Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

þ       QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 20172019

OR

¨       TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File No. 000-30351

DEEP DOWN, INC.

(Exact name of registrant as specified in its charter)

Registrant’s telephone number, including area code:(281) 517-5000

Not applicable

(Former name, former address and former fiscal year, if changed since last report)

Securities registered pursuant to Section 12(b) of the Act: None

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days.þYes¨No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). YesþNo¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).Yes . Yes¨Noþ

At November 14, 2017,12, 2019, there were 13,436,24313,290,680 shares outstanding of Common Stock, par value $0.001 per share.share.

IMPORTANT INFORMATION REGARDING THIS FORM 10-Q

Unless otherwise indicated, references to “we,” “us,” and “our” in this Quarterly Report on Form 10-Q (“Report”) refer collectively to Deep Down, Inc., a Nevada corporation (“Deep Down”), and its directly and indirectly wholly-owned subsidiaries.

Deep Down is the parent company to the following directly and indirectly wholly-owned subsidiaries:subsidiary Deep Down, Inc., a Delaware corporation (“Deep Down Delaware”); Deep Down International Holdings, LLC, a Nevada limited liability company (“DDIH”); and Deep Down Brasil - Solucoes em Petroleo e Gas, Ltda, a Brazilian limited liability company (“Deep Down Brasil”).

Our current operations are primarily conducted under Deep Down Delaware.  In addition to our strategy of continuing to grow and strengthen our operations, including by expanding our services and products in response to our customers’ demands, we intend to continue to seek strategic acquisitions of complementary service providers, product manufacturers and technologies that are focused primarily on supporting deepwater and ultra-deepwater offshore exploration, development and production of oil and gas reserves and other maritime operations.

Readers should consider the following information as they review this Report:

Forward-Looking Statements

The statements contained or incorporated by reference in this Report that are not historical facts are “forward-looking statements” (as such term is defined in the Private Securities Litigation Reform Act of 1995), within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). All statements other than statements of historical fact are, or may be deemed to be, forward-looking statements. Forward-looking statements include any statement that may project, indicate or imply future results, events, performance or achievements. The forward-looking statements contained herein are based on current expectations that involve a number of risks and uncertainties. These statements can be identified by the use of forward-looking terminology such as “believes,” “expect,” “may,” “will,” “should,” “intend,” “plan,” “could,” “estimate”“estimate,” or “anticipate,” or the negative thereof or other variations thereon or comparable terminology, or by discussions of strategy that involve risks and uncertainties.

Given the risks and uncertainties relating to forward-looking statements, investors should not place undue reliance on such statements. Forward-looking statements included in this Report speak only as of the date of this Report and are not guarantees of future performance. Although we believe that the expectations reflected in the forward-looking statements are reasonable, such expectations may prove to be incorrect. All subsequent written and oral forward-looking statements attributable to us, or persons acting on our behalf, are expressly qualified in their entirety by these cautionary statements. The risks and uncertainties mentioned previously relate to, among other matters, the following:

DEEP DOWN, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWSCHANGES IN STOCKHOLDERS’ EQUITY

FOR THE NINE-MONTH ENDED September 30, 2019 and 2018

(Unaudited)

(In thousands)

The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.

DEEP DOWN, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(In thousands)

The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Amounts and shares in thousands except per share amounts)

Basis of Presentation

The accompanying unauditedcondensedconsolidated financial statements of Deep Down, Inc. and its directly and indirectly wholly-owned subsidiariessubsidiary (“Deep Down,” “we,” “us” or the “Company”) were prepared in accordance with the rules and regulations of the Securities and Exchange Commission (“SEC” or the “Commission”) pertaining to interim financial information and instructions to Form 10-Q. As permitted under those rules, certain footnotesnotes 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, 2016, filed on March 31, 2017 with the Commission.2018.

Preparation of financial statements in conformity withUS GAAPrequires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, the disclosed amounts of contingent assets and liabilities, and the reported amounts of revenues and expenses. If the underlying estimates and assumptions upon which the financial statements are based change in future periods, then the actual amounts may differ from those included in the accompanying unaudited condensed consolidated financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included.

Liquidity

The Company’s primary and potential sources of liquidity include cash on hand, cash from operating activities, and proceeds from opportunistic sales of property, plant and equipment (“PP&E”). The Company’s cash as of September 30, 2019 and December 31, 2018 was $1,782 and $2,015, respectively. The decrease in cash was largely the result of prolonged payment terms by some of our customers, which resulted in a $2,334 increase in our accounts receivable as of September 30, 2019 compared to December 31, 2018. As of September 30, 2019, our working capital was $6,572 compared to $7,026 as of December 31, 2018.

The Company’s plans to mitigate its limited liquidity include: closely monitoring capital expenditures planned for the remainder of 2019 and beyond to conserve capital, potential opportunistic sales of PP&E, further reducing administrative costs, and potentially pursuing a line of credit to further supplement our operating requirements.

The Company’s operations are influenced by a number of factors that are beyond its control, including general conditions of the offshore energy sector, oil and gas operators’ willingness to spend development capital, and other factors that could adversely affect the Company’s financial position, results of operations and liquidity.

Principles of Consolidation

The unaudited condensed consolidated financial statements presented herein include the accounts of Deep Down, Inc. andits directly and indirectly wholly-owned subsidiaries.subsidiary. All intercompany transactions and balances have been eliminated.

Segments

For the quartersnine months ended September 30, 20172019 and 2016,2018, we had one operating and reporting segment, Deep Down Delaware.

Recently Issued Accounting Standards Not Yet Adopted

In May 2014,June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standard Update (“ASU”) No. 2014-09, “Revenue2016-13, “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 Contracts with Customers” (“ASU 2014-09”). This update provides a five-stepthe 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 be applied to all contracts with customers and requires expanded disclosures aboutvarying degrees depending on the nature, amount, timing and uncertainty of revenue (and the related cash flows) arising from customer contracts, significant judgments and changes in judgments used in applying the revenue model andcredit quality for the assets recognized from costs incurred to obtain or fulfill a contract. The effective date for this standard was deferred in July 2015held by the entity, their duration and how the entity applies current US GAAP. These ASUs will now bebecome effective for us beginning January 1, 2018. The standard provides for different application methods during adoption.2020. We are currently in the process of evaluating the potential impact this new pronouncement will have on our financial statements. We are reviewing our existing contractsdo not expect these ASUs to identify any that may be impacted by this standard, and evaluating new contracts we are negotiating to ensure compliance with this standard. We have not completed our full evaluation and therefore cannot conclude whether the pronouncement will have a significantmaterial impact on our financial statements at this time, but we expectand related disclosures.

In August 2018, the FASB issued ASU No. 2018-13, “Fair Value Measurement (Topic 820) Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement” (“ASU 2018-13”), which modifies the disclosure requirements of this standardfair value measurements. ASU 2018-13 is effective for us beginning January 1, 2020. Certain disclosures are required to significantly enhance our revenue disclosures.be applied on a retrospective basis and others on a prospective basis. We currently anticipate that we will utilize the modified retrospective method of adoption, however, this expectation may change following the completion of our evaluation of thedo not expect ASU 2018-13 to have a material impact of this pronouncement on our financial statements.statement disclosures.

All other new accounting pronouncements that have been issued but not yet effective are currently being evaluated to determine if they will have a material impact on our financial position or results of operations.

In February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842),” and subsequent amendments, which replaced existing lease guidance in US GAAP and requires lessees to recognize right-of-use (“ASU 2016-02”ROU”). assets and lease liabilities on the balance sheet for leases greater than twelve months and disclose key information about leasing arrangements. We adopted the standard on January 1, 2019 using the modified retrospective method and used the effective date as our date of initial application. Financial information will not be updated and the disclosures required under the new standard will not be provided for dates and periods before January 1, 2019. There were no adjustments to opening retained earnings on adoption.

The amendments in this update require, among other things,Company leases certain properties, buildings and equipment under various arrangements that lessees recognizeprovide the following for all leases (with the exception of short-term leases) at the commencement date: (1) a lease liability, which is a lessee's obligation to make lease payments arising from a lease, measured on a discounted basis; and (2) a right-of-use asset, which is an asset that represents the lessee's right to use or control the use of, a specifiedunderlying asset and require lease payments for the lease term. LesseesThe Company’s lease portfolio consists of operating leases, which expire at various dates through 2023.

The new standard provides a number of optional practical expedients for transition. We elected the package of practical expedients under the transition guidance which permitted us not to reassess under the new standard our prior conclusions for lease identification and lessors must applylease classification on expired or existing contracts and whether initial direct costs previously capitalized would qualify for capitalization under Topic 842. We also elected the practical expedient related to land easements, which allowed us not to reassess our current accounting treatment for existing agreements on land easements, which are not accounted for as leases. We did not elect the hindsight practical expedient to determine the reasonably certain lease term for existing leases.

The new standard also provides practical expedients and recognition exemptions for an entity’s ongoing accounting policy elections. For leases with an initial term of twelve months or less a modified retrospective transition approachlessee is permitted to make an accounting policy election by class of underlying asset not to recognize lease assets and liabilities and instead recognize lease expense for such leases existing at, or entered into after,generally on a straight line basis over the beginning of the earliest comparative period presented in the financial statements. The amendments are effectivelease term. We elected this short-term lease recognition exemption for us beginning January 1, 2019.all leases that qualify. We do not anticipate the adoptionseparate lease and non-lease components. Some of ASU 2016-02 will haveour agreements contain variable payment provisions (other than those that depend on an index or a material effect onrate, such as CPI) which are not included in our results of operations, however we are still evaluating the impact on our financial position.future minimum lease payments. These variable lease agreements include usage-based payments for equipment under service contracts and other properties.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(AmountsOur long-term lease agreements do not contain any material restrictive covenants. Our equipment leases have remaining terms of between 1 year and 3 years, and property leases have remaining terms of between 1 year and 5 years. Some of these leases may include options to extend the leases, and some may include options to terminate the leases within 30 days. When we are not reasonably certain to exercise these options, the options are not considered in thousands except per share amounts)determining the lease term, and associated payments are excluded from future minimum lease payments.

In October 2016, the FASB issued ASU No. 2016-16, “Intra-Entity Transfers of Assets Other Than Inventory.” This update requires that income tax consequencesROU 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 of our leases may require significant judgement, 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 intra-entity transferimplicit rate and assessing the likelihood of an asset other than inventory whenrenewal or termination options.

During the transfer occurs. third quarter ended September 30, 2019, we derecognized $164 in lease liabilities and ROU assets associated with a related party lease that was on a month-to-month basis.

As of September 30, 2019, we do not have any finance lease assets or liabilities, nor do we have any subleases.

The amendments in this ASU are effective for us onfollowing tables present information about our operating leases.

The components of our lease expense were as follows:

As of September 30, 2019, we do not have any finance lease assets or liabilities, nor do we have any subleases.

During the third quarter, we did not have any sale/leaseback transactions.

On January 1, 2018, we adopted Accounting Standards Codification (“ASC”) Topic 606 (“ASC 606”) using the modified retrospective method applied to those contracts which were not completed as of January 1, 2018. There was no significant impact on the Company’s results of operations or financial position upon the adoption of ASC 606. We did not record any adjustments to opening retained earnings as of January 1, 2018 because the Company’s revenue recognition methodologies for both fixed price contracts (over time using cost to cost as an input measure of performance) and for service contracts (over time as services are currently evaluatingperformed) do not materially change by the impactadoption of this ASU on our consolidated financial statements.the new standard.

In January 2017,Revenues are recognized when control of the FASB issued ASU No. 2017-01, “Business Combinations.” This new ASU clarifiedpromised goods or services is transferred to our customers, in an amount that reflects the definition of a business withconsideration we expect to be entitled to in exchange for those goods or services. To determine the objective of adding guidance to assist entities with evaluatingproper revenue recognition method for our customer contracts, we evaluate whether transactionstwo 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 acquisitions (or disposals)more than one performance obligation. This evaluation requires significant judgment and the decision to combine a group of assetscontracts or businesses. The new standard is effective for us January 1, 2018separate the combined or single contract into multiple performance obligations could change the amount of revenue and will be applied prospectively. We are currently evaluating the impactprofit recorded in a given period. For most of our pending adoptionfixed 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 new standard, but do not expect it to have a material impact on our consolidated financial position or resultsdelivery of operations.

In February 2017,multiple units). Hence, the FASB issued ASU No. 2017-05, “Other Income—Gains and Losses from the Derecognition of Nonfinancial Assets” (“ASU 2017-05”). This update clarifies the scope of accounting for the derecognition or partial sale of nonfinancial assets to exclude all businesses and nonprofit activities. ASU 2017-05 also provides a definition for in-substance nonfinancial assets and additional guidance on partial sales of nonfinancial assets. We are currently evaluating the effect of ASU No. 2017-05 on our consolidated financial statements and will adopt ASU 2017-05 in conjunction with ASU 2014-09 on January 1, 2018.

In May 2017, the FASB issued ASU No. 2017-09, “Scope of Modification Accounting” (“ASU 2017-09”), which amends the scope of modification accounting for share-based payment arrangements. This update clarifies when a change to the terms or conditions of a share-based payment award should beentire contract is accounted for as a modification. An entity shouldone performance obligation.

We account for a contract when it has approval and commitment from both parties, the effects of a modification unless the fair value, vesting conditions and classification, as an entity instrument or a liability instrument,rights of the modified awardparties are identified, payment terms are identified, the same beforecontract has commercial substance and after a change to the terms or conditionscollectability of the share-based payment award. The new standardconsideration is effective for us January 1, 2018. We do not expect ASU 2017-09 to have a material impact on our consolidated financial position or results of operations.probable.

Disaggregation of Revenue

The componentsfollowing table presents our revenues disaggregated by revenue sources of fixed price and service contracts. Sales taxes are excluded from revenues.

Three Months Ended September 30, 2019 Compared to Three Months Ended September 30, 2018

Nine Months Ended September 30, 2019 Compared to Nine Months Ended September 30, 2018

Fixed Price Contracts

For fixed price contracts, we generally recognize revenue over time as we perform because of continuous transfer of control to the customer. This continuous transfer of control to the customer is supported by clauses in the contract that allow the customer to unilaterally terminate the contract for convenience, pay us for costs incurred plus a reasonable profit and take control of any work in process. Additionally, in other fixed price contracts, the customer typically controls the work in process as evidenced either by contractual termination clauses or by our rights to payment for work performed to date plus a reasonable profit in connection with delivery of products or services that do not have an alternative use to the Company.

Because of control transferring over time, revenue is recognized based on the extent of progress towards completion of the performance obligation. The selection of the method to measure progress towards completion requires judgment and is based on the nature of the products or services to be provided. We generally use the cost-to-cost measure of progress for our contracts because it best depicts the transfer of control to the customer which occurs as we incur costs on our contracts. Under the cost-to-cost measure of progress, the extent of progress towards completion is measured based on the ratio of costs incurred to date to the total estimated costs at completion of the performance obligation. Revenues, including estimated fees or profits, are recorded proportionally as costs are incurred.

Contracts are often modified to account for changes in contract specifications and requirements. We consider contract modifications to exist when the modification either creates new, or changes the existing, enforceable rights and obligations. Most of our contract modifications are for goods or services that are not distinct from the existing contract due to the significant integration service provided in the context of the contract and are accounted for as if they were part of that existing contract. The effect of a contract modification on the transaction price, and our measure of progress for the performance obligation to which it relates, is recognized as an adjustment to revenue (either as an increase in or a reduction of revenue) on a cumulative catch-up basis.

We have a company-wide standard and disciplined quarterly estimate at completion process in which management reviews the progress and execution of our performance obligations. As part of this process, management reviews information including, but not limited to, any outstanding key contract matters, progress towards completion and the related program schedule, identified risks and opportunities and the related changes in estimates of revenues and costs. Changes in estimates of net sales, cost of sales and the related impact to operating income are recognized quarterly on a cumulative catch-up basis, which recognizes in the current period the cumulative effect of the changes on current and prior periods based on a performance obligation’s percentage of completion. A significant change in one or more of these estimates could affect the profitability of one or more of our performance obligations. When estimates of total costs to be incurred exceed total estimates of revenue to be earned on a performance obligation related to fixed price contracts, a provision for the entire loss on the performance obligation is recognized in the period the loss is estimated.

Service Contracts

We recognize revenue for service contracts measuring progress toward satisfying the performance obligation in a manner that best depicts the transfer of goods or services to the customer. The control over services is transferred over time when the services are rendered to the customer on a daily basis. Specifically, we recognize revenue as the services are provided as we have the right to invoice the customer for the services performed. Services are billed and are generally required to be paid on a monthly basis. Payment terms for services are usually 30 days from invoice receipt, but during the recent downturn in the industry, some of our customers have begun instituting new payment terms of up to 60 days from invoice receipt.

Contract Balances

Costs and estimated earnings in excess of billings on uncompleted contracts arise when revenues are recorded on a percentage-of-completion basis but cannot be invoiced under the terms of the contract. Such amounts are invoiced upon completion of contractual milestones. Billings in excess of costs and estimated earnings on uncompleted contracts arise when milestone billings are summarized below: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.

The balance inAssets related to costs and estimated earnings in excess of billings on uncompleted contracts, at September 30, 2017 and December 31, 2016 consisted primarily of earned but unbilled revenuesas well as liabilities related to fixed-price projects.

The balance in billings in excess of costs and estimated earnings on uncompleted contracts, athave been classified as current. The contract cycle for certain long-term contracts may extend beyond one year, thus complete collection of amounts related to these contracts may extend beyond one year, though such long-term contracts include contractual milestone billings as discussed above. At September 30, 20172019 and December 31, 2016 consisted primarily2018, we had no contracts whose term extended beyond one year.

The following table summarizes our contract assets, which are “Costs and estimated earnings in excess of unearned billings related to fixed-price projects.on uncompleted contracts” and our contract liabilities, which are “Billings in excess of costs and estimated earnings on uncompleted contracts.”

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTSRemaining Performance Obligations

(Amounts in thousands except per share amounts)

Remaining performance obligations represent the transaction price of firm orders for which work has not been performed and excludes unexercised contract options and potential orders and also any remaining performance obligations for any sales arrangements that had not fully satisfied the criteria to be considered a contract with a customer pursuant to the requirements of ASC 606.

At September 30, 2019 and December 31, 2018, all of our fixed price 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.

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.

The components of net property, plant and equipment, net are summarized below:

From 2008 through JuneIn January 2018, we financed a new Company vehicle. The financed amount was $67 and was for a term of six years with an interest rate of 0.9%, with monthly payments of $1. During the quarter ended September 30, 2016, we maintained a credit facility (the “Facility”) with Whitney Bank.  In March 2016, we paid all borrowings under2019, the Facility with proceeds received fromCompany vehicle was sold to our former Chief Executive Officer and the outstanding balance of the debt was paid. The sale of our Channelview location.Following the expiration of the Facility on June 30, 2016, we no longer have any credit facilities available to us.vehicle resulted in a $7 loss.

Share-based Compensation Plan

We have a share-based compensation plan, the “2003 Directors, Officers and Consultants Stock Option, Stock Warrant and Stock Award Plan” (the “Plan”). Awards of common stock and options to purchase common stock granted under the Plan have vesting periods of three years and options are exercisable for two years once fully vested. Share-based compensation expense related to awards is based on the fair value at the date of grant, and is recognized over the requisite expected service period, net of estimated forfeitures. Under the Plan, the total number of options permitted is 15 percent of issued and outstanding common shares.

Summary of Nonvested Shares of Restricted Stock

On May 2, 2017,July 27, 2018, we granted 30300 shares of restricted stock to an independent director.our Chief Financial Officer (“CFO”) who is now our current Chief Executive Officer (“CEO”) after our former officer resigned effective August 31, 2019. These shares havehad a fair value grant price of $1.15$0.79 per share, based on the closing price of our common stock on that day. These shares vest over three years in equal tranches on the grantanniversary date anniversary,of his appointment to the role of the CFO, subject to continued service on our Boardas an officer of Directors.the Company. For the three months ended September 30, 2019 and 2018, we recognized share based compensation expense of $20 and $14, respectively. We are amortizing the related share-based compensation of $33$237 over the three-year requisite service period.

On June 24, 2019, the three non-employee members of the Board of Directors (the “Board”) were each granted an option to purchase 50 shares of our common stock at a price of $0.75 per share. Fair value of these stock options was $0.44 per share at the date of grant. The options vested 25% on August 31, 2019, and the remainder is scheduled to vest in three tranches on November 30, 2019, February 29, 2020 and May 31, 2020, subject to the recipient’s continued service on the Board. Once vested, the options are exercisable until June 24, 2024.

On September 23, 2019, we granted 200 shares of restricted stock to our Chief Operating Officer (“COO”). These shares had a fair value grant price of $0.65 per share, based on the closing price of our common stock on that day. One fourth of the shares vested immediately and the remaining shares are scheduled to vest over three years in equal tranches on the anniversary date of his appointment to the role, subject to continued service as our COO. We recognized $33 in compensation expense for the quarter ended September 30, 2019 and we are amortizing the remaining share-based compensation of $64 over the three-year requisite service period as the shares vest.

On September 24, 2019, we granted our new CEO an option to purchase 150 shares of our common stock at a price of $0.65 per share. Fair value of these stock options was $0.39 per share at the date of grant. The options are scheduled to vest in two equal tranches on the first and second anniversaries of the grant subject to his continued service as our CEO. We recognized $0 in compensation expense for the quarter ended September 30, 2019 and we are amortizing the related share based compensation of $59 over the two-year requisite service period as the shares vest.

Summary of Shares of Restricted Stock

For the ninethree months endedSeptember 30,, 2017 2019 and 2016,2018, we recognized a total of $101$55 and $309,$5 respectively, of share based compensation related to restricted stock awards. For the nine months ended September 30, 2019 and 2018, we recognized a total of $183 and $15 respectively, of share-based compensation expense related to restricted stock awards, which is included in selling, general and administrative expenses in the accompanying unaudited condensed consolidated statements of operations. The unamortized estimated fair value of nonvestedunvested shares of restricted stock awards was $73$168 atSeptember 30,, 2017. 2019 and $222 at December 31, 2018. These costs are expected to be recognized as expense over a weighted-average period of 0.301.80 years.

Summary of Stock Options

For the three and nine months ended September 30, 2019, we recognized $17 in compensation expense related to outstanding stock option awards. The share-based compensation expense is recognized over the vesting period and is included in selling, general and administrative expenses in the condensed consolidated statements of operations. The estimated fair value of non-vested stock options was $108 at September 30, 2019 and $0 as of December 31, 2018. This cost is expected to be recognized as an expense over the period ending September 24, 2021.

On May 23, 2016, ourMarch 26, 2018, the Board of Directors authorized athe repurchase program (the “Repurchase Program”) under which we were originally authorized to repurchaseof up to $1,000 of ourthe Company’s outstanding stock. Subsequently, on March 29, 2017, our Board of Directors authorized a renewal and extension of the Repurchase Program for an additional $1,000 until March 31, 2018. The purchases could be made from time to time in the open market, through privately negotiated transactions and Rule 10b5-1 trading plans in accordance with applicable laws, rules and regulations.common stock (the “Repurchase Program”). The Repurchase Program was funded from cash on hand and cash provided by operating activities. Ashand. During the three months ended March 31, 2019, 228 shares of September 30, 2017, we had exhaustedour outstanding common stock were purchased at the price of $0.75 under the Repurchase Program. AsThe Repurchase Program expired on March 31, 2019.

On May 2, 2019, the Company repurchased 60 shares from a former member of the Board. The shares were repurchased at the price of $0.80 per share, which was the average closing price for the ten trading days prior to the date of this report no decisions have been made on any furtherrepurchase.

On September 1, 2019, the Company received 300 shares of common stock repurchases. The average price per sharefrom our former CEO in exchange for certain previously impaired Company equipment ($0 carrying value at the time of exchange). No value was recorded to treasury stock throughSeptember 30, 2017 was $1.02. Treasury shares are accounted for usingbecause the cost method.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Amounts in thousands except per share amounts)assets had approximately $0 fair value at the time of the exchange.

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. Although our future projections indicate that we may be able to realize some of these deferred tax assets, due to the degree of uncertainty of these projections, atAt September 30,, 2017 2019 and December 31, 20162018 management has recorded a full deferred tax asset valuation allowance.

Litigation

From time to time we are involved in legal proceedings arising from the normal course of business. AsWe expense or accrue legal costs as we incur them. A summary of the date of this Report, we were not involved in anyour material legal proceedings.proceedings is as follows:

On August 6, 2018, GE Oil and Gas UK Ltd (“GE”) requested that the Company mediate a dispute between the parties in the ICC International Centre for ADR. The dispute involves alleged delays and defects in products manufactured by the Company for GE dating back to 2013. Mediation took place on November 28, 2018, but no resolution was reached. The original amount in dispute was $2,630, but as of GE’s latest filing with the ICC, the amount in dispute has been reduced to $2,252. The parties are in the process of filing preliminary submissions, and the arbitration is currently set for April 2020. The Company disputes GE’s allegations and intends to vigorously defend itself against these allegations. At this point in the legal process, we do not believe a loss to us is probable, therefore we have not recorded a liability related to this matter.

In November 2011, the Company delivered equipment to Aker Solutions, Inc. (“Aker”), but Aker declined to pay the final invoice in the aggregate amount of $270 alleging some warranty items needed to be repaired. The Company made repairs, but Aker continued to claim further work was required. The Company repeatedly attempted to collect on the receivable, and ultimately filed suit on November 16, 2012, in the Harris County District Court. Aker subsequently filed a counter-claim on March 20, 2013 in the aggregate amount of $1,000, for reimbursement of insurance payments allegedly made for repairs. Trial is scheduled for April 2020. At this point in the legal process, we do not believe a loss to us is probable, therefore we have not recorded a liability related to this matter.

Operating Leases

We lease certain offices, facilities, equipment and vehicles under non-cancellable operating and capital leases expiring at various dates through 2023.

Basic earnings per share (“EPS”) is calculated by dividing net income (loss) by the weighted-average number of common shares outstanding for the period. Diluted EPS is calculated by dividing net income (loss) by the weighted-average number of common shares and dilutive common stock equivalents (warrants, nonvested stock awards and stock options) outstanding during the period. Diluted EPS reflects the potential dilution that could occur if options to purchase common stock were exercised for shares of common stock and all nonvested stock awards vest.

AtFor the three and nine months ended September 30, 20172019 and 2016,2018 there were no potentially dilutive securities outstanding, but theythat were not taken into considerationincluded in calculatingthe computation of diluted EPSearnings per share because there were losses, so including themtheir effect would have beenbe anti-dilutive.

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 is payable 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.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis provides information that management believes is relevant for an assessment and understanding of our results of operations and financial condition. This information should be read in conjunction with our audited historical consolidated financial statements, which are included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2016, filed with the Securities and Exchange Commission (“SEC”) on March 31, 20172018, and our unaudited condensed consolidated financial statements, and notes thereto, included with this Quarterly Report on Form 10-Q (“Report”) in Part I. Item 1. “Financial Statements.Statements,” and is available on the SEC’s website. Dollar and share amounts are in thousands, except backlog amount.

General

We are an oilfield products and services company specializing in complex deepwater and ultra-deepwater oil and gas production distribution system support services,systems, serving the worldwide offshore exploration and production industry. Our services and technological solutions include distribution system installation support and engineering services, umbilical terminations, loose-tube steel flying leads, buoyancy products and services, remotely operated vehicles (“ROVs”) and toolings. We support subsea engineering, installation, commissioning, and maintenance projects through specialized, highly experienced service teams and engineered technological solutions.

In Part I. Item 2. “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” all dollar and share amounts are in thousands of dollars and shares, respectively, unless otherwise indicated.

Industry and Executive Outlook

Three years into the downturn inWhile oil prices are not yet perceived to be at levels ideal for large scale offshore development, we are pleased with our ability to generate almost as much revenue during the industry has largely comefirst nine months of 2019 as we generated during the entire year of 2018. Our cost rationalization efforts also continue to terms withbear fruit, as evidenced by reductions in our operating expenses, not including certain transaction costs incurred related to the lower prices, and adjusted accordingly. So much so, thatresignation of the recent slight uptickCompany’s Founder, compared to the same period in prices is giving rise to optimism about the future. However, even without increases in prices, oil companies have modified their strategies to manage their operations with the lower prices, with projects being executed at breakeven prices as low as $50 a barrel.2018.

One key strategy being employed acrossFollowing the industry isconclusion of our strategic review process, our Company Founder and former Chief Executive Officer resigned as an officer and as a member of our board of directors, effective August 31, 2019 to pursue interests outside the increased use of strategic partnerships. Whether between oil and gas operators and their suppliers, or between suppliers who serve different steps along the value chain, these partnerships are realizing increased value due to the alignment of incentives, while spreading project risks.industry.

His departure coincided with a renewed focus on our core business, providing the opportunity for him to purchase non-core assets from the Company in exchange for some of his shares of the Company’s common stock. Consequently, we also streamlined our workforce to better align our human resources with our areas of focus. Our personnel changes also included the addition of a Chief Operating Officer, a new role for our organization.

These changes have also provided the opportunity to engage our employees, customers, and shareholders, in soliciting their feedback on our Company, to ensure our areas of focus are better aligned with their objectives. The feedback has been overwhelmingly positive, with our stakeholders being supportive of our renewed focus on our core business.

Our strategy for the future will center around strategic sales efforts, product and service excellence, and financial discipline. While we expect our solid reputation to continue generating incoming requests from customers, we plan to enhance our front end activities to strategically target new opportunities. To better serve our customers, we are disheartened by delaysalso performing a deep dive into the full portfolio of our products, services, and rental equipment, to streamline our project execution and increase our competitiveness in some key projectsthe market. While there are various opportunities we could pursue in different areas, we intend to primarily pursue opportunities which align with our core competencies, and where we see a clear path to financial success.

As a result, while we will continue to pursue select international prospects, our immediate focus will be on opportunities we can successfully execute out of our Houston facility, and we expect to bescale back our plans for expansion into the West African and Southeast Asian markets.

In light of increased bidding activity, a committed backlog of approximately $12 million and working on, and the resulting disappointing results,capital of $6.6 million, we areremain cautiously optimistic that partnerships we are pursuing will provide material benefits for us in 2018 and beyond, even as we continueof our ability to engage with our existing and new customers on their projects. We are especially looking to take advantage of such partnerships to pursue opportunities in international markets, where there is an increase in the focus on local content regulations, in order to enhance local capacity.

We are continuing to engage in more discussions with different customers on what is commonly referred to as brownfield work, which is where operators seek to derive further benefit from their existing infrastructure, rather than develop new fields. We continue to view this as a growth opportunity for us, especially as a mitigation for continued delays in new projects, and are making concerted efforts to enhance our market position in this area.

Our balance sheet continues to be strong, we continue to evaluate opportunities to optimize our cost structure, and we are continuing to engage with our customers as they make plans for their projects in 2018 and beyond. Through these efforts we remain strongly committed to creating the mostcreate value for our customers, shareholders and employees.stakeholders.

Results of Operations

Three Months Ended September 30, 20172019 Compared to Three Months Ended September 30, 20162018

Revenues. Revenues for the three months ended September 30, 20172019 were $3,470$4,397 compared to revenues of $9,165$3,912 for the three months ended September 30, 2016.2018. The $5,695,$485, or 6212 percent, decreaseincrease was primarily the result of delays in the commencement of certain customermore projects and fewer projects in process in 2017, coupled with the commencement of procurement and manufacturing activities on certain customer orders that resulted in higher than normal revenues induring the three month periodmonths ended September 30, 2016.2019, compared to the three months ended September 30, 2018.

Gross profit. Gross profit for the three months ended September 30, 20172019 was $1,034,$1,845, or 3042 percent of revenues, compared to $3,297,$1,548, or 3640 percent of revenues, for the three months ended September 30, 2016.2018. The $2,263 decrease$297 increase in gross profit or 6 percent decrease in gross profit percentage respectively, was due primarily to lowerincreased revenues induring the three months ended September 30, 2017.2019, compared to the three months ended September 30, 2018.

Selling, general and administrative expenses.expensesSelling, general and administrative (“SG&A”). SG&A expenses were $2,264,$2,136, or 6549 percent of revenues, for the three months ended September 30, 2017 compared2019, which included $349 in one-time expenses incurred in relation to $2,210,the resignation of the Company’s Founder. SG&A expenses were $2,145, or 2455 percent of revenues for the three months ended September 30, 2016. The $54 increase in 2017 resulted primarily from labor costs directed to2018. Excluding the one-time charges, SG&A activities due to lower manufacturing and/or service activities.

Other income (expense). Duringexpenses for the three months ended September 30, 2017, we recognized2019 were $1,787, or 41 percent of revenues. The $358 decrease in regular SG&A expense included a gain on$243 decrease in legal fees, as well as other expense reductions resulting from the sale of property, plant and equipment of $559 relatedCompany’s continuous efforts to the sale of one of our ROVs.There was no gain or loss on the sale of property, plant and equipment during the three months ended September 30, 2016.reduce operating expenses.

Modified EBITDA. Our management evaluates our performance based on a non-GAAPnon-US GAAP measure which consists of earnings (net income or loss) available to common shareholders before net interest expense,income, income taxes, non-cash share-based compensation expense, equity in net income or loss of joint venture, non-cash impairments, depreciation and amortization, other non-cash items and one-time charges (“Modified EBITDA”). This measure may not be comparable to similarly titled measures employed by other companies and is not a measure of performance calculated in accordance with US GAAP. The measure should not be considered in isolation or as a substitute for operating income or loss, net income or loss, cash flows provided by operating, investing or financing activities, or other cash flow data prepared in accordance with US GAAP. The amounts included in the Modified EBITDA calculation, however, are derived from amounts included in the accompanying unaudited condensed consolidated statements of operations.

We believe Modified EBITDA is useful to investors in evaluating our operating performance because it is widely used to measure a company’s operating performance, which can vary substantially from company to company depending upon accounting methods and book value of assets, financing methods, capital structure and the method by which assets were acquired. It helps investors more meaningfully evaluate and compare the results of our operations from period to period by removing the impact of our capital structure (primarily interest); asset base (primarily depreciation and amortization); one-time events; and actions that do not affect liquidity (share-based compensation expense equity in net income or loss of joint venture) from our operating results;results); and it helps investors identify items that are within our operational control. Depreciation and amortization charges, while a component of operating income, are fixed at the time of the asset purchase or acquisition in accordance with the depreciable lives of the related asset and as such are not a directly controllable period operating charge.

The following is a reconciliation of net income (loss)loss to Modified EBITDA (EBITDA loss) for the three months ended September 30, 20172019 and 2016:2018: