UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington D.C., 20549
FORM 10-K
☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2018
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File No. 0-30351
DEEP DOWN, INC.
(Exact name of registrant as specified in its charter)
| Nevada | 75-2263732 | |
| (State of other jurisdiction of incorporation) | (I.R.S. Employer Identification No.) | |
| 18511 Beaumont Highway, Houston, Texas | 77049 | |
| (Address of Principal Executive Office) | (Zip Code) |
Registrant’s telephone number, including area code: (281) 517-5000
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock, $0.001 par value
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yeso No þ
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes o No þ
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 (or such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o
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 during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes þ No o
Indicate by check mark if disclosures of delinquent filers in response to Item 405 of Regulations S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. þ
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 definition of “large accelerated filer”, “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer o Accelerated filer o Non-accelerated filer o Smaller reporting company þ Emerging growth company o
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. o
Indicate by checkmark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act) Yes o No þ
As of June 30, 2018, the aggregate market value of the voting and non-voting common equity held by non-affiliates, computed by reference to the price at which the common equity was last sold, was $10,969,184.
At April 12, 2019, the registrant had 13,453,393 outstanding shares of common stock, par value $0.001 per share.
DOCUMENTS INCORPORATED BY REFERENCE
None
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Forward-Looking Information
Unless otherwise indicated, the terms “Deep Down, Inc.”, “Deep Down”, “Company”, “we”, “our” and “us” are used in this report to refer to Deep Down, Inc., a Nevada corporation, and its directly and indirectly wholly-owned subsidiaries.
In this Annual Report on Form 10-K (the “Report”), we may make certain forward-looking statements (“Statements”), including statements regarding our plans, strategies, objectives, expectations, intentions and resources that are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. We do not undertake to update, revise or correct any of the Statements. The Statements should also be read in conjunction with our audited consolidated financial statements and the notes thereto.
The Statements contained in this Report that are not historical fact 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 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”, “expects”, “may”, “will”, “should”, “intend”, “plan”, “could”, “is likely”, or “anticipates”, or the negative thereof or other variations thereon or comparable terminology, or by discussions of strategy that involve risks and uncertainties. We caution the readers that these Statements are only predictions. No assurances can be given that the future results indicated, whether expressed or implied, will be achieved. While sometimes presented with numerical specificity, these projections and other Statements are based upon a variety of assumptions relating to the business of the Company, which, although considered reasonable by us, may not be realized. Because of the number and range of assumptions underlying our projections and Statements, many of which are subject to significant uncertainties and contingencies that are beyond our reasonable control, some of the assumptions inevitably will not materialize, and unanticipated events and circumstances may occur subsequent to the date of this Report. These Statements are based on current expectations and we assume no obligation to update this information. Therefore, our actual experience and the results achieved during the period covered by any particular projections or Statements may differ substantially from those projected. Consequently, the inclusion of projections and other Statements should not be regarded as a representation by us or any other person that these estimates and projections will be realized, and actual results may vary materially. There can be no assurance that any of these expectations will be realized or that any of the Statements contained herein will prove to be accurate.
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; |
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| · | 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. |
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| ITEM 1. | Business. |
History
Deep Down, Inc. is a Nevada corporation engaged in the oilfield services industry. As used herein, “Deep Down”, “Company”, “we”, “our” and “us” refers to Deep Down, Inc. and/or its subsidiaries. Deep Down, Inc. (OTCQB: DPDW), a publicly traded Nevada corporation, was incorporated on December 14, 2006, through a reverse merger with MediQuip Holdings, Inc., a publicly traded Nevada corporation.
Deep Down is the parent company to the following directly wholly-owned subsidiary: Deep Down, Inc., a Delaware corporation (“Deep Down Delaware”). Our current operations are primarily conducted under Deep Down Delaware.
In addition to our strategy of continuing to grow and strengthen our operations, including by expanding our services and products in response to our customers’ demands, we intend to continue to seek strategic partnerships with complementary service providers, product manufacturers and technologies that are focused primarily on supporting deepwater and ultra-deepwater offshore exploration, development and production of oil and gas reserves, and other maritime operations.
Our website address is www.deepdowninc.com. We make available, free of charge on or through our website, copies of our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 as soon as reasonably practicable after we electronically file such material with, or furnish it to, the Securities and Exchange Commission (“SEC”). Paper or electronic copies of such material may be requested by contacting the Company at our corporate offices. Information filed with the SEC is also available at www.sec.gov or may be read and copied at the SEC’s Public Reference Room at 100 F. Street, NE, Washington, DC 20549. Information regarding operations of the Public Reference Room may be obtained by calling the SEC at 1-800-SEC-0330.
Business Overview
We are a global provider of specialized services to the offshore energy industry to support deepwater and ultra-deepwater exploration, development and production of oil and gas and other maritime operations. While we are primarily a service company, we also produce custom engineered products that assist us in fulfilling service objectives for specific projects on a contractual basis. We design and manufacture a broad line of surface deepwater and ultra-deepwater and offshore equipment solutions which are used by major integrated, large independent, and foreign national oil and gas companies in offshore areas throughout the world. Our products are often developed in direct response to customer requests for solutions to critical problems in the field. We serve the growing offshore petroleum and maritime industries with technical management and support services. One of our greatest strengths is the extensive knowledge base of our service, engineering and management personnel in many aspects of the deepwater and ultra-deepwater industry. Set forth below is a more detailed description of important services and products we provide.
Our goal is to provide superior services and products to our customers in a safe, cost-effective and timely manner. We believe there is significant demand for, and brand name recognition of, our established products due to the technological capabilities, reliability, cost-effectiveness, timeliness of delivery and operational efficiency features of these products. Since our formation, we have introduced many new products that continue to broaden the markets we currently serve.
For the years ended December 31, 2018 and 2017, we had only one operating and reporting segment, Deep Down Delaware. All of the services and products we provide are interrelated, are performed for the same general customers and are marketed as such.
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Services and Products
Services. We provide a wide variety of engineering and management services, including the design, installation and retrieval of subsea equipment and systems, connection and termination operations, well-commissioning services, as well as construction support and Remotely Operated Vehicle (“ROV”) operations support. We pride ourselves in our ability to collaborate with the engineering functions of oil and gas operators, installation contractors and subsea equipment manufacturers to determine the fastest, safest, and most cost-effective solutions to the full spectrum of complex issues which arise in our industry.
Project Management and Engineering. Our project management teams specialize in deepwater subsea developments. Our services are centered on the utilization of standardized hardware, proven, well-tested installation techniques, and experienced, consistent teams that have proven to be safe and skilled in all aspects of the installation process. Many installation contractors find it beneficial to utilize our services to help reduce on-board personnel since our specialized technicians can perform multiple tasks. Our teams have vast experience with the installation of flexible and rigid risers and flowlines, umbilicals, flexible and rigid jumpers, steel tube and thermoplastic hose flying leads, pipeline end terminations and manifolds. Our engineers have experience ranging from the initial conceptual design phases through manufacturing and installation and concluding with topside connections and commissioning. Our experience provides us with a level of “hands on” and practical understanding that has proven to be indispensable in enabling us to offer custom solutions to the many problems encountered both subsea and topside. Because of our wide knowledge base, our engineering team is often hired by oil and gas operators, installation contractors and subsea equipment manufacturers to provide installation management and engineering support services. Our engineering team has been involved in several of the innovative solutions used today in deepwater subsea systems. We specialize in offshore installation engineering and the writing of practical installation procedures. We deal with issues involving flying leads, compliant umbilical splices, bend stiffener latchers, umbilical hardware, hold-back clamps, and the development of distribution system components. We are heavily involved in the fabrication of installation aids to simplify offshore executions, and offer hydraulic, fiber optic, and electrical testing services and various contingency testing tools.
Spooling Services. Our experienced personnel are involved in the operation of spooling equipment on many projects, including operations for other companies to run their spooling equipment. We have developed a very efficient (in both time and cost) system for spooling, utilizing our horizontal drive units, under-rollers, tensioners, carousels and rapid deployment cartridges.
Testing and Commissioning Services. Umbilical manufacturers, control suppliers, installation contractors, and oil and gas operators utilize our services to perform all aspects of testing, including initial Factory Acceptance Testing (“FAT”), extended factory acceptance testing and System Integration Testing (“SIT”), related to the connecting of the umbilical termination assemblies, the performing of installations, and the completion of the commissioning of the system thereafter. To execute these services, we have assembled a variety of personnel and equipment to ensure that all testing operations are done in a safe and time-efficient manner, ensuring a reduced overall project cost. We also work hard to utilize the most detailed digital testing and monitoring equipment to ensure that the most accurate data is provided to our customers. We have been hired to perform coiled tubing flushing, cleaning, and hydro testing, umbilical filling, flushing, pressure, flow rate, and cleanliness testing, load out monitoring and testing, installation monitoring, post installation testing, system commissioning, umbilical intermediate testing, and umbilical termination assembly cleanliness, flow, and leak testing. We employ a variety of different pumping systems to meet industry needs and offer maximum flexibility. Our philosophy is to flush through the maximum number of lines at the highest flow rate possible to maximize efficiency. Due to the different requirements for testing and commissioning of subsea systems, we have an assortment of pumps and equipment to deploy to ensure a safe and efficient commissioning program. We have experience handling all types of commissioning fluids, including asphaltine dispersants, diesel, methanol, xylene, corrosion inhibitors, water-based control fluids, oil-based control fluids, 100 percent glycol, paraffin inhibitors, and alcohol. We have been involved in the design, procurement, testing, installation, and operation of the testing equipment. Our engineers and service technicians can also assist in writing the testing procedures and sequences from simple FAT to very extensive multiple pressures and fluids testing up to full system SIT procedures. We work closely with the project managers and production platform engineers to help ensure that all aspects of the installation or retrieval project, including potential risks and dangers, are identified, planned for, and eliminated prior to arrival on the production platform.
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Storage Management. Our facility in Houston, Texas covers more than 255,000 square feet on 23 acres, offering internal high quality warehousing capacity, external storage and a strategic location in Houston's Ship Channel area. Our warehouse is designed to provide customers with flexible and cost effective warehousing and storage management alternatives. Our professional and experienced warehouse staff, combined with the very latest in information technology, results in a fully integrated warehousing package designed to deliver effective solutions to customer needs. Among other capabilities, we are capable of providing long-term specialized contract warehousing; long and short-term storage; modern materials handling equipment; covered loading areas; quality security systems; integrated inventory management; packing and repacking; computerized stock controls; and labeling.
Our shore-based facility located at Core Industries, Inc. in Mobile, Alabama has 6,500 square feet and houses our 3,400 ton carousel system, and is used to store customers’ products. The site is sufficient to allow for full system integration testing of our customers’ equipment prior to deployment offshore.
ROV and ROV Tooling Services. As part of our ROV services, we have observation and light work class ROV units capable of operating in depths of 10,000 feet. Our services include offering these vehicles to strategic alliance partners who lease our vehicles and provide the actual services of platform inspection, platform installation and abandonment, search and recovery, salvage, subsea sampling, subsea intervention, telecommunication cable inspections, anchor handling, ROV consulting and project management, ROV pilots and technicians, and underwater cinematography. We provide an extensive line of ROV intervention tooling, both used to support our own operations and for rental to our customers. Our ROV tooling equipment includes flying lead orientation tools, class 1-5 torque tools, hot stabs, pipe cutting systems, dredging and pumping systems, ROV clamps and ROV-friendly hooks and shackles that are state-of-the-art in design.
Equipment Refurbishment and Intervention Services. In addition to the new products we build, we have cultivated expertise in the refurbishment and repurposing of recovered subsea distribution assets and providing support for offshore interventions.
Items refurbished and repurposed for customers include Logic Caps (“LC(s)”), intermediate logic caps, and Hydraulic Distribution Manifolds (“HDM(s)”). Once a recovered asset is received, it is cleaned, any production fluids are flushed out with a water-based control fluid, and the asset is moved into storage. As an emergency or intervention arises, we pull the stored asset, reroute and weld the tubing, and then perform FAT per customer specifications. Finally, we send out our service technicians and equipment to support the offshore campaign.
Additionally, we perform various tasks in support of offshore interventions. We reconfigure Deep Down Hydrate Remediation Frames and Hydraulic Flying Leads (“HFL(s)”) at either of our facilities or in the field. Our service technicians go offshore to pre-charge and make any changes to the frame needed to remediate hydrates.
We also developed the Fast Response Box (“FRB”), a concept cultivated from our vast offshore campaign experience. Our team identified the necessary components for an emergency reroute of a chemical or hydraulic line performed on the deck of a vessel. After the subsea distribution hardware is brought up, our service technicians safely depressurize, flush, cut out tubing, and reroute as required to get the well or field back up and producing. We then pre-charge the system and assist in overboarding and reinstallation. Our ability to provide a fully functional temporary solution is designed to bring the well or field back into production immediately and allows time for a permanent solution to be developed.
Our capabilities further include in-house software and hardware engineering to provide innovative solutions from wireless testing and monitoring equipment, to Dynamic Positioning (“DP”) systems. We have also developed camera systems that can be set up at any site, enabling our customers to witness FATs, SITs or vessel load-outs in real-time, from any location in the world.
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Products. We provide installation support equipment and component parts and assemblies for subsea distribution systems. We believe the key to successful installations of hardware is to design the subsea system by considering installation issues first, working backwards to the design of the hardware itself. This is why we have been instrumental in the development of hardware and techniques to simplify deepwater installations. We design, manufacture, fabricate, inspect, assemble and test subsea equipment, surface equipment and offshore equipment that is used by major integrated, large independent and foreign national oil and gas companies in offshore areas throughout the world. Our products are used during oil and gas exploration, development and production operations on offshore drilling rigs, such as floating rigs and jack-ups, and for drilling and production of oil and gas wells on offshore platforms, tension leg platforms and moored vessels such as Floating Production Storage and Offloading vessels (“FPSO”).
Flying Leads. Deep Down is a leader in flying lead design, manufacture and installation; in particular steel tube flying leads. Our flagship product, the Loose Steel Tube Flying Lead (“LSFL”), was developed to eliminate the residual memory left in traditional flying leads due to the bundling process. The loose lay of the tubes significantly reduces stiffness of the assembly, allows the bundle to lay flat on the sea floor, follow the prescribed lay path precisely, bend in a tight radius with minimal resistance and offers maximum compliance for easy makeup in lengths up to 1,000’. When greater lengths up to 10,000’ are required, we utilize our patented Non-Helical Umbilical (“NHU®”) in conjunction with a compliant section on each end of the assembly to achieve the same result. We also offer hybrid LSFL® assemblies which can include a wide variety of combinations of electrical, optical, hose and steel tube elements. Hybrid LSFL® technology provides installation savings in both time and money as fewer operations are required to install the combined unit.
Deep Down employs the patented Moray® termination system on each end of the LSFL®. The Moray® termination is a light weight, high-strength, configurable and field serviceable framework used to connect any commercially available Multi-Quick Connect (“MQC”) plate to the LSFL® bundle. The Moray® termination assembly allows the installation load from the steel tubes or strength member to be transmitted directly to the framework and through to the installation rigging while isolating couplers from the load to maintain maximum compliance. The Moray® termination with compliant section is ideal for umbilical end terminations; it eliminates the need for bulky armor pots and is more manageable than a traditional umbilical end termination. In this application, the Moray® termination can be used to house multiple electrical, optical and auxiliary hydraulic interfaces in integrated ROV panels. Moray® termination assemblies can be outfitted with integrated buoyancy allowing quicker installation times by eliminating the need to recover buoyancy modules. Additionally, this allows for the use of a smaller class ROV on a vessel should the need for rework arise.
Umbilical Hardware. Our blend of experiences with umbilical manufacturers, subsea engineers and installation contractors has been effective, giving us a unique perspective when fabricating and designing terminations for umbilical manufacturers. Members of our team were involved with the designs for the armored thermo plastic umbilicals at Oceaneering Multiflex, the first steel tube umbilical in the Gulf of Mexico for the Shell Popeye® umbilical, and the standardization of many steel tube umbilical terminations. We believe our designs are often much lighter in weight and smaller than the typical hardware that has been created and used in the past by our competitors. Our engineering team has designed and fabricated bending restrictors, armor pots, split barrels, tubing fittings and unions, hinging umbilical splices and topside terminations with our unique threaded welded fittings, umbilical compliant splice, and the bend stiffener latcher. We offer both polymer and steel bend limiters. The compliant splice is a patented method of converting spare umbilicals into actual production umbilicals by splicing spare umbilicals together to produce any length required or to repair a damaged umbilical. This termination system eliminates the burdens of dealing with umbilical splices during installation and is capable of housing both electrical and fiber optic termination assemblies while still allowing for the splice to be spooled up onto a reel or carousel. Our Umbilical Termination Assembly (“UTA”) and new compliant UTA allows us to terminate the umbilical with a higher degree of quality and place the critical components of the base unit on the reel or on the carousel and handle it with additional ease and safety. Then it is combined with the mud mat assembly easily and offers both first end stab and hangover features as well as yoke second end landing. The new compliant version allows the UTA to be expanded for multiple J-plates and yet feature the same compliant features in our compliance splicing increasing the ease of handling on the deployment equipment – overboarding – and landing on the seafloor. Our termination services are becoming popular because they offer the ability to take existing umbilical hang offs from multiple manufacturers, which may have been exposed to harsh environmental conditions, and add them to temporary handling clamps – lifting up the umbilical and providing a completely new hangoff arrangement and thus extending the life of the umbilical and the subsea field. Bend Stiffener Latchers™ (“BSL”) are still the leaders in the industry allowing bend stiffeners to be carried by the umbilical topside termination assembly in a more compact and overlapping configuration. BSLs are overboarded with the highest strength and can be installed into an existing I-tube with existing flange or an I-tube with a mating bell mouth. They are then latched in by ROV allowing the bend stiffener to be securely attached to the I-tube transferring all the dynamic bending while the umbilical is pulled up and hung off. This process eliminates the handling of two major pieces of hardware, and the need to have measurements between the components as the system is fully extending and adjustable.
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Riser Isolation Valves and Subsea Isolation Valve Services. Deep Down's new Riser Isolation Valve (“RIV”) and Subsea Isolation Valve (“SSIV”) control systems are unique solutions that provide platform personnel hydraulic control and electrical indication for subsea production valve manipulation. These systems provide numerous advantages to the customer including: emergency shutdown capabilities, valve positioning monitoring systems, and auxiliary positions for spare and/or future field development.
In addition to fabrication of these systems, Deep Down provides subsea installation engineering, consulting, and service personnel to support customers, installation contractors, valve vendors and more. Our expertise ensures scope is fully defined and delegated allowing for safe and successful installations. The Deep Down team provides commissioning and technical assistance to customers and platform personnel, and seeks to ensure that the systems are working properly and all necessary operational information is handed over to the end users.
Capitalizing on our expertise in umbilical manufacturing, Subsea and Topside Umbilical Termination Assemblies (“SUTA” / “TUTA”), hydraulic and electrical flying leads, and super duplex welding, we provide quality products our clients can depend on. We believe our installation-friendly project designs help us meet customer specifications. When Deep Down’s expert installation team is on the job, product integrity is preserved, helping us ensure successful installations.
Installation Aids. To help our customers and to meet our own internal needs, we have developed an extensive array of installation aids, including steel flying lead installation systems, tensioners, lay chutes, many varieties of buoyancy, clump weights, Vortex Induced Vibration (“VIV”) strakes, mud mats, dual tank skids, gang boxes, work vans, pumping and testing skids, control booths, fluid drum carriers, crimping systems, load cells, 300 and 340 ton under-rollers, powered reels, 200 ton, 400 ton and 3,400 ton and 3,500 ton carousel, UTA and bridging jumper running and parking deployment frames, termination shelters, pipe straighteners, ROV hooks and shackles, stackable SeaStax® tanks, baskets, Subsea Deployment Basket System (SDB®), Horizontal Drive Units (“HDU”) and Rapid Deployment Cartridges (“RDC”).
Buoyancy Products. We design, engineer and manufacture deepwater buoyancy systems and support hardware essential to installation and operational requirements. Deep Down's rotational molding operations produce high density polyethylene products including bend restrictors, VIV suppression strakes and fairings, protective outer shells for distributed buoyancy modules and other flotation products. Our unique distributed buoyancy module clamps are designed for quick and easy installation for both "over the stinger" and vertical lay system methods.
Further expansion of our flotation product line includes drilling riser buoyancy support hardware and installation services and development of a “Buoyant Rod” concept that we hope to have significant applications in the flotation industry.
Non-Helical Umbilical®. Deep Down's patented Non-Helical Umbilical (“NHU®”) combines our experience manufacturing miles of loose steel tube flying leads, terminating conventional steel umbilicals, and observing installation behavior of all umbilicals. The NHU® can be manufactured in lengths up to 10 miles using super duplex tubes in standard sizes and in any configuration of hydraulic, electrical or optical elements. It is intended for long-term infield (static) or short-term dynamic service applications.
Multiple tubes may be fed into the patented Deep Down NHU® manufacturing mechanism, bundled, then extruded with a high density polyethylene outer jacket. Umbilicals are not torque balanced on their own, so rather than expending resources to balance and imparting stresses to helically wind them, the NHU® uses the imbalance to its advantage, resulting in a standard bundle.
The proprietary NHU® manufacturing concept is fully containerized, portable and easily transported for setup virtually anywhere in the world. The ability to manufacture in close proximity to subsea fields offers the benefits of reduced lead times, the use of smaller installation vessels, use of compact Deep Down equipment, the incorporation of the appropriate percentages of local content, and more favorable economics.
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Manufacturing
Our primary operations are located at a 255,000 sq. ft. facility on 23 acres off Beaumont Highway, on the eastern end of Houston, Texas, where we have been since 2013. In addition to increasing our production capacity, this facility provided the space to build our Steel Tube Flying Lead (“STFL”) Overhead Tracking System. This system enables us to easily move STFLs from station to station during production for welding, X-ray and FAT. We have also significantly expanded our clean, stainless steel welding and tube bending environment, which is separated from all carbon steel fabrication.
We have a 12’x60’ wet testing tank, adding the capability to test our products and rigging with buoyancy scenarios in the water. Featuring filtered water and underwater lighting, this testing tank enables us to launch and test small ROVs and ROV operations.
Our manufacturing plant is ISO 9001 certified. We continue to improve our standards and product quality through the use of quality assurance specialists working with our product manufacturing personnel throughout the manufacturing process. We have the capacity to complete large turn-key projects and still have reserve space for unforeseen emergency projects requiring immediate service and the attention to which our customers are accustomed.
Customers
Demand for our deepwater and ultra-deepwater services, surface equipment and offshore rig equipment is dependent on the condition of the oil and gas industry and its ability and need to make capital expenditures, as well as continual maintenance and improvements on its offshore exploration, drilling and production operations. The level of these expenditures is generally dependent upon various factors such as expected prices of oil and gas, exploration and production costs of oil and gas, and the level of offshore drilling and production activity. The prevailing view of future oil and gas prices are influenced by numerous factors affecting the supply and demand for oil and gas. These factors include worldwide economic activity, interest rates, cost of capital, environmental regulation, tax policies, and production levels and prices set and maintained by producing nations and the Organization of the Petroleum Exporting Countries. Capital expenditures are also dependent on the cost of exploring for and producing oil and gas, the sale and expiration dates of domestic and international offshore leases, the discovery rate of new oil and gas reserves in offshore areas and technological advances. Oil and gas prices and the level of offshore drilling and production activity have historically been characterized by significant volatility.
Our principal customers are major integrated oil and gas companies, large independent oil and gas companies, foreign national oil and gas companies, subsea equipment manufacturers and subsea equipment installation contractors involved in offshore exploration, development and production. Offshore drilling contractors, engineering and construction companies, and other companies involved in maritime operations represent a smaller customer base.
We are not dependent on any one customer or group of customers. The number and variety of our products required in a given period by a customer depends upon its capital expenditure budget as well as the results of competitive bids. Consequently, a customer may account for a material portion of revenues in one period and may represent an immaterial portion of revenues in a subsequent period. While we are not dependent on any one customer or group of customers, the loss of one or more of our significant customers could, at least on a short-term basis, have an adverse effect on the results of our operations.
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Marketing and Sales
We market our services and products worldwide through our Houston-based sales force. We periodically advertise in trade and technical publications targeting our customer base. We also participate in industry conferences and trade shows to enhance industry awareness of our products and services. Our customers generally order products and services after consultation with us on their project. Orders are typically completed within two weeks to three months depending on the type of product or service. Larger and more complex products may require four to six months to complete, though we have accepted several longer-term projects, requiring significantly more time to complete. Our customers select our products and services based on the quality, reliability and reputation of the product or service, price, timely delivery and advanced technology. For large production system orders, we engage our project management team to coordinate customer needs with our engineering, manufacturing and service departments, as well as with subcontractors and vendors. Our profitability on our projects is dependent on performing accurate and cost-effective bids as well as performing efficiently in accordance with bid specifications. Various factors can adversely affect our performance on individual projects that could potentially adversely affect the profitability of a project.
Backlog
Information regarding our backlog is incorporated herein by reference from the section entitled, “Industry and Executive Outlook” in Part II, Item 7 of this Report.
Product Development and Engineering
The technological demands of the oil and gas industry continue to increase as offshore exploration and drilling operations expand into deeper and more hostile environments. Conditions encountered in these environments could soon include well pressures of up to 20,000 psi, mixed flows of oil and gas under high pressure that may also be highly corrosive, and water depths in excess of 10,000 feet. We are continually engaged in product development activities to generate new products and to improve existing products and services to meet our customers’ specific needs. We also focus our activities on reducing the overall cost to the customer, which includes not only the initial capital cost but also operating costs associated with our products.
We have an established track record of introducing new products and product enhancements. Our product development work is conducted at our facility in Houston, Texas, and in the field. Our application engineering staff also provides engineering services to customers in connection with the design and sales of our products. Our ability to develop new products and maintain technological advantages is important to our future success.
We believe that the success of our business depends more on the technical competence, creativity and marketing abilities of our employees than on any individual patent, trademark or copyright. Nevertheless, as part of our ongoing product development and manufacturing activities, our policy is to seek patents when appropriate on inventions concerning new products and product improvements. All patent rights for products developed by employees are assigned to us.
Competition
The principal competitive factors in the petroleum drilling, development and production and maritime equipment markets are quality, reliability and reputation of the product, price, technology, and timely delivery. We face significant competition from other manufacturers of exploration, production, and maritime equipment. Several of our primary competitors are diversified multinational companies with substantially larger operating staffs and greater capital resources and have a longer history in the manufacturing of these types of equipment.
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Employees
At April 15, 2019, we had a total of 58 full-time employees. We also work with a pool of contractors who enable us to scale our operations at short notice, as business needs demand. Our employees are not covered by collective bargaining agreements and we generally consider our employee relations to be good. Our operations depend in part on our ability to attract a skilled labor force. While we believe that our wage rates are competitive and that our relationship with our skilled labor force is good, a significant increase in the wages paid by competing employers could result in a reduction of our skilled labor force and increases in the wage rates that we pay or both.
Governmental Regulations
A significant portion of our business activities are subject to federal, state, local and foreign laws and regulations and similar agencies of foreign governments. The technical requirements of these laws and regulations are becoming increasingly expensive, complex and stringent. These regulations are administered by various federal, state and local health and safety and environmental agencies and authorities, including the Occupational Safety and Health Administration of the U.S. Department of Labor and the U.S. Environmental Protection Agency. From time to time, we are also subject to a wide range of reporting requirements, certifications and compliance as prescribed by various federal and state governmental agencies. Expenditures relating to such regulations are made in the normal course of our business and are neither material nor place us at any competitive disadvantage. We do not currently expect that compliance with such laws will require us to make material additional expenditures.
We are also affected by tax policies and other laws and regulations generally relating to the oil and gas industry, including those specifically directed to offshore operations. Adoption of laws and regulations that curtail exploration and development drilling for oil and gas could adversely affect our operations by limiting demand for our services or products.
Increased concerns about the environment have resulted in offshore drilling in certain areas being opposed by environmental groups, and certain areas have been restricted. To the extent that new or additional environmental protection laws that prohibit or restrict offshore drilling are enacted and result in increased costs to the oil and gas industry in general, our business could be materially affected. In addition, these laws may provide for "strict liability" for damages to natural resources or threats to public health and safety, rendering a party liable for the environmental damage without regard to negligence or fault on the part of such party. Sanctions for noncompliance may include revocation of permits, corrective action orders, administrative or civil penalties and criminal prosecution. Certain environmental laws provide for joint and several liabilities for remediation of spills and releases of hazardous substances. In addition, companies may be subject to claims alleging personal injury or property damage as a result of alleged exposure to hazardous substances, as well as damage to natural resources. Such laws and regulations may also expose us to liability for the conduct of or conditions caused by others, or for our acts that were in compliance with all applicable laws at the time such acts were performed. Compliance with environmental laws and regulations may require us to obtain permits or other authorizations for certain activities and to comply with various standards or procedural requirements.
We cannot determine to what extent our future operations and earnings may be affected by new legislation, new regulations or changes in existing regulations. We believe that our facilities are in substantial compliance with current regulatory standards. Based on our experience to date, we do not currently anticipate any material adverse effect on our business or consolidated financial position as a result of future compliance with existing environmental laws and regulations controlling the discharge of materials into the environment. However, future events, such as changes in existing laws and regulations or their interpretation, more vigorous enforcement policies of regulatory agencies, or stricter or different interpretations of existing laws and regulations, may require additional expenditures which may be material.
Intellectual Property
While we are the holder of various patents, trademarks and licenses relating to our business, we do not consider any individual intellectual property to be material to our business operations.
| 8 |
| ITEM 1A. | RISK FACTORS |
Not Applicable
| ITEM 1B. | UNRESOLVED STAFF COMMENTS |
None
| ITEM 2. | Description of Property |
Our operating facility is located at 18511-810 Beaumont Highway, Houston, Texas 77049 (“Highway 90”). Our Highway 90 facility consists of approximately 23 acres of land and includes 255,000 sq. ft. of indoor manufacturing and storage space. We have a 10-year lease on our Highway 90 facility, which commenced in June 2013 at a base rate of $90,000 per month, adjustable based on the CPI, for the remainder of the lease term. Additionally, we lease, on a month-to-month basis, 6,500 square feet of storage space in Mobile, AL to house our 3,400 ton carousel system for $5,000 per month.
We believe that our current space is suitable, adequate and of sufficient capacity to support our current operations.
| ITEM 3. | Legal Proceedings |
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 (“ICC”). The dispute involves alleged delays and defects in products manufactured by the Company for GE dating back to 2013. The Company disputes GE’s allegations and intends to vigorously defend itself against these allegations. Mediation took place on November 28, 2018, but no resolution was found. On February 22, 2019, GE initiated arbitration proceedings with the ICC. The total amount in dispute was originally $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.
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 the week of April 22, 2019.
| ITEM 4. | MINE SAFETY DISCLOSUREs |
None
| 9 |
| ITEM 5. | MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES |
Price Range for Common Stock
Our common stock trades on the QB Tier of the OTC Markets Group (OTCQB) under the symbol OTCQB: DPDW. The following table sets forth, for the quarters ended on the dates indicated below, the high and low bid quotations for our common stock as reported by the OTC Markets.
| High | Low | |||||||
| Fiscal Year 2018: | ||||||||
| December 31, 2018 | $ | 0.85 | $ | 0.81 | ||||
| September 30, 2018 | $ | 0.92 | $ | 0.88 | ||||
| June 30, 2018 | $ | 0.82 | $ | 0.82 | ||||
| March 31, 2018 | $ | 0.89 | $ | 0.74 | ||||
| Fiscal Year 2017: | ||||||||
| December 31, 2017 | $ | 0.99 | $ | 0.67 | ||||
| September 30, 2017 | $ | 1.11 | $ | 0.85 | ||||
| June 30, 2017 | $ | 1.25 | $ | 1.00 | ||||
| March 31, 2017 | $ | 1.45 | $ | 1.00 | ||||
Stockholders of Record
As of April 15, 2019, there were 1,102 stockholders of record of our common stock. All common stock held in street names are recorded in the Company’s stock register as being held by one stockholder.
Dividend Policy
To date, we have not paid any cash dividends and our present policy is to retain earnings for working capital for the growth of our operations.
Issuer Purchases of Equity Securities
On March 26, 2018, the Board of Directors authorized the repurchase of up to $1 million in shares of the Company's common stock. The repurchase program was funded from cash on hand and cash provided by operating activities.
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The table below summarizes information about our purchases of common stock, based on trade date, during the quarter ended December 31, 2018:
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 (1) | ||||||||||||||
| October 1 - October 31 | 12,700 | $ | 0.8894 | 12,700 | $ | 988,705 | |||||||||||
| November 1 - November 30 | 5,700 | 0.8053 | 5,700 | 984,115 | |||||||||||||
| December 1 - December 31 | 6,400 | 0.8366 | 6,400 | 978,761 | |||||||||||||
| Total for three months ended December 31, 2018 | 24,800 | $ | 0.8564 | 24,800 | |||||||||||||
| (1) | An additional 228,113 shares were repurchased in the quarter ended March 31, 2019, for an aggregate purchase price of $170,152. The share repurchase program expired on March 31, 2019. |
| ITEM 6. | SELECTED FINANCIAL DATA |
Not Applicable
| Item 7. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
The following discussion of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and the notes to those consolidated financial statements appearing elsewhere in this Report. This discussion contains forward-looking statements that involve significant risks and uncertainties. As a result of many factors, our actual results may differ materially from those anticipated in our forward-looking statements.
General
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 and related services. We support subsea engineering, installation, commissioning, and maintenance projects through specialized, highly experienced service teams and engineered technological solutions. Our primary focus is on more complex deepwater and ultra-deepwater oil production distribution system support services and technologies, used between the platform and the wellhead.
Industry and Executive Outlook
“Offshore is ready for the limelight again,” read the first line of a recent article describing the optimism expressed by executives from leading deep-water explorers and contractors at the recently held Scotia Howard Weil Energy Conference in New Orleans. The prevailing theme at the conference was a coming revival of the offshore oil and gas industry.
However, while there are a number of indicators of an imminent recovery, our 2018 results bear witness to the longer than expected downturn. We are disappointed by our lowest revenue levels in several years, and the corresponding bottom line results, primarily due to slower initiation of new projects by our customers.
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While we are disappointed by our recent results, we are encouraged by our increasing backlog, which now stands at $15 million, most of which is currently planned for 2019. We are especially pleased by orders we have recently received from new customers, both domestic and international. Our efforts to increase the proportion of work we perform directly for operators and end clients have continued to bear fruit, with the majority of our new orders being directly for end users. We continue to expect to be fully operational in one international location this year, subject to final regulatory approval from the local government.
In light of the operating results over the past few years, volatility in commodity prices and strategic focus on our core business going forward, we recorded impairment charges of $2,320,171 related to our construction in progress and certain equipment.
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.
Looking towards the future, our solutions continue to be in high demand, with increasing opportunities being presented to us. We remain optimistic about the future prospects for the Company, and remain committed to providing the best value for our customers, in the most ideal working environment for our employees, and ultimately maximizing value for our shareholders.
All remaining dollar and share amounts in Management’s Discussion and Analysis of Financial Condition and Results of Operations are in thousands of dollars and shares, unless otherwise indicated.
Results of Operations
Revenues
| Year Ended December 31, | Increase (Decrease) | |||||||||||||||
| 2018 | 2017 | $ | % | |||||||||||||
| Revenues | $ | 16,175 | $ | 19,478 | $ | (3,303 | ) | (17 | )% | |||||||
The 17 percent decrease in revenue is primarily the result of projects with more limited scopes of work in 2018, compared to projects executed in 2017.
Cost of sales and gross profit
| Year Ended December 31, | Increase (Decrease) | |||||||||||||||
| 2018 | 2017 | $ | % | |||||||||||||
| Cost of sales | $ | 11,393 | $ | 10,931 | $ | 462 | 4 | % | ||||||||
| Gross profit | $ | 4,782 | $ | 8,547 | $ | (3,765 | ) | (44 | )% | |||||||
| Gross profit % | 30 | % | 44 | % | – | (14 | )% | |||||||||
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Our gross profit percentage decreased primarily due to lower revenues during the year ended December 31, 2018 relative to our fixed cost of sales, and a higher proportion of higher margin service work and equipment rental during the year ended December 31, 2017.
We record depreciation expense related to revenue-generating property, plant and equipment as cost of sales, which totaled $1,590 and $1,077 for the years ended December 31, 2018 and 2017, respectively. The increased depreciation during 2018 included $430 related to our determination that certain equipment has no remaining useful life.
Selling, general and administrative expenses
| Year Ended December 31, | Increase (Decrease) | |||||||||||||||
| 2018 | 2017 | $ | % | |||||||||||||
| Selling, general & administrative | $ | 7,818 | $ | 9,113 | $ | (1,295 | ) | (14 | )% | |||||||
| Selling, general & administrative as a % of revenues | 48 | % | 47 | % | $ | – | 1 | % | ||||||||
The decrease in selling, general and administrative expenses (“SG&A”) was due to cost containment measures introduced in response to the lower revenues during the year ended December 31, 2018.
Asset Impairment
For the year ended December 31, 2018, we recorded impairment charges of $1,890 related to our construction in progress. The impairment resulted from an analysis of the carrying value of our assets in light of our operating results over the past few years, volatility in commodity prices, and a strategic focus on our core business going forward. We did not record any impairment for the year ended December 31, 2017.
Interest income, net
Net interest income for the year ended December 31, 2018 was $35 compared to net interest income of $56 for the year ended December 31, 2017. The decrease of $21 is due to our reduced cash balance in interest bearing accounts.
Gain on sale of assets
During the years ended December 31, 2018 and December 31, 2017 we sold old equipment, including Remotely Operated Vehicles (“ROVs”), which resulted in gains on sales of assets of $439 and $576, respectively.
Equity in net income of joint venture
In 2017, we received $94 as an earnout distribution from our equity in a joint venture. We no longer have an investment in the joint venture.
Modified EBITDA
Our management evaluates our performance based on a non-GAAP measure, which consists of earnings (net income or loss) available to common shareholders before net interest expense or income, income taxes, non-cash share-based compensation expense, equity in net income or loss of joint venture, 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, 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 consolidated statements of operations.
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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 asset impairment); and actions that do not affect liquidity (share-based compensation expense, equity in net income or loss of joint venture) 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 loss to Modified EBITDA (loss) for the years ended December 31, 2018 and 2017 (certain prior year amounts have been excluded to conform to the current year presentation):
| Year Ended December 31, | ||||||||
| 2018 | 2017 | |||||||
| Net loss | $ | (4,742 | ) | $ | (116 | ) | ||
| Less interest income | (35 | ) | (56 | ) | ||||
| Add back depreciation and amortization | 1,872 | 1,348 | ||||||
| Add back asset impairment | 1,890 | – | ||||||
| Deduct gain on sale of assets | (439 | ) | (576 | ) | ||||
| Add back income tax expense | 8 | 5 | ||||||
| Add back share-based compensation | 56 | 134 | ||||||
| Modified EBITDA (loss) | $ | (1,390 | ) | $ | 739 | |||
Modified EBITDA decreased by $2,129 in 2018 compared to 2017. The decrease in EBITDA was primarily due to the increase in net loss during 2018 as compared to 2017, partially offset by the addback of the impairment charges.
Liquidity and Capital Resources
During the fiscal year ended December 31, 2018, we used $1,924 of our cash on hand to fund our operating, investing and financing activities. We used $1,545 in our operating activities, primarily due to decreased customer orders. We also used $346 in investing activities, which included $882 in purchases of Property, Plant and Equipment (“PP&E”), offset by $538 in proceeds from the sale of equipment, and cash receipts from a note receivable. We also used $33 in financing activities, which included $22 for repurchases of our outstanding stock and $11 for payments on a motor vehicle loan.
During the fiscal year ended December 31, 2017, we used $4,264 of our cash on hand to fund our operating, investing and financing activities. We used $762 in our operating activities, primarily due to decreased customer orders. We also used $2,029 in investing activities, which included $2,940 in purchases of PP&E, offset by $908 in proceeds from the sale of equipment, a cash distribution from a former joint venture and cash receipts from a note receivable. The $2,940 in new PP&E included $992 in purchases of equipment used in our traditional lines of business and betterments of existing equipment, $914 in equipment developed and built as part of our sponsorship of Texas A&M’s participation in the Shell XPRIZE competition, and $1,034 in new equipment and technologies, which at the time were projected to be new revenue streams for the Company. We also used $1,473 in financing activities, due to repurchases of our outstanding stock.
Through a combination of our current working capital of $7,026, cash expected to be generated from operations, potential opportunistic sales of PP&E in the future and reduction in our capital investments budget, we believe we will have adequate liquidity to meet our future operating requirements.
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Summary of Critical Accounting Policies and Estimates
Use of Estimates
The preparation of financial statements in accordance with US GAAP requires us to make estimates and judgments that may affect assets and liabilities. On an on-going basis, we evaluate our estimates, including those related to revenue recognition and related allowances, contract assets and liabilities, impairments of long-lived assets, including intangibles, income taxes including the valuation allowance for deferred tax assets, contingencies and litigation, and share-based payments. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable, the results of which form the basis for making judgments about the carrying values of assets and liabilities. Actual results may differ from these estimates under different assumptions or conditions.
Revenue Recognition
On January 1, 2018, we adopted ASC Topic 606 (“ASC 606”) using the modified retrospective method applied to those contracts which were not completed as of January 1, 2018. Results for reporting periods beginning after January 1, 2018 are presented under ASC 606, while prior period amounts are not adjusted and continue to be reported in accordance with our historic accounting under ASC Topic 605, Revenue Recognition.
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 incurred) do not materially change by the adoption of the new standard.
Revenues are recognized when control of the promised goods or services is transferred to our customers, in an amount that reflects the consideration we expect to be entitled to in exchange for those goods or services. To determine the proper revenue recognition method for our customer contracts, we evaluate whether two or more contracts should be combined and accounted for as one single contract and whether the combined or single contract should be accounted for as more than one performance obligation. This evaluation requires significant judgment and the decision to combine a group of contracts or separate the combined or single contract into multiple performance obligations could change the amount of revenue and profit recorded in a given period. For most of our fixed price contracts, the customer contracts with us to provide a significant service of integrating a complex set of tasks and components into a single project or capability (even if that single project results in the delivery of multiple units). Hence, the entire contract is accounted for as one performance obligation.
We account for a contract when it has approval and commitment from both parties, the rights of the parties are identified, payment terms are identified, the contract has commercial substance and collectability of consideration is probable.
Fixed price contracts
For fixed price contracts, we generally recognize revenue over time as we perform because of continuous transfer of control to the customer. This continuous transfer of control to the customer is supported by clauses in the contract that allow the customer to unilaterally terminate the contract for convenience, pay us for costs incurred plus a reasonable profit and take control of any work in process. Additionally, in other fixed price contracts, the customer typically controls the work in process as evidenced either by contractual termination clauses or by our rights to payment for work performed to date plus a reasonable profit to deliver products or services that do not have an alternative use to the Company.
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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 on a percentage-of-completion basis but cannot be invoiced under the terms of the contract. Such amounts are invoiced upon completion of contractual milestones. Billings in excess of costs and estimated earnings on uncompleted contracts arise when milestone billings are permissible under the contract, but the related costs have not yet been incurred. All contract costs are recognized currently on jobs formally approved by the customer and contracts are not shown as complete until virtually all anticipated costs have been incurred and the risk of loss has passed to the customer.
Assets related to costs and estimated earnings in excess of billings on uncompleted contracts, as well as liabilities related to billings in excess of costs and estimated earnings on uncompleted contracts, have been classified as current. The contract cycle for certain long-term contracts may extend beyond one year, thus complete collection of amounts related to these contracts may extend beyond one year, though such long-term contracts include contractual milestone billings as discussed above. As of December 31, 2018, we had no contracts whose term extended beyond one year.
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Allowance for Doubtful Accounts
We provide an allowance for doubtful accounts receivables based on a specific review of each customer’s accounts receivable balance with respect to its ability to make payments. When specific accounts are determined to require an allowance, they are expensed by a provision for bad debts in that period. At December 31, 2018 and 2017, we estimated the allowance for doubtful accounts requirement to be $10. Bad debt (credit) expense totaled $67 and $(22) for the years ended December 31, 2018 and 2017, respectively.
Income Taxes
We follow the asset and liability method of accounting for income taxes. This method takes into account the differences between financial statement treatment and tax treatment of certain transactions. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect of a change in tax rates is recognized as income or expense in the period that includes the enactment date.
We record a valuation allowance to reduce the carrying value of our deferred tax assets when it is more likely than not that some or all of the deferred tax assets will expire before realization of the benefit or that future deductibility is not probable. The ultimate realization of the deferred tax assets depends upon our ability to generate sufficient taxable income of the appropriate character in the future. This requires management to use estimates and make assumptions regarding significant future events such as the taxability of entities operating in the various taxing jurisdictions. In evaluating our ability to recover our deferred tax assets, we consider all reasonably available positive and negative evidence, including our past operating results, the existence of cumulative losses in the most recent years and our forecast of future taxable income. In estimating future taxable income, we develop assumptions, including the amount of future state, and federal pre-tax operating income, the reversal of temporary differences and the implementation of feasible and prudent tax planning strategies. These assumptions require significant judgment. When the likelihood of the realization of existing deferred tax assets changes, adjustments to the valuation allowance are charged in the period in which the determination is made, either to income or goodwill, depending upon when that portion of the valuation allowance was originally created.
We record an estimated tax liability or tax benefit for income and other taxes based on what we determine will likely be paid in the various tax jurisdictions in which we operate. We use our best judgment in the determination of these amounts. However, the liabilities ultimately realized and paid are dependent upon various matters, including resolution of tax audits, and may differ from amounts recorded. An adjustment to the estimated liability would be recorded as a provision or benefit to income tax expense in the period in which it becomes probable that the amount of the actual liability or benefit differs from the recorded amount.
Our future effective tax rates could be adversely affected by changes in the valuation of our deferred tax assets or liabilities or changes in tax laws or interpretations thereof. If and when our deferred tax assets are no longer fully reserved, we will begin to provide for taxes at the full statutory rate. In addition, we are subject to the examination of our income tax returns by the Internal Revenue Service and other tax authorities. We regularly assess the likelihood of adverse outcomes resulting from these examinations to determine the adequacy of our provision for income taxes.
Recent Accounting Pronouncements
Recent Accounting Pronouncements are included in Note 1, “Description of Business and Summary of Significant Accounting Policies and Estimates”, of the Notes to Consolidated Financial Statements included in this Report.
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Inflation and Seasonality
We do not believe that our operations are significantly impacted by inflation. Our business is not seasonal in nature.
| Item 7A. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
Not Applicable
| Item 8. | Financial Statements AND SUPPLEMENTAL DATA |
The financial statements are included herewith commencing on page F-1.
| Item 9. | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure |
None
| Item 9A. | Controls and Procedures |
Evaluation of Disclosure Controls and Procedures. The Company’s disclosure controls and procedures are designed to ensure that such information required to be disclosed by the Company in reports filed or submitted under the Exchange Act, as amended, 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 December 31, 2018, 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 December 31, 2018.
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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 December 31, 2018, based on revisions and updates issued in 2013 by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) to its report 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 December 31, 2018.
Changes in Internal Control Over Financial Reporting. The Company’s management, with the participation of the principal executive and principal financial officer, have concluded that there were no changes in internal control over financial reporting during the fiscal quarter ended December 31, 2018.
| Item 9B. | Other Information |
Not Applicable
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| Item 10. | Directors, Executive Officers and Corporate Governance |
The following table sets forth the names, ages and positions of our directors and executive officers as of December 31, 2018:
| Name | Age | Position Held With Deep Down | ||
| Ronald E. Smith (1) | 60 | President, Chief Executive Officer and Director | ||
| Mary L. Budrunas (1)(2) | 67 | Vice President, Corporate Secretary and Director | ||
| Mark Carden | 60 | Chairman of the Board of Directors | ||
| Randolph W. Warner (2) | 71 | Director | ||
| Charles K. Njuguna | 41 | Chief Financial Officer |
_________________________
| (1) | Ronald E. Smith and Mary L. Budrunas are married to each other. | |
| (2) | Ms. Budrunas and Mr. Warner resigned from the Board of Directors as of April 5, 2019. |
Biographical information regarding each of our current directors and executive officers is as follows. The following paragraphs also include specific information about each director’s experience, qualifications, attributes or skills that led the Board of Directors to the conclusion that the individual should serve on the Board as of the time of this filing, in light of our business and structure:
Ronald E. Smith, President, Chief Executive Officer and Director. Mr. Smith co-founded Deep Down in 1997 and has served as our Chief Executive Officer, President and Director since December 2006. Prior to December 2006, Mr. Smith was Deep Down’s President. Mr. Smith graduated from Texas A&M University with a Bachelor of Science degree in Ocean Engineering in 1981. Mr. Smith worked both onshore and offshore in management positions for Ocean Drilling and Exploration Company (ODECO), Oceaneering Multiflex, Mustang Engineering and Kvaerner before founding Deep Down. Mr. Smith’s interests include all types of offshore technology, nautical innovations, state of the art communications, diving technology, hydromechanics, naval architecture, dynamics of offshore structures, diving technology and marketing of new or innovative concepts. Mr. Smith is directly responsible for the invention or development of many innovative solutions for the offshore industry, including the first steel tube flying lead installation system. Mr. Smith is also credited for the new patented Loose Steel Tube Flying Leads, subsea deployment systems, new subsea J-plates and the recently patented NHU (Non Helical Umbilical), which is a mobile steel tube umbilical production facility employing a new concept to build Steel Tube Umbilicals.
Mr. Smith is qualified for service on the Board due to his extensive background in many aspects of the offshore industry, spanning almost three decades. Mr. Smith’s wide range of knowledge and experience with the various technologies and platforms in the deepwater industry brings invaluable expertise to our Board.
Mark Carden, Chairman of the Board of Directors. Mr. Carden has served as Chairman of the Board since September 30, 2017, when Mr. Eugene L. Butler resigned as Executive Chairman and Chief Financial Officer. Mr. Carden joined the Board as an independent director effective May 1, 2014, and was appointed Chairman of the Audit Committee of the Board of Directors. Mr. Carden was a Partner at Coopers & Lybrand, LLP, now PricewaterhouseCoopers, LLP and held multiple senior-level financial positions specializing in electric and gas utilities from 1981 to 1999; he most recently served as Chief Operating Officer, Global Energy Assurance Practice. Additionally, Mr. Carden was one of three CPAs in the US selected to serve a two year fellowship at the Financial Accounting Standards Board from 1991 to 1993. Mr. Carden holds a BBA from Texas A&M University. He is currently the Executive Pastor and Elder at Clear Creek Community Church, in League City, Texas.
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Mr. Carden is qualified for service on the Board based on his experience and expertise in management, notably his knowledge of the energy market and business strategy, and is a financial expert as defined in Item 407(d)(5)(ii) of Regulation S-K.
Charles K. Njuguna, Chief Financial Officer. Mr. Njuguna has served as the Company’s Chief Financial Officer since September 2017, following Mr. Butler’s resignation. Mr. Njuguna joined the Company in early 2012 to manage the Company’s corporate accounting activities, was later appointed to manage all of the Company’s commercial activities, and most recently served as Business Manager, with oversight for a wide range of financial, operational and administrative functions. Additionally, Mr. Njuguna has over 20 years of international business experience, including various operational and financial management roles in Africa, the UK and the US. Mr. Njuguna holds an MBA from the University of Texas at Austin.
Mr. Njuguna is qualified to serve as an officer based on his in-depth knowledge of the Company’s operations and his international business experience.
Corporate Governance
Code of Ethics
The Company has adopted Codes of Ethical Conduct that apply to all its directors, officers (including its chief executive officer, chief financial officer, controller and any person performing such functions) and employees. The Company has previously filed copies of these Codes of Ethical Conduct and they can be located pursuant to the information shown in the Exhibit list items 14.1 and 14.2 to this Report. Copies of the Company’s Codes of Ethical Conduct may also be obtained at the Investors section of the Company’s website, www.deepdowninc.com, or by written request addressed to the Corporate Secretary, Deep Down, Inc., PO Box 1389 Crosby, TX. The Company intends to satisfy the requirements under Item 5.05 of Form 8-K regarding disclosure of amendments to, or waivers from, provisions of its code of ethics that apply to the Chief Executive Officer, Chief Financial Officer or Controller by posting such information on the Company’s website. Information contained on the website is not part of this Report.
The Company’s Board of Directors is responsible for reviewing and making recommendations concerning the selection of outside auditors, reviewing the scope, results and effectiveness of the annual audit of the Company's financial statements and other services provided by the Company’s independent public accountants. The Board of Directors reviews the Company's internal accounting controls, practices and policies. Our Board of Directors has determined that Mr. Carden qualifies as an independent audit committee financial expert as defined in Item 407(d)(5)(ii) of Regulation S-K.
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Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Exchange Act requires our officers and directors, and persons who own more than ten percent of a registered class of our equity securities, to file reports of securities ownership and changes in such ownership with the SEC. Officers, directors and greater than ten percent shareholders also are required by rules promulgated by the SEC to furnish us with copies of all Section 16(a) forms they file.
Based solely on the Company’s review of the copies of such forms received by it, the Company believes that all Section 16(a) filing requirements applicable to its officers and directors and greater-than ten percent beneficial owners during the year ended December 31, 2018 were in compliance.
| Item 11. | Executive Compensation |
The following table sets forth information concerning total compensation earned in the years ended December 31, 2018 and 2017 by our Principal Executive Officer (“PEO”), and our other executive officer as of December 31, 2018 (collectively, our “Named Officers”).
Summary Compensation Tables for the years ended December 31, 2018 and 2017
| Name and Principal Position | Year | Salary | Stock Awards | All Other Compensation (1) (2) | Total | |||||||||||||||
| Ronald E. Smith, | 2018 | $ | 493,845 | $ | – | $ | 62,552 | $ | 556,397 | |||||||||||
| President and Chief Executive Officer | 2017 | $ | 501,562 | $ | – | $ | 71,585 | $ | 573,147 | |||||||||||
| Charles K. Njuguna, | 2018 | $ | 246,157 | $ | 90,000 | $ | 59,558 | $ | 395,715 | |||||||||||
| Chief Financial Officer | 2017 | $ | 225,674 | $ | – | $ | 13,442 | $ | 239,116 | |||||||||||
| (1) | Amounts in 2018 represent: |
| · | Automobile allowances of $19,500 to Messrs. Smith and Njuguna; |
| · | Payments for vacation not taken in 2018 of $19,291 for Mr. Smith and $14,423 for Mr. Njuguna; |
| · | Reimbursement of $10,761 to Mr. Smith and $25,635 to Mr. Njuguna for healthcare premiums and | |
| · | Cash bonus of $13,000 paid to Mr. Smith for time spent outside the country on a customer project |
| (2) | Amounts in 2017 represent: |
| · | Automobile allowance of $19,500 to Mr. Smith and $13,442 to Mr. Njuguna; |
| · | Payments for vacation not taken in 2017 of $52,085 for Mr. Smith |
| 22 |
Narrative Disclosure to Summary Compensation Table
On January 1, 2016, the Company entered into an employment agreement with Mr. Smith for a term of three years, and subject to automatic annual renewals, unless at least 90 days prior to the applicable renewal date, the Company shall give notice that the employment agreement shall not be extended. The term of the agreement has been renewed through December 31, 2019. The employment agreement provides that Mr. Smith receive annual cash compensation of $501,562.
On July 27, 2018, the Company entered into an employment agreement with Mr. Njuguna for a term of three years, effective October 1, 2017, and subject to automatic annual renewals, unless at least 90 days prior to the applicable renewal date, the Company shall give notice that the employment agreement shall not be extended. The employment agreement provides that Mr. Njuguna receive annual cash compensation of $250,000.
Outstanding Equity Awards at December 31, 2018
The following table summarizes nonvested stock awards assuming a market value of $0.85 per share (the closing market price of the Company’s common stock on December 31, 2018). See Note 5, “Share-Based Compensation”, of the Notes to Consolidated Financial Statements included in this Report for additional information.
| STOCK AWARDS | ||||||||
| Number of Shares or Units of Stock That Have Not Vested | Market Value of Shares or Units of Stock that Have Not Vested | |||||||
| Name | (#) (1) | ($) | ||||||
| Charles K Njuguna | 200,000 | 170,000 | ||||||
| (1) | The shares are scheduled to vest in two equal installments on October 1, 2019 and October 1, 2020. |
Benefits payable upon change in control
Both Mr. Smith and Mr. Njuguna’s (the “Executives”) employment agreements contain provisions related to change in control.
In the event of termination of the Executive’s employment for any reason, he will be entitled to receive all accrued, unpaid salary and vacation time through the date of termination and all benefits to which the Executive is entitled or vested under the terms of all employee benefit and compensation plans, agreements and arrangements in which the Executive is a participant as of the date of termination. In addition, subject to executing a general release in favor of us, the Executive will be entitled to receive certain severance payments in the event his employment is terminated by the Company “other than for cause” or by the Executive with “good reason.” These severance payments include the following:
(i) a lump sum in cash equal to one times the Executive’s annual base salary (at the rate in effect on the date of termination), provided, however, that if such termination occurs prior to the date that is twelve months following a change of control, then such payment will be equal to three times the Executive’s annual base salary (at the rate in effect on the date of termination);
(ii) a lump sum in cash equal to the average annual bonus paid to the Executive for the prior two full fiscal years preceding the date of termination; provided, however, that if such termination occurs prior to the date that is twelve months following a change of control, then such payment will be equal to two times the average annual bonus paid to the Executive for the prior two full fiscal years preceding the date of termination;
| 23 |
(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 our annual incentive bonus arrangement; provided, however, that such pro rata portion shall be calculated based on the Executive’s annual bonus for the previous fiscal year; but if no previous annual bonus has been paid to the Executive, then the lump sum cash payment for this current pro rata annual bonus obligation shall be no less than fifty percent of the 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.
The Executives have agreed to not, during the term of their employment and for a one-year period after their termination, engage in “Competition” (as defined in his employment agreement) with us, solicit business from any of our customers or potential customers, solicit the employment or services of any person employed by or a consultant to us on the date of termination or within six months prior thereto, or otherwise knowingly interfere with our business or accounts or any of our subsidiaries.
The Executives’ employment agreements also provide that we, to the extent permitted by applicable law and our by-laws, will defend, indemnify and hold harmless the Executive from any and all claims, demands or causes of action, including reasonable attorneys’ fees and expenses, suffered or incurred by the Executive as a result of the assertion or filing of any claim, demand, litigation or other proceedings based upon statements, acts or omissions made by or on behalf of the Executive pursuant to the Employment Agreement or in the course and scope of the Executive’s employment with us. We will also maintain and pay all applicable premiums for directors’ and officers’ liability insurance which shall provide full coverage for the defense and indemnification of the Executive, to the fullest extent permitted by applicable law.
Compensation of Directors
The Compensation Committee of the Board of Directors makes all decisions regarding director compensation. Only directors who are not employees, independent contractors or consultants of the Company or any of its subsidiaries or affiliates (“Independent Directors”), are entitled to receive a fee, plus reimbursement of reasonable out-of-pocket expenses incurred to attend Board meetings.
The Company uses a combination of cash and equity-based compensation, in the form of restricted stock, to attract and retain qualified candidates to serve on the Board. We believe our compensation arrangement for Independent Directors is comparable to the standards of peer companies within our industry and geographical location.
We pay our Independent Directors meeting fees of $1,500 per meeting attended of the Board of Directors. Compensation for our Independent Directors consists of equity and cash as described below. Our Independent Director, as of the date of this Report, is Mr. Mark Carden.
On October 1, 2016, the Company entered into a 3-year consulting agreement (the “Agreement”), with Ms. Mary L. Budrunas, the spouse of Mr. Smith and a former full-time employee of the Company. Ms. Budrunas retired from being a full-time employee of the Company effective September 30, 2016, but continues to provide services to the Company.
The following table provides certain information with respect to the 2018 compensation awarded or earned by the Independent Directors who served in such capacity during the year, and Ms. Budrunas. Ms. Budrunas and Mr. Warner resigned from the Board of Directors on April 5, 2019.
| Name | Fees Earned or Paid in Cash ($) | All Other Compensation ($)(1) | Total | |||||||||
| Randolph W. Warner | $ | 10,500 | $ | – | $ | 10,500 | ||||||
| Mark Carden | $ | 10,500 | $ | – | $ | 10,500 | ||||||
| Mary L. Budrunas | $ | 210,000 | $ | 210,000 | ||||||||
| (1) | The Agreement provides for Ms. Budrunas to be reasonably available to the Company, up to 60 hours per month, in exchange for compensation of $17,500 per month. |
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| Item 12. | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters |
Set forth below is certain information with respect to beneficial ownership of Common Stock as of April 15, 2019, except as otherwise noted below, by (i) each person known by us to beneficially own more than 5 percent of the outstanding shares of our common stock; (ii) each Director as of such date; (iii) our “Named Officers” (as determined under Item 402(m) of Regulation S-K); and (iv) all directors and executive officers of Deep Down as a group. To our knowledge, all persons listed in the table have sole voting and investment power with respect to their shares, except to the extent that authority is shared with their respective spouse under applicable law.
| Name | Number of Shares of Common Stock Beneficially Owned | Number of Shares That May Be Acquired By Options Exercisable Within 60 Days | Total | Percent of Outstanding Common Stock (1) | ||||||||||||
| Jamaka Capital Management LLC | 1,484,091 | – | 1,484,091 | (2) | 11.0% | |||||||||||
| Perlus Microcap Fund, L.P. | 1,243,183 | – | 1,243,183 | (3) | 9.2% | |||||||||||
| Aegis Financial Corporation | 816,206 | – | 816,206 | (4) | 6.1% | |||||||||||
| Directors and Executive Officers: | ||||||||||||||||
| Ronald E. Smith | 2,888,116 | – | 2,888,116 | (5) | 21.5% | |||||||||||
| Charles K. Njuguna | 267,350 | – | 267,350 | (6) | 2.0% | |||||||||||
| Mark Carden | 60,980 | – | 60,980 | (7) | * | |||||||||||
| All directors and officers as a group (5 persons) | 3,216,446 | – | 3,216,446 | 23.9% | ||||||||||||
______________
* Indicates ownership of less than 1% of Common Stock outstanding.
| (1) | The percentages in the table are calculated using the total shares outstanding as of April 15, 2019 or a total of 13,453,393 shares. |
| (2) | Based on a Schedule 13D filed with the SEC dated November 14, 2017, Jamaka Capital Management LLC, 3889 Maple Avenue, Dallas, TX 75219, may be deemed the beneficial owners of 1,484,091 shares. |
| (3) | Based on a Schedule 13G filed with the SEC dated January 26, 2016, by Perlus Microcap Fund, L.P., 7 Esplanade, St. Helier, Jersey, Channel Islands JE1 2TR. |
| 25 |
| (4) | Based on a Schedule 13G filed with the SEC dated February 8, 2019, by Aegis Financial Corporation, 6862 Elm Street, Suite 830, McLean, Virginia 22101 |
| (5) | Includes 930,651 shares held directly by Mr. Smith’s spouse, 367,544 shares held indirectly through the Company’s Simple IRA Plan, and 23,071 shares held indirectly by Mr. Smith’s spouse through the Company’s Simple IRA Plan. |
| (6) | Includes 200,000 shares of nonvested stock, scheduled to vest in two equal installments on October 1, 2019 and October 1, 2020. |
| (7) | Includes 20,000 shares of nonvested stock, scheduled to vest in two equal installments on May 2, 2019 and May 2, 2020, and 980 shares held indirectly in retirement and trading accounts owned by Mr. Carden and his wife. |
| ITEM 13. | Certain Relationships and Related Transactions, and Director Independence |
Certain Relationships and Related Transactions
Our Board of Directors and management recognize that related person transactions present a heightened risk of conflicts of interest, and therefore we review all relationships and transactions in which we and our directors, director nominees and executive officers or their immediate family members, as well as holders of more than 5 percent of any class of our voting securities and their family members, have a direct or indirect material interest. As required under SEC rules, transactions that are determined to be directly or indirectly material to us or a related person are disclosed in the appropriate annual and/or quarterly statements filed with the SEC.
Director Independence
We believe that Mr. Carden is “independent” under the requirements of Rule 303A.02 of the NYSE Listed Company Manual.
| ITEM 14. | Principal Accountant Fees and Services |
The following table sets forth the aggregate fees paid to Moss Adams for audit services rendered in connection with the Company’s consolidated financial statements and reports for the years ended December 31, 2018 and 2017, and for other services rendered during those years on behalf of Deep Down and its subsidiaries:
| 26 |
| December 31, 2018 | December 31, 2017 | |||||||
| (i) Audit Fees | $ | 196,484 | $ | 200,191 | ||||
| (ii) Audit Related Fees | – | – | ||||||
| (iii) Tax Fees | 18,251 | 47,655 | ||||||
| (iv) All Other Fees | – | – | ||||||
Audit Fees: Consists of fees billed for professional services rendered for the audit of Deep Down’s consolidated financial statements, the review of interim condensed consolidated financial statements included in quarterly reports, services that are normally provided in connection with statutory and regulatory filings or engagements and attest services, except those not required by statute or regulation.
Audit-Related Fees: Consists of fees billed for assurance and related services that are reasonably related to the performance of the audit and review of Deep Down’s consolidated financial statements and are not reported under "Audit Fees."
Tax Fees: Consists of tax compliance, tax preparation and other tax services. Tax compliance and tax preparation consists of fees billed for professional services related to assistance with tax returns. Other tax services consist of fees billed for other miscellaneous tax consulting.
All Other Fees: None.
Pre-Approval of Audit and Permissible Non-Audit Services of Independent Auditors
The Board of Directors pre-approves all audit and permissible non-audit services provided by Moss Adams. These services may include audit services, audit-related services, tax services and other services. The Board of Directors may also pre-approve particular services on a case-by-case basis and may delegate pre-approval authority to one or more directors. If so delegated, the director must report any pre-approval decision to the Board of Directors at its first meeting after the pre-approval was obtained.
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| ITEM 15. | EXHIBITS, FINANCIAL STATEMENT SCHEDULES |
Information required by this item is incorporated herein by reference from the section entitled “Exhibit Index” of this Report.
| ITEM 16. | FORM 10-K SUMMARY |
None
| 28 |
Pursuant to the requirements of Section 13 or 15(d) 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.
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 Auger Matthew Auger Controller (Principal Accounting Officer) |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the registrant and in the capacities and on the date indicated:
|
Signature |
Title |
||
| /s/ Ronald E. Smith | President, Chief Executive Officer and Director | ||
| Ronald E. Smith | (Principal Executive Officer) | ||
| /s/ Charles K. Njuguna | Chief Financial Officer | ||
| Charles K. Njuguna | (Principal Financial Officer) | ||
| /s/ Mark Carden | Chairman of the Board of Directors | ||
| Mark Carden | |||
| Date: April 15, 2019 |
| 29 |
_________________________
* Filed herewith.
# Furnished herewith.
† Exhibit constitutes a management contract or compensatory plan or arrangement.
| 30 |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and the Board of Directors of
Deep Down, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Deep Down, Inc. and subsidiaries (the “Company”) as of December 31, 2018 and 2017, the related consolidated statements of operations, changes in stockholders’ equity and cash flows for the years then ended, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the consolidated financial position of the Company as of December 31, 2018 and 2017, and the consolidated results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures to respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ Moss Adams LLP
Houston, Texas
April 15, 2019
We have served as the Company’s auditor since 2017.
| F-1 |
DEEP DOWN, INC.
| (In thousands, except share and per share amounts) | ||||||||
| ASSETS | ||||||||
| Current assets: | December 31, 2018 | December 31, 2017 | ||||||
| Cash | $ | 2,015 | $ | 3,939 | ||||
| Short term investment (certificate of deposit) | 1,035 | 1,017 | ||||||
| Accounts receivable, net of allowance of $10 and $10, respectively | 4,388 | 4,142 | ||||||
| Contract assets | 1,931 | 925 | ||||||
| Prepaid expenses and other current assets | 621 | 302 | ||||||
| Total current assets | 9,990 | 10,325 | ||||||
| Property, plant and equipment, net | 9,691 | 12,352 | ||||||
| Intangibles, net | 56 | 63 | ||||||
| Other assets | 383 | 1,230 | ||||||
| Total assets | $ | 20,120 | $ | 23,970 | ||||
| LIABILITIES AND STOCKHOLDERS' EQUITY | ||||||||
| Current liabilities: | ||||||||
| Accounts payable and accrued liabilities | $ | 1,982 | $ | 1,511 | ||||
| Contract liabilities | 973 | 612 | ||||||
| Current portion of long-term debt | 9 | – | ||||||
| Total current liabilities | 2,964 | 2,123 | ||||||
| Long-term debt (Auto loan) | 47 | – | ||||||
| Total long term liabilities | 47 | – | ||||||
| Total liabilities | 3,011 | 2,123 | ||||||
| Commitments and contingencies (Note 8) | ||||||||
| Stockholders' equity: | ||||||||
| Common stock, $0.001 par value, 24,500,000 shares authorized, 15,706,010 and 15,438,660 shares issued, respectively | 16 | 15 | ||||||
| Additional paid-in capital | 73,271 | 73,246 | ||||||
| Treasury stock 2,027,217 and 2,002,417 shares, respectively, at cost | (2,062 | ) | (2,040 | ) | ||||
| Accumulated deficit | (54,116 | ) | (49,374 | ) | ||||
| Total stockholders' equity | 17,109 | 21,847 | ||||||
| Total liabilities and stockholders' equity | $ | 20,120 | $ | 23,970 | ||||
The accompanying notes are an integral part of the consolidated financial statements.
| F-2 |
DEEP DOWN, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
| Year Ended | ||||||||
| December 31, | ||||||||
| (In thousands, except per share amounts) | 2018 | 2017 | ||||||
| Revenues | $ | 16,175 | $ | 19,478 | ||||
| Cost of sales: | ||||||||
| Cost of sales | 9,803 | 9,854 | ||||||
| Depreciation expense | 1,590 | 1,077 | ||||||
| Total cost of sales | 11,393 | 10,931 | ||||||
| Gross profit | 4,782 | 8,547 | ||||||
| Operating expenses: | ||||||||
| Selling, general and administrative | 7,818 | 9,113 | ||||||
| Asset impairment | 1,890 | – | ||||||
| Depreciation and amortization | 282 | 271 | ||||||
| Total operating expenses | 9,990 | 9,384 | ||||||
| Operating loss | (5,208 | ) | (837 | ) | ||||
| Other income: | ||||||||
| Interest income, net | 35 | 56 | ||||||
| Gain on sale of assets | 439 | 576 | ||||||
| Equity in net income of joint venture and other income | – | 94 | ||||||
| Total other income | 474 | 726 | ||||||
| Loss before income taxes | (4,734 | ) | (111 | ) | ||||
| Income tax expense | (8 | ) | (5 | ) | ||||
| Net loss | $ | (4,742 | ) | $ | (116 | ) | ||
| Net loss per share: | ||||||||
| Basic | $ | (0.35 | ) | $ | (0.01 | ) | ||
| Fully diluted | $ | (0.35 | ) | $ | (0.01 | ) | ||
| Weighted-average shares outstanding: | ||||||||
| Basic | 13,553 | 14,233 | ||||||
| Fully diluted | 13,553 | 14,233 | ||||||
The accompanying notes are an integral part of the consolidated financial statements.
| F-3 |
DEEP DOWN, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2018 and 2017
| Additional | ||||||||||||||||||||||||
| Common Stock | Paid-in | Treasury | Accumulated | |||||||||||||||||||||
| (In thousands) | Shares (#) | Amount ($) | Capital | Stock | Deficit | Total | ||||||||||||||||||
| Balance at December 31, 2016 | 15,408 | $ | 15 | $ | 73,112 | $ | (567 | ) | $ | (49,258 | ) | $ | 23,302 | |||||||||||
| Net loss | – | – | – | – | (116 | ) | (116 | ) | ||||||||||||||||
| Restricted stock awards | 30 | – | – | – | – | |||||||||||||||||||
| Treasury shares purchased | – | – | (1,473 | ) | – | (1,473 | ) | |||||||||||||||||
| Share-based compensation | – | – | 134 | – | – | 134 | ||||||||||||||||||
| Balance at December 31, 2017 | 15,438 | $ | 15 | $ | 73,246 | $ | (2,040 | ) | $ | (49,374 | ) | $ | 21,847 | |||||||||||
| Net loss | – | – | – | – | (4,742 | ) | (4,742 | ) | ||||||||||||||||
| Restricted stock awards | 300 | – | – | – | – | – | ||||||||||||||||||
| Shares surrendered to settle employee tax liabilities and retired | (32 | ) | 1 | (31 | ) | – | – | (30 | ) | |||||||||||||||
| Treasury shares purchased | – | – | – | (22 | ) | – | (22 | ) | ||||||||||||||||
| Share-based compensation | – | – | 56 | – | – | 56 | ||||||||||||||||||
| Balance at December 31, 2018 | 15,706 | $ | 16 | $ | 73,271 | $ | (2,062 | ) | $ | (54,116 | ) | $ | 17,109 | |||||||||||
The accompanying notes are an integral part of the consolidated financial statements.
| F-4 |
DEEP DOWN, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
| Year Ended | ||||||||
| December 31, | ||||||||
| (In thousands) | 2018 | 2017 | ||||||
| Cash flows from operating activities: | ||||||||
| Net loss | $ | (4,742 | ) | $ | (116 | ) | ||
| Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
| Depreciation and amortization | 1,872 | 1,348 | ||||||
| Share-based compensation | 56 | 134 | ||||||
| Bad debt expense (recovery) | 67 | (22 | ) | |||||
| Equity in net income of joint venture and other income | – | (94 | ) | |||||
| Gain on disposal of assets | (439 | ) | (576 | ) | ||||
| Loss on asset impairment | 1,890 | – | ||||||
| Changes in operating assets and liabilities: | ||||||||
| Accounts receivable, net | (503 | ) | 1,919 | |||||
| Contract Assets | (1,006 | ) | 152 | |||||
| Prepaid expenses and other current assets | 218 | (6 | ) | |||||
| Other assets | 210 | (497 | ) | |||||
| Accounts payable and accrued liabilities | 471 | (267 | ) | |||||
| Contract liabilities | 361 | (2,737 | ) | |||||
| Net cash used in operating activities | (1,545 | ) | (762 | ) | ||||
| Cash flows from investing activities: | ||||||||
| Proceeds from sale of property, plant and equipment | 538 | 908 | ||||||
| Payments received on employee receivable (included in other assets) | 16 | 15 | ||||||
| Advances | – | (94 | ) | |||||
| Purchases of property, plant and equipment | (882 | ) | (2,940 | ) | ||||
| Cash used in short term investment | (18 | ) | (12 | ) | ||||
| Cash distribution received from joint venture | – | 94 | ||||||
| Net cash used in investing activities | (346 | ) | (2,029 | ) | ||||
| Cash flows from financing activities: | ||||||||
| Principal payments on long-term debt | (11 | ) | – | |||||
| Cash paid for purchase of our common stock | (22 | ) | (1,473 | ) | ||||
| Net cash used in financing activities | (33 | ) | (1,473 | ) | ||||
| Change in cash | (1,924 | ) | (4,264 | ) | ||||
| Cash, beginning of year | 3,939 | 8,203 | ||||||
| Cash, end of year | $ | 2,015 | $ | 3,939 | ||||
| Supplemental schedule of non-cash investing and financing activities: | ||||||||
| Shares of common stock surrendered to settle employee payroll tax liabilities | $ | 30 | $ | – | ||||
| Reclassification of equipment | $ | – | $ | 3,117 | ||||
| Reclassification of a note receivable | $ | 537 | $ | 553 | ||||
| Property, plant, and equipment acquired with debt | $ | 67 | $ | – | ||||
| Property, plant, and equipment acquired in exchange for accounts receivable | $ | 250 | $ | – | ||||
| Accounts receivable for sale of property, plant and equipment | $ | 40 | $ | – | ||||
The accompanying notes are an integral part of the consolidated financial statements.
| F-5 |
DEEP DOWN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
All dollar and share amounts in the Notes to the Financial Statements are in thousands of dollars and shares, unless otherwise indicated, except per share amounts.
NOTE 1: DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND ESTIMATES
Description of Business
Deep Down, Inc., a Nevada corporation (“Deep Down Nevada”), and its directly wholly-owned subsidiary, Deep Down, Inc., a Delaware corporation (“Deep Down Delaware”); (collectively referred to as “Deep Down”, “we”, “us” or the “Company”), is an oilfield services company specializing in complex deepwater and ultra-deepwater oil production distribution system support services, serving the worldwide offshore exploration and production industry. Our services and technological solutions include distribution system installation support and engineering services, umbilical terminations, loose-tube steel flying leads, flotation and Remote Operated Vehicles (“ROVs”) and related services. We support subsea engineering, installation, commissioning, and maintenance projects through specialized, highly experienced service teams and engineered technological solutions. Deep Down’s primary focus is on more complex deepwater and ultra-deepwater oil production distribution system support services and technologies, used between the platform and the wellhead.
Liquidity
As a deepwater service provider, our revenues, profitability, cash flows, and future rate of growth are generally dependent on the condition of the global oil and gas industry, and our customers’ ability to invest capital for offshore exploration, drilling and production and maintain or increase levels of expenditures for maintenance of offshore drilling and production facilities. Oil and gas prices and the level of offshore drilling and production activity have historically been characterized by significant volatility. At times we enter into large, fixed-price contracts which may require significant lead time and investment. A decline in offshore drilling and production activity could result in lower contract volume or delays in significant contracts which could negatively impact our earnings and cash flows. Our earnings and cash flows could also be negatively affected by delays in payments by significant customers or delays in completion of our contracts for any reason. While our objective is to enter into contracts with our customers that are cash flow positive, we may not always be able to achieve this objective. We are dependent on our cash flows from operations to fund our working capital requirements and the uncertainties noted above create risks that we may not achieve our planned earnings or cash flow from operations, which may require us to raise additional debt or equity capital. There can be no assurance that we could raise additional debt or equity capital.
During the fiscal years ended December 31, 2018 and 2017, we financed our capital needs through cash on hand and opportunistic sales of property, plant and equipment. As of December 31, 2018, our working capital was $7,026 compared to $8,202 as of December 31, 2017.
Summary of Significant Accounting Policies and Estimates
Principles of Consolidation
The consolidated financial statements include the accounts of Deep Down and its wholly-owned subsidiaries for the years ended December 31, 2018 and 2017. All intercompany transactions and balances have been eliminated.
| F-6 |
Use of Estimates
The preparation of these financial statements in accordance with US GAAP requires us to make estimates and judgments that may affect assets and liabilities. On an on-going basis, we evaluate our estimates, including those related to revenue recognition and related allowances, contract assets and liabilities, impairments of long-lived assets, including intangibles, income taxes including the valuation allowance for deferred tax assets, contingencies and litigation, and share-based payments. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable, the results of which form the basis for making judgments about the carrying values of assets and liabilities. Actual results may differ from these estimates under different assumptions or conditions.
Segments
For the years ended December 31, 2018 and 2017, we only had one operating and reporting segment, Deep Down Delaware.
Cash and Cash Equivalents
We consider all highly liquid investments with maturities from date of purchase of three months or less to be cash equivalents. Cash and cash equivalents consist of cash on deposit with domestic banks and, at times, may exceed federally insured limits.
Fair Value of Financial Instruments
Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. We utilize a fair value hierarchy, which maximizes the use of observable inputs and minimizes the use of unobservable inputs when measuring fair value. The fair value hierarchy has three levels of inputs that may be used to measure fair value:
Level 1 - Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities.
Level 2 - Quoted prices in markets that are not active; or other inputs that are observable, either directly or indirectly, for substantially the full term of the asset or liability.
Level 3 - Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable.
Our financial instruments consist primarily of cash, accounts receivables and payables, and notes receivable (included in other assets). The carrying values of cash, accounts receivables and payables approximated their fair values at December 31, 2018 and 2017 due to their short-term maturities. The carrying values of our notes receivable approximate their fair values at December 31, 2018 and 2017 because the interest rates approximate current market rates.
Accounts Receivable
Accounts receivable are uncollateralized customer obligations due under normal trade terms. We provide an allowance for doubtful accounts receivable based on a specific review of each customer’s accounts receivable balance with respect to their ability to make payments. Generally, we do not charge interest on past due accounts. When specific accounts are determined to require an allowance, they are expensed by a provision for bad debts in that period. At December 31, 2018 and 2017, we estimated the allowance for doubtful accounts requirement to be $10. Bad debt expense (credit) totaled $67 and $(22) for the years ended December 31, 2018 and 2017, respectively.
| F-7 |
Concentration of Revenues and Credit Risk
For the year ended December 31, 2018, our five largest customers accounted for 33 percent, 15 percent, 15 percent, 11 percent and 11 percent of total revenues. For the year ended December 31, 2017, our five largest customers accounted for 61 percent, 11 percent, 10 percent, 3 percent and 3 percent of total revenues. The loss of one or more of these customers could have a material impact on our results of operations and cash flows.
As of December 31, 2018, three of our customers accounted for 50 percent, 26 percent and 10 percent of total accounts receivable. As of December 31, 2017, three of our customers accounted for 37 percent, 17 percent and 12 percent of total accounts receivable.
Property Plant and Equipment
Property, plant and equipment (“PP&E”) is stated at cost, net of accumulated depreciation and amortization. Depreciation and amortization is computed using the straight-line method over the estimated useful lives of the respective assets. Replacements and betterments are capitalized, while maintenance and repairs are expensed as incurred. It is our policy to include amortization expense on assets acquired under capital leases with depreciation expense on owned assets. Additionally, we record depreciation and amortization expense related to revenue-generating assets as a component of cost of sales in the accompanying consolidated statements of operations.
If circumstances associated with our PP&E have changed or a significant event has occurred that may affect the recoverability of the carrying amount of our PP&E, an impairment indicator exists and we test the PP&E for impairment. Before testing for impairment, we group PP&E with other finite-lived long-lived assets (“long lived assets”) at the lowest level of identifiable cash flows that are largely independent of cash flows from other assets or groups of assets. Testing long-lived assets for impairment is a two-step process:
Step 1 - We test the long-lived asset or asset group for recoverability by comparing the carrying amount of the asset or asset group with the sum of the undiscounted future cash flows from use and the eventual disposal of the asset or asset group. If the carrying amount of the long-lived asset or asset group is determined to be greater than the sum of the undiscounted future cash flows from use and disposal, we would need to perform step 2.
Step 2 - If the long-lived asset or group of assets fails the recoverability test in step 1, we would record an impairment expense for the difference between the carrying amount and the fair value of the long-lived asset or asset group.
After considering the recent volatility in oil prices, our performance over the past few years, and strategic focus on our core business going forward, we conducted an evaluation of the carrying amount of certain of our long-lived assets. As a result of this evaluation, we recorded impairment charges in an aggregate amount of $2,320, of which $1,890 is reported as asset impairment and $430 as depreciation expense in cost of sales in the consolidated statements of operations related to construction in progress and certain equipment.
Additionally, we tested remaining long-lived assets for impairment but determined no additional impairment.
Equity Method Investments
Equity method investments in joint ventures are reported as investments in joint venture on the consolidated balance sheets, and our share of earnings or losses in the joint venture is reported as equity in net income or loss of joint venture in the consolidated statements of operations. We currently have no remaining investments in joint ventures.
| F-8 |
Lease Obligations
We lease land, buildings, vehicles and certain equipment under non-cancellable operating leases. Deep Down Delaware leases indoor manufacturing space and leases office, warehouse and operating space in Houston, Texas, under non-cancellable operating leases. Additionally, we lease space in Mobile, Alabama to house our 3,400 ton carousel system. We also lease certain office and other operating equipment under capital leases; the related assets are included with property, plant and equipment on the consolidated balance sheets.
At the inception of a lease, we evaluate the agreement to determine whether the lease will be accounted for as an operating or capital lease. The term of the lease used for such an evaluation includes renewal option periods only in instances in which the exercise of the renewal option can be reasonably assured and failure to exercise such option would result in an economic penalty.
Revenue Recognition
On January 1, 2018, we adopted ASC Topic 606 (“ASC 606”) using the modified retrospective method applied to those contracts which were not completed as of January 1, 2018. Results for reporting periods beginning after January 1, 2018 are presented under ASC 606, while prior period amounts are not adjusted and continue to be reported in accordance with our historic accounting under ASC Topic 605, Revenue Recognition. See further discussion in Note 2.
Income Taxes
We follow the asset and liability method of accounting for income taxes. This method takes into account the differences between financial statement treatment and tax treatment of certain transactions. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect of a change in tax rates is recognized as income or expense in the period that includes the enactment date.
We record a valuation allowance to reduce the carrying value of our deferred tax assets when it is more likely than not that some or all of the deferred tax assets will expire before realization of the benefit or that future deductibility is not probable. The ultimate realization of the deferred tax assets depends upon our ability to generate sufficient taxable income of the appropriate character in the future. This requires management to use estimates and make assumptions regarding significant future events such as the taxability of entities operating in the various taxing jurisdictions. In evaluating our ability to recover our deferred tax assets, we consider all reasonably available positive and negative evidence, including our past operating results, the existence of cumulative losses in the most recent years and our forecast of future taxable income. In estimating future taxable income, we develop assumptions, including the amount of future state, and federal pre-tax operating income, the reversal of temporary differences and the implementation of feasible and prudent tax planning strategies. These assumptions require significant judgment. When the likelihood of the realization of existing deferred tax assets changes, adjustments to the valuation allowance are charged in the period in which the determination is made, either to income or goodwill, depending upon when that portion of the valuation allowance was originally created.
We record an estimated tax liability or tax benefit for income and other taxes based on what we determine will likely be paid in the various tax jurisdictions in which we operate. We use our best judgment in the determination of these amounts. However, the liabilities ultimately realized and paid are dependent upon various matters, including resolution of tax audits, and may differ from amounts recorded. An adjustment to the estimated liability would be recorded as a provision or benefit to income tax expense in the period in which it becomes probable that the amount of the actual liability or benefit differs from the recorded amount.
| F-9 |
Our future effective tax rates could be adversely affected by changes in the valuation of our deferred tax assets or liabilities or changes in tax laws or interpretations thereof. If and when our deferred tax assets are no longer fully reserved, we will begin to provide for taxes at the full statutory rate. In addition, we are subject to the examination of our income tax returns by the Internal Revenue Service and other tax authorities. We regularly assess the likelihood of adverse outcomes resulting from these examinations to determine the adequacy of our provision for income taxes.
Share-Based Compensation
We record share-based awards exchanged for employee service at fair value on the date of grant and expense the awards in the consolidated statements of operations over the requisite employee service period. Share-based compensation expense includes an estimate for forfeitures and is generally recognized over the expected term of the award on a straight-line basis. At December 31, 2018 and 2017, we had one type of share-based employee compensation: restricted stock.
Earnings or Loss per Common Share
Basic earnings or loss per common share (“EPS”) is calculated by dividing net earnings or loss by the weighted average number of common shares outstanding for the period. Diluted EPS is calculated by dividing net earnings or loss by the weighted average number of common shares and dilutive common stock equivalents (stock options) outstanding during the period. Diluted EPS reflects the potential dilution that could occur if stock options and warrants to purchase common stock were exercised for shares of common stock. In periods where losses are reported, the weighted-average number of common shares outstanding excludes common stock equivalents, because their inclusion would be anti-dilutive.
Recently Issued Accounting Standards
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 asset for all leases, with the exception of 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 right-of-use 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.
The new guidance is effective for fiscal years beginning after December 15, 2018. The Company adopted this guidance in the first quarter of 2019 using the optional transition method (ASU 2018-11). Consequently, the Company's reporting for the comparative periods presented in the financial statements will continue to be in accordance with ASC Topic 840, Leases. The Company has substantially completed its evaluation of the impact on the Company’s lease portfolio.The adoption of this guidance will result in the addition of right-of-use assets and corresponding lease obligations to the consolidated balance sheet and will not have a material impact on the Company’s results of operations or cash flows.
ASC Topic 842 provides for certain practical expedients when adopting the guidance. The Company plans to elect 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 plans to apply 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 a right-of-use 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 recognize a single lease cost allocated over the lease term, generally on a straight-line basis. The Company plans to elect 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.
| F-10 |
The Company plans to elect to not capitalize any lease in which the estimated value of the underlying asset at 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.
As part of our assessment, we formed an implementation work team, conducted training for the relevant staff regarding the potential impacts of ASC Topic 842 and have substantially concluded our contract analyses and policy review. We engaged external resources to assist us in our efforts of completing the analysis of potential changes to current accounting practices and are in the process of implementing a new lease accounting system in connection with the adoption of the updated guidance. We also evaluated the impact of ASC Topic 842 on our internal control over financial reporting and other changes in business practices and processes. The Company is in the process of finalizing its catalog of existing lease contracts and implementing changes to its systems.
Upon adoption, the Company expects to record operating lease right-of-use assets in the range of approximately $4,700 to $5,100, representing the present value of future lease payments under operating leases with terms of greater than twelve months. The Company is continuing to evaluate the impact the pronouncement will have on the related disclosures.
NOTE 2: REVENUES: ADOPTION OF ASC 606, “REVENUE FROM CONTRACTS WITH CUSTOMERS”
On January 1, 2018, we adopted ASC 606 using the modified retrospective method applied to those contracts which were not completed as of January 1, 2018. Results for reporting periods beginning after January 1, 2018 are presented under ASC 606, while prior period amounts are not adjusted and continue to be reported in accordance with our historic accounting under ASC Topic 605, Revenue Recognition.
There was no significant impact upon the adoption of ASC 606. We did not record any adjustments to opening retained earnings as of January 1, 2018 because the Company’s revenue recognition methodologies for both fixed price contracts (over time using cost to cost as an input measure of performance) and for service contracts (over time as services are incurred) do not materially change by the adoption of the new standard. Revenues are recognized when control of the promised goods or services is transferred to our customers, in an amount that reflects the consideration we expect to be entitled to in exchange for those goods or services.
To determine the proper revenue recognition method for our customer contracts, we evaluate whether two or more contracts should be combined and accounted for as one single contract and whether the combined or single contract should be accounted for as more than one performance obligation. This evaluation requires significant judgment and the decision to combine a group of contracts or separate the combined or single contract into multiple performance obligations could change the amount of revenue and profit recorded in a given period.
For most of our fixed price contracts, the customer contracts with us to provide a significant service of integrating a complex set of tasks and components into a single project or capability (even if that single project results in the delivery of multiple units). Hence, the entire contract is accounted for as one performance obligation. We account for a contract when it has approval and commitment from both parties, the rights of the parties are identified, payment terms are identified, the contract has commercial substance and collectability of consideration is probable.
| F-11 |
Disaggregation of Revenue
The following table presents our revenues disaggregated by fixed price and service contracts. Sales taxes are excluded from revenues.
Year Ended
| December 31, 2018 | December 31, 2017 | |||||||
| Fixed Price Contracts | $ | 7,693 | $ | 6,599 | ||||
| Service Contracts | 8,482 | 12,879 | ||||||
| Total | $ | 16,175 | $ | 19,478 | ||||
Fixed price contracts
For fixed price contracts, we generally recognize revenue over time as we perform because of continuous transfer of control to the customer. This continuous transfer of control to the customer is supported by clauses in the contract that allow the customer to unilaterally terminate the contract for convenience, pay us for costs incurred plus a reasonable profit and take control of any work in process. Additionally, in other fixed price contracts, the customer typically controls the work in process as evidenced either by contractual termination clauses or by our rights to payment for work performed to date plus a reasonable profit to deliver products or services that do not have an alternative use to the Company.
Because of control transferring over time, revenue is recognized based on the extent of progress towards completion of the performance obligation. The selection of the method to measure progress towards completion requires judgment and is based on the nature of the products or services to be provided. We generally use the cost-to-cost measure of progress for our contracts because it best depicts the transfer of control to the customer which occurs as we incur costs on our contracts. Under the cost-to-cost measure of progress, the extent of progress towards completion is measured based on the ratio of costs incurred to date to the total estimated costs at completion of the performance obligation. Revenues, including estimated fees or profits, are recorded proportionally as costs are incurred.
Contracts are often modified to account for changes in contract specifications and requirements. We consider contract modifications to exist when the modification either creates new, or changes the existing, enforceable rights and obligations. Most of our contract modifications are for goods or services that are not distinct from the existing contract due to the significant integration service provided in the context of the contract and are accounted for as if they were part of that existing contract. The effect of a contract modification on the transaction price, and our measure of progress for the performance obligation to which it relates, is recognized as an adjustment to revenue (either as an increase in or a reduction of revenue) on a cumulative catch-up basis.
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.
| F-12 |
Contract balances
Costs and estimated earnings in excess of billings on uncompleted contracts arise when revenues are recorded on a percentage-of-completion basis but cannot be invoiced under the terms of the contract. Such amounts are invoiced upon completion of contractual milestones. Billings in excess of costs and estimated earnings on uncompleted contracts arise when milestone billings are permissible under the contract, but the related costs have not yet been incurred. All contract costs are recognized currently on jobs formally approved by the customer and contracts are not shown as complete until virtually all anticipated costs have been incurred and the risk of loss has passed to the customer.
Assets related to costs and estimated earnings in excess of billings on uncompleted contracts, as well as liabilities related to billings in excess of costs and estimated earnings on uncompleted contracts, have been classified as current. The contract cycle for certain long-term contracts may extend beyond one year, thus complete collection of amounts related to these contracts may extend beyond one year, though such long-term contracts include contractual milestone billings as discussed above. As of 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”.
| December 31, 2018 | December 31, 2017 | |||||||
| Costs incurred on uncompleted contracts | $ | 9,697 | $ | 9,564 | ||||
| Estimated earnings on uncompleted contracts | 10,787 | 10,741 | ||||||
| 20,484 | 20,305 | |||||||
| Less: Billings to date on uncompleted contracts | (19,526 | ) | (19,992 | ) | ||||
| $ | 958 | $ | 313 | |||||
| Included in the accompanying consolidated balance sheets under the following captions: | ||||||||
| Contract assets | $ | 1,931 | $ | 925 | ||||
| Contract liabilities | (973 | ) | (612 | ) | ||||
| $ | 958 | $ | 313 | |||||
The balance in costs and estimated earnings in excess of billings on uncompleted contracts at December 31, 2018 and 2017 consisted primarily of earned but unbilled revenues related to fixed-price projects.
The balance in billings in excess of costs and estimated earnings on uncompleted contracts at December 31, 2018 and 2017 consisted primarily of unearned billings 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 and potential orders and also any remaining performance obligations for any sales arrangements that had not fully satisfied the criteria to be considered a contract with a customer pursuant to the requirements of ASC 606.
As of December 31, 2018, all of our fixed price contracts are short-term in nature with a contract term 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.
| F-13 |
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 3: PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consisted of the following:
| December 31, 2018 | December 31, 2017 | Range of Asset Lives | ||||||||||
| Buildings and improvements | 285 | 285 | 7 - 36 years | |||||||||
| Leasehold improvements | 908 | 908 | 2 - 5 years | |||||||||
| Equipment | 18,640 | 19,012 | 2 - 30 years | |||||||||
| Furniture, computers and office equipment | 1,166 | 1,166 | 2 - 8 years | |||||||||
| Construction in progress | 158 | 2,127 | – | |||||||||
| Total property, plant and equipment | 21,157 | 23,498 | ||||||||||
| Less: Accumulated depreciation | (11,466 | ) | (11,146 | ) | ||||||||
| Property, plant and equipment, net | $ | 9,691 | $ | 12,352 | ||||||||
Depreciation expense excluded from cost of sales in the accompanying consolidated statements of operations was $242 and $234 for the years ended December 31, 2018 and 2017, respectively. Depreciation expense included in cost of sales in the accompanying consolidated statements of operations was $1,590 and $1,077 for the years ended December 31, 2018 and 2017, respectively.
Construction in progress represents assets that are not ready for service or are in the construction stage. Assets are depreciated once they are placed in service. See discussion in Note 1 related to impairment of these assets.
NOTE 4: INCOME OR LOSS PER COMMON SHARE
The following is a reconciliation of the number of shares used in the basic and diluted net income or loss per common share calculation:
| Year Ended | ||||||||
| December 31, | ||||||||
| 2018 | 2017 | |||||||
| Numerator: | ||||||||
| Net loss | $ | (4,742 | ) | $ | (116 | ) | ||
| Denominator: | ||||||||
| Weighted average number of common shares outstanding | 13,553 | 14,233 | ||||||
| Denominator for diluted earnings per share | 13,553 | 14,233 | ||||||
| Net loss per common share outstanding, basic and fully diluted | $ | (0.35 | ) | $ | (0.01 | ) | ||
At December 31, 2018 and 2017, there were no outstanding stock options convertible to shares of common stock, or any other potentially dilutive securities.
| F-14 |
NOTE 5: SHARE-BASED COMPENSATION
The following table summarizes the activity of our nonvested restricted shares for the years ended December 31, 2018 and 2017:
| Restricted Shares | Weighted-Average Grant-Date Fair Value | ||||||||
| Nonvested at December 31, 2016 | 240 | $ | 0.88 | ||||||
| Granted | 30 | 1.15 | |||||||
| Vested | (20 | ) | 1.18 | ||||||
| Nonvested at December 31, 2017 | 250 | $ | 0.50 | ||||||
| Granted | 300 | 0.79 | |||||||
| Vested | (120 | ) | 0.83 | ||||||
| Nonvested at December 31, 2018 | 430 | $ | 0.83 | ||||||
For the years ended December 31, 2018 and 2017, we recognized a total of $56 and $134, respectively, of share-based compensation expense related to restricted stock awards, which is included in selling, general and administrative expenses in the accompanying consolidated statements of operations. The unamortized estimated fair value of nonvested shares of restricted stock awards was $222 at December 31, 2018. These costs are expected to be recognized as expense over a weighted average period of 2.28 years. The unamortized estimated fair value of nonvested shares of restricted stock awards was $139 at December 31, 2017.
NOTE 6: TREASURY STOCK
On December 31, 2017, we had 2,002 shares of our outstanding common stock held in treasury.
On March 26, 2018, our Board of Directors authorized a repurchase program (the “Repurchase Program”) under which we could repurchase up to $1,000 of our outstanding stock. The Repurchase Program was funded from cash on hand and cash provided by operating activities.
During the quarter ended December 31, 2018, we repurchased 25 shares of our outstanding common stock at a total cost of $21 under this Repurchase Program. The average price per share of treasury stock purchased under the Repurchase program through December 31, 2018 was $0.86. Treasury shares are accounted for using the cost method.
On December 31, 2018, we had 2,027 shares of our outstanding common stock held in treasury.
An additional 228 shares of our outstanding common stock were repurchased in the quarter ended March 31, 2019, for an aggregate amount of $170.
The Repurchase Program expired on March 31, 2019.
| F-15 |
NOTE 7: INCOME TAXES
Income tax expense is comprised of the following:
Year Ended December 31, | ||||||||
| 2018 | 2017 | |||||||
| Federal: | ||||||||
| Current | $ | – | $ | – | ||||
| Deferred | 2 | 1 | ||||||
| Total | $ | 2 | $ | 1 | ||||
| State: | ||||||||
| Current | $ | 8 | $ | 5 | ||||
| Deferred | (2 | ) | (1 | ) | ||||
| Total | $ | 6 | $ | 4 | ||||
| Total income tax expense (benefit) | $ | 8 | $ | 5 | ||||
Income taxes expense differs from the amount computed by applying the U.S. statutory income tax rate to loss before income taxes for the reasons set forth below.
Year Ended December 31, |
||||||||
| 2018 | 2017 | |||||||
| Income tax expense at federal statutory rate | 21.00 | % | 34.00 | % | ||||
| State taxes, net of federal benefit | (0.10 | ) % | 2.52 | % | ||||
| Valuation allowance | (25.08 | ) % | 1,662.43 | % | ||||
| Remeasurement of deferred taxes from 34% to 21% | 0.00 | % | (1,710.52 | ) % | ||||
| Research and development credits | 3.87 | % | 2.21 | % | ||||
| Other permanent differences | (0.31 | ) % | (15.63 | ) % | ||||
| Other, net | 0.42 | % | 20.84 | % | ||||
| Total effective rate | (0.20 | ) % | (4.15 | ) % | ||||
Comprehensive tax reform legislation enacted in December 2017, commonly referred to as the Tax Cuts and Jobs Acts (“2017 Tax Act”), has significantly changed U.S. federal income tax laws. The 2017 Tax Act, among other things, reduced the corporate income tax rate from 34% to 21%, limits the deductibility of business interest expense and net operating losses, provides additional limitations on the deductibility of executive compensation, imposes a one-time tax on unrepatriated earnings from certain foreign subsidiaries, taxes offshore earnings at reduced rates regardless of whether they are repatriated, and allows the immediate deduction of certain new investments instead of deductions for depreciation expense over time. As a result of the 2017 Tax Act, the Company recorded deferred tax expense of $1,900 (1,710.52%) related to the remeasurement of its net deferred tax assets from 34% to 21%, which was substantially offset by a corresponding $1,900 (1,662.43%) reduction in its deferred tax valuation allowance. The Company does not believe that the 2017 Tax Act will further impact its consolidated financial statements, however, its consolidated financial statements may change due to changes in interpretation of the 2017 Tax Act and additional regulatory guidance that may be issued.
| F-16 |
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes, as well as operating loss and tax credit carry forwards. The tax effects of the temporary differences and carry forwards are as follows:
| As of | ||||||||
| December 31, | ||||||||
| 2018 | 2017 | |||||||
| Deferred tax assets: | ||||||||
| Net operating loss carryforwards | $ | 4,245 | $ | 3,255 | ||||
| R&D & other credit carryforwards | 685 | 501 | ||||||
| Share-based compensation | 730 | 741 | ||||||
| Intangible amortization | 16 | 21 | ||||||
| Allowance for bad debt | 2 | 2 | ||||||
| Other | 16 | 8 | ||||||
| Total deferred tax assets | $ | 5,694 | $ | 4,528 | ||||
| Less: valuation allowance | (4,837 | ) | (3,649 | ) | ||||
| Net deferred tax assets | $ | 857 | $ | 879 | ||||
| Deferred tax liabilities: | ||||||||
| Depreciation on property and equipment | $ | (857 | ) | $ | (879 | ) | ||
| Amortization of intangibles | – | – | ||||||
| Total deferred tax liabilities | $ | (857 | ) | $ | (879 | ) | ||
| Net deferred tax position | $ | – | $ | – | ||||
We have $19,809 of federal and $1,096 of state net operating loss (“NOL”) carryforwards and $685 in research and development and other credits available to offset future taxable income. These federal and state NOL’s will expire at various dates through 2036. Management analyzed its current operating results and future projections and determined that a full valuation allowance was needed due to our cumulative losses in recent years. We have no uncertain tax positions at December 31, 2018. Accordingly, we do not have any accruals for penalties or interest related to our tax returns. Should an examination or audit arise, we would evaluate the need for an accrual and record one, if necessary. Our tax returns from the tax years ended December 31, 2012 through December 31, 2017 are open to examination by the IRS.
NOTE 8: COMMITMENTS AND CONTINGENCIES
Operating Leases
We lease certain offices, facilities, equipment and vehicles under non-cancellable operating and capital leases expiring at various dates through 2023.
At December 31, 2018, future minimum contractual lease obligations were as follows:
| Years ending December 31,: | Operating Leases | ||||
| 2019 | 1,372 | ||||
| 2020 | 1,357 | ||||
| 2021 | 1,350 | ||||
| 2022 | 1,350 | ||||
| 2023 | 571 | ||||
| Thereafter | – | ||||
| Total minimum lease payments | $ | 6,000 | |||
Rent expense for the years ended December 31, 2018 and 2017 was $1,373 and $1,445, respectively.
See discussion about our expected adoption of ASC 842 in Note 1.
| F-17 |
Letters of Credit
Certain customers could require us to issue standby letters of credit in the normal course of business to ensure performance under terms of contracts or as a form of product warranty. The beneficiary of a letter of credit could demand payment from the issuing bank for the amount of the outstanding letter of credit. We had no outstanding letters of credit at December 31, 2018 or 2017.
Employment Agreements
Our Chief Executive Officer and Chief Financial Officer (“Executives”) are employed under employment agreements containing severance provisions. In the event of termination of the Executives’ employment for any reason, the Executives 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 Executives will be entitled to receive certain severance payments in the event their employment is terminated by the Company “other than for cause” or by the Executives with “good reason.” These severance payments include: (i) a lump sum in cash equal to one to three times the Executives’ annual base salary; (ii) a lump sum in cash equal to one to two times the average annual bonus paid to the Executives 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 Executives’ annual base salary; and (iv) if the Executives’ 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 Executives shall immediately vest and become exercisable.
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 involves alleged delays and defects in products manufactured by the Company for GE dating back to 2013. The Company disputes GE’s allegations and intends to vigorously defend itself against these allegations. Mediation took place on November 28, 2018, but no resolution was found. On February 22, 2019, GE initiated arbitration proceedings with the ICC. The total amount in dispute was originally $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. 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 the week of April 22, 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 9: SUBSEQUENT EVENTS
We have evaluated subsequent events through the date the consolidated financial statements were filed with the Securities and Exchange Commission.
On February 26, 2019, we received a payment of $500 on our note receivable reported in prepaid and other current assets in the accompanying consolidated balance sheet as of December 31, 2018. The remaining portion of the note receivable of $37 is expected to be collected during 2019.
| F-18 |
Exhibit 21.1
SUBSIDIARIES OF REGISTRANT
| Company | Incorporated | |
| Deep Down, Inc. | Delaware |
Exhibit 31.1
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
PURSUANT TO RULES 13a-14(a) AND 15d-14(a)
OF THE SECURITIES EXCHANGE ACT OF 1934
I, Ronald E. Smith, President and Chief Executive Officer of Deep Down, Inc. (the “Company”), certify that:
(1) I have reviewed this Annual Report on Form 10-K for the fiscal year ended December 31, 2018;
(2) Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
(3) Based on my knowledge, the financial statements, and other financial information included in the report, fairly present in all material respects the financial condition, results of operations and cash flows of the Company as of, and for, the periods represented in this report;
(4) The Company’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the Company and have:
(a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Company, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which the report is being prepared;
(b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c) evaluated the effectiveness of the Company’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) disclosed in this report any change in the Company’s internal control over financial reporting that occurred during the Company’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting; and
(5) The Company’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Company’s auditors and to the audit committee of the board of directors (or persons fulfilling the equivalent function):
(a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Company’s ability to record, process, summarize and report financial information; and
(b) any fraud, whether or not material, that involves management or other employees who have a significant role in the Company’s internal control over financial reporting.
April 15, 2019
/s/ Ronald E. Smith
Ronald E. Smith
President and Chief Executive Officer
(Principal Executive Officer)
Exhibit 31.2
EXHIBIT 31.2
CERTIFICATION OF CHIEF FINANCIAL OFFICER
PURSUANT TO RULES 13a-14(a) AND 15d-14(a)
OF THE SECURITIES EXCHANGE ACT OF 1934
I, Charles K. Njuguna, Chief Financial Officer of Deep Down, Inc. (the “Company”), certify that:
(1) I have reviewed this Annual Report on Form 10-K for the fiscal year ended December 31, 2018;
(2) Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
(3) Based on my knowledge, the financial statements, and other financial information included in the report, fairly present in all material respects the financial condition, results of operations and cash flows of the Company as of, and for, the periods represented in this report;
(4) The Company’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the Company and have:
(a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Company, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which the report is being prepared;
(b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c) evaluated the effectiveness of the Company’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) disclosed in this report any change in the Company’s internal control over financial reporting that occurred during the Company’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting; and
(5) The Company’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Company’s auditors and to the audit committee of the board of directors (or persons fulfilling the equivalent function):
(a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Company’s ability to record, process, summarize and report financial information; and
(b) any fraud, whether or not material, that involves management or other employees who have a significant role in the Company’s internal control over financial reporting.
April 15, 2019
/s/ Charles K. Njuguna
Charles K. Njuguna
Chief Financial Officer
(Principal Financial Officer)
Exhibit 32.1
DEEP DOWN, INC.
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report on Form 10-K of Deep Down, Inc. (the “Company”) for the year ended December 31, 2018, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), the undersigned, Ronald E. Smith, President and Chief Executive Officer of the Company hereby certifies, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
/s/ Ronald E. Smith
Ronald E. Smith
President and Chief Executive Officer
(Principal Executive Officer)
April 15, 2019
Exhibit 32.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report on Form 10-K of Deep Down, Inc. (the “Company”) for the year ended December 31, 2018, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), the undersigned, Charles K. Njuguna, Chief Financial Officer of the Company hereby certifies, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
/s/ Charles K. Njuguna
Charles K. Njuguna
Chief Financial Officer
(Principal Financial Officer)
April 15, 2019
Document and Entity Information - USD ($) |
12 Months Ended | ||
|---|---|---|---|
Dec. 31, 2018 |
Apr. 12, 2019 |
Jun. 30, 2018 |
|
| Document And Entity Information | |||
| Entity Registrant Name | Deep Down, Inc. | ||
| Entity Central Index Key | 0001110607 | ||
| Document Type | 10-K | ||
| Document Period End Date | Dec. 31, 2018 | ||
| Amendment Flag | false | ||
| Current Fiscal Year End Date | --12-31 | ||
| Is Entity a Well-known Seasoned Issuer? | No | ||
| Is Entity a Voluntary Filer? | No | ||
| 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 Common Stock, Shares Outstanding | 13,453,393 | ||
| Entity Public Float | $ 10,969,184 | ||
| Document Fiscal Period Focus | FY | ||
| Document Fiscal Year Focus | 2018 |
CONSOLIDATED BALANCE SHEETS (Parenthetical) - USD ($) $ in Thousands |
Dec. 31, 2018 |
Dec. 31, 2017 |
|---|---|---|
| ASSETS | ||
| Accounts receivable allowance | $ 10 | $ 10 |
| Stockholders' equity: | ||
| Common stock par value | $ 0.001 | $ 0.001 |
| Common stock shares authorized | 24,500,000 | 24,500,000 |
| Common stock issued | 15,706,010 | 15,438,660 |
| Treasury stock shares | 2,027,217 | 2,002,417 |
CONSOLIDATED STATEMENTS OF OPERATIONS - USD ($) shares in Thousands, $ in Thousands |
12 Months Ended | |
|---|---|---|
Dec. 31, 2018 |
Dec. 31, 2017 |
|
| Income Statement [Abstract] | ||
| Revenues | $ 16,175 | $ 19,478 |
| Cost of sales: | ||
| Cost of sales | 9,803 | 9,854 |
| Depreciation expense | 1,590 | 1,077 |
| Total cost of sales | 11,393 | 10,931 |
| Gross profit | 4,782 | 8,547 |
| Operating expenses: | ||
| Selling, general and administrative | 7,818 | 9,113 |
| Asset impairment | 1,890 | 0 |
| Depreciation and amortization | 282 | 271 |
| Total operating expenses | 9,990 | 9,384 |
| Operating loss | (5,208) | (837) |
| Other income: | ||
| Interest income, net | 35 | 56 |
| Gain on sale of assets | 439 | 576 |
| Equity in net income of joint venture and other income | 0 | 94 |
| Total other income | 474 | 726 |
| Loss before income taxes | (4,734) | (111) |
| Income tax expense | (8) | (5) |
| Net loss | $ (4,742) | $ (116) |
| Net loss per share: | ||
| Basic | $ (0.35) | $ (0.01) |
| Fully diluted | $ (0.35) | $ (0.01) |
| Weighted-average shares outstanding: | ||
| Basic | 13,553 | 14,233 |
| Fully diluted | 13,553 | 14,233 |
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY - USD ($) shares in Thousands, $ in Thousands |
Common Stock |
Additional Paid-In Capital |
Treasury Stock |
Accumulated Deficit |
Total |
|---|---|---|---|---|---|
| Beginning Balance, Shares at Dec. 31, 2016 | 15,408 | ||||
| Beginning Balance, Amount at Dec. 31, 2016 | $ 15 | $ 73,112 | $ (567) | $ (49,258) | $ 23,302 |
| Net loss | (116) | (116) | |||
| Restricted stock awards, shares | 30 | ||||
| Treasury shares purchased | (1,473) | (1,473) | |||
| Share-based compensation | 134 | 134 | |||
| Ending Balance, Shares at Dec. 31, 2017 | 15,438 | ||||
| Ending Balance, Amount at Dec. 31, 2017 | $ 15 | 73,246 | (2,040) | (49,374) | 21,847 |
| Net loss | (4,742) | (4,742) | |||
| Restricted stock awards, shares | 300 | ||||
| Shares surrendered to settle employee tax liabilities and retired, shares | (32) | ||||
| Shares surrendered to settle employee tax liabilities and retired, value | $ 1 | (31) | (30) | ||
| Treasury shares purchased | (22) | (22) | |||
| Share-based compensation | 56 | 56 | |||
| Ending Balance, Shares at Dec. 31, 2018 | 15,706 | ||||
| Ending Balance, Amount at Dec. 31, 2018 | $ 16 | $ 73,271 | $ (2,062) | $ (54,116) | $ 17,109 |
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND ESTIMATES |
12 Months Ended |
|---|---|
Dec. 31, 2018 | |
| Accounting Policies [Abstract] | |
| DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND ESTIMATES |
NOTE 1: DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND ESTIMATES
Description of Business
Deep Down, Inc., a Nevada corporation (“Deep Down Nevada”), and its directly wholly-owned subsidiary, Deep Down, Inc., a Delaware corporation (“Deep Down Delaware”); (collectively referred to as “Deep Down”, “we”, “us” or the “Company”), is an oilfield services company specializing in complex deepwater and ultra-deepwater oil production distribution system support services, serving the worldwide offshore exploration and production industry. Our services and technological solutions include distribution system installation support and engineering services, umbilical terminations, loose-tube steel flying leads, flotation and Remote Operated Vehicles (“ROVs”) and related services. We support subsea engineering, installation, commissioning, and maintenance projects through specialized, highly experienced service teams and engineered technological solutions. Deep Down’s primary focus is on more complex deepwater and ultra-deepwater oil production distribution system support services and technologies, used between the platform and the wellhead.
Liquidity
As a deepwater service provider, our revenues, profitability, cash flows, and future rate of growth are generally dependent on the condition of the global oil and gas industry, and our customers’ ability to invest capital for offshore exploration, drilling and production and maintain or increase levels of expenditures for maintenance of offshore drilling and production facilities. Oil and gas prices and the level of offshore drilling and production activity have historically been characterized by significant volatility. At times we enter into large, fixed-price contracts which may require significant lead time and investment. A decline in offshore drilling and production activity could result in lower contract volume or delays in significant contracts which could negatively impact our earnings and cash flows. Our earnings and cash flows could also be negatively affected by delays in payments by significant customers or delays in completion of our contracts for any reason. While our objective is to enter into contracts with our customers that are cash flow positive, we may not always be able to achieve this objective. We are dependent on our cash flows from operations to fund our working capital requirements and the uncertainties noted above create risks that we may not achieve our planned earnings or cash flow from operations, which may require us to raise additional debt or equity capital. There can be no assurance that we could raise additional debt or equity capital.
During the fiscal years ended December 31, 2018 and 2017, we financed our capital needs through cash on hand and opportunistic sales of property, plant and equipment. As of December 31, 2018, our working capital was $7,026 compared to $8,202 as of December 31, 2017.
Summary of Significant Accounting Policies and Estimates
Principles of Consolidation
The consolidated financial statements include the accounts of Deep Down and its wholly-owned subsidiaries for the years ended December 31, 2018 and 2017. All intercompany transactions and balances have been eliminated.
Use of Estimates
The preparation of these financial statements in accordance with US GAAP requires us to make estimates and judgments that may affect assets and liabilities. On an on-going basis, we evaluate our estimates, including those related to revenue recognition and related allowances, contract assets and liabilities, impairments of long-lived assets, including intangibles, income taxes including the valuation allowance for deferred tax assets, contingencies and litigation, and share-based payments. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable, the results of which form the basis for making judgments about the carrying values of assets and liabilities. Actual results may differ from these estimates under different assumptions or conditions.
Segments
For the years ended December 31, 2018 and 2017, we only had one operating and reporting segment, Deep Down Delaware.
Cash and Cash Equivalents
We consider all highly liquid investments with maturities from date of purchase of three months or less to be cash equivalents. Cash and cash equivalents consist of cash on deposit with domestic banks and, at times, may exceed federally insured limits.
Fair Value of Financial Instruments
Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. We utilize a fair value hierarchy, which maximizes the use of observable inputs and minimizes the use of unobservable inputs when measuring fair value. The fair value hierarchy has three levels of inputs that may be used to measure fair value:
Level 1 - Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities.
Level 2 - Quoted prices in markets that are not active; or other inputs that are observable, either directly or indirectly, for substantially the full term of the asset or liability.
Level 3 - Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable.
Our financial instruments consist primarily of cash, accounts receivables and payables, and notes receivable (included in other assets). The carrying values of cash, accounts receivables and payables approximated their fair values at December 31, 2018 and 2017 due to their short-term maturities. The carrying values of our notes receivable approximate their fair values at December 31, 2018 and 2017 because the interest rates approximate current market rates.
Accounts Receivable
Accounts receivable are uncollateralized customer obligations due under normal trade terms. We provide an allowance for doubtful accounts receivable based on a specific review of each customer’s accounts receivable balance with respect to their ability to make payments. Generally, we do not charge interest on past due accounts. When specific accounts are determined to require an allowance, they are expensed by a provision for bad debts in that period. At December 31, 2018 and 2017, we estimated the allowance for doubtful accounts requirement to be $10. Bad debt expense (credit) totaled $67 and $(22) for the years ended December 31, 2018 and 2017, respectively.
Concentration of Revenues and Credit Risk
For the year ended December 31, 2018, our five largest customers accounted for 33 percent, 15 percent, 15 percent, 11 percent and 11 percent of total revenues. For the year ended December 31, 2017, our five largest customers accounted for 61 percent, 11 percent, 10 percent, 3 percent and 3 percent of total revenues. The loss of one or more of these customers could have a material impact on our results of operations and cash flows.
As of December 31, 2018, three of our customers accounted for 50 percent, 26 percent and 10 percent of total accounts receivable. As of December 31, 2017, three of our customers accounted for 37 percent, 17 percent and 12 percent of total accounts receivable.
Property Plant and Equipment
Property, plant and equipment (“PP&E”) is stated at cost, net of accumulated depreciation and amortization. Depreciation and amortization is computed using the straight-line method over the estimated useful lives of the respective assets. Replacements and betterments are capitalized, while maintenance and repairs are expensed as incurred. It is our policy to include amortization expense on assets acquired under capital leases with depreciation expense on owned assets. Additionally, we record depreciation and amortization expense related to revenue-generating assets as a component of cost of sales in the accompanying consolidated statements of operations.
If circumstances associated with our PP&E have changed or a significant event has occurred that may affect the recoverability of the carrying amount of our PP&E, an impairment indicator exists and we test the PP&E for impairment. Before testing for impairment, we group PP&E with other finite-lived long-lived assets (“long lived assets”) at the lowest level of identifiable cash flows that are largely independent of cash flows from other assets or groups of assets. Testing long-lived assets for impairment is a two-step process:
Step 1 - We test the long-lived asset or asset group for recoverability by comparing the carrying amount of the asset or asset group with the sum of the undiscounted future cash flows from use and the eventual disposal of the asset or asset group. If the carrying amount of the long-lived asset or asset group is determined to be greater than the sum of the undiscounted future cash flows from use and disposal, we would need to perform step 2.
Step 2 - If the long-lived asset or group of assets fails the recoverability test in step 1, we would record an impairment expense for the difference between the carrying amount and the fair value of the long-lived asset or asset group.
After considering the recent volatility in oil prices, our performance over the past few years, and strategic focus on our core business going forward, we conducted an evaluation of the carrying amount of certain of our long-lived assets. As a result of this evaluation, we recorded impairment charges in an aggregate amount of $2,320, of which $1,890 is reported as asset impairment and $430 as depreciation expense in cost of sales in the consolidated statements of operations related to construction in progress and certain equipment.
Additionally, we tested remaining long-lived assets for impairment but determined no additional impairment.
Equity Method Investments
Equity method investments in joint ventures are reported as investments in joint venture on the consolidated balance sheets, and our share of earnings or losses in the joint venture is reported as equity in net income or loss of joint venture in the consolidated statements of operations. We currently have no remaining investments in joint ventures.
Lease Obligations
We lease land, buildings, vehicles and certain equipment under non-cancellable operating leases. Deep Down Delaware leases indoor manufacturing space and leases office, warehouse and operating space in Houston, Texas, under non-cancellable operating leases. Additionally, we lease space in Mobile, Alabama to house our 3,400 ton carousel system. We also lease certain office and other operating equipment under capital leases; the related assets are included with property, plant and equipment on the consolidated balance sheets.
At the inception of a lease, we evaluate the agreement to determine whether the lease will be accounted for as an operating or capital lease. The term of the lease used for such an evaluation includes renewal option periods only in instances in which the exercise of the renewal option can be reasonably assured and failure to exercise such option would result in an economic penalty.
Revenue Recognition
On January 1, 2018, we adopted ASC Topic 606 (“ASC 606”) using the modified retrospective method applied to those contracts which were not completed as of January 1, 2018. Results for reporting periods beginning after January 1, 2018 are presented under ASC 606, while prior period amounts are not adjusted and continue to be reported in accordance with our historic accounting under ASC Topic 605, Revenue Recognition. See further discussion in Note 2.
Income Taxes
We follow the asset and liability method of accounting for income taxes. This method takes into account the differences between financial statement treatment and tax treatment of certain transactions. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect of a change in tax rates is recognized as income or expense in the period that includes the enactment date.
We record a valuation allowance to reduce the carrying value of our deferred tax assets when it is more likely than not that some or all of the deferred tax assets will expire before realization of the benefit or that future deductibility is not probable. The ultimate realization of the deferred tax assets depends upon our ability to generate sufficient taxable income of the appropriate character in the future. This requires management to use estimates and make assumptions regarding significant future events such as the taxability of entities operating in the various taxing jurisdictions. In evaluating our ability to recover our deferred tax assets, we consider all reasonably available positive and negative evidence, including our past operating results, the existence of cumulative losses in the most recent years and our forecast of future taxable income. In estimating future taxable income, we develop assumptions, including the amount of future state, and federal pre-tax operating income, the reversal of temporary differences and the implementation of feasible and prudent tax planning strategies. These assumptions require significant judgment. When the likelihood of the realization of existing deferred tax assets changes, adjustments to the valuation allowance are charged in the period in which the determination is made, either to income or goodwill, depending upon when that portion of the valuation allowance was originally created.
We record an estimated tax liability or tax benefit for income and other taxes based on what we determine will likely be paid in the various tax jurisdictions in which we operate. We use our best judgment in the determination of these amounts. However, the liabilities ultimately realized and paid are dependent upon various matters, including resolution of tax audits, and may differ from amounts recorded. An adjustment to the estimated liability would be recorded as a provision or benefit to income tax expense in the period in which it becomes probable that the amount of the actual liability or benefit differs from the recorded amount.
Our future effective tax rates could be adversely affected by changes in the valuation of our deferred tax assets or liabilities or changes in tax laws or interpretations thereof. If and when our deferred tax assets are no longer fully reserved, we will begin to provide for taxes at the full statutory rate. In addition, we are subject to the examination of our income tax returns by the Internal Revenue Service and other tax authorities. We regularly assess the likelihood of adverse outcomes resulting from these examinations to determine the adequacy of our provision for income taxes.
Share-Based Compensation
We record share-based awards exchanged for employee service at fair value on the date of grant and expense the awards in the consolidated statements of operations over the requisite employee service period. Share-based compensation expense includes an estimate for forfeitures and is generally recognized over the expected term of the award on a straight-line basis. At December 31, 2018 and 2017, we had one type of share-based employee compensation: restricted stock.
Earnings or Loss per Common Share
Basic earnings or loss per common share (“EPS”) is calculated by dividing net earnings or loss by the weighted average number of common shares outstanding for the period. Diluted EPS is calculated by dividing net earnings or loss by the weighted average number of common shares and dilutive common stock equivalents (stock options) outstanding during the period. Diluted EPS reflects the potential dilution that could occur if stock options and warrants to purchase common stock were exercised for shares of common stock. In periods where losses are reported, the weighted-average number of common shares outstanding excludes common stock equivalents, because their inclusion would be anti-dilutive.
Recently Issued Accounting Standards
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 asset for all leases, with the exception of 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 right-of-use 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.
The new guidance is effective for fiscal years beginning after December 15, 2018. The Company adopted this guidance in the first quarter of 2019 using the optional transition method (ASU 2018-11). Consequently, the Company's reporting for the comparative periods presented in the financial statements will continue to be in accordance with ASC Topic 840, Leases. The Company has substantially completed its evaluation of the impact on the Company’s lease portfolio.The adoption of this guidance will result in the addition of right-of-use assets and corresponding lease obligations to the consolidated balance sheet and will not have a material impact on the Company’s results of operations or cash flows.
ASC Topic 842 provides for certain practical expedients when adopting the guidance. The Company plans to elect 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 plans to apply 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 a right-of-use 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 recognize a single lease cost allocated over the lease term, generally on a straight-line basis. The Company plans to elect 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 plans to elect to not capitalize any lease in which the estimated value of the underlying asset at 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.
As part of our assessment, we formed an implementation work team, conducted training for the relevant staff regarding the potential impacts of ASC Topic 842 and have substantially concluded our contract analyses and policy review. We engaged external resources to assist us in our efforts of completing the analysis of potential changes to current accounting practices and are in the process of implementing a new lease accounting system in connection with the adoption of the updated guidance. We also evaluated the impact of ASC Topic 842 on our internal control over financial reporting and other changes in business practices and processes. The Company is in the process of finalizing its catalog of existing lease contracts and implementing changes to its systems.
Upon adoption, the Company expects to record operating lease right-of-use assets in the range of approximately $4,700 to $5,100, representing the present value of future lease payments under operating leases with terms of greater than twelve months. The Company is continuing to evaluate the impact the pronouncement will have on the related disclosures. |
2. REVENUES: ADOPTION OF ASC 606 |
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| REVENUES: ADOPTION OF ASC 606 |
NOTE 2: REVENUES: ADOPTION OF ASC 606, “REVENUE FROM CONTRACTS WITH CUSTOMERS”
On January 1, 2018, we adopted ASC 606 using the modified retrospective method applied to those contracts which were not completed as of January 1, 2018. Results for reporting periods beginning after January 1, 2018 are presented under ASC 606, while prior period amounts are not adjusted and continue to be reported in accordance with our historic accounting under ASC Topic 605, Revenue Recognition.
There was no significant impact upon the adoption of ASC 606. We did not record any adjustments to opening retained earnings as of January 1, 2018 because the Company’s revenue recognition methodologies for both fixed price contracts (over time using cost to cost as an input measure of performance) and for service contracts (over time as services are incurred) do not materially change by the adoption of the new standard. Revenues are recognized when control of the promised goods or services is transferred to our customers, in an amount that reflects the consideration we expect to be entitled to in exchange for those goods or services.
To determine the proper revenue recognition method for our customer contracts, we evaluate whether two or more contracts should be combined and accounted for as one single contract and whether the combined or single contract should be accounted for as more than one performance obligation. This evaluation requires significant judgment and the decision to combine a group of contracts or separate the combined or single contract into multiple performance obligations could change the amount of revenue and profit recorded in a given period.
For most of our fixed price contracts, the customer contracts with us to provide a significant service of integrating a complex set of tasks and components into a single project or capability (even if that single project results in the delivery of multiple units). Hence, the entire contract is accounted for as one performance obligation. We account for a contract when it has approval and commitment from both parties, the rights of the parties are identified, payment terms are identified, the contract has commercial substance and collectability of consideration is probable.
Disaggregation of Revenue
The following table presents our revenues disaggregated by fixed price and service contracts. Sales taxes are excluded from revenues.
Year Ended
Fixed price contracts
For fixed price contracts, we generally recognize revenue over time as we perform because of continuous transfer of control to the customer. This continuous transfer of control to the customer is supported by clauses in the contract that allow the customer to unilaterally terminate the contract for convenience, pay us for costs incurred plus a reasonable profit and take control of any work in process. Additionally, in other fixed price contracts, the customer typically controls the work in process as evidenced either by contractual termination clauses or by our rights to payment for work performed to date plus a reasonable profit to deliver products or services that do not have an alternative use to the Company.
Because of control transferring over time, revenue is recognized based on the extent of progress towards completion of the performance obligation. The selection of the method to measure progress towards completion requires judgment and is based on the nature of the products or services to be provided. We generally use the cost-to-cost measure of progress for our contracts because it best depicts the transfer of control to the customer which occurs as we incur costs on our contracts. Under the cost-to-cost measure of progress, the extent of progress towards completion is measured based on the ratio of costs incurred to date to the total estimated costs at completion of the performance obligation. Revenues, including estimated fees or profits, are recorded proportionally as costs are incurred.
Contracts are often modified to account for changes in contract specifications and requirements. We consider contract modifications to exist when the modification either creates new, or changes the existing, enforceable rights and obligations. Most of our contract modifications are for goods or services that are not distinct from the existing contract due to the significant integration service provided in the context of the contract and are accounted for as if they were part of that existing contract. The effect of a contract modification on the transaction price, and our measure of progress for the performance obligation to which it relates, is recognized as an adjustment to revenue (either as an increase in or a reduction of revenue) on a cumulative catch-up basis.
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 on a percentage-of-completion basis but cannot be invoiced under the terms of the contract. Such amounts are invoiced upon completion of contractual milestones. Billings in excess of costs and estimated earnings on uncompleted contracts arise when milestone billings are permissible under the contract, but the related costs have not yet been incurred. All contract costs are recognized currently on jobs formally approved by the customer and contracts are not shown as complete until virtually all anticipated costs have been incurred and the risk of loss has passed to the customer.
Assets related to costs and estimated earnings in excess of billings on uncompleted contracts, as well as liabilities related to billings in excess of costs and estimated earnings on uncompleted contracts, have been classified as current. The contract cycle for certain long-term contracts may extend beyond one year, thus complete collection of amounts related to these contracts may extend beyond one year, though such long-term contracts include contractual milestone billings as discussed above. As of 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”.
The balance in costs and estimated earnings in excess of billings on uncompleted contracts at December 31, 2018 and 2017 consisted primarily of earned but unbilled revenues related to fixed-price projects.
The balance in billings in excess of costs and estimated earnings on uncompleted contracts at December 31, 2018 and 2017 consisted primarily of unearned billings 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 and potential orders and also any remaining performance obligations for any sales arrangements that had not fully satisfied the criteria to be considered a contract with a customer pursuant to the requirements of ASC 606.
As of December 31, 2018, all of our fixed price contracts are short-term in nature with a contract term 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. |
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3. PROPERTY, PLANT AND EQUIPMENT |
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| Property, Plant and Equipment [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| PROPERTY, PLANT AND EQUIPMENT |
NOTE 3: PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consisted of the following:
Depreciation expense excluded from cost of sales in the accompanying consolidated statements of operations was $242 and $234 for the years ended December 31, 2018 and 2017, respectively. Depreciation expense included in cost of sales in the accompanying consolidated statements of operations was $1,590 and $1,077 for the years ended December 31, 2018 and 2017, respectively.
Construction in progress represents assets that are not ready for service or are in the construction stage. Assets are depreciated once they are placed in service. See discussion in Note 1 related to impairment of these assets. |
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4. INCOME OR LOSS PER COMMON SHARE |
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| INCOME OR LOSS PER COMMON SHARE |
NOTE 4: INCOME OR LOSS PER COMMON SHARE
The following is a reconciliation of the number of shares used in the basic and diluted net income or loss per common share calculation:
At December 31, 2018 and 2017, there were no outstanding stock options convertible to shares of common stock, or any other potentially dilutive securities. |
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5. SHARE-BASED COMPENSATION |
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| Disclosure of Compensation Related Costs, Share-based Payments [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| SHARE-BASED COMPENSATION |
NOTE 5: SHARE-BASED COMPENSATION
The following table summarizes the activity of our nonvested restricted shares for the years ended December 31, 2018 and 2017:
For the years ended December 31, 2018 and 2017, we recognized a total of $56 and $134, respectively, of share-based compensation expense related to restricted stock awards, which is included in selling, general and administrative expenses in the accompanying consolidated statements of operations. The unamortized estimated fair value of nonvested shares of restricted stock awards was $222 at December 31, 2018. These costs are expected to be recognized as expense over a weighted average period of 2.28 years. The unamortized estimated fair value of nonvested shares of restricted stock awards was $139 at December 31, 2017. |
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6. TREASURY STOCK |
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| Equity [Abstract] | |
| Treasury Stock |
NOTE 6: TREASURY STOCK
On December 31, 2017, we had 2,002 shares of our outstanding common stock held in treasury.
On March 26, 2018, our Board of Directors authorized a repurchase program (the “Repurchase Program”) under which we could repurchase up to $1,000 of our outstanding stock. The Repurchase Program was funded from cash on hand and cash provided by operating activities.
During the quarter ended December 31, 2018, we repurchased 25 shares of our outstanding common stock at a total cost of $21 under this Repurchase Program. The average price per share of treasury stock purchased under the Repurchase program through December 31, 2018 was $0.86. Treasury shares are accounted for using the cost method.
On December 31, 2018, we had 2,027 shares of our outstanding common stock held in treasury.
An additional 228 shares of our outstanding common stock were repurchased in the quarter ended March 31, 2019, for an aggregate amount of $170.
The Repurchase Program expired on March 31, 2019. |
7. INCOME TAXES |
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| Income Tax Disclosure [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| INCOME TAXES |
NOTE 7: INCOME TAXES
Income tax expense is comprised of the following:
Income taxes expense differs from the amount computed by applying the U.S. statutory income tax rate to loss before income taxes for the reasons set forth below.
Comprehensive tax reform legislation enacted in December 2017, commonly referred to as the Tax Cuts and Jobs Acts (“2017 Tax Act”), has significantly changed U.S. federal income tax laws. The 2017 Tax Act, among other things, reduced the corporate income tax rate from 34% to 21%, limits the deductibility of business interest expense and net operating losses, provides additional limitations on the deductibility of executive compensation, imposes a one-time tax on unrepatriated earnings from certain foreign subsidiaries, taxes offshore earnings at reduced rates regardless of whether they are repatriated, and allows the immediate deduction of certain new investments instead of deductions for depreciation expense over time. As a result of the 2017 Tax Act, the Company recorded deferred tax expense of $1,900 (1,710.52%) related to the remeasurement of its net deferred tax assets from 34% to 21%, which was substantially offset by a corresponding $1,900 (1,662.43%) reduction in its deferred tax valuation allowance. The Company does not believe that the 2017 Tax Act will further impact its consolidated financial statements, however, its consolidated financial statements may change due to changes in interpretation of the 2017 Tax Act and additional regulatory guidance that may be issued.
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes, as well as operating loss and tax credit carry forwards. The tax effects of the temporary differences and carry forwards are as follows:
We have $19,809 of federal and $1,096 of state net operating loss (“NOL”) carryforwards and $685 in research and development and other credits available to offset future taxable income. These federal and state NOL’s will expire at various dates through 2036. Management analyzed its current operating results and future projections and determined that a full valuation allowance was needed due to our cumulative losses in recent years. We have no uncertain tax positions at December 31, 2018. Accordingly, we do not have any accruals for penalties or interest related to our tax returns. Should an examination or audit arise, we would evaluate the need for an accrual and record one, if necessary. Our tax returns from the tax years ended December 31, 2012 through December 31, 2017 are open to examination by the IRS. |
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8. COMMITMENTS AND CONTINGENCIES |
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| Commitments and Contingencies Disclosure [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||
| COMMITMENTS AND CONTINGENCIES |
NOTE 8: COMMITMENTS AND CONTINGENCIES
Operating Leases
We lease certain offices, facilities, equipment and vehicles under non-cancellable operating and capital leases expiring at various dates through 2023.
At December 31, 2018, future minimum contractual lease obligations were as follows:
Rent expense for the years ended December 31, 2018 and 2017 was $1,373 and $1,445, respectively.
See discussion about our expected adoption of ASC 842 in Note 1.
Letters of Credit
Certain customers could require us to issue standby letters of credit in the normal course of business to ensure performance under terms of contracts or as a form of product warranty. The beneficiary of a letter of credit could demand payment from the issuing bank for the amount of the outstanding letter of credit. We had no outstanding letters of credit at December 31, 2018 or 2017.
Employment Agreements
Our Chief Executive Officer and Chief Financial Officer (“Executives”) are employed under employment agreements containing severance provisions. In the event of termination of the Executives’ employment for any reason, the Executives 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 Executives will be entitled to receive certain severance payments in the event their employment is terminated by the Company “other than for cause” or by the Executives with “good reason.” These severance payments include: (i) a lump sum in cash equal to one to three times the Executives’ annual base salary; (ii) a lump sum in cash equal to one to two times the average annual bonus paid to the Executives 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 Executives’ annual base salary; and (iv) if the Executives’ 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 Executives shall immediately vest and become exercisable.
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 involves alleged delays and defects in products manufactured by the Company for GE dating back to 2013. The Company disputes GE’s allegations and intends to vigorously defend itself against these allegations. Mediation took place on November 28, 2018, but no resolution was found. On February 22, 2019, GE initiated arbitration proceedings with the ICC. The total amount in dispute was originally $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. 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 the week of April 22, 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. |
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9. SUBSEQUENT EVENTS |
12 Months Ended |
|---|---|
Dec. 31, 2018 | |
| Subsequent Events [Abstract] | |
| SUBSEQUENT EVENTS |
NOTE 9: SUBSEQUENT EVENTS
We have evaluated subsequent events through the date the consolidated financial statements were filed with the Securities and Exchange Commission.
On February 26, 2019, we received a payment of $500 on our note receivable reported in prepaid and other current assets in the accompanying consolidated balance sheet as of December 31, 2018. The remaining portion of the note receivable of $37 is expected to be collected during 2019. |
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND ESTIMATES (Policies) |
12 Months Ended |
|---|---|
Dec. 31, 2018 | |
| Accounting Policies [Abstract] | |
| Description of Business | Description of Business
Deep Down, Inc., a Nevada corporation (“Deep Down Nevada”), and its directly and indirectly wholly-owned subsidiaries, Deep Down, Inc., a Delaware corporation (“Deep Down Delaware”); and (collectively referred to as “Deep Down”, “we”, “us” or the “Company”), is an oilfield services company specializing in complex deepwater and ultra-deepwater oil production distribution system support services, serving the worldwide offshore exploration and production industry. Our services and technological solutions include distribution system installation support and engineering services, umbilical terminations, loose-tube steel flying leads, flotation and Remote Operated Vehicles (“ROVs”) and related services. We support subsea engineering, installation, commissioning, and maintenance projects through specialized, highly experienced service teams and engineered technological solutions. Deep Down’s primary focus is on more complex deepwater and ultra-deepwater oil production distribution system support services and technologies, used between the platform and the wellhead. |
| Liquidity |
Liquidity
As a deepwater service provider, our revenues, profitability, cash flows, and future rate of growth are generally dependent on the condition of the global oil and gas industry, and our customers’ ability to invest capital for offshore exploration, drilling and production and maintain or increase levels of expenditures for maintenance of offshore drilling and production facilities. Oil and gas prices and the level of offshore drilling and production activity have historically been characterized by significant volatility. At times we enter into large, fixed-price contracts which may require significant lead time and investment. A decline in offshore drilling and production activity could result in lower contract volume or delays in significant contracts which could negatively impact our earnings and cash flows. Our earnings and cash flows could also be negatively affected by delays in payments by significant customers or delays in completion of our contracts for any reason. While our objective is to enter into contracts with our customers that are cash flow positive, we may not always be able to achieve this objective. We are dependent on our cash flows from operations to fund our working capital requirements and the uncertainties noted above create risks that we may not achieve our planned earnings or cash flow from operations, which may require us to raise additional debt or equity capital. There can be no assurance that we could raise additional debt or equity capital.
During the fiscal years ended December 31, 2018 and 2017, we financed our capital needs through cash on hand and opportunistic sales of property, plant and equipment. As of December 31, 2018, our working capital was $7,026 compared to $8,202 as of December 31, 2017. |
| Principles of Consolidation | Principles of Consolidation
The consolidated financial statements include the accounts of Deep Down and its wholly-owned subsidiaries for the years ended December 31, 2018 and 2017. All intercompany transactions and balances have been eliminated. |
| Use of Estimates |
Use of Estimates
The preparation of these financial statements in accordance with US GAAP requires us to make estimates and judgments that may affect assets and liabilities. On an on-going basis, we evaluate our estimates, including those related to revenue recognition and related allowances, contract assets and liabilities, impairments of long-lived assets, including intangibles, income taxes including the valuation allowance for deferred tax assets, contingencies and litigation, and share-based payments. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable, the results of which form the basis for making judgments about the carrying values of assets and liabilities. Actual results may differ from these estimates under different assumptions or conditions. |
| Segments | Segments
For the years ended December 31, 2018 and 2017, we only had one operating and reporting segment, Deep Down Delaware. |
| Cash and Cash Equivalents | Cash and Cash Equivalents
We consider all highly liquid investments with maturities from date of purchase of three months or less to be cash equivalents. Cash and cash equivalents consist of cash on deposit with domestic banks and, at times, may exceed federally insured limits. |
| Fair Value of Financial Instruments |
Fair Value of Financial Instruments
Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. We utilize a fair value hierarchy, which maximizes the use of observable inputs and minimizes the use of unobservable inputs when measuring fair value. The fair value hierarchy has three levels of inputs that may be used to measure fair value:
Level 1 - Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities.
Level 2 - Quoted prices in markets that are not active; or other inputs that are observable, either directly or indirectly, for substantially the full term of the asset or liability.
Level 3 - Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable.
Our financial instruments consist primarily of cash, accounts receivables and payables, and notes receivable (included in other assets). The carrying values of cash, accounts receivables and payables approximated their fair values at December 31, 2018 and 2017 due to their short-term maturities. The carrying values of our notes receivable approximate their fair values at December 31, 2018 and 2017 because the interest rates approximate current market rates. |
| Accounts Receivable |
Accounts Receivable
Accounts receivable are uncollateralized customer obligations due under normal trade terms. We provide an allowance for doubtful accounts receivable based on a specific review of each customer’s accounts receivable balance with respect to their ability to make payments. Generally, we do not charge interest on past due accounts. When specific accounts are determined to require an allowance, they are expensed by a provision for bad debts in that period. At December 31, 2018 and 2017, we estimated the allowance for doubtful accounts requirement to be $10. Bad debt expense (credit) totaled $67 and $(22) for the years ended December 31, 2018 and 2017, respectively. |
| Concentration of Revenues and Credit Risk |
Concentration of Revenues and Credit Risk
For the year ended December 31, 2018, our five largest customers accounted for 33 percent, 15 percent, 15 percent, 11 percent and 11 percent of total revenues. For the year ended December 31, 2017, our five largest customers accounted for 61 percent, 11 percent, 10 percent, 3 percent and 3 percent of total revenues. The loss of one or more of these customers could have a material impact on our results of operations and cash flows.
As of December 31, 2018, three of our customers accounted for 50 percent, 26 percent and 10 percent of total accounts receivable. As of December 31, 2017, three of our customers accounted for 37 percent, 17 percent and 12 percent of total accounts receivable. |
| Property Plant and Equipment |
Property Plant and Equipment
Property, plant and equipment (“PP&E”) is stated at cost, net of accumulated depreciation and amortization. Depreciation and amortization is computed using the straight-line method over the estimated useful lives of the respective assets. Replacements and betterments are capitalized, while maintenance and repairs are expensed as incurred. It is our policy to include amortization expense on assets acquired under capital leases with depreciation expense on owned assets. Additionally, we record depreciation and amortization expense related to revenue-generating assets as a component of cost of sales in the accompanying consolidated statements of operations.
If circumstances associated with our PP&E have changed or a significant event has occurred that may affect the recoverability of the carrying amount of our PP&E, an impairment indicator exists and we test the PP&E for impairment. Before testing for impairment, we group PP&E with other finite-lived long-lived assets (“long lived assets”) at the lowest level of identifiable cash flows that are largely independent of cash flows from other assets or groups of assets. Testing long-lived assets for impairment is a two-step process:
Step 1 - We test the long-lived asset or asset group for recoverability by comparing the carrying amount of the asset or asset group with the sum of the undiscounted future cash flows from use and the eventual disposal of the asset or asset group. If the carrying amount of the long-lived asset or asset group is determined to be greater than the sum of the undiscounted future cash flows from use and disposal, we would need to perform step 2.
Step 2 - If the long-lived asset or group of assets fails the recoverability test in step 1, we would record an impairment expense for the difference between the carrying amount and the fair value of the long-lived asset or asset group.
After considering the recent volatility in oil prices, our performance over the past few years, and strategic focus on our core business going forward, we conducted an evaluation of the carrying amount of certain of our long-lived assets. As a result of this evaluation, we recorded impairment charges in an aggregate amount of $2,320, of which $1,890 is reported as asset impairment and $430 as depreciation expense in cost of sales in the consolidated statements of operations related to construction in progress and certain equipment.
Additionally, we tested remaining long-lived assets for impairment but determined no additional impairment. |
| Equity Method Investments | Equity Method Investments
Equity method investments in joint ventures are reported as investments in joint venture on the consolidated balance sheets, and our share of earnings or losses in the joint venture is reported as equity in net income or loss of joint venture in the consolidated statements of operations. We currently have no remaining investments in joint ventures. |
| Lease Obligations |
Lease Obligations
We lease land, buildings, vehicles and certain equipment under non-cancellable operating leases. Deep Down Delaware leases indoor manufacturing space and leases office, warehouse and operating space in Houston, Texas, under non-cancellable operating leases. Additionally, we lease space in Mobile, Alabama to house our 3,400 ton carousel system. We also lease certain office and other operating equipment under capital leases; the related assets are included with property, plant and equipment on the consolidated balance sheets.
At the inception of a lease, we evaluate the agreement to determine whether the lease will be accounted for as an operating or capital lease. The term of the lease used for such an evaluation includes renewal option periods only in instances in which the exercise of the renewal option can be reasonably assured and failure to exercise such option would result in an economic penalty. |
| Revenue Recognition |
Revenue Recognition
On January 1, 2018, we adopted ASC Topic 606 (“ASC 606”) using the modified retrospective method applied to those contracts which were not completed as of January 1, 2018. Results for reporting periods beginning after January 1, 2018 are presented under ASC 606, while prior period amounts are not adjusted and continue to be reported in accordance with our historic accounting under ASC Topic 605, Revenue Recognition. See further discussion in Note 2. |
| Income Taxes | Income Taxes
We follow the asset and liability method of accounting for income taxes. This method takes into account the differences between financial statement treatment and tax treatment of certain transactions. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect of a change in tax rates is recognized as income or expense in the period that includes the enactment date.
We record a valuation allowance to reduce the carrying value of our deferred tax assets when it is more likely than not that some or all of the deferred tax assets will expire before realization of the benefit or that future deductibility is not probable. The ultimate realization of the deferred tax assets depends upon our ability to generate sufficient taxable income of the appropriate character in the future. This requires management to use estimates and make assumptions regarding significant future events such as the taxability of entities operating in the various taxing jurisdictions. In evaluating our ability to recover our deferred tax assets, we consider all reasonably available positive and negative evidence, including our past operating results, the existence of cumulative losses in the most recent years and our forecast of future taxable income. In estimating future taxable income, we develop assumptions, including the amount of future state, and federal pre-tax operating income, the reversal of temporary differences and the implementation of feasible and prudent tax planning strategies. These assumptions require significant judgment. When the likelihood of the realization of existing deferred tax assets changes, adjustments to the valuation allowance are charged in the period in which the determination is made, either to income or goodwill, depending upon when that portion of the valuation allowance was originally created.
We record an estimated tax liability or tax benefit for income and other taxes based on what we determine will likely be paid in the various tax jurisdictions in which we operate. We use our best judgment in the determination of these amounts. However, the liabilities ultimately realized and paid are dependent upon various matters, including resolution of tax audits, and may differ from amounts recorded. An adjustment to the estimated liability would be recorded as a provision or benefit to income tax expense in the period in which it becomes probable that the amount of the actual liability or benefit differs from the recorded amount.
Our future effective tax rates could be adversely affected by changes in the valuation of our deferred tax assets or liabilities or changes in tax laws or interpretations thereof. If and when our deferred tax assets are no longer fully reserved, we will begin to provide for taxes at the full statutory rate. In addition, we are subject to the examination of our income tax returns by the Internal Revenue Service and other tax authorities. We regularly assess the likelihood of adverse outcomes resulting from these examinations to determine the adequacy of our provision for income taxes. |
| Share-Based Compensation |
Share-Based Compensation
We record share-based awards exchanged for employee service at fair value on the date of grant and expense the awards in the consolidated statements of operations over the requisite employee service period. Share-based compensation expense includes an estimate for forfeitures and is generally recognized over the expected term of the award on a straight-line basis. At December 31, 2018 and 2017, we had one type of share-based employee compensation: restricted stock. |
| Earnings or Loss per Common Share | Earnings or Loss per Common Share
Basic earnings or loss per common share (“EPS”) is calculated by dividing net earnings or loss by the weighted average number of common shares outstanding for the period. Diluted EPS is calculated by dividing net earnings or loss by the weighted average number of common shares and dilutive common stock equivalents (stock options) outstanding during the period. Diluted EPS reflects the potential dilution that could occur if stock options and warrants to purchase common stock were exercised for shares of common stock. In periods where losses are reported, the weighted-average number of common shares outstanding excludes common stock equivalents, because their inclusion would be anti-dilutive. |
| Recently Issued Accounting Standards |
Recently Issued Accounting Standards
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 asset for all leases, with the exception of 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 right-of-use 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.
The new guidance is effective for fiscal years beginning after December 15, 2018. The Company adopted this guidance in the first quarter of 2019 using the optional transition method (ASU 2018-11). Consequently, the Company's reporting for the comparative periods presented in the financial statements will continue to be in accordance with ASC Topic 840, Leases. The Company has substantially completed its evaluation of the impact on the Company’s lease portfolio.The adoption of this guidance will result in the addition of right-of-use assets and corresponding lease obligations to the consolidated balance sheet and will not have a material impact on the Company’s results of operations or cash flows.
ASC Topic 842 provides for certain practical expedients when adopting the guidance. The Company plans to elect 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 plans to apply 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 a right-of-use 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 recognize a single lease cost allocated over the lease term, generally on a straight-line basis. The Company plans to elect 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 plans to elect to not capitalize any lease in which the estimated value of the underlying asset at 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.
As part of our assessment, we formed an implementation work team, conducted training for the relevant staff regarding the potential impacts of ASC Topic 842 and have substantially concluded our contract analyses and policy review. We engaged external resources to assist us in our efforts of completing the analysis of potential changes to current accounting practices and are in the process of implementing a new lease accounting system in connection with the adoption of the updated guidance. We also evaluated the impact of ASC Topic 842 on our internal control over financial reporting and other changes in business practices and processes. The Company is in the process of finalizing its catalog of existing lease contracts and implementing changes to its systems.
Upon adoption, the Company expects to record operating lease right-of-use assets in the range of approximately $4,700 to $5,100, representing the present value of future lease payments under operating leases with terms of greater than twelve months. The Company is continuing to evaluate the impact the pronouncement will have on the related disclosures. |
2. REVENUES: ADOPTION OF ASC 606 (Tables) |
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| Revenue from Contract with Customer [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Disaggregation of Revenue - Contract Revenue | The following table presents our revenues disaggregated by fixed price and service contracts. Sales taxes are excluded from revenues.
Year Ended
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| Schedule of earnings in excess of billings on uncompleted contracts | 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”.
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3. PROPERTY, PLANT AND EQUIPMENT (Tables) |
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| Property, Plant and Equipment [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Net Property, plant and equipment | Property, plant and equipment consisted of the following:
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4. INCOME OR LOSS PER COMMON SHARE (Tables) |
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| Net loss per share: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Reconciliation of number of shares in earnings per share calculation | The following is a reconciliation of the number of shares used in the basic and diluted net income or loss per common share calculation:
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5. SHARE-BASED COMPENSATION (Tables) |
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| Disclosure of Compensation Related Costs, Share-based Payments [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Restricted stock activity | The following table summarizes the activity of our nonvested restricted shares for the years ended December 31, 2018 and 2017:
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7. INCOME TAXES (Tables) |
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| Income Tax Disclosure [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Provision for income taxes |
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| Reconciliation of effective income tax rate |
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| Schedule of deferred taxes |
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8. COMMITMENTS AND CONTINGENCIES (Tables) |
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| Commitments and Contingencies Disclosure [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||
| Future minimum contractual lease obligations | At December 31, 2018, future minimum contractual lease obligations were as follows:
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2. REVENUES: ADOPTION OF ASC 606, “REVENUE FROM CONTRACTS WITH CUSTOMERS” (Details - Disaggregation of Revenue) - USD ($) $ in Thousands |
12 Months Ended | |
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Dec. 31, 2018 |
Dec. 31, 2017 |
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| Total | $ 16,175 | $ 19,478 |
| Fixed-price Contract [Member] | ||
| Total | 7,693 | 6,599 |
| Service Contracts [Member] | ||
| Total | $ 8,482 | $ 12,879 |
2. REVENUES: ADOPTION OF ASC 606, “REVENUE FROM CONTRACTS WITH CUSTOMERS” (Details - Contract balances) - USD ($) $ in Thousands |
Dec. 31, 2018 |
Dec. 31, 2017 |
|---|---|---|
| Billings In Excess Of Costs And Estimated Earnings On Uncompleted Contracts And Deferred Revenues | ||
| Costs incurred on uncompleted contracts | $ 9,697 | $ 9,564 |
| Estimated earnings on uncompleted contracts | 10,787 | 10,741 |
| Gross costs and estimated earnings | 20,484 | 20,305 |
| Less: Billings to date on uncompleted contracts | (19,526) | (19,992) |
| Costs incurred plus estimated earning less billings on uncompleted contracts, net | 958 | 313 |
| Included in the accompanying condensed consolidated balance sheets under the following captions: | ||
| Contract Assets | 1,931 | 925 |
| Contract Liabilities | (973) | (612) |
| Costs incurred plus estimated earning less billings on uncompleted contracts | $ 958 | $ 313 |
3. PROPERTY, PLANT AND EQUIPMENT (Details Narrative) - USD ($) $ in Thousands |
12 Months Ended | |
|---|---|---|
Dec. 31, 2018 |
Dec. 31, 2017 |
|
| Property, Plant and Equipment [Abstract] | ||
| Depreciation expense excluded from cost of sales | $ 242 | $ 234 |
| Depreciation expense | $ 1,590 | $ 1,077 |
4. INCOME OR LOSS PER COMMON SHARE (Details) - USD ($) $ / shares in Units, shares in Thousands, $ in Thousands |
12 Months Ended | |
|---|---|---|
Dec. 31, 2018 |
Dec. 31, 2017 |
|
| Net loss per share: | ||
| Net (loss) | $ (4,742) | $ (116) |
| Denominator: | ||
| Weighted average number of common shares outstanding | 13,553 | 14,233 |
| Denominator for diluted earnings per share | 13,553 | 14,233 |
| Net loss per common share outstanding, basic and fully diluted | $ (0.35) | $ (0.01) |
4. INCOME OR LOSS PER COMMON SHARE (Details Narrative) - shares |
Dec. 31, 2018 |
Dec. 31, 2017 |
|---|---|---|
| Net loss per share: | ||
| Options outstanding available to be convertible into common stock | 0 | 0 |
5. SHARE-BASED COMPENSATION (Details - Restricted stock activity) - Restricted Stock [Member] - $ / shares shares in Thousands |
12 Months Ended | |
|---|---|---|
Dec. 31, 2018 |
Dec. 31, 2017 |
|
| Restricted Shares | ||
| Nonvested Outstanding, beginning balance | 250 | 240 |
| Granted | 300 | 30 |
| Vested | (120) | (20) |
| Nonvested Outstanding, ending balance | 430 | 250 |
| Weighted Average Grant-Date Fair Value | ||
| Nonvested Outstanding, beginning balance | $ 0.50 | $ 0.88 |
| Granted | 0.79 | 1.15 |
| Vested | 0.83 | 1.18 |
| Nonvested Outstanding, ending balance | $ 0.83 | $ 0.50 |
5. SHARE-BASED COMPENSATION (Details Narrative) - Restricted Stock Awards [Member] - USD ($) $ in Thousands |
12 Months Ended | |
|---|---|---|
Dec. 31, 2018 |
Dec. 31, 2017 |
|
| Share-based compensation | $ 56 | $ 134 |
| Unamortized estimated fair value of restricted stock awards | $ 222 | $ 139 |
| Unamortized expense recognition period | 2 years 3 months 11 days | |
6. TREASURY STOCK (Details Narrative) - USD ($) $ in Thousands |
3 Months Ended | 12 Months Ended | ||
|---|---|---|---|---|
Mar. 31, 2019 |
Dec. 31, 2018 |
Dec. 31, 2018 |
Dec. 31, 2017 |
|
| Equity [Abstract] | ||||
| Stock repurchase program, amount authorized | $ 1,000 | $ 1,000 | ||
| Stock repurchase program, expiration date | Mar. 31, 2019 | |||
| Stock purchased, Value | $ 170 | $ 21 | $ 22 | $ 1,473 |
| Stock repurchases, Share | 228,113 | 24,800 | ||
| Treasury stock shares | 2,027,217 | 2,027,217 | 2,002,417 | |
7. INCOME TAXES (Details - Provision for income taxes) - USD ($) $ in Thousands |
12 Months Ended | |
|---|---|---|
Dec. 31, 2018 |
Dec. 31, 2017 |
|
| Federal: | ||
| Current | $ 0 | $ 0 |
| Deferred | 2 | 1 |
| Total | 2 | 1 |
| State: | ||
| Current | 8 | 5 |
| Deferred | (2) | (1) |
| Total | 6 | 4 |
| Total income tax expense (benefit) | $ 8 | $ 5 |
7. INCOME TAXES (Details - Tax rates) |
12 Months Ended | |
|---|---|---|
Dec. 31, 2018 |
Dec. 31, 2017 |
|
| Income Tax Disclosure [Abstract] | ||
| Income tax benefit (expense) at federal statutory rate | 21.00% | 34.00% |
| State taxes, net of federal expense | (0.10%) | 2.52% |
| Valuation allowance | (25.08%) | 1662.43% |
| Remeasure deferred taxes from 34% to 21% | 0.00% | (1710.52%) |
| Research and development credits | 3.87% | 2.21% |
| Other permanent differences | (0.31%) | (15.63%) |
| Other , net | 0.42% | 20.84% |
| Total effective rate | (0.20%) | (4.15%) |
7. INCOME TAXES (Details - Deferred tax assets) - USD ($) $ in Thousands |
Dec. 31, 2018 |
Dec. 31, 2017 |
|---|---|---|
| Deferred tax assets: | ||
| Net operating loss carryforwards | $ 4,245 | $ 3,255 |
| R&D & other credit carryforwards | 685 | 501 |
| Share-based compensation | 730 | 741 |
| Intangible amortization | 16 | 21 |
| Allowance for bad debt | 2 | 2 |
| Other | 16 | 8 |
| Total deferred tax assets | 5,694 | 4,528 |
| Less: valuation allowance | (4,837) | (3,649) |
| Net deferred tax assets | 857 | 879 |
| Deferred tax liabilities: | ||
| Depreciation on property and equipment | (857) | (879) |
| Amortization of intangibles | 0 | 0 |
| Total deferred tax liabilities | (857) | (879) |
| Net deferred tax position | $ 0 | $ 0 |
7. INCOME TAXES (Details Narrative) - USD ($) $ in Thousands |
12 Months Ended | |
|---|---|---|
Dec. 31, 2018 |
Dec. 31, 2017 |
|
| Income Tax Disclosure [Abstract] | ||
| Deferred tax expense | $ 1,900 | |
| Federal NOL carryforwards | 19,809 | |
| State NOL carryforwards | 1,096 | |
| R&D & other credit carryforwards | 685 | $ 501 |
| Uncertain tax positions | $ 0 | |
| Operating loss expiration date | Dec. 31, 2036 |
8. COMMITMENTS AND CONTINGENCIES (Details) $ in Thousands |
Dec. 31, 2018
USD ($)
|
|---|---|
| Operating leases | |
| 2019 | $ 1,372 |
| 2020 | 1,357 |
| 2021 | 1,350 |
| 2022 | 1,350 |
| 2023 | 571 |
| Thereafter | 0 |
| Total minimum lease payments | $ 6,000 |
8. COMMITMENTS AND CONTINGENCIES (Details Narrative) - USD ($) $ in Thousands |
12 Months Ended | |
|---|---|---|
Dec. 31, 2018 |
Dec. 31, 2017 |
|
| Commitments and Contingencies Disclosure [Abstract] | ||
| Rent expense | $ 1,373 | $ 1,445 |
| Letters Of Credit Outstanding | $ 0 | $ 0 |
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