| DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND ESTIMATES | Description of Business Deep Down, Inc.,
a Nevada corporation (“Deep Down Nevada”), and its directly and indirectly wholly-owned subsidiaries, Deep Down, Inc.,
a Delaware corporation (“Deep Down Delaware”); Deep Down International Holdings, LLC, a Nevada limited liability company;
and Deep Down Brasil - Solucoes em Petroleo e Gas, Ltda, a Brazilian limited liability company (“Deep Down Brasil”),
(collectively referred to as “Deep Down”, “we”, “us” or the “Company”) is an oilfield
services company specializing in complex deepwater and ultra-deepwater oil production distribution system support services, 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, flotation and Remote Operated
Vehicles (“ROVs”) and related services. We support subsea engineering, installation, commissioning, and maintenance
projects through specialized, highly experienced service teams and engineered technological solutions. Deep Down’s primary
focus is on more complex deepwater and ultra-deepwater oil production distribution system support services and technologies, used
between the platform and the wellhead. Liquidity As a deepwater
service provider, our revenues, profitability, cash flows, and future rate of growth are generally dependent on the condition
of the global oil and gas industry, and our customers’ ability to invest capital for offshore exploration, drilling and
production and maintain or increase levels of expenditures for maintenance of offshore drilling and production facilities. Oil
and gas prices and the level of offshore drilling and production activity have historically been characterized by significant
volatility. We enter into large, fixed-price contracts which may require significant lead time and investment. A decline in offshore
drilling and production activity could result in lower contract volume or delays in significant contracts which could negatively
impact our earnings and cash flows. Our earnings and cash flows could also be negatively affected by delays in payments by significant
customers or delays in completion of our contracts for any reason. While our objective is to enter into contracts with our customers
that are cash flow positive, we may not always be able to achieve this objective. We are dependent on our cash flows from operations
to fund our working capital requirements and the uncertainties noted above create risks that we may not achieve our planned earnings
or cash flow from operations, which may require us to raise additional debt or equity capital. There can be no assurance that
we could raise additional capital. During the fiscal
years ended December 31, 2016 and 2015, we supplemented the financing of our capital needs primarily through debt and operating
cash flow. Since 2008, we had maintained a credit facility with Whitney Bank, a state chartered bank (“Whitney”);
see additional discussion in Note 5, “Long-Term Debt”, of the Notes to Consolidated Financial Statements. Summary of
Significant Accounting Policies and Estimates Principles
of Consolidation The consolidated
financial statements include the accounts of Deep Down and its wholly-owned subsidiaries for the years ended December 31, 2016
and 2015. All intercompany transactions and balances have been eliminated. Reclassifications Certain prior
period amounts have been reclassified to conform to the current period presentation. These reclassifications have not resulted
in any changes to previously reported net income (loss) or cash flows. Use of
Estimates The preparation
of these financial statements in accordance with US GAAP requires us to make estimates and judgments that may affect assets and
liabilities. On an on-going basis, we evaluate our estimates, including those related to revenue recognition and related allowances,
costs incurred and estimated earnings incurred in excess of billings on uncompleted contracts, impairments of long-lived assets,
including intangibles, income taxes including the valuation allowance for deferred tax assets, billings in excess of costs incurred
and estimated earnings on uncompleted contracts, contingencies and litigation, and share-based payments. We base our estimates
on historical experience and on various other assumptions that are believed to be reasonable, the results of which form the basis
for making judgments about the carrying values of assets and liabilities. Actual results may differ from these estimates under
different assumptions or conditions. Segments For the years
ended December 31, 2016 and 2015, we only had one operating and reporting segment, Deep Down Delaware. Cash and
Cash Equivalents We consider all
highly liquid investments with maturities from date of purchase of three months or less to be cash equivalents. Cash and cash
equivalents consist of cash on deposit with domestic banks and, at times, may exceed federally insured limits. Fair Value
of Financial Instruments Fair value is
defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal
or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement
date. We utilize a fair value hierarchy, which maximizes the use of observable inputs and minimizes the use of unobservable
inputs when measuring fair value. The fair value hierarchy has three levels of inputs that may be used to measure fair value: Level 1 - Unadjusted quoted
prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities. Level 2 - Quoted prices
in markets that are not active; or other inputs that are observable, either directly or indirectly, for substantially the full
term of the asset or liability. Level 3 - Prices or valuation
techniques that require inputs that are both significant to the fair value measurement and unobservable. Our financial
instruments consist primarily of cash, trade receivables and payables, note receivable, and debt instruments. The carrying values
of cash, trade receivables and payables approximated their fair values at December 31, 2016 and 2015 due to their short-term maturities.
The carrying values of our debt instruments and note receivable approximate their fair values at December 31, 2016 and 2015 because
the interest rates approximate current market rates. Accounts Receivable Trade receivables
are uncollateralized customer obligations due under normal trade terms. We provide an allowance for doubtful trade receivables
based on a specific review of each customer’s trade receivable balance with respect to their ability to make payments. Generally,
we do not charge interest on past due accounts. When specific accounts are determined to require an allowance, they are expensed
by a provision for bad debts in that period. At December 31, 2016 and 2015, we estimated the allowance for doubtful accounts
requirement to be $10 and $150, respectively. Bad debt expense (credit) totaled $167 and $70 for the years ended December 31,
2016 and 2015, respectively. Concentration
of Credit Risk As of December
31, 2016, three of our customers accounted for 66 percent, 7 percent and 5 percent of total trade accounts receivable. As of December
31, 2015, three of our customers accounted for 35 percent, 26 percent and 17 percent of total trade accounts receivable. For the year
ended December 31, 2016, our five largest customers accounted for 60 percent, 10 percent, 7 percent, 3 percent and 3 percent of
total revenues. For the year ended December 31, 2015, our five largest customers accounted for 34 percent, 21 percent,
10 percent, 7 percent and 5 percent of total revenues. The loss of one or more of these customers
could have a material impact on our results of operations. Inventory Inventory, which
consists of a 3.5 MT portable umbilical carousel, is stated at the lower of cost or market, net of reserve for obsolescence. The
obsolescence reserve was $0 as of December 31, 2015 and due to a reclassification of our carousel from inventory to other assets,
there is no longer an inventory balance at December 31, 2016. The reclassification was made due to the uncertainty of when it
will be sold or put on rent. Long-Lived
Assets Property,
plant and equipment. Equity Method Investments Equity method
investments in joint ventures are reported as investments in joint venture on the consolidated balance sheets, and our share of
earnings or losses in the joint venture is reported as equity in net income or loss of joint venture in the consolidated statements
of operations. We currently have no remaining investment, but still expect equity distributions from time to time. Lease Obligations We lease land,
buildings, vehicles and certain equipment under non-cancellable operating leases. Since February 2009, we have leased
our corporate headquarters in Houston, Texas, under a non-cancellable operating lease. As of August 1, 2016, we assigned our lease
for our corporate headquarters to the company we had previously sub-leased a portion of our office space to. Deep Down Delaware
leases indoor manufacturing space and leases office, warehouse and operating space in Houston, Texas and in Morgan City, Louisiana,
under a non-cancellable operating lease. As a result of the consolidation of Mako Technology, LLC’s operations into Deep
Down Delaware in August 2012, in December 2012, we sub-leased our leased property in Morgan City, Louisiana to a third party.
This lease expired on May 31, 2016 and we did not renew it. Additionally, we lease space in Mobile, Alabama to house our 3.4 ton
carousel system. We also lease certain office and other operating equipment under capital leases; the related assets are included
with property, plant and equipment on the consolidated balance sheets. At the inception
of a lease, we evaluate the agreement to determine whether the lease will be accounted for as an operating or capital lease. The
term of the lease used for such an evaluation includes renewal option periods only in instances in which the exercise of the renewal
option can be reasonably assured and failure to exercise such option would result in an economic penalty. Revenue
Recognition We recognize
revenue once the following four criteria are met: (i) persuasive evidence of an arrangement exists; (ii) delivery of the equipment
has occurred or services have been rendered, (iii) the price of the equipment or service is fixed or determinable and (iv) collectability
of the related receivable is reasonably assured. Service revenue is recognized as the service is provided, and time and materials
contracts are billed on a bi-weekly or monthly basis as costs are incurred. Customer billings for shipping and handling charges
are included in revenue. Revenues are recorded net of sales taxes. From time to
time, we enter into fixed-price contracts. The percentage-of-completion method is used as a basis for recognizing revenue on these
contracts. We recognize revenue as costs are incurred because we believe the incurrence of cost reasonably reflects progress made
toward project completion. Provisions for
estimated losses on uncompleted large fixed-price contracts (if any) are recorded in the period in which it is determined it is
more likely than not a loss will be incurred. Changes in job performance, job conditions, and total contract values may
result in revisions to costs and income and are recognized in the period in which the revisions are determined. Unapproved
change orders are accounted for in revenue and cost when it is probable that the costs will be recovered through a change in the
contract price. In circumstances where recovery is considered probable but the revenues cannot be reliably estimated, costs attributable
to change orders are deferred pending determination of contract price. 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. Assets and liabilities
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. Income
Taxes We follow the
asset and liability method of accounting for income taxes. This method takes into account the differences between financial statement
treatment and tax treatment of certain transactions. Deferred tax assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective
tax bases. Deferred tax assets and liabilities are measured using tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered or settled. The effect of a change in tax rates is recognized as
income or expense in the period that includes the enactment date. We record a valuation
allowance to reduce the carrying value of our deferred tax assets when it is more likely than not that some or all of the deferred
tax assets will expire before realization of the benefit or that future deductibility is not probable. The ultimate realization
of the deferred tax assets depends upon our ability to generate sufficient taxable income of the appropriate character in the
future. This requires management to use estimates and make assumptions regarding significant future events such as the taxability
of entities operating in the various taxing jurisdictions. In evaluating our ability to recover our deferred tax assets, we consider
all reasonably available positive and negative evidence, including our past operating results, the existence of cumulative losses
in the most recent years and our forecast of future taxable income. In estimating future taxable income, we develop assumptions,
including the amount of future state, and federal pre-tax operating income, the reversal of temporary differences and the implementation
of feasible and prudent tax planning strategies. These assumptions require significant judgment. When the likelihood of the realization
of existing deferred tax assets changes, adjustments to the valuation allowance are charged in the period in which the determination
is made, either to income or goodwill, depending upon when that portion of the valuation allowance was originally created. We record an
estimated tax liability or tax benefit for income and other taxes based on what we determine will likely be paid in the various
tax jurisdictions in which we operate. We use our best judgment in the determination of these amounts. However, the liabilities
ultimately realized and paid are dependent upon various matters, including resolution of tax audits, and may differ from amounts
recorded. An adjustment to the estimated liability would be recorded as a provision or benefit to income tax expense in the period
in which it becomes probable that the amount of the actual liability or benefit differs from the recorded amount. Our future effective
tax rates could be adversely affected by changes in the valuation of our deferred tax assets or liabilities or changes in tax
laws or interpretations thereof. If and when our deferred tax assets are no longer fully reserved, we will begin to provide for
taxes at the full statutory rate. In addition, we are subject to the examination of our income tax returns by the Internal Revenue
Service and other tax authorities. We regularly assess the likelihood of adverse outcomes resulting from these examinations to
determine the adequacy of our provision for income taxes. Share-Based
Compensation We record share-based
awards exchanged for employee service at fair value on the date of grant and expense the awards in the consolidated statements
of operations over the requisite employee service period. Share-based compensation expense includes an estimate for
forfeitures and is generally recognized over the expected term of the award on a straight-line basis. At December 31,
2016, we had two types of share-based employee compensation: restricted stock. Key assumptions
used in the Black-Scholes model for stock option valuations include (1) expected volatility (2) expected term (3) discount
rate and (4) expected dividend yield. Volumes are low and small trades can have a major impact on prices, so we based our estimates
of volatility on a representative peer group consisting of companies in the same industry, with similar market capitalizations
and similar stage of development. Additionally, we continue to use the simplified method related to employee option grants. Earnings
or Loss per Common Share Basic earnings
or loss per common share (“EPS”) is calculated by dividing net earnings or loss by the weighted average number of
common shares outstanding for the period. Diluted EPS is calculated by dividing net earnings or loss by the weighted average number
of common shares and dilutive common stock equivalents (stock options) outstanding during the period. Diluted EPS reflects the
potential dilution that could occur if stock options and warrants to purchase common stock were exercised for shares of common
stock. In periods where losses are reported, the weighted-average number of common shares outstanding excludes common stock equivalents,
because their inclusion would be anti-dilutive. Recently
Issued Accounting Standards Not Yet Adopted In May 2014,
the Financial Accounting Standards Board (“FASB”) issued 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 and will not be exercising
early adoption. 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 July 2015,
the FASB issued ASU No. 2015-11, “Simplifying the Measurement of Inventory” (“ASU 2015-11”). ASU 2015-11
requires in scope inventory to be measured at the lower of cost and net realizable value rather than at the lower of cost or market
under existing guidance. The amendments in this ASU are effective for us beginning January 1, 2017. We do not anticipate the adoption
of ASU 2015-11 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)”. 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 2014-15 will have a material effect on our results
of operations and are still evaluating the impact on our financial position. In March 2016,
the FASB issued ASU No. 2016-09, “Improvements to Employee Share-Based Payment Accounting” (“ASU 2016-09”).
Among other amendments, ASU 2016-09 requires that excess tax benefits or deficiencies are recognized as income tax expense or
benefit in the income statement, gives an entity the ability to elect to estimate the number of awards that are expected to vest
or account for forfeitures as they occur and permits withholding up to the maximum statutory tax rates as the threshold to qualify
for equity classification. The guidance will become effective for us beginning January 1, 2017. We do not anticipate the adoption
of ASU 2014-15 will have a material effect on our financial position or results of operations. In October 2016,
the FASB 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 are effective for us on January 1, 2018. Early application is permitted. We are currently evaluating
the impact of this ASU on our consolidated financial statements. |
