We have audited the accompanying consolidated
balance sheets of Deep Down, Inc. (the “Company”) as of December 31, 2020 and 2019, the related consolidated statements
of operations, changes in stockholders’ equity and cash flows for the years then ended, and the related notes (collectively
referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present
fairly, in all material respects, the consolidated financial position of the Company as of December 31, 2020 and 2019, and the
consolidated results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally
accepted in the United States of America.
These consolidated financial statements
are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated
financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight
Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the
U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with
the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether
the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required
to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audit we are
required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion
on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures
to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing
procedures to respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures
in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates
made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our
audits provide a reasonable basis for our opinion.
The critical audit matters communicated
below are matters arising from the current period audit of the consolidated financial statements that were communicated or required
to be communicated to the audit committee and that (1) relate to accounts or disclosures that are material to the consolidated
financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical
audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not,
by communicating the critical audit matters below, providing a separate opinion on the critical audit matters or on the accounts
or disclosures to which they relate.
As described in Note 3 to the consolidated
financial statements, total revenue of approximately $8,664,000 for the year ended December 31, 2020 is generated from fixed price
contracts. For the Company’s fixed price contracts, 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. The Company uses the cost-to-cost
measure of progress for its contracts because it best depicts the transfer of control to the customer which occurs as the Company
incurs costs on the 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. Management’s estimation of total
cost at completion is subject to many variables and requires significant judgment. There are many factors which impact management’s
estimate, including, but not limited to, the ability to properly execute the engineering, design and fabrication phases consistent
with customers’ expectations, the availability and costs of labor and materials resources, productivity, weather, and level
of success in the installation phase. Each of these factors can affect the accuracy of cost estimates, and ultimately, future profitability.
The principal considerations in our determination
that revenue recognition - determination of estimated costs to complete for fixed price contracts is a critical audit matter are
the complexity of these estimates and exercise of significant judgment by management when developing these estimates for fixed
price contracts. This in turn led to a high degree of auditor judgment, subjectivity, and effort in performing procedures and evaluating
audit evidence related to the estimates of costs to complete.
The primary procedures we performed to
address this critical audit matter included:
As described in Notes 2 and 4 to the consolidated
financial statements, the Company’s consolidated right-of-use operating lease assets and net property, plant and equipment
were approximately $3,174,000 and $2,604,000, respectively, as of December 31, 2020. Management conducts impairment tests on long-lived
assets whenever significant events or changes in circumstances indicate the carrying value may not be recoverable. The carrying
value of a long-lived asset or asset group is not recoverable if it exceeds the sum of the undiscounted cash flows expected to
result from the use and eventual disposition of the asset or asset group. Downturn in the offshore energy sector and its negative
financial impact on the Company’s operations led management to conclude the carrying amount of its long-lived assets, which
are evaluated as asset groups, required an impairment review to be performed as of June 30, 2020. The Company recorded an impairment
charge of approximately $4,490,000 during the quarter ended June 30, 2020 related to its certain idle fixed assets, which were
evaluated for impairment at the asset level. Impairment review of the remaining long-lived assets resulted in management’s
conclusion that those assets were not impaired.
The principal consideration in our determination
that long-lived asset impairments is a critical audit matter was the significant judgment used by management when estimating the
revenue component of the future undiscounted cash flows of the group of assets. This in turn led to a high degree of auditor judgment,
subjectivity, and effort in performing procedures and evaluating audit evidence obtained related to management’s significant
assumptions, including the amount and timing of the revenue component of the net future undiscounted cash flows.
The primary procedures we performed to
address this critical audit matter included:
The accompanying notes are an integral part of
the consolidated financial statements.
The accompanying notes are an integral part of
the consolidated financial statements.
The accompanying notes are an integral part of
the consolidated financial statements.
The accompanying notes are an integral part of
the consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
All dollar and share amounts in the Notes to
the Consolidated Financial Statements are in thousands of dollars and shares, unless otherwise indicated, except per share amounts.
NOTE 1:
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DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND ESTIMATES
|
Description of Business
Deep Down, Inc., a Nevada corporation (“Deep
Down Nevada”), and its directly wholly owned subsidiary, Deep Down, Inc., a Delaware corporation (“Deep Down Delaware”);
(collectively referred to as “Deep Down”, “we”, “us” or the “Company”), is an oilfield
services company specializing in complex deepwater and ultra-deepwater oil production distribution system support services and technologies
used between the production facility and the wellhead. Our services and technological solutions include distribution system installation
support and engineering services, umbilical terminations, loose-tube steel flying leads, and related services. Additionally, our highly
experienced, specialized service teams can support subsea engineering, installation, commissioning, and maintenance projects located anywhere
in the world.
Liquidity
The Company’s cash on hand was $3,745 and
working capital was $4,080 as of December 31, 2020. As of December 31, 2019, cash on hand and working capital was $3,523 and $4,939, respectively.
Other than loans obtained under the Paycheck Protection Program (“PPP”), the Company does not have a credit facility in place
and depends on cash on hand, cash flows from operations, and the potential opportunistic sales of Property, Plant & Equipment (“PP&E”).
See Note 11 and Note 12 for further discussion of the PPP loans.
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, cash received
from a second PPP loan, and potential opportunistic sales of PP&E in addition to pursuing a disciplined approach to making capital
investments. However, given the abrupt decline in oil prices and global economic activity caused by COVID-19 in 2020, the Company cannot
predict this with certainty. To mitigate this uncertainty and preserve liquidity, the Company will continue to pursue opportunistic cost
containment initiatives, which can include workforce reductions, limiting overhead spending and research and development efforts to only
critical items, and actively pursuing further cost reduction opportunities as they become available.
Summary of Significant Accounting Policies and Estimates
Principles of Consolidation
The consolidated financial statements include
the accounts of Deep Down and its wholly owned subsidiary for the years ended December 31, 2020 and 2019. All intercompany transactions
and balances have been eliminated.
Use of Estimates
The preparation of these financial statements
in accordance with accounting principles generally accepted in the United States of America (“US GAAP”) requires us to make
estimates and judgments that may affect assets and liabilities. On an ongoing basis, we evaluate our estimates, including those related
to revenue recognition and related allowances, contract assets and liabilities, impairments of long-lived assets, income taxes including
the valuation allowance for deferred tax assets, contingencies and litigation, and share-based payments. We base our estimates on historical
experience and on various other assumptions that are believed to be reasonable, the results of which form the basis for making judgments
about the carrying values of assets and liabilities. Actual results may differ from these estimates under different assumptions or conditions.
Segments
For the years ended December 31, 2020 and 2019,
we only had one operating and reporting segment, Deep Down Delaware.
Cash and Cash Equivalents
We consider all highly liquid investments with
maturities from date of purchase of three months or less to be cash equivalents. Cash and cash equivalents consist of cash on deposit
with domestic banks and, at times, may exceed federally insured limits.
Fair Value of Financial Instruments
Fair value is defined as the exchange price that
would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset
or liability in an orderly transaction between market participants on the measurement date. We utilize a fair value hierarchy, which maximizes
the use of observable inputs and minimizes the use of unobservable inputs when measuring fair value. The fair value hierarchy has three
levels of inputs that may be used to measure fair value:
Level 1 - Unadjusted quoted prices in active markets that
are accessible at the measurement date for identical, unrestricted assets or liabilities.
Level 2 - Quoted prices in markets that are not active; or
other inputs that are observable, either directly or indirectly, for substantially the full term of the asset or liability.
Level 3 - Prices or valuation techniques that require inputs
that are both significant to the fair value measurement and unobservable.
Our financial instruments consist primarily of
cash, accounts receivables and payables, and notes receivable (included in other assets). The carrying values of cash, accounts receivables,
and payables approximated their fair values at December 31, 2020 and 2019 due to their short-term maturities. The carrying values of our
notes receivable approximate their fair values at December 31, 2020 and 2019 because the interest rates approximate current market rates.
Accounts Receivable
Accounts receivable are uncollateralized customer
obligations due under normal trade terms. The Company provides an allowance on accounts receivables based on a specific review of
each customer’s accounts receivable balance with respect to its ability to make payments. Generally, the Company does not
charge interest on past due accounts. When specific accounts are determined to require an allowance, they are expensed by a provision
for bad debts in that period. At December 31, 2020 and 2019, the Company estimated the allowance for doubtful accounts requirement
to be $84 and $50, respectively. Bad debt expense totaled $238 and $20 for the years ended December 31, 2020 and 2019, respectively.
Concentration of Revenues and Credit Risk
Deep Down’s revenues are derived from the
sale of products and services to customers who participate in the offshore sector of the oil and gas industry. Customers may be similarly
affected by economic and other changes in the oil and gas industry. For the year ended December 31, 2020, our five largest customers accounted
for 43 percent, 10 percent, 8 percent, 8 percent, and 5 percent of total revenues. For the year ended December 31, 2019, our five largest
customers accounted for 44 percent, 20 percent, 7 percent, 6 percent, and 5 percent of total revenues. The loss of one or more of these
customers could have a material impact on our results of operations and cash flows.
As of December 31, 2020, three of our customers
accounted for 52 percent, 12 percent, and 9 percent of total accounts receivable. As of December 31, 2019, three of our customers accounted
for 41 percent, 17 percent, and 9 percent of total accounts receivable.
Property, plant and equipment
PP&E is stated at cost, net of accumulated
depreciation, amortization, and related impairments. Depreciation and amortization are computed using the straight-line method over the
estimated useful lives of the respective assets. Replacements and betterments are capitalized, while maintenance and repairs are expensed
as incurred. It is our policy to include amortization expense on assets acquired under finance leases with depreciation expense on owned
assets. Additionally, we record depreciation and amortization expense related to revenue-generating assets as a component of cost of sales
in the accompanying consolidated statements of operations.
If circumstances associated with our PP&E
have changed or a significant event has occurred that may affect the recoverability of the carrying amount of our PP&E, an impairment
indicator exists, and we test the PP&E for impairment. Before testing for impairment, we group PP&E with other finite-lived long-lived
assets (“long-lived assets”) at the lowest level of identifiable cash flows that are largely independent of cash flows from
other assets or groups of assets. Testing long-lived assets for impairment is a two-step process:
Step 1 - We test the long-lived asset
group for recoverability by comparing the carrying amount of the asset group with the sum of the undiscounted future cash flows from use
and the eventual disposal of the asset group. If the carrying amount of the long-lived asset group is determined to be greater than the
sum of the undiscounted future cash flows from use and disposal, we would need to perform step 2.
Step 2 - If the long-lived group of
assets fails the recoverability test in step 1, we would record an impairment expense for the difference between the carrying amount and
the fair value of the long-lived asset group.
During the year ended December 31, 2020, the Company
recorded a charge of $4,490 for the impairment of certain idle, long-lived assets, which were evaluated at the asset level. The impairment
was the result of an analysis of the carrying value of the assets and our inability to objectively project future cash flows from the
sale or lease of these assets, particularly in light of the impact of the COVID-19 pandemic and resulting global economic disruption.
Prior to performing the impairment analysis of
our long-lived assets on a group level as of December 31, 2019, the Company conducted an evaluation of the carrying amount of certain
specific long-lived assets that are non-strategic to the core operations of the business and recorded impairment charges of $396. The
Company did not record any further impairment of its long-lived assets.
The valuation of impaired equipment is a Level
3 non-recurring fair value measurement. Impaired assets discussed above were written down to zero value.
Equity Method Investments
Equity method investments in joint ventures are
reported as investments in joint venture on the consolidated balance sheets, and our share of earnings or losses in the joint venture
is reported as equity in net income or loss of joint venture in the consolidated statements of operations. We currently have no investments
in joint ventures.
Lease Obligations
At the inception of a lease, Deep Down evaluates
the agreement to determine whether the lease will be accounted for as an operating or finance lease. The term of the lease used for such
an evaluation includes renewal option periods only in instances in which the exercise of the renewal option can be reasonably assured,
and if the contract contains a substantial penalty for failure to renew or extend the lease, it could lead the lessee to conclude it has
a significant economic incentive to extend the lease beyond the base rental period.
Deep Down leases land, buildings, vehicles, and
certain equipment under non-cancellable operating leases. The Company leases office, indoor manufacturing, warehouse, and operating space
in Houston, Texas and leases storage space in Mobile, Alabama to house its 3,400 metric ton carousel system.
Lease Concessions
As it relates to lease concessions related to
its leases affected by economic disruption caused by the COVID-19 pandemic, the Company elected to account for the deferred payments as
variable lease payments. As such, the Company recorded a reduction to rent expense in the period of the deferral. When the Company later
incurs the deferred rent, it will recognize it as variable rent expense.
PPP Loan Payable
The Company elected to account for the PPP loan
received as a debt arrangement. This debt is recorded on the consolidated balance sheets as a liability, both current and long-term. Interest
is accrued over the term of the loan at the effective interest rate. Debt will be derecognized when the debt is extinguished. Debt is
extinguished when either the debtor pays the creditor or the debtor is legally released from being the primary obligor.
A PPP loan is forgiven in total or in part only
after the SBA has paid the lender the amount of the PPP loan the SBA has determined is eligible for forgiveness, at which point, the lender
should notify the borrower of the forgiveness of the PPP loan. When the debt is extinguished, any amount that is forgiven (including accrued
but unpaid interest) is recognized in the income statement as a gain upon debt extinguishment; however, there is no guarantee that any
portion of the debt balance will be forgiven.
Income Taxes
We follow the asset and liability method of accounting
for income taxes. This method considers the differences between financial statement treatment and tax treatment of certain transactions.
Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using
tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled.
The effect of a change in tax rates is recognized as income or expense in the period that includes the enactment date.
We record a valuation allowance to reduce the
carrying value of our deferred tax assets when it is more likely than not that some or all of the deferred tax assets will expire before
realization of the benefit or that future deductibility is not probable. The ultimate realization of the deferred tax assets depends upon
our ability to generate sufficient taxable income of the appropriate character in the future. This requires management to use estimates
and make assumptions regarding significant future events such as the taxability of entities operating in the various taxing jurisdictions.
In evaluating our ability to recover our deferred tax assets, we consider all reasonably available positive and negative evidence, including
our past operating results, the existence of cumulative losses in the most recent years and our forecast of future taxable income. In
estimating future taxable income, we develop assumptions, including the amount of future state and federal pre-tax operating income, the
reversal of temporary differences and the implementation of feasible and prudent tax planning strategies. These assumptions require significant
judgment. When the likelihood of the realization of existing deferred tax assets changes, adjustments to the valuation allowance are charged
in the period in which the determination is made, either to income or goodwill, depending upon when that portion of the valuation allowance
was originally created.
We record an estimated tax liability or tax benefit
for income and other taxes based on what we determine will likely be paid in the various tax jurisdictions in which we operate. We use
our best judgment in the determination of these amounts. However, the liabilities ultimately realized and paid are dependent upon various
matters, including resolution of tax audits, and may differ from amounts recorded. An adjustment to the estimated liability would be recorded
as a provision or benefit to income tax expense in the period in which it becomes probable that the amount of the actual liability or
benefit differs from the recorded amount.
Our future effective tax rates could be adversely
affected by changes in the valuation of our deferred tax assets or liabilities or changes in tax laws or interpretations thereof. If and
when our deferred tax assets are no longer fully reserved, we will begin to provide for taxes at the full statutory rate. In addition,
we are subject to the examination of our income tax returns by the Internal Revenue Service and other tax authorities. We regularly assess
the likelihood of adverse outcomes resulting from these examinations to determine the adequacy of our provision for income taxes.
Share-Based Compensation
We record share-based awards exchanged for employee
service at fair value on the date of grant and expense the awards in the consolidated statements of operations over the requisite employee
service period. Share-based compensation expense includes an estimate for forfeitures and is generally recognized over the expected term
of the award on a straight-line basis. At December 31, 2020 and 2019 we had two types of share-based compensation: stock options and restricted
stock. See further discussion in Note 6.
Earnings or Loss per Common Share
Basic earnings or loss per common share (“EPS”)
is calculated by dividing net earnings or loss by the weighted average number of common shares outstanding for the period. Diluted EPS
is calculated by dividing net earnings or loss by the weighted average number of common shares and dilutive common stock equivalents (stock
options) outstanding during the period. Diluted EPS reflects the potential dilution that could occur if stock options and warrants to
purchase common stock were exercised for shares of common stock. In periods where losses are reported, the weighted-average number of
common shares outstanding excludes common stock equivalents, because their inclusion would be anti-dilutive.
Recently Issued Accounting Standards
In December 2019, the Financial Accounting Standards
Board (“FASB”) issued Accounting Standards Update (“ASU”) 2019-12 “Income Taxes (Topic 740).” Topic
740 is effective for fiscal years and interim periods beginning after December 15, 2020. This update simplifies the accounting for income
taxes by removing certain exceptions such as the exception to the incremental approach for intra-period tax allocation, the exception
to the requirement to recognize a deferred tax liability for equity method investments, the exception to the ability not to recognize
a deferred tax liability for a foreign subsidiary and the exception to the general methodology for calculating income taxes in an interim
period. The adoption of ASU No. 2019-12 is not expected to have a material impact on our financial statements and disclosures.
In June 2016, the FASB issued ASU No. 2016-13,
“Financial Instruments-Credit Losses: Measurement of Credit Losses on Financial Instruments,” as modified by subsequently
issued ASU No. 2018-19, “Codification Improvements to Topic 326, Financial Instruments-Credit Losses.” The guidance introduces
a new credit reserving model known as the Current Expected Credit Loss (“CECL”) model, which is based on expected losses,
and differs significantly from the incurred loss approach used today. The CECL model requires estimating all expected credit losses for
certain types of financial instruments, including trade receivables, held at the reporting date based on historical experience, current
conditions, and reasonable and supportable forecasts. These ASUs affect an entity to varying degrees depending on the credit quality for
the assets held by the entity, their duration and how the entity applies current US GAAP. These ASUs were initially effective for the
Company beginning January 1, 2020.
In November 2019, the FASB issued ASU No. 2019-10 “Financial
Instruments—Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842): Effective Dates.” The
FASB issued this update to extend and simplify how effective dates are staggered between larger public companies and all other entities
for the aforementioned major updates. Topic 326 is effective for fiscal years and interim periods beginning after December 15, 2022
for smaller reporting companies. We are currently evaluating the impact of these updates on our financial statements and related disclosures,
but at this time, we do not expect a material impact on our financial statements and disclosures.
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. 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.
During the year ended December 31, 2019, the Company
removed $164 in lease liabilities and ROU assets associated with a related party lease that was on a month-to-month basis.
As of December 31, 2020 and 2019, 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:
|
|
December 31, 2020
|
|
|
December 31, 2019
|
|
Assets:
|
|
|
|
|
|
|
|
|
Right-of-use operating lease assets
|
|
$
|
3,174
|
|
|
$
|
4,334
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
Current lease liabilities
|
|
|
1,261
|
|
|
|
1,181
|
|
Non-current lease liabilities
|
|
|
1,951
|
|
|
|
3,180
|
|
Total lease liabilities
|
|
$
|
3,212
|
|
|
$
|
4,361
|
|
The components of our lease expense were as follows:
|
|
Year Ended December 31,
|
|
|
|
2020
|
|
|
2019
|
|
Operating lease expense included in Cost of sales
|
|
$
|
977
|
|
|
$
|
1,238
|
|
Operating lease expense included in SG&A
|
|
$
|
139
|
|
|
$
|
240
|
|
Short term lease expense
|
|
$
|
194
|
|
|
$
|
309
|
|
Total lease expense
|
|
$
|
1,310
|
|
|
$
|
1,787
|
|
Lease Term and Discount Rate:
|
|
December 31, 2020
|
|
|
December 31, 2019
|
|
Weighted-average remaining lease terms (years) on operating leases
|
|
|
2.43
|
|
|
|
3.28
|
|
Weighted-average discount rates on operating leases
|
|
|
5.374%
|
|
|
|
5.374%
|
|
For the year ended December 31, 2020, the Company did not have any
sale/leaseback transactions.
Present value of lease liabilities:
Years ending December 31,
|
|
Operating Leases
|
|
2021
|
|
|
1,399
|
|
2022
|
|
|
1,415
|
|
2023
|
|
|
597
|
|
2024
|
|
|
8
|
|
Thereafter
|
|
|
4
|
|
Total minimum lease payments
|
|
$
|
3,423
|
|
|
|
|
|
|
Less: Interest
|
|
|
(211
|
)
|
Present value of lease liabilities
|
|
$
|
3,212
|
|
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 our revenues disaggregated by fixed price
and service contracts. Sales taxes are excluded from revenues.
|
|
Year Ended December 31,
|
|
|
|
2020
|
|
|
2019
|
|
Fixed Price Contracts
|
|
$
|
8,664
|
|
|
$
|
12,337
|
|
Service Contracts
|
|
|
4,313
|
|
|
|
6,578
|
|
Total
|
|
$
|
12,977
|
|
|
$
|
18,915
|
|
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. For the years ending 2020 and 2019, there were no contracts with terms that extended beyond one
year.
The following table summarizes our contract assets,
which are “Costs and estimated earnings in excess of billings on uncompleted contracts” and our contract liabilities, which
are “Billings in excess of costs and estimated earnings on uncompleted contracts”.
|
|
December 31, 2020
|
|
|
December 31, 2019
|
|
Costs incurred on uncompleted contracts
|
|
$
|
2,098
|
|
|
$
|
1,687
|
|
Estimated earnings on uncompleted contracts
|
|
|
3,153
|
|
|
|
2,294
|
|
|
|
|
5,251
|
|
|
|
3,981
|
|
Less: Billings to date on uncompleted contracts
|
|
|
(5,792
|
)
|
|
|
(3,790
|
)
|
|
|
$
|
(541
|
)
|
|
$
|
191
|
|
|
|
|
|
|
|
|
|
|
Included in the accompanying consolidated balance sheets under the following
captions:
|
|
|
|
|
|
|
|
|
Contract assets
|
|
$
|
189
|
|
|
$
|
814
|
|
Contract liabilities
|
|
|
(730
|
)
|
|
|
(623
|
)
|
|
|
$
|
(541
|
)
|
|
$
|
191
|
|
The contract asset and liability balances at December
31, 2020 and 2019 consisted primarily of revenue related to fixed-price projects.
Remaining Performance Obligations
Remaining performance obligations represent the
transaction price of firm orders for which work has not been performed and excludes unexercised contract options, potential orders, and
any remaining performance obligations for any sales arrangements that had not fully satisfied the criteria to be considered a contract
with a customer pursuant to the requirements of ASC 606.
Practical Expedients and Exemptions
We generally expense sales commissions when incurred
because the amortization period would have been one year or less. These costs are recorded within selling, general and administrative
expenses.
Many of our services contracts are short-term
in nature with a contract term of one year or less. For those contracts, we have utilized the practical expedient in ASC 606-10-50-14
exempting the Company from disclosure of the transaction price allocated to remaining performance obligations if the performance obligation
is part of a contract that has an original expected duration of one year or less.
Additionally, our payment terms are short-term
in nature with settlements of one year or less. We have, therefore, utilized the practical expedient in ASC 606-10-32-18 exempting the
Company from adjusting the promised amount of consideration for the effects of a significant financing component given that the period
between when the entity transfers a promised good or service to a customer and when the customer pays for that good or service will be
one year or less.
Further, in many of our service contracts, we
have a right to consideration from a customer in an amount that corresponds directly with the value to the customer of our performance
completed to date (for example, a service contract in which we bill a fixed amount for each hour of service provided). For those contracts,
we have utilized the practical expedient in ASC 606-10-55-18, which allows us to recognize revenue in the amount for which we have the
right to invoice.
Accordingly, we do not disclose the value of unsatisfied
performance obligations for (i) contracts with an original expected length of one year or less and (ii) contracts for which we recognize
revenue at the amount to which we have the right to invoice for services performed.
NOTE 4: PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consisted of the following:
|
|
|
|
|
|
|
|
Range of
|
|
|
December 31, 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
|
|
|
84
|
|
|
|
64
|
|
|
–
|
|
|
|
|
|
|
|
|
|
|
|
Total property, plant and equipment
|
|
|
14,525
|
|
|
|
20,033
|
|
|
|
Less: Accumulated depreciation
|
|
|
(11,921
|
)
|
|
|
(12,069
|
)
|
|
|
Property, plant and equipment, net
|
|
$
|
2,604
|
|
|
$
|
7,964
|
|
|
|
Depreciation expense included in cost of sales
in the accompanying consolidated statements of operations was $830 and $1,105 for the years ended December 31, 2020 and 2019, respectively.
Depreciation expense excluded from cost of sales in the accompanying consolidated statements of operations was $252 and $276 for the years
ended December 31, 2020 and 2019, respectively.
Construction in progress represents assets that
are not ready for service or are in the construction stage. Assets are depreciated once they are placed in service.
See discussion in Note 1 for any impairment charges
related to these assets.
NOTE 5: INCOME OR LOSS PER COMMON SHARE
The following is a reconciliation of the number
of shares used in the basic and diluted net income or loss per common share calculation:
|
|
Year Ended December 31,
|
|
|
|
2020
|
|
|
2019
|
|
Numerator:
|
|
|
|
|
|
|
Net loss
|
|
$
|
(6,057
|
)
|
|
$
|
(2,774
|
)
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
Weighted average number of common shares outstanding
|
|
|
12,495
|
|
|
|
13,386
|
|
Denominator for diluted earnings per share
|
|
|
12,495
|
|
|
|
13,386
|
|
|
|
|
|
|
|
|
|
|
Net loss per common share outstanding, basic and fully diluted
|
|
$
|
(0.48
|
)
|
|
$
|
(0.21
|
)
|
At December 31, 2020, there were outstanding options
that were vested and exercisable into 300 shares of common stock; however, they have been excluded from the calculation of EPS because
their exercise would be anti-dilutive. At December 31, 2019, there were outstanding options that were vested and exercisable into 225
shares of common stock; however, they have been excluded from the calculation of EPS because their exercise would be anti-dilutive.
NOTE 6: SHARE-BASED COMPENSATION
The following table summarizes the activity of
our nonvested restricted shares for the years ended December 31, 2020 and 2019:
|
|
Restricted
Shares
|
|
|
Weighted-
Average
Grant-Date
Fair Value
|
|
Nonvested at December 31, 2018
|
|
|
230
|
|
|
$
|
0.83
|
|
Granted
|
|
|
200
|
|
|
|
0.65
|
|
Vested
|
|
|
(170
|
)
|
|
|
0.78
|
|
Nonvested at December 31, 2019
|
|
|
260
|
|
|
$
|
0.72
|
|
Granted
|
|
|
–
|
|
|
|
–
|
|
Vested
|
|
|
(110
|
)
|
|
|
0.82
|
|
Cancellations & Forfeitures
|
|
|
(150
|
)
|
|
|
0.65
|
|
Nonvested at December 31, 2020
|
|
|
–
|
|
|
$
|
–
|
|
The following table summarizes the activity of our nonvested stock
options for the years ended December 31, 2020 and 2019:
|
|
Shares
Underlying Options
|
|
|
Weighted-
Average Exercise Price
|
|
|
Weighted- Average Remaining Contractual Term
(in years)
|
|
Outstanding at December 31, 2018
|
|
|
–
|
|
|
$
|
–
|
|
|
|
–
|
|
Granted
|
|
|
300
|
|
|
|
0.70
|
|
|
|
|
|
Vested
|
|
|
(75
|
)
|
|
|
0.75
|
|
|
|
|
|
Outstanding at December 31, 2019
|
|
|
225
|
|
|
$
|
0.68
|
|
|
|
4.7
|
|
Granted
|
|
|
200
|
|
|
|
0.47
|
|
|
|
|
|
Vested
|
|
|
(225
|
)
|
|
|
0.59
|
|
|
|
|
|
Outstanding at December 31, 2020
|
|
|
200
|
|
|
$
|
0.57
|
|
|
|
4.1
|
|
Exercisable at December 31, 2020
|
|
|
300
|
|
|
$
|
0.63
|
|
|
|
3.8
|
|
For the years ended December 31, 2020 and 2019,
we recognized a total of $117 and $250, respectively, of share-based compensation expense related to restricted stock awards and stock
options, which is included in selling, general and administrative expenses in the accompanying consolidated statements of operations.
The unamortized estimated fair value of nonvested shares of restricted stock awards and stock options was $48 and $134 at December 31,
2020 and 2019, respectively. These costs are expected to be recognized as expense over a weighted-average period of 0.35 years.
NOTE 7: TREASURY STOCK
During the year ended December 31, 2019, the Company
repurchased 588 shares of common stock at a total cost of $218 under a repurchase program authorized on March 26, 2018 and repurchased
6 shares of common stock at a total cost of $4 under the 2019 Repurchase Program. The average price per share of treasury stock purchased
in 2019 was $0.37.
On December 31, 2019, the Company had 2,621 shares
of common stock held in treasury.
On December 23, 2019, the Board of Directors authorized
a repurchase program (the “2019 Repurchase Program”) under which the Company could repurchase up to 500 shares of outstanding
stock. The 2019 Repurchase Program was funded from cash on hand and cash provided by operating activities.
During the year ended December 31, 2020, the Company
repurchased an aggregate of 743 shares of common stock at a total cost of $524 under the 2019 Repurchase Program and in a privately negotiated
transaction. 495 shares were purchased under the 2019 Repurchase Program, and the remaining 248 shares were separately authorized by the
Board. The 2019 Repurchase Program was exhausted at the conclusion of this transaction.
Additionally, 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 during the year ended
December 31, 2020.
On December 31, 2020, the Company had 3,367 shares
of common stock held in treasury.
Treasury shares are accounted for using the cost
method.
NOTE 8: INCOME TAXES
Income tax (benefit) expense is comprised of
the following:
|
|
Year Ended December 31,
|
|
|
|
2020
|
|
|
2019
|
|
Federal:
|
|
|
|
|
|
|
Current
|
|
$
|
–
|
|
|
$
|
–
|
|
Deferred
|
|
|
10
|
|
|
|
5
|
|
Total
|
|
$
|
10
|
|
|
$
|
5
|
|
State:
|
|
|
|
|
|
|
|
|
Current
|
|
$
|
13
|
|
|
$
|
(8
|
)
|
Deferred
|
|
|
(10
|
)
|
|
|
(5
|
)
|
Total
|
|
$
|
3
|
|
|
$
|
(13
|
)
|
Total income tax expense (benefit)
|
|
$
|
13
|
|
|
$
|
(8
|
)
|
Income tax expense (benefit) differs from the amount computed by applying
the U.S. statutory income tax rate to loss before income taxes for the reasons set forth below.
|
|
Year Ended December 31,
|
|
|
2020
|
|
2019
|
Income tax benefit at federal statutory rate
|
|
(21.00)%
|
|
(21.00)%
|
State taxes, net of federal benefit
|
|
0.01 %
|
|
(0.50)%
|
Valuation allowance
|
|
20.76 %
|
|
19.98 %
|
Research and development credits
|
|
0.21 %
|
|
0.79 %
|
Other permanent differences
|
|
0.24 %
|
|
0.44 %
|
Total effective
rate
|
|
0.21 %
|
|
(0.29)%
|
Deferred income taxes reflect the net tax effects
of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used
for income tax purposes, as well as operating loss and tax credit carry forwards. The tax effects of the temporary differences and
carry forwards are as follows:
|
|
December 31,
|
|
|
|
2020
|
|
|
2019
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Net operating loss carryforwards
|
|
$
|
5,339
|
|
|
$
|
4,521
|
|
R&D and other credit carryforwards
|
|
|
650
|
|
|
|
663
|
|
Share-based compensation
|
|
|
774
|
|
|
|
757
|
|
Intangible amortization
|
|
|
6
|
|
|
|
11
|
|
Allowance for bad debt
|
|
|
18
|
|
|
|
2
|
|
Other
|
|
|
137
|
|
|
|
193
|
|
Total
deferred tax assets
|
|
$
|
6,924
|
|
|
$
|
6,147
|
|
Less: valuation
allowance
|
|
|
(6,637
|
)
|
|
|
(5,385
|
)
|
Net
deferred tax assets
|
|
$
|
287
|
|
|
$
|
762
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Depreciation
on property and equipment
|
|
$
|
(287
|
)
|
|
$
|
(762
|
)
|
Total
deferred tax liabilities
|
|
$
|
(287
|
)
|
|
$
|
(762
|
)
|
Net
deferred tax position
|
|
$
|
–
|
|
|
$
|
–
|
|
We have $25,017 of federal and $1,148 of state
NOL carry forwards and $650 in research and development and other credits available to offset future taxable income. These federal and
state NOLs will expire at various dates through 2034, except for federal NOLs generated in 2018 and subsequent years. Management analyzed
its current operating results and future projections and determined that a full valuation allowance was needed due to our cumulative losses
in recent years. We have no uncertain tax positions at December 31, 2020. Accordingly, we do not have any accruals for penalties or interest
related to our tax returns. Should an examination or audit arise, we would evaluate the need for an accrual and record one, if necessary.
Our federal tax returns from the tax years ended December 31, 2017 through December 31, 2019 are open to examination by the IRS.
NOTE 9: COMMITMENTS AND CONTINGENCIES
Letters of Credit
Certain customers could require us to issue standby
letters of credit in the normal course of business to ensure performance under terms of contracts or as a form of product warranty. The
beneficiary of a letter of credit could demand payment from the issuing bank for the amount of the outstanding letter of credit. We had
no outstanding letters of credit at December 31, 2020 or 2019.
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 participants 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.
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 consolidated statements of operations for the twelve months ended December 31, 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 counter claim 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 December 2021. The Company accrued a liability
related to this matter in the amount of $750 for the year ended December 31, 2019. The remaining liability was $420 at December 31, 2020.
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 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 $42 per month, from September 1, 2019 through December 31, 2019, and $15 per month, from
January 1, 2020 through December 31, 2021, in exchange for his future services.
Under the terms of the Transition Agreement, the
Company agreed to pay Mr. Smith a severance payment of $250, which was fully accrued during the nine-month period ended September 30,
2019 and was paid in structured payments through December 31, 2019.
Additionally, under the terms of the Transition
Agreement, the Company accepted 300 of Mr. Smith's shares of the Company’s common stock in exchange for certain previously impaired
Company equipment ($0 carrying value at the time of the exchange). Because the assets had an approximate fair value of $0 at the time
of the exchange no value was recorded to treasury stock. The Transition Agreement also provides for the Company to transfer a Company
truck to Mr. Smith with the associated liability assumed by Mr. Smith. We recognized a $7 loss on this transaction.
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. SMALL BUSINESS ADMINISTRATION’S
PAYCHECK PROTECTION PROGRAM LOAN
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 (“April 2020 PPP loan”) in the amount of $1,111,
which was used to finance payroll during the second and third quarters of 2020. The April 2020 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 April
2020 PPP loan, the U.S. Treasury and SBA refined its payment deferral guidance whereby payment of principal, interest, and fees for PPP
loans are to be deferred until the amount of forgiveness determined under section 1106 of the CARES Act is remitted to the lender if the
loan forgiveness application is submitted within ten months after the end of the loan forgiveness covered period. Additionally, certain
conditions detailed in the loan agreement could cause the note to become immediately due and payable at the lender’s option. The
Company applied for forgiveness of the April 2020 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.
NOTE 12: SUBSEQUENT EVENTS
We have evaluated subsequent events through the
date the consolidated financial statements were filed with the Securities and Exchange Commission.
The Company applied for a second loan under the
SBA’s Paycheck Protection Program, and on March 1, 2021, the Company received a potentially forgivable loan (“March 2021
PPP loan”) in the amount of $1,111. The March 2021 PPP loan is evidenced by a promissory note, dated to be effective as of March
1, 2021, between the Company and the lender. The promissory note matures on March 1, 2026 and bears interest at a fixed rate of 1.00
percent per annum, beginning on the date of advance until the loan maturity date.