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

DEEP DOWN, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

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

DEEP DOWN, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

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

DEEP DOWN, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

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

DEEP DOWN, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

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)

Basis of Presentation

The accompanying unauditedcondensedconsolidated financial statements of Deep Down, Inc. and its directly and indirectly wholly-owned subsidiaries (“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 footnotes 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, 2016,2017, filed on March 31, 201728, 2018 with the Commission.

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 and cash equivalents on hand, cash from operating activities, and proceeds from opportunistic sales of non-core equipment. The Company’s cash as of June 30, 2018 and December 31, 2017 was $2,423 and $3,939, respectively. The reduction in cash was caused by cash used in operating activities of $1,489 primarily because of our net loss of $558 and an increase of $632 in accounts receivable during the six months ended June 30, 2018.

The Company’s plans to mitigate its limited liquidity include: closely monitoring capital expenditures planned for the remainder of 2018 and beyond to conserve capital; possibly selling certain non-core equipment; further reducing administrative costs, if necessary; and potentially establishing 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. All intercompany transactions and balances have been eliminated.

Segments

For the quarters ended SeptemberJune 30, 20172018 and 2016,2017, we had one operating and reporting segment, Deep Down Delaware.

Recently Issued Accounting Standards Not Yet Adopted

In May 2014,February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting StandardStandards Update (“ASU”) No. 2014-09, “Revenue from Contracts with Customers” (“ASU 2014-09”). This update provides a five-step approach to be applied to all contracts with customers and requires expanded disclosures about 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 and the assets recognized from costs incurred to obtain or fulfill a contract. The effective date for this standard was deferred in July 2015 and will now be effective for us beginning January 1, 2018. The standard provides for different application methods during adoption. 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 contracts 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 significant impact on our financial statements at this time, but we expect requirements of this standard to significantly enhance our revenue disclosures. 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 the impact of this pronouncement on our financial statements.

In February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842)” (“ASU 2016-02”). The amendments in this update require, among other things, that lessees recognize 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 specified asset for the lease term. Lessees and lessors must apply a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. The amendments are effective for us beginning January 1, 2019. We do not anticipate the adoption of ASU 2016-02 will have a material effect on our results of operations howeveror financial position, but we are still evaluating the impact on our financial position.both.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Amounts in thousands except per share amounts)

In October 2016, the FASB

All other new accounting pronouncements that have been issued ASU No. 2016-16, “Intra-Entity Transfers of Assets Other Than Inventory.” This update requires that income tax consequences are recognized on an intra-entity transfer of an asset other than inventory when the transfer occurs. The amendments in this ASU arebut not yet effective for us on January 1, 2018. We are currently evaluating the impact of this ASU on our consolidated financial statements.

In January 2017, the FASB issued ASU No. 2017-01, “Business Combinations.” This new ASU clarified the definition of a business with the objective of adding guidancebeing evaluated to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The new standard is effective for us January 1, 2018 anddetermine if they will be applied prospectively. We are currently evaluating the impact of our pending adoption of the new standard, but do not expect it to have a material impact on our consolidated financial position or results of operations.

In February 2017, 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 be accounted for as a modification. An entity should account for the effects of a modification unless the fair value, vesting conditions and classification, as an entity instrument or a liability instrument, of the modified award are the same before and after a change to the terms or conditions of the share-based payment award. The new standard 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.

The componentsOn January 1, 2018, we adopted ASC Topic 606 (“ASC 606”) using the modified retrospective method applied to those contracts which were not completed as of billings, costsJanuary 1, 2018. Results for reporting periods beginning after January 1, 2018 are presented under ASC 606, while prior period amounts are not adjusted and estimated earnings on uncompleted contracts are summarized below:continue to be reported in accordance with our historic accounting under Revenue Recognition ASC Topic 605.

There was no significant impact 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 incurred) do not materially change by the adoption of the new standard.

The balanceRevenues are recognized when control of the promised goods or services is transferred to our customers, in costsan 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 estimated earningsaccounted 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 excessa given period. For most of billings on uncompletedour fixed price contracts, at September 30, 2017the customer contracts with us to provide a significant service of integrating a complex set of tasks and December 31, 2016 consisted primarilycomponents into a single project or capability (even if that single project results in the delivery of earned but unbilled revenues related to fixed-price projects.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 balance in billings in excessfollowing table presents our revenues disaggregated by revenue sources of costsfixed price and estimated earnings on uncompleted contracts at September 30, 2017 and December 31, 2016 consisted primarily of unearned billings related to fixed-price projects.service contracts. Sales taxes are excluded from revenues.

Three Months Ended June 30, 2018 Compared to Three Months Ended June 30, 2017

Six Months Ended June 30, 2018 Compared to Six Months Ended June 30, 2017

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Amounts in thousands except per share amounts)

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 to deliver 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 companywide standard and disciplined quarterly estimate at completion (EAC) 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.

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 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.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Amounts in thousands except per share amounts)

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. As of June 30, 2018, 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 billings on uncompleted contracts” and our contract liabilities, which are “Billings in excess of costs and estimated earnings on uncompleted contracts”.

The balance in contract assets at June 30, 2018 and December 31, 2017 consisted primarily of earned but unbilled revenues related to fixed-price contracts.

The balance in contract liabilities at June 30, 2018 and December 31, 2017 consisted primarily of unearned billings related to fixed-price contracts.

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 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.

As of June 30, 2018, all of our fixed price contracts are short-term in nature with a contract term 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.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Amounts in thousands except per share amounts)

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 June 30, 2016,In January 2018, we maintainedfinanced a credit facility (the “Facility”)new Company vehicle. The financed amount was $67 and is for a term of six years with Whitney Bank.  In March 2016, we paidan interest rate of 0.9%, with monthly payments of $1. The financing company will hold a lien on the vehicle until all borrowings under the Facility with proceeds received from the sale of our Channelview location.Following the expiration of the Facility on June 30, 2016, we no longerpayments have any credit facilities available to us.been made.

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, we granted 30 shares of restricted stock to an independent director. These shares have a fair value grant price of $1.15 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 grant date anniversary, subject to continued service on our Board of Directors. We are amortizing the related share-based compensation of $33$34.50 over the three-year requisite service period.

For the ninesix months endedSeptember June 30,, 2018 and 2017, and 2016, we recognized a total of $101$10 and $309,$67, 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 nonvested shares of restricted stock awards was $73$29 atSeptember June 30,, 2017. 2018. These costs are expected to be recognized as expense over a weighted-average period of 0.301.37 years.

On May 23, 2016, our Board of Directors authorized a repurchase program (the “Repurchase Program”) under which we were originally authorized to repurchase up to $1,000 of our 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. The Repurchase Program was funded from cash on hand and cash provided by operating activities. As of September 30, 2017, we had exhausted the Repurchase Program. As of the date of this report no decisions have been made on any further stock repurchases. The average price per share of treasury stock throughSeptember 30, 2017 was $1.02. Treasury shares are accounted for using the cost method.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Amounts in thousands except per share amounts)

On March 26, 2018, the Board of Directors authorized the repurchase of up to $1,000 of the Company’s outstanding common stock (the “Repurchase Program”). The Repurchase Program will be funded from cash on hand and cash provided by operating activities.

The time of the purchases and amount of stock purchased will be determined at the discretion of management subject to market conditions, business opportunities and other appropriate factors and may include purchases through one or more broker-assisted plans and methods, including, but not limited to, open-market purchases, privately negotiated transactions and Rule 10b-18 trading plans. The Repurchase Program will expire on March 31, 2019.

As of June 30, 2018, no stock repurchases had been made under the Repurchase Program.

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, atSeptemberAt June 30,, 2017 2018 and December 31, 20162017 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. As of the date of this Report, we were notare involved in anyone material legal proceedings.proceeding. 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. The Company disputes GE’s allegations and intends to vigorously defend itself against these allegations. The total amount in controversy is $2,630,261.08.Atthis point in the legal process, the loss to the Company is not probable; therefore no liability has been recorded in the Company’s consolidated financial statements.

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.

At SeptemberJune 30, 20172018 and 2016,2017, there were no potentially dilutive securities outstanding, but they were not taken into consideration in calculating diluted EPS because there were losses, so including them would have been anti-dilutive.

outstanding.

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, 2016,2017, filed with the Securities and Exchange Commission (“SEC”) on March 31, 201728, 2018 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.

General

We are an oilfield services company specializing in complex deepwater and ultra-deepwater oil production distribution system support services, 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

ThreeWe believe industry demand for our specialized equipment and services is in the early stages of an upward trend, driven by major oil companies and independents that are starting to reinvest in new and existing projects following several years of industry challenges. This trend is susceptible to some bumps in the road as we saw in the second quarter, when work we had expected to perform in the period was pushed into the downturnsecond half of 2018, resulting in oil prices,lower revenues than expected. Despite the industry has largely come to terms withinevitable delays, we are seeing a variety of signs that support our optimism for the lower prices, and adjusted accordingly. So much so, that the recent slight uptick 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.

One key strategy being employed acrossIn particular, customers are increasingly contacting us to help them address their maintenance needs, which consists of work that had been deferred in prior periods due to budget constraints. With a clearer and more positive outlook for the industry, is the increased use of strategic partnerships. Whether between oil and gas operators are now moving forward with routine maintenance and upgrade projects that we expect will drive increased demand for our solutions. Additionally, we believe the improvement in operating results we are seeing from many oil industry leaders bodes well for their suppliers, or between suppliers who serve different steps along the value chain, these partnerships are realizing increased value dueability to the alignment of incentives, while spreading project risks.invest in new offshore projects, which we expect will provide future opportunities for us.

While cost cutting and operational streamlining have been key focus points during the downturn, there has also been an upturn in industry consolidation activity, spanning companies of all sizes. We are increasingly finding ourselves in discussions with other companies about finding ways to work together, often leading to suggestions of consolidating our operations.

Another outcome of the downturn has been the shift in contracting strategy by the super major operators, where they are now looking to award Engineering, Procurement, Construction and Installation (“EPCI”) contracts. These EPCI contracts would be issued to the largest service providers, who would then likely subcontract to companies like ours.

Coupling the interest in our company as a consolidation candidate with the shift towards EPCI contracts, we are disheartened by delayshave determined that it is in some key projects we expect to be working on,our shareholders’ and the resulting disappointing results, we are cautiously optimistic that partnerships we are pursuing will provide material benefitsCompany’s best interest for us to engage an investment bank to assist us as we evaluate our strategic alternatives. There can be no assurance that the exploration of strategic alternatives will result in 2018any transaction or other alternative. We have not set a timetable for completion of the process, and beyond, even asdo not intend to comment further regarding the process unless a specific transaction or other alternative is approved by the Board of Directors, the process is concluded, or it is otherwise determined that further disclosure is appropriate or required by law.

In the meantime, we continue to engagework with our existingcommitted employees and newsupportive supplier base to provide unique solutions for our customers, on their projects. We are especially looking to take advantagewhile maximizing our shareholders’ value, aided in no small part by our continued strong balance sheet. With a committed backlog 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. Weabout $15 million, we continue to view thisthe future as a growth opportunitybeing exceedingly bright 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.the company.

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 most value for our customers, shareholders and employees.

Results of Operations 

Three Months Ended SeptemberJune 30, 20172018 Compared to Three Months Ended SeptemberJune 30, 20162017

Revenues. Revenues for the three months ended SeptemberJune 30, 20172018 were $3,470$4,104 compared to revenues of $9,165$5,379 for the three months ended SeptemberJune 30, 2016.2017. The $5,695,$1,275, or 6224 percent, decrease was primarily the result of delays in the commencement of certain customer 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 in the three month period ended September 30, 2016.2018.

Gross profit. Gross profit for the three months ended SeptemberJune 30, 20172018 was $1,034,$1,651, or 3040 percent of revenues, compared to $3,297,$2,663, or 3650 percent of revenues, for the three months ended SeptemberJune 30, 2016.2017. The $2,263$1,012 decrease in gross profit, or 610 percent decrease in gross profit percentage, respectively, was due to lower revenues in the three months ended SeptemberJune 30, 2017.2018, compared to a larger proportion of higher-margin service projects in the three months ended June 30, 2017, which resulted in above average margins.

Selling, general and administrative expenses.Selling, general and administrative (“SG&A”) expenses were $2,264,$1,745, or 6543 percent of revenues, for the three months ended SeptemberJune 30, 20172018 compared to $2,210,$2,223, or 2441 percent of revenues, for the three months ended SeptemberJune 30, 2016.2017. The $54 increase$478 decrease in 20172018 resulted primarily from labor costs directed toa $313 decrease in SG&A activitieslabor as a result of personnel reductions, and a $77 decrease in legal and professional fees, as well as the impact of other cost cutting measures. The increase in SG&A expense as a percent of revenues was due to lower manufacturing and/or service activities.

Other income (expense). During the three months ended September 30, 2017, we recognized a gain on the sale of property, plant and equipment of $559 related to the sale of one of our ROVs.There was no gain or loss on the sale of property, plant and equipmentrevenues during the three months ended SeptemberJune 30, 2016.2018 as compared to the three months ended June 30, 2017.

Modified EBITDA. Our management evaluates our performance based on a non-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); actions that do not affect liquidity (share-based compensation expense equity in net income or loss of joint venture) from our operating 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) to Modified EBITDA (EBITDA loss) for the three months ended SeptemberJune 30, 20172018 and 2016:2017:

Modified EBITDA loss was ($863)$153 for the three months ended SeptemberJune 30, 20172018 compared to Modified EBITDA of $1,492$890 for the three months ended SeptemberJune 30, 2016.2017. The $2,355$737 decrease in Modified EBITDA was due primarily to the decrease in net income, which was driven by the previously discussed decreased revenues, as well as thean increase in gain on sale of assets, and decreases in depreciation and amortization, and share-based compensation costs during the 2017 period.

Nine Months Ended September 30, 2017 Compared to Nine Months Ended September 30, 2016

Revenues. Revenues for the ninethree months ended SeptemberJune 30, 2017 were $14,458 compared to revenues of $19,489 for the nine months ended September 30, 2016. The $5,031, or 26 percent, decrease was primarily a result of project delays and fewer projects in process in 2017, coupled with the previously discussed above average activity levels in the same period in 2016.2018.

Six Months Ended June 30, 2018 Compared to Six Months Ended June 30, 2017

Revenues. Revenues for the six months ended June 30, 2018 were $7,810 compared to revenues of $10,987 for the six months ended June 30, 2017. The $3,177, or 29 percent, decrease was primarily the result of fewer projects in process in 2018.

Gross Profit.profit. Gross profit for the ninesix months ended SeptemberJune 30, 20172018 was $6,341,$2,785, or 4436 percent of revenues, compared to gross profit of $6,672,$5,307, or 3448 percent of revenues, for the ninesix months ended SeptemberJune 30, 2016. Though we had a slight2017. The $2,522 decrease of $331 in gross profit, we maintained higher margins as aor 12 percent decrease in gross profit percentage, ofrespectively, was due to lower revenues duein the three months ended June 30, 2018, compared to a larger proportion of higher marginhigher-margin service work, as well asprojects in the resolution of an outstanding customer issue, during the ninesix months ended SeptemberJune 30, 2017.2017, which resulted in above average margins.

Selling, general and administrative expenses.SG&A expenses for the nine months ended September 30, 2017 were $6,995,$3,662, or 48 percent of revenues, compared to $7,376, or 3847 percent of revenues, for the ninesix months ended SeptemberJune 30, 2016.2018 compared to $4,732, or 43 percent of revenues, for the six months ended June 30, 2017. The $381$1,070 decrease in 20172018 resulted primarily due tofrom a reduction$575 decrease in certain SG&A salarieslabor, as a result of personnel reductions, and rent expense incurreda $212 decrease in 2016, related to the salelegal and move from our Channelview location in 2016,professional fees, as well as a decrease in our legal expenses.

Equity in net incomethe impact of joint venture. Duringother cost cutting measures. The percent of revenues increase was due to lower revenues during the ninefirst six months ended September 30, 2017, we recorded $94 of equity in net income of joint venture, related to net income, for the year ended December 31, 2016, of Cuming Flotation Technologies, LLC, in which we previously owned a 20 percent interest.

Other income (expense). During the nine months ended September 30, 2017, we recognized a gain on the sale of property, plant and equipment of $574 primarily related2018 as compared to the salefirst six months of one of our ROVs, while during the nine months ended September 30, 2016, we recognized a gain on the sale of property, plant and equipment of $1,070 related to the sale of our Channelview location.2017.

Modified EBITDA. As noted above, our management evaluates our performance based on 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 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 GAAP. The amounts included in the Modified EBITDA calculation, however, are derived from amounts included in the accompanying condensed consolidated statements of operations.

The following is a reconciliation of net loss(loss) income to Modified EBITDA for the ninesix months ended SeptemberJune 30, 20172018 and 2016:2017:

Modified EBITDA loss was $(271) for the ninesix months ended SeptemberJune 30, 2017 was $5072018 compared to Modified EBITDA of $587$1,369 for the ninesix months ended SeptemberJune 30, 2016.2017. The $80$1,640 decrease in Modified EBITDA was due primarily due to the decrease in net income, which was driven by the previously discussed decreased revenues, an increase in gain on sale of assets, the decreaseand decreases in depreciation and amortization, and share-based compensation andcosts during the increase in net loss in 2017 as compared to 2016.six months ended June 30, 2018.

Liquidity and Capital Resources

Overview

Historically,During the six months ended June 30, 2018 and June 30, 2017, we have supplemented the financing ofprimarily financed our operating and capital needs through debtcash on hand and equity financings.cash we generated from operations. However, in January 2018, we financed a new company vehicle. The financed amount was $67 and is for a term of six years with an interest rate of 0.9%, with monthly payments of $1. The financing company will hold a lien on the vehicle until all payments have been made.

From 2008 throughDuring the six months ended June 30, 2016, we maintained a credit facility (the “Facility”) with Whitney Bank. In March 2016, we paid all borrowings under the Facility with proceeds received from the sale2018, our trade accounts receivable increased by $632, impacting our cash position which declined by $1,516. This increase in trade accounts receivable reflected efforts by some of our Channelview location.Followinglarger customers to lengthen vendor payment terms, a situation we expect to be resolved in the expiration of the Facility on June 30, 2016, we no longer have any credit facilities available to us.

Ascoming months. The decline in cash was also a result of a $667 decrease in our accounts payable and accrued liabilities.

Through a combination of cash we expect to generategenerated from operations, opportunistic sales of non-core equipment, and reductions in our administrative costs and capital investments budget, we believe we will have adequate liquidity to meet our future operating requirements forrequirements. However, in light of the foreseeable future.decline in our working capital, we are also actively engaged in discussions with different financial institutions, with the intention of establishing a line of credit to further supplement our operating requirements.

To the extent our then current and forecasted liquidity allows, we will continue to repurchase our common stock. See “Share Repurchase Program” below for additional information. 

Inflation and Seasonality

We do not believe that our operations are significantly impacted by inflation. Our business is not significantly seasonal in nature.

Off-Balance Sheet Arrangements

We have no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to investors.

Critical Accounting Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and reported amounts of revenues and expenses during the reporting period. The most significant estimates used in our financial statements relate to revenue recognition where we use percentage-of completionpercentage-of-completion accounting on our large fixed-price contracts, the allowance for doubtful accounts, and the valuation allowance for deferred income tax assets. These estimates require judgments, which we base on historical experience and on various other assumptions, as well as specific circumstances. Estimates may change as new events occur, additional information becomes available or operating environments change.

Refer to Part II. Item 2.7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” in our Annual Report on Form 10-K for the year ended December 31, 20162017 for a discussion of our critical accounting policies and estimates.

Recently Issued Accounting Standards

Except as set forth in Note 1 to our unaudited condensed consolidated financial statements, management has not yet determined whether recently issued accounting standards, which are not yet effective, will have a material impact on our condensed consolidated financial statements upon adoption.

Share Repurchase Program

On May 23, 2016, ourMarch 26, 2018, the Board of Directors authorized athe repurchase program (the “Repurchase Program”) under which we may 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 may 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 waswill be funded from cash on hand and cash provided by operating activities.

The time of the purchases and amount of stock purchased will be determined at the discretion of management subject to market conditions, business opportunities and other appropriate factors and may include purchases through one or more broker-assisted plans and methods, including, but not limited to, open-market purchases, privately negotiated transactions and Rule 10b5-1 trading plans. The Repurchase Program will expire on March 31, 2019.

As of SeptemberJune 30, 2017, we2018, no stock repurchases had exhaustedbeen made under the Repurchase Program. As of the date of this Report no decisions have been made on any further stock repurchases.

Recent Events

On July 31, 2018, we announced that our Board of Directors had initiated a review of our strategic alternatives to maximize shareholder value, including a potential sale of the Company. We have engaged the GulfStar Group, LLC as financial advisor and Gray, Reed & McGraw, LLP as legal advisor to assist in the process.

There can be no assurance that the exploration of strategic alternatives will result in any transaction or other alternative. We have not set a timetable for completion of the process, and we do not intend to comment further regarding the process unless a specific transaction or other alternative is approved by the Board of Directors, the process is concluded, or it is otherwise determined that further disclosure is appropriate or required by law.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

Not Applicable

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures.   The Company’s disclosure controls and procedures are designed to ensure that such information required to be disclosed by the Company in reports filed or submitted under the Exchange Act as amended, is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. The Company’s disclosure controls and procedures are also designed to ensure that such information is accumulated and communicated to management, including the principal executive and the principal financial officer, as appropriate to allow timely decisions regarding required disclosures. There are inherent limitations to the effectiveness of any system of disclosure controls and procedures, including the possibility of human error and the circumvention or overriding of controls and procedures. Accordingly, even effective disclosure controls and procedures can only provide reasonable assurance that control objectives are attained. The Company’s disclosure controls and procedures are designed to provide such reasonable assurance.assurance.

The Company’s management, with the participation of the principal executive and principal financial officer, evaluated the effectiveness of the design and operation of the Company’s disclosure controls and procedures as of SeptemberJune 30, 2017,2018, as required by Rule 13a-15(e) of the Exchange Act. Based upon that evaluation, the principal executive and the principal financial officer have concluded that the Company’s disclosure controls and procedures were effective as of SeptemberJune 30, 2017.2018.

Management’s Report on Internal Control Over Financial Reporting.   The Company’s management is responsible for establishing and maintaining adequate internal controls over financial reporting, as defined in Rule 13a-15(f) of the Exchange Act. Although the internal controls over financial reporting were not audited, the Company’s management, including the principal executive and principal financial officer, assessed the effectiveness of internal controls over financial reporting as ofSeptember June 30,, 2017, 2018, based on criteria issued in 2013 by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) entitled“Internal Control-Integrated Framework.” Upon evaluation, the Company’s management has concluded that the Company’s internal controls over financial reporting were effective as ofSeptember June 30,, 2017. 2018.

Changes in Internal Control Over Financial Reporting.   The Company’s management, with the participation of the principal executive and principal financial officer, have concluded there were no changes in internal control during the fiscal quarter ended SeptemberJune 30, 2017.

2018.

PART II. – OTHER INFORMATION

ITEM 1.LEGAL PROCEEDINGS

From time to time we are involved in legal proceedings arising from the normal course of business. As of the date of this Report, we were notare involved in anyone material legal proceedings.proceeding. 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. The Company disputes GE’s allegations and intends to vigorously defend itself against these allegations. The total amount in controversy is $2,630,261.08. At this point in the legal process, the loss to the Company is not probable; therefore no liability has been recorded in the Company’s consolidated financial statements.

ITEM 2.  UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS1A. RISK FACTORS

We recently announced a process to explore and evaluate strategic alternatives to maximize stockholder value, which may result in the use of a significant amount of our management resources or significant costs, and we may not be able to achieve any particular outcome or to fully realize the potential benefit of such alternatives.

In July 2018, we announced that the Board of Directors is conducting a process to explore and evaluate strategic alternatives to maximize stockholder value. The table below summarizes information aboutBoard has not made any decisions related to any strategic alternatives at this time. No assurances can be made with regard to the timeline for completion of the strategic review, or whether the review will result in any particular outcome. This process may divert the attention of management and cause us to incur various expenses, whether or not any particular outcome is achieved.  This process could also negatively impact our purchases of common stock, based on trade date, during the quarter ended September 30, 2017:relationships with our customers and employees.

ISSUER PURCHASES OF EQUITY SECURITIES