The accompanying notes are an integral part of
the unaudited condensed consolidated financial statements.
The accompanying notes are an integral part of
the unaudited condensed consolidated financial statements.
The accompanying notes are an integral part of
the unaudited condensed consolidated financial statements.
The accompanying notes are an integral part of
the unaudited condensed consolidated financial statements.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(Amounts in thousands except per share amounts)
NOTE 1: |
BASIS OF PRESENTATION |
Basis of Presentation
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 (the "Merger Agreement”) providing for the merger of the Company with the Company’s
wholly-owned subsidiary, Koil Energy Solutions, Inc. (the “Merger Sub” and, the transaction, the “Merger”). As
permitted by Chapter 92A.180 of 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 $3,439 and
working capital was $6,276 as of June 30, 2022. As of December 31, 2021, cash on hand and working capital was $3,676 and $7,098, respectively.
The Company depends on cash on hand, cash flows from operations, and the potential opportunistic sales of property, plant and equipment
(“PP&E”) to satisfy its liquidity needs.
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.
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 six months ended
June 30, 2022 and 2021. All intercompany transactions and balances have been eliminated.
Segments
For the three and six months ended June 30, 2022
and 2021, the Company’s operations were organized as one reportable segment.
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.
As of June 30, 2022, we do not have any finance
lease assets or liabilities, nor do we have any subleases.
The following tables present information about
our operating leases:
Lease information table | |
| | |
| |
| |
June 30, 2022 | | |
December 31, 2021 | |
Assets: | |
| | | |
| | |
Right-of-use assets | |
$ | 1,217 | | |
$ | 1,861 | |
| |
| | | |
| | |
Liabilities: | |
| | | |
| | |
Current lease liabilities | |
| 1,222 | | |
| 1,306 | |
Non-current lease liabilities | |
| 21 | | |
| 588 | |
Total lease liabilities | |
$ | 1,243 | | |
$ | 1,894 | |
The components of our lease expense were as follows:
Components of lease expense | |
| | | |
| | | |
| | | |
| | |
| |
Three Months Ended | | |
Six Months Ended | |
| |
June 30, | | |
June 30, | |
| |
2022 | | |
2021 | | |
2022 | | |
2021 | |
Operating lease expense included in: | |
| | | |
| | | |
| | | |
| | |
Cost of sales | |
$ | 311 | | |
$ | 316 | | |
$ | 624 | | |
$ | 633 | |
Selling, general and administrative expenses | |
| 24 | | |
| 35 | | |
| 58 | | |
| 108 | |
Short term lease expense | |
| 129 | | |
| 68 | | |
| 220 | | |
| 113 | |
Total lease expense | |
$ | 464 | | |
$ | 419 | | |
$ | 902 | | |
$ | 854 | |
Lease term and discount rate:
Lease term and discount rate |
|
|
|
|
|
|
June 30, 2022 |
|
December 31, 2021 |
Weighted-average remaining lease terms on operating leases (yrs.) |
|
0.95 |
|
1.43 |
Weighted-average discount rates on operating leases |
|
5.374% |
|
5.374% |
During the three months ended June 30, 2022, the Company did not have
any sale/leaseback transactions.
Present value of lease liabilities:
Future minimum lease payments | |
| |
|
| |
Operating Leases | | |
July 1, 2022 - June 30, 2023 | |
$ | 1,251 | |
July 1, 2023 - June 30, 2024 | |
| 14 | |
July 1, 2024 - June 30, 2025 | |
| 7 | |
Total lease payments | |
$ | 1,272 | |
Less: Interest | |
| (29 | ) |
Present value of lease liabilities | |
$ | 1,243 | |
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.
Disaggregation of revenue | |
| | |
| |
| |
Three Months Ended | |
| |
June 30, | |
| |
2022 | | |
2021 | |
Fixed Price Contracts | |
$ | 745 | | |
$ | 2,011 | |
Service Contracts | |
| 2,754 | | |
| 2,517 | |
Total | |
$ | 3,499 | | |
$ | 4,528 | |
| |
| | |
| |
| |
Six Months Ended | |
| |
June 30, | |
| |
2022 | | |
2021 | |
Fixed Price Contracts | |
$ | 2,429 | | |
$ | 3,305 | |
Service Contracts | |
| 4,671 | | |
| 5,145 | |
Total | |
$ | 7,100 | | |
$ | 8,450 | |
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 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 June 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”.
Schedule of earnings in excess of billings on uncompleted contracts | |
| | |
| |
| |
June 30, 2022 | | |
December 31, 2021 | |
Costs incurred on uncompleted contracts | |
$ | 40 | | |
$ | 1,312 | |
Estimated earnings on uncompleted contracts | |
| 14 | | |
| 1,485 | |
Gross costs and estimated earnings | |
| 54 | | |
| 2,797 | |
Less: Billings to date on uncompleted contracts | |
| (153 | ) | |
| (2,695 | ) |
Costs incurred plus estimated earning less billings on uncompleted contracts, net | |
$ | (99 | ) | |
$ | 102 | |
| |
| | | |
| | |
Included in the accompanying unaudited condensed consolidated balance sheets under the following captions: | |
| | | |
| | |
Contract assets | |
$ | 7 | | |
$ | 352 | |
Contract liabilities | |
| (106 | ) | |
| (250 | ) |
Costs incurred plus estimated earning less billings on uncompleted contract | |
$ | (99 | ) | |
$ | 102 | |
The contract asset and liability balances at June
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:
Schedule of property, plant and equipment | |
| | |
| | |
| |
| |
| | |
| | |
Range of | |
| |
June 30, 2022 | | |
December 31, 2021 | | |
Asset Lives | |
Buildings and improvements | |
$ | 285 | | |
$ | 285 | | |
7 - 36 years | |
Leasehold improvements | |
| 899 | | |
| 899 | | |
2 - 5 years | |
Equipment | |
| 10,205 | | |
| 11,885 | | |
2 - 30 years | |
Furniture, computers and office equipment | |
| 386 | | |
| 429 | | |
2 - 8 years | |
Construction in progress | |
| 759 | | |
| 60 | | |
– | |
| |
| | | |
| | | |
| |
Total property, plant and equipment | |
| 12,534 | | |
| 13,558 | | |
| |
Less: Accumulated depreciation and amortization | |
| (10,267 | ) | |
| (11,831 | ) | |
| |
Property, plant and equipment, net | |
$ | 2,267 | | |
$ | 1,727 | | |
| |
NOTE 5: |
SHARE-BASED COMPENSATION |
Share-based compensation is included in selling,
general and administrative expenses in the accompanying unaudited condensed consolidated statements of operations and additional paid-in
capital in the accompanying unaudited consolidated balance sheets. During the three and six months ended June 30, 2022, the Company recognized
a total of $14 and $71 of share-based compensation expense, respectively. During the three and six months ended June 30, 2021, the Company
recognized a total of $17 and $37 of share-based compensation expense, respectively. The unamortized estimated fair value of nonvested
shares of restricted stock and stock options was zero 0 at June 30, 2022.
No shares of common stock were purchased during
the three and six months ended June 30, 2021. During the three months ended June 30, 2022, 147 shares of common stock were purchased for
an aggregate amount of $100 in a privately negotiated transaction. During the six months ended June 30, 2022, 501 shares of common stock
were purchased for an aggregate amount of $326 in a privately negotiated transaction. Treasury shares are accounted for using the cost
method. See further discussion in Note 10.
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 June 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.
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 $100, and no liability remained as of June 30, 2022.
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 $750, 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 $180 at June 30, 2021, and no liability remained
at June 30, 2022.
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.
Reconciliation of number of shares in earnings per share calculation | |
| | | |
| | | |
| | | |
| | |
| |
Three Months Ended | | |
Six Months Ended | |
| |
June 30, | | |
June 30, | |
| |
2022 | | |
2021 | | |
2022 | | |
2021 | |
Weighted average common shares outstanding - basic | |
| 11,992 | | |
| 12,389 | | |
| 12,074 | | |
| 12,389 | |
Dilutive effect of common stock equivalents | |
| 65 | | |
| 55 | | |
| 62 | | |
| 49 | |
Weighted average common shares outstanding - diluted | |
| 12,057 | | |
| 12,444 | | |
| 12,136 | | |
| 12,438 | |
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 $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 services. The Company recorded consulting expenses related to the Transition
Agreement totaling $45 and $90 for the three and six months ended June 31, 2021, respectively.
In addition to the other payments provided for
under the Transition Agreement, the Company also agreed to pay Mr. Smith 1.5% of the net sale or lease value of two carousels owned by
Company, if such sale or lease occurred prior to December 31, 2021, and subject to certain other conditions. Such carousels were not sold
prior to December 31, 2021. No commissions were paid during the three months ended June 30, 2022, and a commission in the amount of $4
was paid to Mr. Smith during the six months ended June 30, 2022 and was related to the lease of one of the carousels during the quarter
ending December 31, 2021. No commissions were paid during the three or six months ended June 30, 2021.
On January 5, 2022, the Company repurchased 235
shares of common stock from Mr. Smith at a total cost of $150. On March 24, 2022, the Company repurchased 119 shares of common stock from
Mr. Smith in exchange for several long-lived assets that were non-strategic to the core operations of the business. On June 3, 2022, the
Company repurchased 147 shares of common stock from Mr. Smith at a total cost of $100. The price per share used for each transaction was
market price, and the average price per share paid to Mr. Smith was $0.65.
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 (i.e., tax credit) will be received.
The Company recognized a $650 employee retention
credit as other income on its consolidated statement of operations for the year ended December 31, 2021, and the Company has a $650 employee
retention tax credit receivable balance recorded on its consolidated balance sheet as of June 30, 2022. The Company filed for refunds
of the employee retention credits and as of the date of this Quarterly Report on Form 10-Q, has not received any refunds.