The accompanying notes are an integral part
of the unaudited condensed consolidated financial statements.
The accompanying notes are an integral part
of the unaudited condensed consolidated financial statements.
The accompanying notes are an integral part
of the unaudited condensed consolidated financial statements.
The accompanying notes are an integral part
of the unaudited condensed consolidated financial statements.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(Amounts in thousands except per share
amounts)
NOTE 1:
|
BASIS OF PRESENTATION
|
Basis of Presentation
The accompanying unaudited condensed consolidated
financial statements of Deep Down, Inc. and its wholly-owned subsidiary (“Deep Down”, “we”, “us”
or the “Company”) were prepared in accordance with the rules and regulations of the Securities and Exchange Commission
(“SEC” or the “Commission”) pertaining to interim financial information and instructions to Form 10-Q.
As permitted under those rules, certain notes or other financial information that are normally required by United States generally
accepted accounting principles (“US GAAP”) can be condensed or omitted. Therefore, these statements should be read
in conjunction with the audited consolidated financial statements, and notes thereto, included in our Annual Report on Form 10-K
for the year ended December 31, 2019.
Preparation of financial statements in
conformity with US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities,
the disclosed amounts of contingent assets and liabilities, and the reported amounts of revenues and expenses. If the underlying
estimates and assumptions upon which the financial statements are based change in future periods, then the actual amounts may differ
from those included in the accompanying unaudited condensed consolidated financial statements. In the opinion of management, all
adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included.
Liquidity
The Company’s cash on hand was $4,045
and working capital was $4,497 as of September 30, 2020. As of December 31, 2019, cash on hand and working capital was $3,523 and
$4,939, respectively. The Company does not have a credit facility in place and generally depends on cash on hand, cash flows from
operations, and the potential opportunistic sales of property, plant and equipment (“PP&E”) to meet its liquidity
needs.
The Company cannot predict with certainty
the long-term impact of the abrupt decline in oil prices and global economic disruption caused by COVID-19 on the Company’s
operations and cash flows. The Company took steps to mitigate the challenges presented by the current macro environment, including
workforce reductions, wage reductions, rent abatement, and limiting capital expenditures and research and development efforts to
only critical items. The Company continues to seek further cost reduction opportunities to preserve liquidity.
As a result of the abrupt decline in oil
prices and global economic activity caused by COVID-19, the Company applied for a loan under the Small Business Administration’s
(“SBA”) Paycheck Protection Program, and on April 29, 2020, the Company received a loan (“PPP loan”) in
the amount of $1,111, which was used to finance payroll during the second and third quarters of 2020. The PPP loan is evidenced
by a promissory note, dated to be effective as of April 27, 2020, between the Company and the lender. The promissory note matures
on April 27, 2022 and bears interest at a fixed rate of 1.00 percent per annum, payable in 18 monthly payments commencing on November
27, 2020.
Subsequent to the effective date of the
Company’s PPP loan, the U.S. Treasury and SBA refined its payment deferral guidance whereas payments for PPP loans are to
be deferred for at least ten months after the end of the loan forgiveness covered period. Additionally, if the loan forgiveness
application is submitted within ten months after the end of the loan forgiveness covered period, payments will be further deferred
until such loan forgiveness application is processed by the SBA. The Company applied for forgiveness of its PPP loan in its entirety
in October 2020, which falls within ten months after the end of the Company’s loan forgiveness covered period. The Company
has not received guidance from its lender regarding the timing or ultimate outcome of its forgiveness application. Therefore, due
to the uncertain timing of payments, the Company did not carry a portion of its PPP loan balance as a current liability at September
30, 2020.
The Company believes it will have adequate
liquidity to meet its future operating requirements arising in the normal course of business for the next twelve months through
a combination of current cash on hand, cash expected to be generated from operations, current working capital, and potential opportunistic
sales of PP&E in addition to pursuing a disciplined approach to making capital investments.
Principles of Consolidation
The unaudited condensed consolidated financial
statements presented herein include the accounts of Deep Down, Inc. and its wholly owned subsidiary. Any intercompany transactions
and balances have been eliminated.
Segments
For the three and nine months ended September
30, 2020 and 2019, the Company had one operating and reporting segment, Deep Down Delaware.
In February 2016, the Financial Accounting
Standards Board (“FASB”) issued ASU 2016-02, Leases (“ASC Topic 842”). Under this guidance, lessees are
required to recognize on the balance sheet a lease liability and a right-of-use (“ROU”) asset for all leases, except
for short-term leases with terms of twelve months or less. The lease liability represents the lessee’s obligation to make
lease payments arising from a lease and will initially be measured as the present value of the lease payments. The ROU asset represents
the lessee’s right to use a specified asset for the lease term, and will be measured at the lease liability amount, adjusted
for lease prepayment, lease incentives received and the lessee’s initial direct costs.
ASC Topic 842 provides for certain practical
expedients when adopting the guidance. The Company elected the package of practical expedients allowing the Company, for all leases
that commenced prior to the adoption date, to not reassess whether any expired or existing contracts are, or contain, leases, the
lease classification for any expired or existing leases, or initial direct costs for any expired or existing leases.
The Company utilizes the land easements
practical expedient allowing the Company to not assess whether any expired or existing land easements are, or contain, leases if
they were not previously accounted for as leases under the existing leasing guidance. Instead, the Company will continue to apply
its existing accounting policies to historical land easements. The Company elects to apply the short-term lease exception; therefore,
the Company will not record an ROU asset or corresponding lease liability for leases with an initial term of twelve months or less
that are not reasonably certain of being renewed and instead will recognize a single lease cost allocated over the lease term,
generally on a straight-line basis. The Company elects to apply the practical expedient to not separate lease components from non-lease
components and instead account for both as a single lease component for all asset classes.
The Company elects to not capitalize any
lease in which the estimated value of the underlying asset at the commencement date is less than the Company’s capitalization
threshold. A lease would need to qualify for the low value exception based on various criteria.
ROU assets and lease liabilities are recognized
at the commencement date based on the present value of lease payments over the lease term and include options to extend or terminate
the lease when they are reasonably certain to be exercised. The present value of lease payments is determined primarily using the
incremental borrowing rate based on the information available at the lease commencement date. Lease agreements with lease and non-lease
components are generally accounted for as a single lease component. The Company’s operating lease expense is recognized on
a straight-line basis over the lease term and a portion is recorded in cost of sales, and the remainder is recorded in selling,
general and administrative expenses. The accounting for some leases may require significant judgment, which includes determining
whether a contract contains a lease, determining the incremental borrowing rate to utilize in our net present value calculation
of lease payments for lease agreements which do not provide an implicit rate, and assessing the likelihood of renewal or termination
options.
As of September 30, 2020, the Company does
not have any finance lease assets or liabilities, nor does the Company have any subleases.
The following tables present information
about our operating leases:
|
|
September 30, 2020
|
|
|
December 31, 2019
|
|
Assets:
|
|
|
|
|
|
|
|
|
Right-of-use assets
|
|
$
|
3,444
|
|
|
$
|
4,334
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
Current lease liabilities
|
|
|
1,234
|
|
|
|
1,181
|
|
Non-current lease liabilities
|
|
|
2,247
|
|
|
|
3,180
|
|
Total lease liabilities
|
|
$
|
3,481
|
|
|
$
|
4,361
|
|
The components of the Company’s lease expense are as follows:
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
Operating lease expense included in Cost of sales
|
|
$
|
271
|
|
|
$
|
312
|
|
|
$
|
659
|
|
|
$
|
926
|
|
Operating lease expense included in SG&A
|
|
|
26
|
|
|
|
55
|
|
|
|
100
|
|
|
|
185
|
|
Short term lease expense
|
|
|
37
|
|
|
|
41
|
|
|
|
124
|
|
|
|
278
|
|
Total lease expense
|
|
$
|
334
|
|
|
$
|
408
|
|
|
$
|
883
|
|
|
$
|
1,389
|
|
Lease term and discount rate:
|
|
|
|
|
September 30, 2020
|
|
|
December 31, 2019
|
Weighted-average remaining lease terms on operating leases (yrs.)
|
|
|
|
|
|
|
2.70
|
|
|
3.28
|
Weighted-average discount rates on operating leases
|
|
|
|
|
|
|
5.374%
|
|
|
5.374%
|
During the quarter ended September 30, 2020, the Company did
not have any sale/leaseback transactions.
Present value of lease liabilities:
Twelve months ending September 30,
|
|
|
Operating Leases
|
|
2021
|
|
|
$
|
1,387
|
|
2022
|
|
|
|
1,403
|
|
2023
|
|
|
|
943
|
|
Thereafter
|
|
|
|
–
|
|
Total lease payments
|
|
|
$
|
3,733
|
|
Less: Interest
|
|
|
|
(252
|
)
|
Present value of lease liabilities
|
|
|
$
|
3,481
|
|
NOTE 3: REVENUE FROM CONTRACTS WITH
CUSTOMERS
Revenues are recognized when control of
the promised goods or services is transferred to our customers in an amount that reflects the consideration we expect to be entitled
to in exchange for those goods or services. To determine the proper revenue recognition method for our customer contracts, we evaluate
whether two or more contracts should be combined and accounted for as one single contract and whether the combined or single contract
should be accounted for as more than one performance obligation. This evaluation requires significant judgment and the decision
to combine a group of contracts or separate the combined or single contract into multiple performance obligations could change
the amount of revenue and profit recorded in a given period.
For most of our fixed price contracts,
the customer contracts with us to provide a significant service of integrating a complex set of tasks and components into a single
project or capability even if that single project results in the delivery of multiple units. Hence, the entire contract is accounted
for as one performance obligation. We account for a contract when it has approval and commitment from both parties, the rights
of the parties are identified, payment terms are identified, the contract has commercial substance and collectability of consideration
is probable.
Disaggregation of Revenue
The following table presents the Company’s
revenues disaggregated by fixed price and service contracts. Sales taxes are excluded from revenues.
|
|
Three Months Ended
|
|
|
|
September 30,
|
|
|
|
2020
|
|
|
2019
|
|
Fixed Price Contracts
|
|
$
|
2,522
|
|
|
$
|
3,012
|
|
Service Contracts
|
|
|
614
|
|
|
|
1,385
|
|
Total
|
|
$
|
3,136
|
|
|
$
|
4,397
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
|
September 30,
|
|
|
|
|
2020
|
|
|
|
2019
|
|
Fixed Price Contracts
|
|
$
|
6,338
|
|
|
$
|
9,422
|
|
Service Contracts
|
|
|
3,128
|
|
|
|
6,544
|
|
Total
|
|
$
|
9,466
|
|
|
$
|
15,966
|
|
Fixed price contracts
For fixed price contracts, we generally
recognize revenue over time as we perform because of continuous transfer of control to the customer. This continuous transfer of
control to the customer is supported by clauses in the contract that allow the customer to unilaterally terminate the contract
for convenience, pay us for costs incurred plus a reasonable profit and take control of any work in process. In our fixed price
contracts, the customer either controls the work in process or we deliver products with no alternative use to the Company and have
rights to payment for work performed to date plus a reasonable profit as evidenced by contractual termination clauses.
Because of control transferring over time,
revenue is recognized based on the extent of progress towards completion of the performance obligation. The selection of the method
to measure progress towards completion requires judgment and is based on the nature of the products or services to be provided.
We generally use the cost-to-cost measure of progress for our contracts because it best depicts the transfer of control to the
customer which occurs as we incur costs on our contracts. Under the cost-to-cost measure of progress, the extent of progress towards
completion is measured based on the ratio of costs incurred to date to the total estimated costs at completion of the performance
obligation. Revenues, including estimated fees or profits, are recorded proportionally as costs are incurred.
Contracts are often modified to account
for changes in contract specifications and requirements. We consider contract modifications to exist when the modification either
creates new, or changes the existing, enforceable rights and obligations. Most of our contract modifications are for goods or services
that are not distinct from the existing contract due to the significant integration service provided in the context of the contract
and are accounted for as if they were part of that existing contract. The effect of a contract modification on the transaction
price, and our measure of progress for the performance obligation to which it relates, is recognized as an adjustment to revenue
(either as an increase in or a reduction of revenue) on a cumulative catch-up basis.
We have a company-wide standard and disciplined
quarterly estimate at completion process in which management reviews the progress and execution of our performance obligations.
As part of this process, management reviews information including, but not limited to, any outstanding key contract matters, progress
towards completion and the related program schedule, identified risks and opportunities and the related changes in estimates of
revenues and costs. Changes in estimates of net sales, cost of sales and the related impact to operating income are recognized
quarterly on a cumulative catch-up basis, which recognizes in the current period the cumulative effect of the changes on current
and prior periods based on a performance obligation’s percentage of completion. A significant change in one or more of these
estimates could affect the profitability of one or more of our performance obligations. When estimates of total costs to be incurred
exceed total estimates of revenue to be earned on a performance obligation related to fixed price contracts, a provision for the
entire loss on the performance obligation is recognized in the period the loss is estimated.
Service Contracts
We recognize revenue for service contracts
measuring progress toward satisfying the performance obligation in a manner that best depicts the transfer of goods or services
to the customer. The control over services is transferred over time when the services are rendered to the customer on a daily basis.
Specifically, we recognize revenue as the services are provided as we have the right to invoice the customer for the services performed.
Services are billed and paid on a monthly basis. Payment terms for services are usually 30 days from invoice receipt but have increased
to 45 days during the recent industry downturn.
Contract balances
Costs and estimated earnings in excess
of billings on uncompleted contracts arise when revenues are recorded based on the extent of progress towards completion but cannot
be invoiced under the terms of the contract. Such amounts are invoiced upon completion of contractual milestones. Billings in excess
of costs and estimated earnings on uncompleted contracts arise when milestone billings are permissible under the contract, but
the related costs have not yet been incurred. All contract costs are recognized currently on jobs formally approved by the customer
and contracts are not shown as complete until virtually all anticipated costs have been incurred and the risk of loss has passed
to the customer.
Assets related to costs and estimated earnings
in excess of billings on uncompleted contracts, as well as liabilities related to billings in excess of costs and estimated earnings
on uncompleted contracts, have been classified as current. The contract cycle for certain long-term contracts may extend beyond
one year; thus, complete collection of amounts related to these contracts may extend beyond one year though such long-term contracts
include contractual milestone billings as discussed above. At September 30, 2020 and December 31, 2019, there were no contracts
with terms that extended beyond one year.
The following table summarizes the Company’s
contract assets, which are “Costs and estimated earnings in excess of billings on uncompleted contracts” and our contract
liabilities, which are “Billings in excess of costs and estimated earnings on uncompleted contracts”.
|
|
September 30, 2020
|
|
|
December 31, 2019
|
|
Costs incurred on uncompleted contracts
|
|
$
|
2,308
|
|
|
$
|
1,687
|
|
Estimated earnings on uncompleted contracts
|
|
|
3,506
|
|
|
|
2,294
|
|
|
|
|
5,814
|
|
|
|
3,981
|
|
Less: Billings to date on uncompleted contracts
|
|
|
(5,987
|
)
|
|
|
(3,790
|
)
|
|
|
$
|
(173
|
)
|
|
$
|
191
|
|
|
|
|
|
|
|
|
|
|
Included in the accompanying unaudited condensed consolidated balance sheets under the following captions:
|
|
|
|
|
|
|
|
|
Contract assets
|
|
$
|
275
|
|
|
$
|
814
|
|
Contract liabilities
|
|
|
(448
|
)
|
|
|
(623
|
)
|
|
|
$
|
(173
|
)
|
|
$
|
191
|
|
The contract asset and liability balances
at September 30, 2020 and December 31, 2019 are primarily associated with revenue related to fixed-price projects.
Remaining Performance Obligations
Remaining performance obligations represent
the transaction price of firm orders for which work has not been performed and excludes unexercised contract options, potential
orders, and any remaining performance obligations for any sales arrangements that had not fully satisfied the criteria to be considered
a contract with a customer pursuant to the requirements of ASC 606.
Practical Expedients and Exemptions
We generally expense sales commissions
when incurred because the amortization period would have been one year or less. These costs are recorded within selling, general
and administrative expenses.
Many of our services contracts are short-term
in nature with a contract term of one year or less. For those contracts, we have utilized the practical expedient in ASC 606-10-50-14
exempting the Company from disclosure of the transaction price allocated to remaining performance obligations if the performance
obligation is part of a contract that has an original expected duration of one year or less.
Additionally, our payment terms are short-term
in nature with settlements of one year or less. We have, therefore, utilized the practical expedient in ASC 606-10-32-18 exempting
the Company from adjusting the promised amount of consideration for the effects of a significant financing component given that
the period between when the entity transfers a promised good or service to a customer and when the customer pays for that good
or service will be one year or less.
Further, in many of our service contracts,
we have a right to consideration from a customer in an amount that corresponds directly with the value to the customer of our performance
completed to date (for example, a service contract in which we bill a fixed amount for each hour of service provided). For those
contracts, we have utilized the practical expedient in ASC 606-10-55-18, which allows us to recognize revenue in the amount for
which we have the right to invoice.
Accordingly, we do not disclose the value
of unsatisfied performance obligations for (i) contracts with an original expected length of one year or less and (ii) contracts
for which we recognize revenue at the amount to which we have the right to invoice for services performed.
NOTE 4:
|
PROPERTY, PLANT AND EQUIPMENT
|
Property, plant and equipment consisted
of the following:
|
|
|
|
|
|
|
|
Range of
|
|
|
|
September 30, 2020
|
|
|
December 31, 2019
|
|
|
Asset Lives
|
|
Buildings and improvements
|
|
$
|
285
|
|
|
$
|
285
|
|
|
|
7 - 36 years
|
|
Leasehold improvements
|
|
|
906
|
|
|
|
896
|
|
|
|
2 - 5 years
|
|
Equipment
|
|
|
12,343
|
|
|
|
17,887
|
|
|
|
2 - 30 years
|
|
Furniture, computers and office equipment
|
|
|
907
|
|
|
|
901
|
|
|
|
2 - 8 years
|
|
Construction in progress
|
|
|
31
|
|
|
|
64
|
|
|
|
–
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total property, plant and equipment
|
|
|
14,472
|
|
|
|
20,033
|
|
|
|
|
|
Less: Accumulated depreciation and amortization
|
|
|
(11,693
|
)
|
|
|
(12,069
|
)
|
|
|
|
|
Property, plant and equipment, net
|
|
$
|
2,779
|
|
|
$
|
7,964
|
|
|
|
|
|
Impairment of Long-lived Assets
As a result of unfavorable market conditions
primarily due to the COVID-19 pandemic and developments in global oil markets, which triggered historically low crude oil prices
and decreases in our customers’ capital budgets, the Company determined the carrying amount of certain idle long-lived assets
exceeded their respective expected cash flows and therefore recorded an impairment charge of $4,490 related to idle fixed assets
during the second quarter of 2020.
The Company owns, and routinely invests
in, a portfolio of long-lived assets which are used both internally for product manufacturing and externally to perform services
in the field. We evaluate for impairment our property and equipment that is held and used whenever changes in circumstances indicate
that the carrying amount of an asset group may not be recoverable. Recoverability is assessed based on estimated undiscounted future
net cash flows. Estimating future net cash flows requires us to make assumptions and estimates including, but not limited to, cash
flows associated with future use and eventual disposal of the asset group and determination of the primary asset of the group.
Should the review indicate that the carrying value is not fully recoverable, the amount of the impairment loss is determined by
comparing the carrying value to the estimated fair value. No impairment was recorded related to the long-lived assets held and
used during the three months ended September 30, 2020.
NOTE 5:
|
SHARE-BASED COMPENSATION
|
Share-based compensation is included in
selling, general and administrative expenses in the accompanying unaudited condensed consolidated statements of operations and
additional paid in capital in the accompanying unaudited consolidated balance sheets. On August 5, 2020, the three non-employee
members of the Board of Directors (the “Board”) were each granted an option to purchase 50 shares of the Company’s
common stock at a price of $0.37 per share. Fair value of these stock options was $0.25 per share at the date of the grant. Options
for 25% of the shares vested on August 31, 2020, with the remaining shares scheduled to vest in equal installments on November
30, 2020, February 28, 2021, and May 31, 2021, subject to the recipient’s continued service on the Board. During the three
and nine months ended September 30, 2020, the Company recognized a total of $39 and $113, respectively, of share-based compensation
expense. During the three and nine months ended September 30, 2019, the Company recognized a total of $72 and $200, respectively,
of share-based compensation expense. The unamortized estimated fair value of nonvested shares of restricted stock and stock options
was $69 and $134 at September 30, 2020 and December 31, 2019, respectively. These costs are expected to be recognized as expenses
over a weighted-average period of 0.48 years.
On December 23, 2019, the Board authorized
the repurchase of up to 500 shares of the Company’s outstanding common stock (the “Repurchase Program”). The
Repurchase Program was funded from cash on hand and cash provided by operating activities. The Board separately authorized the
repurchase of additional shares during the quarter ended March 31, 2020, in a privately negotiated transaction. As of March 31,
2020, the repurchase program had been exhausted.
For the three months ended September 30,
2020, the Company purchased 3 shares of common stock at an average price of approximately $0.43 per share totaling $1 in a privately
negotiated transaction. For the nine months ended September 30, 2020, the Company purchased 746 shares of common stock at an average
price of approximately $0.70 per share totaling $525 in privately negotiated transactions.
For the three months ended September 30,
2019, the Company received 300 shares of common stock from our former CEO in exchange for certain previously impaired Company equipment
($0 carrying value at the time of exchange). No value was recorded to treasury stock because the assets had approximately $0 fair
value at the time of the exchange. For the nine months ended September 30, 2019, the Company purchased 588 shares of common stock
at an average price of approximately $0.37 per share totaling $218.
Treasury shares are accounted for using
the cost method.
Income tax expense during interim periods
is based on applying the estimated annual effective income tax rate to interim period operations. The estimated annual effective
income tax rate may vary from the statutory rate due to the impact of permanent items relative to our pre-tax income, as well as
by any valuation allowance recorded. We employ an asset and liability approach that results in the recognition of deferred tax
assets and liabilities for the expected future tax consequences of temporary differences between the financial basis and the tax
basis of those assets and liabilities. A valuation allowance is established when it is more likely than not that some of the deferred
tax assets will not be realized. At September 30, 2020 and December 31, 2019, management has recorded a full deferred tax asset
valuation allowance.
NOTE 8:
|
COMMITMENTS AND CONTINGENCIES
|
Employment Agreements
The Company entered into employment agreements
with the Chief Executive Officer and former Chief Operating Officer (the “Executives”) on September 18, 2019 and September
23, 2019, respectively, which contained severance provisions. In the event of termination of the Executives’ employment for
any reason, the Executives would 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 would be entitled to receive certain severance payments in the event of termination
of the Executive’s employment by the Company “other than for cause” or by the Executive with “good reason.”
These severance payments include: (i) a sum in cash equal to one to two times the Executive’s annual base salary; (ii) a
sum in cash equal to one to two times the average annual bonus paid to the Executive for the prior two full fiscal years preceding
the date of termination; (iii) a sum in cash equal to a pro rata portion of the annual bonus payable for the period in which the
date of termination occurs based on the actual performance under the Company’s annual incentive bonus arrangement, but no
less than fifty percent of Executive’s annual base salary; and (iv) if the Executive’s termination occurs prior to
the date that is twelve months following a change of control, then each and every share option, restricted share award and other
equity-based award that is outstanding and held by the Executive shall immediately vest and become exercisable.
On April 1, 2020, the Company eliminated
the position of Chief Operating Officer (“COO”) and relieved the COO of his duties pursuant to the terms of his employment
agreement. In addition to payment of accrued and unpaid salary, vacation time, and other benefits referred to above, the Company
is required to pay the former COO one time his contractual annual base salary of $245, payable over 12 months. This amount is included
in selling, general and administrative expenses in the accompanying unaudited condensed consolidated statements of operations for
the nine months ended September 30, 2020.
Litigation
From time to time, the Company is party
to various legal proceedings arising in the ordinary course of business. The Company expenses or accrues legal costs as incurred
and is involved in only one material legal proceeding as of the date of this Report.
In November 2011, the Company delivered
equipment to Aker Solutions, Inc. (“Aker”), but Aker declined to pay the final invoice in the aggregate amount of $270
alleging some warranty items needed to be repaired. The Company made repairs, but Aker continued to claim further work was required.
The Company repeatedly attempted to collect on the receivable and ultimately filed suit on November 16, 2012, in the Harris County
District Court. Aker subsequently filed a counterclaim on March 20, 2013 in the aggregate amount of $1,000 for reimbursement of
insurance payments allegedly made for repairs. The parties have not reached a resolution on this matter. At this point, it is not
clear as to whether an unfavorable outcome is either probable or remote, and the Company is unable to determine the likelihood
of an unfavorable outcome or the amount or range of potential loss if the outcome should be unfavorable.
On August 6, 2018, GE Oil and Gas UK Ltd.
(“GE”) requested that the Company mediate a dispute between the parties in the ICC International Centre for ADR (“ICC”).
The dispute involved alleged delays and defects in products manufactured by the Company for GE dating back to 2013. During the
second quarter of 2020, the parties finalized the terms of a definitive settlement agreement which is now final and binding. Per
the terms of the settlement, the Company shall pay GE $750 in total, which shall be paid on a monthly basis through February 2022.
The Company accrued a liability related to this matter in the amount of $750 for the year ended December 31, 2019.
NOTE 9:
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EARNINGS PER COMMON SHARE
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Basic earnings per share (“EPS”)
is calculated by dividing net income (loss) by the weighted-average number of common shares outstanding for the period. Diluted
EPS is calculated by dividing net income (loss) by the weighted-average number of common shares and dilutive common stock equivalents
(warrants, nonvested stock awards and stock options) outstanding during the period. Diluted EPS reflects the potential dilution
that could occur if options to purchase common stock were exercised for shares of common stock and all nonvested stock awards vest.
At September 30, 2020 and 2019, all such
securities were anti-dilutive.
NOTE 10:
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RELATED PARTY TRANSACTIONS
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On August 15, 2019, Mr. Ronald E. Smith,
the Company's Founder, resigned as Chief Executive Officer and as a member of the Board, effective as of August 31, 2019. In connection
with Mr. Smith's resignation, the Company and Mr. Smith entered into a Transition Agreement, effective as of September 1, 2019
(the “Transition Agreement”). The Transition Agreement provides for Mr. Smith to serve as an independent consultant
to the Company from September 1, 2019 through December 31, 2021. The Company agreed to pay Mr. Smith $15 per month, from January
1, 2020 through December 31, 2021, in exchange for his future services. The Company therefore recorded consulting expenses related
to the Transition Agreement totaling $45 and $135 for the three and nine months ended September 30, 2020, respectively.
In addition to the other payments provided
for under the Transition Agreement, the Company also agreed to pay Mr. Smith 1.5% of the net sale or lease value of two carousels
owned by Company, if such sale or lease occurs prior to December 31, 2021, unless those assets are sold or leased in conjunction
with a sale of all or substantially all of the assets or stock of Deep Down, in which case no commission is due.
As part of the Transition Agreement, Mr.
Smith is bound by certain non-disclosure and confidentiality provisions, and a non-compete and non-hire agreement.
NOTE 11.
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SMALL BUSINESS ADMINISTRATION’S PAYCHECK PROTECTION PROGRAM LOAN
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As a result of the abrupt decline in oil
prices and global economic activity caused by COVID-19, the Company applied for a loan under the Small Business Administration’s
(“SBA”) Paycheck Protection Program, and on April 29, 2020, the Company received a loan (“PPP loan”) in
the amount of $1,111, which was used to finance payroll during the second and third quarters of 2020. The PPP loan is evidenced
by a promissory note, dated to be effective as of April 27, 2020, between the Company and the lender. The promissory note matures
on April 27, 2022 and bears interest at a fixed rate of 1.00 percent per annum, payable in 18 monthly payments commencing on November
27, 2020.
Subsequent to the effective date of the
Company’s PPP loan, the U.S. Treasury and SBA refined its payment deferral guidance whereas payments for PPP loans are to
be deferred for at least ten months after the end of the loan forgiveness covered period. Additionally, if the loan forgiveness
application is submitted within ten months after the end of the loan forgiveness covered period, payments will be further deferred
until such loan forgiveness application is processed by the SBA. The Company applied for forgiveness of its PPP loan in its entirety
in October 2020, which falls within ten months after the end of the Company’s loan forgiveness covered period. The Company
has not received guidance from its lender regarding the timing or ultimate outcome of its forgiveness application. Therefore, due
to the uncertain timing of payments, the Company did not carry a portion of its PPP loan balance as a current liability at September
30, 2020.