KLNG 10-Q
Koil Energy Solutions, Inc. (KLNG)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM
| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended
OR
| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission File No.:
(Exact name of registrant as specified in its charter)
| (State or other jurisdiction of incorporation) | (I.R.S. Employer Identification No.) | |
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| (Address of Principal Executive Offices) | (Zip Code) |
Registrant’s telephone number, including area
code:
Not applicable
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act: None
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
| N/A | N/A | N/A |
Indicate by check mark whether the registrant (1) has
filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and
(2) has been subject to such filing requirements for the past 90 days. ☒
Indicate by check mark whether the registrant has
submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of
this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer ☐ | Accelerated filer ☐ |
| Smaller reporting company | |
| Emerging growth company |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a
shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐
At November 14, 2022, there were shares outstanding of Common Stock, par value $0.001 per share.
IMPORTANT INFORMATION REGARDING THIS FORM 10-Q
Unless otherwise indicated, references to “we,” “us,” and “our” in this Quarterly Report on Form 10-Q (“Report”) refer collectively to Deep Down, Inc., a Nevada corporation (“Deep Down”), and its wholly owned subsidiary Deep Down, Inc., a Delaware corporation (“Deep Down Delaware”). Our current operations are primarily conducted under Deep Down Delaware.
Readers should consider the following information as they review this Report:
Forward-Looking Statements
The statements contained or incorporated by reference in this Report that are not historical facts are “forward-looking statements” (as such term is defined in the Private Securities Litigation Reform Act of 1995), within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). All statements other than statements of historical fact are, or may be deemed to be, forward-looking statements. Forward-looking statements include any statement that may project, indicate or imply future results, events, performance or achievements. The forward-looking statements contained herein are based on current expectations that involve several risks and uncertainties. These statements can be identified by the use of forward-looking terminology such as “believes,” “expect,” “may,” “will,” “should,” “intend,” “plan,” “could,” “estimate,” or “anticipate,” or the negative thereof or other variations thereon or comparable terminology, or by discussions of strategy that involve risks and uncertainties.
Given the risks and uncertainties relating to forward-looking statements, investors should not place undue reliance on such statements. Forward-looking statements included in this Report speak only as of the date of this Report and are not guarantees of future performance. Although we believe that the expectations reflected in the forward-looking statements are reasonable, such expectations may prove to be incorrect. All subsequent written and oral forward-looking statements attributable to us, or persons acting on our behalf, are expressly qualified in their entirety by these cautionary statements. The risks and uncertainties mentioned previously relate to, among other matters, the following:
| · | Economic uncertainty and financial market conditions may impact our customer base, suppliers and backlog; | |
| · | The volatility of oil and natural gas prices; | |
| · | Our use of percentage-of-completion accounting could result in volatility in our results of operations; | |
| · | A portion of our contracts may contain terms with penalty provisions; | |
| · | Fluctuations in the price and supply of raw materials used to manufacture our products may reduce our profits and could materially impact our ability to meet commitments to our customers; | |
| · | Our operations could be adversely impacted by the continuing effects of government regulations; | |
| · | International and political events may adversely affect our operations; | |
| · | Our operating results may vary significantly from quarter to quarter; | |
| · | We may be unsuccessful at generating profitable internal growth; | |
| · | The departure of key personnel could disrupt our business; | |
| · | Our business requires skilled labor, and we may be unable to attract and retain qualified employees; | |
| · | Unfavorable legal outcomes could have a negative impact on our business; and | |
| · | The impact of global health crises, including epidemics and pandemics. |
| i |
Document Summaries
Descriptions of documents and agreements contained in this Report are provided in summary form only, and such summaries are qualified in their entirety by reference to the actual documents and agreements filed as exhibits to our Annual Report on Form 10-K for the year ended December 31, 2021, other periodic and current reports we have filed with the SEC, or this Report.
Access to Filings
Access to our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments thereto, filed with or furnished to the SEC pursuant to Section 13(a) of the Exchange Act, as well as reports filed by our executive officers and directors pursuant to Section 16(a) of the Exchange Act, may be obtained through our website (www.deepdowninc.com) as soon as reasonably practicable after we, or our executive officers and directors, have filed or furnished such material with the SEC. The contents of our website are not, and shall not be deemed to be, incorporated into this Report.
| ii |
TABLE OF CONTENTS
| iii |
PART I – FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
DEEP DOWN, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
September 30, 2022 | December 31, 2021 | |||||||
| (In thousands, except share and per share amounts) | ||||||||
| ASSETS | ||||||||
| Current assets: | ||||||||
| Cash | $ | $ | ||||||
| Accounts receivable, net | ||||||||
| Employee retention tax credit receivable | ||||||||
| Inventory | ||||||||
| Contract assets | ||||||||
| Prepaid expenses and other current assets | ||||||||
| Total current assets | ||||||||
| Property, plant and equipment, net | ||||||||
| Intangibles, net | ||||||||
| Right-of-use operating lease assets | ||||||||
| Other assets | ||||||||
| Total assets | $ | $ | ||||||
| LIABILITIES AND STOCKHOLDERS' EQUITY | ||||||||
| Current liabilities: | ||||||||
| Accounts payable and accrued expenses | $ | $ | ||||||
| Contract liabilities | ||||||||
| Current lease liabilities | ||||||||
| Total current liabilities | ||||||||
| Operating lease liability, long-term | ||||||||
| Total liabilities | ||||||||
| Commitments and contingencies (Note 8) | ||||||||
| Stockholders' equity: | ||||||||
| Common stock, shares authorized at $ par value, issued at September 30, 2022 and December 31, 2021 | ||||||||
| Additional paid-in capital | ||||||||
| Treasury stock, shares at September 30, 2022 and shares at December 31, 2021, at cost | ( | ) | ( | ) | ||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| Total stockholders' equity | ||||||||
| Total liabilities and stockholders' equity | $ | $ | ||||||
The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.
| 4 |
DEEP DOWN, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
| Three Months Ended | Nine Months Ended | |||||||||||||||
| September 30, | September 30, | |||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
| (In thousands, except per share amounts) | ||||||||||||||||
| Revenues | $ | $ | $ | $ | ||||||||||||
| Cost of sales: | ||||||||||||||||
| Cost of sales | ||||||||||||||||
| Depreciation expense | ||||||||||||||||
| Total cost of sales | ||||||||||||||||
| Gross profit | ||||||||||||||||
| Operating expenses: | ||||||||||||||||
| Selling, general and administrative | ||||||||||||||||
| Depreciation and amortization | ||||||||||||||||
| Total operating expenses | ||||||||||||||||
| Operating loss | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Other (income) expense: | ||||||||||||||||
| Interest expense, net | ||||||||||||||||
| Other income, net | ( | ) | ( | ) | ( | ) | ||||||||||
| Loss (gain) on sale of property, plant and equipment | ( | ) | ||||||||||||||
| Total other (income) expense | ( | ) | ( | ) | ( | ) | ||||||||||
| Income (loss) before income taxes | ( | ) | ( | ) | ||||||||||||
| Income tax expense | ||||||||||||||||
| Net income (loss) | $ | ( | ) | $ | $ | ( | ) | $ | ||||||||
| Net income (loss) per share: | ||||||||||||||||
| Basic | $ | ( | ) | $ | $ | ( | ) | $ | ||||||||
| Fully diluted | $ | ( | ) | $ | $ | ( | ) | $ | ||||||||
| Weighted-average shares outstanding: | ||||||||||||||||
| Basic | ||||||||||||||||
| Fully diluted | ||||||||||||||||
The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.
| 5 |
DEEP DOWN, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(UNAUDITED)
| Additional | ||||||||||||||||||||||||
| Common Stock | Paid-in | Treasury | Accumulated | |||||||||||||||||||||
| (In thousands) | Shares (#) | Amount ($) | Capital | Stock | Deficit | Total | ||||||||||||||||||
| Balance at June 30, 2022 | $ | $ | $ | ( | ) | $ | ( | ) | $ | |||||||||||||||
| Net loss | – | ( | ) | ( | ) | |||||||||||||||||||
| Balance at September 30, 2022 | $ | $ | $ | ( | ) | $ | ( | ) | $ | |||||||||||||||
| Balance at December 31, 2021 | $ | $ | $ | ( | ) | $ | ( | ) | $ | |||||||||||||||
| Net loss | – | ( | ) | ( | ) | |||||||||||||||||||
| Treasury shares purchased | – | ( | ) | ( | ) | |||||||||||||||||||
| Share-based compensation | – | |||||||||||||||||||||||
| Balance at September 30, 2022 | $ | $ | $ | ( | ) | $ | ( | ) | $ | |||||||||||||||
| Additional | ||||||||||||||||||||||||
| Common Stock | Paid-in | Treasury | Accumulated | |||||||||||||||||||||
| (In thousands) | Shares (#) | Amount ($) | Capital | Stock | Deficit | Total | ||||||||||||||||||
| Balance at June 30, 2021 | $ | $ | $ | ( | ) | $ | ( | ) | $ | |||||||||||||||
| Net income | – | |||||||||||||||||||||||
| Share-based compensation | – | |||||||||||||||||||||||
| Balance at September 30, 2021 | $ | $ | $ | ( | ) | $ | ( | ) | $ | |||||||||||||||
| Balance at December 31, 2020 | $ | $ | $ | ( | ) | $ | ( | ) | $ | |||||||||||||||
| Net income | – | |||||||||||||||||||||||
| Share-based compensation | – | |||||||||||||||||||||||
| Balance at September 30, 2021 | $ | $ | $ | ( | ) | $ | ( | ) | $ | |||||||||||||||
The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.
| 6 |
DEEP DOWN, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
| Nine Months Ended | ||||||||
| September 30, | ||||||||
| 2022 | 2021 | |||||||
| (In thousands) | ||||||||
| Cash flows from operating activities: | ||||||||
| Net income (loss) | $ | ( | ) | $ | ||||
| Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: | ||||||||
| Share-based compensation | ||||||||
| Depreciation and amortization | ||||||||
| Loss (gain) on sale of property, plant and equipment | ( | ) | ||||||
| Bad debt expense (recovery) | ( | ) | ||||||
| Non-cash lease (benefit) expense | ( | ) | ||||||
| Forgiveness of PPP loan | ( | ) | ||||||
| Changes in operating assets and liabilities: | ||||||||
| Accounts receivable, net | ( | ) | ||||||
| Contract assets | ( | ) | ||||||
| Inventories | ( | ) | ||||||
| Prepaid expenses and other current assets | ( | ) | ||||||
| Other assets, net | ( | ) | ( | ) | ||||
| Accounts payable and accrued expenses | ( | ) | ( | ) | ||||
| Contract liabilities | ( | ) | ( | ) | ||||
| Net cash provided by (used in) operating activities | ( | ) | ||||||
| Cash flows from investing activities: | ||||||||
| Proceeds from sale of property, plant and equipment | ||||||||
| Purchases of property, plant and equipment | ( | ) | ( | ) | ||||
| Payments received on note receivable | ||||||||
| Net cash used in investing activities | ( | ) | ( | ) | ||||
| Cash flows from financing activities: | ||||||||
| Proceeds from PPP loan | ||||||||
| Repurchase of common shares | ( | ) | ||||||
| Net cash provided by (used in) financing activities | ( | ) | ||||||
| Change in cash | ( | ) | ( | ) | ||||
| Cash, beginning of period | ||||||||
| Cash, end of period | $ | $ | ||||||
| Supplemental schedule of non-cash investing and financing activities: | ||||||||
| Shares of common stock received in exchange for property, plant and equipment | $ | $ | ||||||
The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.
| 7 |
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except per share amounts)
| NOTE 1: | BASIS OF PRESENTATION |
Basis of Presentation
Unless otherwise indicated, the terms “Deep Down, Inc.”, “Deep Down”, “Company”, “we”, “our” and “us” are used in this Report to refer to Deep Down, Inc., a Nevada corporation (“Deep Down Nevada”), and its directly wholly owned subsidiary, Deep Down, Inc., a Delaware corporation (“Deep Down Delaware”). The accompanying unaudited condensed consolidated financial statements of Deep Down, Inc. were prepared in accordance with the rules and regulations of the Securities and Exchange Commission (“SEC” or the “Commission”) pertaining to interim financial information and instructions to Form 10-Q. As permitted under those rules, certain notes or other financial information that are normally required by United States generally accepted accounting principles (“US GAAP”) can be condensed or omitted. Therefore, these statements should be read in conjunction with the audited consolidated financial statements, and notes thereto, included in our Annual Report on Form 10-K for the year ended December 31, 2021.
Preparation of financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosed amounts of contingent assets and liabilities, and the reported amounts of revenues and expenses. If the underlying estimates and assumptions upon which the financial statements are based change in future periods, then the actual amounts may differ from those included in the accompanying unaudited condensed consolidated financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included.
Organization
Deep Down is an energy services company that provides equipment and support services to the world’s energy and offshore industries. Deep Down offers innovative solutions to complex customer challenges presented between the production facility and the energy source. Deep Down's core services and technological solutions include distribution system installation support and engineering services, umbilical terminations, loose-tube steel flying leads, and related services. Additionally, Deep Down's highly experienced professionals can support subsea engineering, manufacturing, installation, commissioning, and maintenance projects located anywhere in the world.
On February 22, 2022, Deep Down Nevada entered into an Agreement and Plan of Merger providing for the merger of the Company with the Company’s wholly-owned subsidiary, Koil Energy Solutions, Inc. (the “Merger”). As permitted by Section 92A.180 of the Nevada Revised Statutes, the purpose of the Merger is to effect a change of the Company’s name from Deep Down, Inc., to Koil Energy Solutions, Inc. (the “Name Change”).
On February 25, 2022, in connection with the foregoing, Deep Down Nevada filed an Issuer Company-Related Action Notification Form with the Financial Industry Regulatory Authority (“FINRA”), requesting confirmation of the Name Change. On February 28, 2022, in connection with the foregoing, the Company filed an Issuer Company-Related Action Notification Form with FINRA, requesting a change of the Company’s ticker symbol (the “Symbol Change”). Subject to approval by FINRA, the Name Change and Symbol Change will not affect the rights of the Company’s security holders. The Company’s securities will continue to be quoted on the OTC Markets. Following the Name Change, the stock certificates, which reflect the name of the Company prior to the Merger, will continue to be valid. Certificates reflecting the Name Change will be issued in due course as old stock certificates are tendered for exchange or transfer to the Company’s transfer agent.
Liquidity
The Company’s cash on hand was $
| 8 |
The Company believes it will have adequate liquidity to meet its future operating requirements through a combination of cash on hand, cash expected to be generated from ongoing operations, and potential sales of PP&E. Given the volatility in oil prices and the impact on global economic activity caused by the COVID-19 pandemic, as well as recent increases in raw materials costs and ongoing supply chain constraints, the Company cannot predict this with certainty. To mitigate this uncertainty and preserve liquidity, the Company will continue to exercise discipline when making capital investments and practice opportunistic cost containment initiatives, which can include workforce alignment and limiting overhead spending and research and development efforts to only critical items.
Principles of Consolidation
The unaudited condensed consolidated financial statements presented herein include the accounts of Deep Down, Inc. and its wholly owned subsidiary for the three and nine months ended September 30, 2022 and 2021. All intercompany transactions and balances have been eliminated.
| NOTE 2: | LEASES |
In February 2016, the 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. 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, 2022, we do not have any finance lease assets or liabilities, nor do we have any subleases.
| 9 |
The following tables present information about our operating leases:
September 30, 2022 | December 31, 2021 | |||||||
| Assets: | ||||||||
| Right-of-use assets | $ | $ | ||||||
| Liabilities: | ||||||||
| Current lease liabilities | ||||||||
| Non-current lease liabilities | ||||||||
| Total lease liabilities | $ | $ | ||||||
The components of our lease expense were as follows:
| Three Months Ended | Nine Months Ended | |||||||||||||||
| September 30, | September 30, | |||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
| Operating lease expense included in: | ||||||||||||||||
| Cost of sales | $ | $ | $ | $ | ||||||||||||
| Selling, general and administrative expenses | ||||||||||||||||
| Short term lease expense | ||||||||||||||||
| Total lease expense | $ | $ | $ | $ | ||||||||||||
Lease term and discount rate:
September 30, 2022 |
December 31, 2021 | |||
| Weighted-average remaining lease terms on operating leases (yrs.) | ||||
| Weighted-average discount rates on operating leases |
During the three months ended September 30, 2022, the Company did not have any sale/leaseback transactions.
Present value of lease liabilities:
| Operating Leases | ||||
| October 1, 2022 – September 30, 2023 | $ | |||
| October 1, 2023 – September 30, 2024 | ||||
| October 1, 2024 – September 30, 2025 | ||||
| October 1, 2025 – September 30, 2026 | ||||
| Thereafter | ||||
| Total lease payments | $ | |||
| Less: Interest | ( | ) | ||
| Present value of lease liabilities | $ | |||
| 10 |
| 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, | ||||||||
| 2022 | 2021 | |||||||
| Fixed Price Contracts | $ | $ | ||||||
| Service Contracts | ||||||||
| Total | $ | $ | ||||||
| Nine Months Ended | ||||||||
| September 30, | ||||||||
| 2022 | 2021 | |||||||
| Fixed Price Contracts | $ | $ | ||||||
| Service Contracts | ||||||||
| Total | $ | $ | ||||||
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.
| 11 |
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 on a daily basis as the services are rendered to the customer. 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 on a monthly basis. Payment terms for services are usually 30 days from invoice receipt but can increase to 45 or 60 days depending on the customer.
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, 2022 and December 31, 2021, there were no contracts with terms that extended beyond one year.
The following table summarizes our contract assets, which are “Costs and estimated earnings in excess of billings on uncompleted contracts” and our contract liabilities, which are “Billings in excess of costs and estimated earnings on uncompleted contracts”.
September 30, 2022 |
December 31, 2021 |
|||||||
| Costs incurred on uncompleted contracts | $ | $ | ||||||
| Estimated earnings on uncompleted contracts | ||||||||
| Gross costs and estimated earnings | ||||||||
| Less: Billings to date on uncompleted contracts | ( |
) | ( |
) | ||||
| Costs incurred plus estimated earning less billings on uncompleted contracts, net | $ | $ | ||||||
| Included in the accompanying unaudited condensed consolidated balance sheets under the following captions: | ||||||||
| Contract assets | $ | $ | ||||||
| Contract liabilities | ( |
) | ( |
) | ||||
| Costs incurred plus estimated earning less billings on uncompleted contracts | $ | $ | ||||||
| 12 |
The contract asset and liability balances at September 30, 2022 and December 31, 2021 consisted primarily of revenue related to fixed-price projects.
Remaining Performance Obligations
Remaining performance obligations represent the transaction price of firm orders for which work has not been performed and excludes unexercised contract options, potential orders, and any remaining performance obligations for any sales arrangements that had not fully satisfied the criteria to be considered a contract with a customer pursuant to the requirements of ASC 606.
Practical Expedients and Exemptions
We generally expense sales commissions when incurred because the amortization period would have been one year or less. These costs are recorded within selling, general and administrative expenses.
Many of our services contracts are short-term in nature with a contract term of one year or less. For those contracts, we have utilized the practical expedient in ASC 606-10-50-14 exempting the Company from disclosure of the transaction price allocated to remaining performance obligations if the performance obligation is part of a contract that has an original expected duration of one year or less.
Additionally, our payment terms are short-term in nature with settlements of one year or less. We have, therefore, utilized the practical expedient in ASC 606-10-32-18 exempting the Company from adjusting the promised amount of consideration for the effects of a significant financing component given that the period between when the Company transfers a promised good or service to a customer and when the customer pays for that good or service is expected to be one year or less.
Further, in many of our service contracts, we have a right to consideration from a customer in an amount that corresponds directly with the value to the customer of our performance completed to date (for example, a service contract in which we bill a fixed amount for each hour of service provided). For those contracts, we have utilized the practical expedient in ASC 606-10-55-18, which allows us to recognize revenue in the amount for which we have the right to invoice.
Accordingly, we do not disclose the value of unsatisfied performance obligations for (i) contracts with an original expected length of one year or less and (ii) contracts for which we recognize revenue at the amount to which we have the right to invoice for services performed.
| NOTE 4: | PROPERTY, PLANT AND EQUIPMENT |
Property, plant and equipment consisted of the following:
September 30, 2022 | December 31, 2021 | Range of Asset Lives | ||||||||
| Buildings and improvements | $ | $ | ||||||||
| Leasehold improvements | ||||||||||
| Equipment | ||||||||||
| Furniture, computers and office equipment | ||||||||||
| Construction in progress | – | |||||||||
| Total property, plant and equipment | ||||||||||
| Less: Accumulated depreciation and amortization | ( | ) | ( | ) | ||||||
| Property, plant and equipment, net | $ | $ | ||||||||
| 13 |
| 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 in additional paid-in capital in the accompanying unaudited consolidated balance sheets. During the three and nine months ended September 30, 2022, the Company recognized share-based compensation and $ of share-based compensation expense, respectively. During the three and nine months ended September 30, 2021, the Company recognized a total of $ and $ of share-based compensation expense, respectively. The unamortized estimated fair value of nonvested shares of restricted stock and stock options was zero at September 30, 2022.
| NOTE 6: | TREASURY STOCK |
shares of common stock were purchased during the
three and nine months ended September 30, 2021. shares of common stock were purchased during the three months ended September 30, 2022,
and during the nine months ended September 30, 2022, shares of common stock were purchased in privately negotiated transactions for
an aggregate amount of $
| NOTE 7: | INCOME TAXES |
Income tax expense during interim periods is based on applying the estimated annual effective income tax rate to interim period operations. The estimated annual effective income tax rate may vary from the statutory rate due to the impact of permanent items relative to our pre-tax income, as well as by any valuation allowance recorded. We employ an asset and liability approach that results in the recognition of deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the financial basis and the tax basis of those assets and liabilities. A valuation allowance is established when it is more likely than not that some of the deferred tax assets will not be realized. At September 30, 2022 and December 31, 2021, management has recorded a full deferred tax asset valuation allowance.
| NOTE 8: | COMMITMENTS AND CONTINGENCIES |
Employment Agreement
Our Chief Executive Officer is employed under an employment agreement containing severance provisions. In the event of termination of the CEO’s employment for any reason, the CEO will be entitled to receive all accrued, unpaid salary and vacation time through the date of termination and all benefits to which the CEO is entitled or vested under the terms of all employee benefit and compensation plans, agreements, and arrangements in which the CEO participates as of the date of termination.
In addition, subject to executing a general release in favor of the Company, the CEO will be entitled to receive certain severance payments in the event his employment is terminated by the Company “other than for cause” or by the CEO with “good reason.” These severance payments include: (i) a lump sum in cash equal to one to two times the CEO’s annual base salary; (ii) a lump sum in cash equal to one to two times the average annual bonus paid to the CEO for the prior two full fiscal years preceding the date of termination; (iii) a lump sum in cash equal to a pro rata portion of the annual bonus payable for the period in which the date of termination occurs based on the actual performance under the Company’s annual incentive bonus arrangement, but no less than fifty percent of the CEO’s annual base salary; and (iv) if the CEO’s termination occurs prior to the date that is twelve months following a change of control, then each and every share option, restricted share award and other equity-based award that is outstanding and held by the CEO shall immediately vest and become exercisable.
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 not involved in any material legal proceedings as of the date of this Report.
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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.
The parties convened for mediation on March 9, 2022, and on May 9, 2022, the Company and Aker finalized the terms of a definitive settlement
agreement with a mutual dismissal with prejudice of all claims by and between them. The Company subsequently reversed a liability accrual
of $
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 paid GE an aggregate of $
| NOTE 9: | EARNINGS PER COMMON SHARE |
Basic earnings per share (“EPS”) is calculated by dividing net income (loss) by the weighted-average number of common shares outstanding for the period. Diluted EPS is calculated by dividing net income (loss) by the weighted-average number of common shares and dilutive effect of common stock equivalents (warrants, nonvested stock awards and stock options) using the treasury method.
In each relevant period, the net income used in the basic and diluted EPS calculations is the same. The following table reconciles the weighted-average basic number of common shares outstanding and the weighted-average diluted number of common shares outstanding for the purpose of calculating basic and diluted EPS.
| Three Months Ended | Nine Months Ended | |||||||||||||||
| September 30, | September 30, | |||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
| Weighted average common shares outstanding - basic | ||||||||||||||||
| Dilutive effect of common stock equivalents | ||||||||||||||||
| Weighted average common shares outstanding - diluted | ||||||||||||||||
| NOTE 10: | RELATED PARTY TRANSACTIONS |
On August 15, 2019, Mr. Ronald E. Smith, the Company's Founder, resigned as Chief Executive Officer and as a member of the Board, effective as of August 31, 2019.
In connection with Mr. Smith's resignation, the Company
entered into a Transition Agreement with him, effective as of September 1, 2019 (the “Transition Agreement”). The Transition
Agreement provided 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 $
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 occurred prior to December 31, 2021, and subject to certain other conditions. Such carousels were not sold prior
to December 31, 2021.
| 15 |
On January 5, 2022, the Company repurchased shares
of common stock from Mr. Smith at a total cost of $
NOTE 11: EMPLOYEE RETENTION CREDIT
Under the provisions of the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) signed into law on March 27, 2020 and the subsequent extension of the CARES Act, the Company was eligible for a refundable employee retention credit subject to certain criteria. Since there are no generally accepted accounting principles for for-profit business entities that receive government assistance that is not in the form of a loan, an income tax credit or revenue from a contract with a customer, we determined the appropriate accounting treatment by analogy to other guidance. The Company accounted for the employee retention credit by analogy to International Accounting Standards (“IAS”) 20, “Accounting for Government Grants and Disclosure of Government Assistance, of International Financial Reporting Standards (IFRS).”
Under an IAS 20 analogy, a business entity would recognize the employee retention credit on a systematic basis over the periods in which the entity recognizes the payroll expenses for which the grant (i.e., tax credit) is intended to compensate when there is reasonable assurance (i.e., it is probable) that the entity will comply with any conditions attached to the grant and the grant will be received.
The Company recognized a $
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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Amounts in thousands except per share amounts)
The following discussion and analysis provides information that management believes is relevant for an assessment and understanding of Deep Down’s results of operations and financial condition. This information should be read in conjunction with the Company’s audited historical consolidated financial statements, which are included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2021 and which is available on the SEC’s website, and the Company’s unaudited condensed consolidated financial statements, and notes thereto, included with this Quarterly Report on Form 10-Q (“Report”) in Part I. Item 1. “Financial Statements.”
General
Deep Down is an energy services company that provides equipment and support services to the world’s energy and offshore industries. Deep Down offers innovative solutions to complex customer challenges presented between the production facility and the energy source. Deep Down's core services and technological solutions include distribution system installation support and engineering services, umbilical terminations, loose-tube steel flying leads, and related services. Additionally, Deep Down's highly experienced professionals can support subsea engineering, manufacturing, installation, commissioning, and maintenance projects located anywhere in the world.
Industry and Executive Outlook
The energy services industry is dependent on the capital and operating expenditure programs of energy companies. The decision for operators to cut back or accelerate their exploration, drilling, and production operations is substantially driven by the overall condition of the energy industry. Particularly, the oil and gas industry has historically been characterized by fluctuations in commodity prices, which are driven by a variety of market forces.
Deep Down’s third quarter results reflect the ongoing challenges that face the offshore industry. Our revenues continue to be impacted by global demand and delays in customer drilling schedules. Inflation, certain geopolitical events, and the lingering effects of the pandemic, all of which continue to weigh on our customers’ abilities to commit to long-term deepwater projects. Despite the broader economic dynamics, we believe that the energy markets will remain productive. We suspect that the combination of OPEC+’s current proactive stance to reduce production, underperforming US production, and limited non-OPEC+ production capacity will encourage increased investment to bring balance to the markets. Our participation in this potential supply-led upcycle is essential for our business to achieve a sustained level of growth.
To further enhance our growth prospects, we made two significant announcements this year: a relocation of the business and a rebranding of the Company.
The transition to our newly leased premises was completed in October. As we settle into the new space, we continue to receive positive feedback from our customers. In the second quarter of 2022, we received our first purchase order to provide hydrogen energy services. The scope of this project initially focuses on storage, management and enhancement of customer furnished materials utilizing our alloy welding and other fabrication capabilities. Following validation of these early-stage activities, future phases could lead to systems integration activities potentially including the commissioning of systems being developed for the retail consumer market.
Rebranding the Company from Deep Down, Inc. to Koil Energy Solutions, Inc. was the next step in promoting our core competencies to expand our product and service offerings into new markets. We are still awaiting approval from the Financial Industry Regulatory Authority (FINRA) for our name and ticker symbol change, but we have moved forward with this change operationally and are currently working with our customers under the new brand.
As we look towards the future, our growth efforts will revolve around three pillars: (i) Systems, (ii) Technology and (iii) Partnerships. These three pillars will be energy source agnostic.
Systems primarily relates to our legacy offerings in the oil and gas segment but represents the shift in our approach to becoming a provider of integrated systems instead of providing only individual components. We have previously realized success with this strategy and have identified several opportunities to pursue on a systematic basis.
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Technology entails the development of new equipment and associated services that straddle both traditional oil and gas as well as renewable energy sources. Our product development team is already hard at work and, in just a short amount of time, has already identified a potentially patentable offering. This pillar will also include our ongoing efforts to further enhance the environmental friendliness of our equipment.
Partnerships involve the collaboration with like-minded organizations where we will seek to leverage our core competencies to jointly capitalize on future opportunities. This will likely be a longer-term strategy and could develop in a variety of ways, such as project specific consortia, strategic alliances, or operational joint ventures.
We will continue to provide additional details in due course as we work with our team to accomplish our vision of having the most experienced, professional and dependable team, who seek to develop the most innovative solutions, including the most efficient and reliable equipment, with the ultimate goal of providing best-in-class returns for our stockholders.
Results of Operations
Three Months Ended September 30, 2022 Compared to Three Months Ended September 30, 2021
Revenues
Three Months Ended September 30, | Increase (Decrease) | |||||||||||||||
| 2022 | 2021 | $ | % | |||||||||||||
| Revenues | $ | 2,257 | $ | 3,550 | $ | (1,293 | ) | (36 | )% | |||||||
The 36 percent decrease in revenues was primarily driven by an overall decline in project activity characterized by a shift from product oriented, fixed price contracts to short duration projects utilizing our support services and rental solutions.
Cost of Sales
Three Months Ended September 30, | Increase (Decrease) | |||||||||||||||
| 2022 | 2021 | $ | % | |||||||||||||
| Cost of sales | $ | 1,988 | $ | 2,713 | $ | (725 | ) | (27 | )% | |||||||
| Gross profit | $ | 269 | $ | 837 | $ | (568 | ) | (68 | )% | |||||||
| Gross profit % | 12% | 24% | – | (12 | )% | |||||||||||
The decrease in gross profit and gross profit as a percentage of sales during the three months ended September 30, 2022 was primarily driven by the decrease in revenues and an increase in lower margin passthrough service costs incurred on certain projects.
The Company records depreciation expense related to revenue-generating property, plant and equipment as cost of sales, which totaled $113 and $144 for the three months ended September 30, 2022 and 2021, respectively. The comparative decrease in depreciation was primarily due to certain long-lived assets becoming fully depreciated throughout the year and the sale or disposal of several long-lived assets that were non-strategic to the core operations of the business.
Selling, general and administrative expenses
Three Months Ended September 30, | Increase (Decrease) | |||||||||||||||
| 2022 | 2021 | $ | % | |||||||||||||
| Selling, general & administrative | $ | 1,644 | $ | 1,336 | $ | 308 | 23% | |||||||||
| Selling, general & administrative as a % of revenue | 73% | 38% | – | 35% | ||||||||||||
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The increase in selling, general and administrative expenses (“SG&A”) for the three months ended September 30, 2022 was primarily due to costs related to the relocation of the Company to a new facility. The increase in SG&A as a percentage of revenues is due to both the increase in SG&A expenses during the three months, as well as the decrease in revenues.
Other income, net
During the three months ended September 30, 2021, the Company recorded net other income of $1,050, which was primarily related to the forgiveness of its second PPP loan obtained in March 2021. The Company recorded no net other income for the three months ended September 30, 2022.
Loss on sale of assets
Loss on sales of assets was approximately $147 and $148 during the three months ended September 30, 2022 and September 30, 2021, respectively, and primarily related to property, plant and equipment sold by the Company that were non-strategic to the core operations of the business.
Modified EBITDA
Our management evaluates our performance based on a non-US GAAP measure which consists of earnings (net income or loss) available to common stockholders before net interest income, income taxes, depreciation and amortization, non-cash share-based compensation expense, non-cash gains or losses on the sale of property, plant and equipment (“PP&E”), other non-cash items and one-time charges (“Modified EBITDA”). This measure may not be comparable to similarly titled measures employed by other companies. The measure should not be considered in isolation or as a substitute for operating income or loss, net income or loss, cash flows provided by operating, investing, or financing activities, or other cash flow data prepared in accordance with US GAAP. The amounts included in the Modified EBITDA calculation, however, are derived from amounts included in the accompanying consolidated statements of operations.
We believe Modified EBITDA is a useful measure of a company’s operating performance, which can vary substantially from company to company depending upon accounting methods and book value of assets, financing methods, capital structure and the method by which assets were acquired. It helps investors more meaningfully evaluate and compare the results of our operations from period to period by removing the impact of our capital structure (primarily interest), asset base (primarily depreciation and amortization), and actions that do not affect liquidity (share-based compensation expense) from our operating results. Additionally, it helps investors identify items that are within our operational control. Depreciation and amortization charges, while a component of operating income, are fixed at the time of the asset purchase or acquisition in accordance with the depreciable lives of the related asset and as such are not a directly controllable period operating charge.
The following is a reconciliation of net income (loss) to Modified EBITDA for the three months ended September 30, 2022 and 2021:
| Three Months Ended | ||||||||
| September 30, | ||||||||
| 2022 | 2021 | |||||||
| Net income (loss) | $ | (1,579 | ) | $ | 332 | |||
| Add: Interest expense, net | 5 | 1 | ||||||
| Add: Income tax expense | 4 | 5 | ||||||
| Add: Depreciation and amortization | 161 | 209 | ||||||
| Add: Share-based compensation | – | 9 | ||||||
| Add: Relocation costs | 262 | – | ||||||
| Add: Loss on sale of asset | 147 | 148 | ||||||
| Deduct: Forgiveness of PPP loan | – | (1,111 | ) | |||||
| Modified EBITDA | $ | (1,000 | ) | $ | (407 | ) | ||
| 19 |
The $593 decrease in Modified EBITDA was due primarily to the decline in revenues during the three months ended September 30, 2022 as compared to the three months ended September 30, 2021.
Nine Months Ended September 30, 2022 Compared to Nine Months Ended September 30, 2021
Revenues
Nine Months Ended September 30, | Increase (Decrease) | |||||||||||||||
| 2022 | 2021 | $ | % | |||||||||||||
| Revenues | $ | 9,357 | $ | 12,000 | $ | (2,643 | ) | (22 | )% | |||||||
The 22 percent decrease in revenues was primarily driven by an overall decline in project activity characterized by a shift from product oriented, fixed price contracts to short duration projects utilizing our support services and rental solutions.
Cost of Sales
Nine Months Ended September 30, | Increase (Decrease) | |||||||||||||||
| 2022 | 2021 | $ | % | |||||||||||||
| Cost of sales | $ | 6,193 | $ | 8,029 | $ | (1,836 | ) | (23 | )% | |||||||
| Gross profit | $ | 3,164 | $ | 3,971 | $ | (807 | ) | (20 | )% | |||||||
| Gross profit % | 34% | 33% | – | 1 | % | |||||||||||
The decrease in gross profit was due to lower revenues for the nine months ended September 30, 2022, partially offset by a decrease in cost of sales as a result of incurring less materials costs. The increase in gross profit as a percentage of sales was due to incurring less materials costs and decreases in lower margin passthrough service costs incurred on certain projects for the nine months ended September 30, 2022.
The Company records depreciation expense related to revenue-generating property, plant and equipment as cost of sales, which totaled $366 and $511 for the nine months ended September 30, 2022 and 2021, respectively. The comparative decrease in depreciation was primarily due to certain long-lived assets becoming fully depreciated throughout the year and sale of several long-lived assets that were non-strategic to the core operations of the business.
Selling, general and administrative expenses
Nine Months Ended September 30, | Increase (Decrease) | |||||||||||||||
| 2022 | 2021 | $ | % | |||||||||||||
| Selling, general & administrative | $ | 4,730 | $ | 4,623 | $ | 107 | 2% | |||||||||
| Selling, general & administrative as a % of revenue | 51% | 39% | – | 12% | ||||||||||||
The increase in SG&A was primarily due to incurring costs related to the relocation of the Company to a new facility and rebranding the Company from Deep Down, Inc. to Koil Energy Solutions, Inc. during the nine months ended September 30, 2022.
Other income, net
Other net income during the nine months ended September 30, 2022 was $52 compared to net other income of $2,193 during the nine months ended September 30, 2021, which was mainly related to receiving the forgiveness of its two PPP loans.
| 20 |
Gain/Loss on sale of assets
The Company recorded a $41 gain on sales of assets during the nine months ended September 30, 2022 and a $94 loss on sale of assets during the nine months ended September 30, 2021, which were primarily related to property, plant and equipment sold by the Company that were non-strategic to the core operations of the business.
Modified EBITDA
The following is a reconciliation of net income (loss) to Modified EBITDA for the nine months ended September 30, 2022 and 2021:
| Nine Months Ended | ||||||||
| September 30, | ||||||||
| 2022 | 2021 | |||||||
| Net income (loss) | $ | (1,666 | ) | $ | 1,204 | |||
| Add: Interest expense, net | 10 | 8 | ||||||
| Add: Income tax expense | 19 | 15 | ||||||
| Add: Depreciation and amortization | 530 | 731 | ||||||
| Add: Share-based compensation | 71 | 46 | ||||||
| Add: Relocation costs | 291 | – | ||||||
| (Deduct) Add: (Gain) loss on sale of asset | (41 | ) | 94 | |||||
| Deduct: Forgiveness of PPP loan | – | (2,222 | ) | |||||
| Deduct: Reversal of litigation accrual | (100 | ) | – | |||||
| Modified EBITDA | $ | (886 | ) | $ | (124 | ) | ||
The $762 decrease in Modified EBITDA was mainly driven by the decrease in revenues during the nine months ended September 30, 2022 as compared to the nine months ended September 30, 2021. Modified EBITDA for the nine months ended September 30, 2021 was also impacted by recording a $534 reserve for doubtful accounts receivable during that period. This is compared to recording a $133 reversal to the reserve for doubtful accounts receivable for the collection of previously reserved amounts during the nine months ended September 30, 2022.
Liquidity and Capital Resources
The Company believes it will have adequate liquidity to meet its future operating requirements through a combination of cash on hand, cash expected to be generated from operations, and potential sales of PP&E. Given the volatility in oil prices and the impact on global economic activity caused by the COVID-19 pandemic, as well as recent increases in raw materials costs and ongoing supply chain constraints, the Company cannot predict this with certainty. To mitigate this uncertainty and preserve liquidity, the Company will continue to exercise discipline when making capital investments and practice opportunistic cost containment initiatives, which can include workforce alignment and limiting overhead spending and research and development efforts to only critical items.
During the nine months ended September 30, 2022, the Company generated $2,078 of net cash from operating activities primarily driven by a decrease in accounts receivable and several other components of working capital. The Company used $1,961 of net cash in investing activities, primarily to fund capital expenditures. The Company also used $250 of net cash in financing activities for the repurchase of common stock, which resulted in a $133 decrease in cash for the period.
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During the nine months ended September 30, 2021, the Company used $1,053 of net cash in operating activities primarily to fund working capital. The Company also used $95 of net cash in investing activities, primarily to fund capital expenditures. The Company generated $1,111 of net cash provided by financing activities from PPP loan proceeds, which resulted in a $37 decrease in cash for the period.
Off-Balance Sheet Arrangements
The Company has no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on its financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to investors.
Critical Accounting Estimates
The preparation of financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and reported amounts of revenues and expenses during the reporting period. The most significant estimates used in the financial statements relate to revenue recognition where the Company measures progress towards completion on a cost-to-cost basis for fixed-price contracts, the allowance for doubtful accounts, and the valuation allowance for deferred income tax assets. Significant estimates are also used in management’s assessment of conditions or events that raise substantial doubt about the Company’s ability to continue as a going concern. These estimates require judgments, which are based on historical experience and on various other assumptions, as well as specific circumstances. Estimates may change as new events occur, additional information becomes available or operating environments change.
Refer to Part II. Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” in our Annual Report on Form 10-K for the year ended December 31, 2021 for a discussion of our critical accounting policies and estimates.
Allowance for Doubtful Accounts and Bad Debt Expense
The Company provides an allowance on trade 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 September 30, 2022 and December 31, 2021, the Company estimated the allowance for doubtful accounts requirement to be $0 and $525, respectively. The Company recorded no charges to bad debt expense during the three months ended September 30, 2022. The Company recorded a credit to bad debt expense totaling $133 during the nine months ended September 30, 2022 due to payments received on certain previously reserved balances. The Company recorded a $534 charge to bad debt expense during the three and nine months ended September 30, 2021.
Recently Issued Accounting Standards
Refer to Note 1 in Part II. Item 8. “Financial Statements and Supplemental Data,” in our Annual Report on Form 10-K for the year ended December 31, 2021 for a discussion of recently issued accounting standards.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not Applicable.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures. The Company’s disclosure controls and procedures are designed to ensure that such information required to be disclosed by the Company in reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. The Company’s disclosure controls and procedures are also designed to ensure that such information is accumulated and communicated to management, including the principal executive and the principal financial officer, as appropriate to allow timely decisions regarding required disclosures. There are inherent limitations to the effectiveness of any system of disclosure controls and procedures, including the possibility of human error and the circumvention or overriding of controls and procedures. Accordingly, even effective disclosure controls and procedures can only provide reasonable assurance that control objectives are attained. The Company’s disclosure controls and procedures are designed to provide such reasonable assurance.
The Company’s management, with the participation of the principal executive and principal financial officer, evaluated the effectiveness of the design and operation of the Company’s disclosure controls and procedures as of September 30, 2022, as required by Rule 13a-15(e) of the Exchange Act. Based upon that evaluation, the principal executive and the principal financial officer have concluded that the Company’s disclosure controls and procedures were effective as of September 30, 2022.
Changes in Internal Control Over Financial Reporting. The Company’s management, with the participation of the principal executive and principal financial officer, have concluded there were no changes in internal control over financial reporting during the three months September 30, 2022.
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PART II – OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
From time to time, the Company is party to various legal proceedings arising in the ordinary course of business. The Company expenses or accrues legal costs as incurred and is not involved in any material legal proceedings as of the date of this Report.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Not Applicable.
ITEM 6. EXHIBITS
Exhibits required by Item 601 of Regulation S-K are listed in the Index to Exhibits of this Quarterly Report on Form 10-Q, which is incorporated herein by reference.
| 24 |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| DEEP DOWN, INC. | ||
| (Registrant) | ||
| Date: November 14, 2022 | ||
| By: | /s/ Charles K. Njuguna | |
| Charles K. Njuguna | ||
| President, Chief Executive Officer and Chief Financial Officer | ||
| (Principal Executive and Financial Officer) | ||
| By: | /s/ Trevor L. Ashurst | |
| Trevor L. Ashurst | ||
| Vice President of Finance | ||
| (Principal Accounting Officer) | ||
| 25 |
INDEX TO EXHIBITS
______________________________
* Filed or furnished herewith.
| 26 |