| 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. At times 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, 2017 and 2016, we financed our capital needs through cash on hand and operating cash
flow. As of December 31, 2017, our working capital was $8.2 million, compared to $12 million as of December 31, 2016. Between
2008 and June 2016, we 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, 2017
and 2016. 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, 2017 and 2016, 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, and notes receivable. The carrying values of
cash, trade receivables and payables approximated their fair values at December 31, 2017 and 2016 due to their short-term maturities.
The carrying values of our notes receivable approximate their fair values at December 31, 2017 and 2016 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, 2017 and 2016, we estimated the allowance for doubtful accounts
requirement to be $10 and $10, respectively. Bad debt expense (credit) totaled $(22) and $167 for the years ended December 31,
2017 and 2016, respectively. Concentration
of Credit Risk As of December
31, 2017, three of our customers accounted for 37 percent, 17 percent and 12 percent of total trade accounts receivable. As of
December 31, 2016, three of our customers accounted for 66 percent, 7 percent and 5 percent of total trade accounts receivable. For the year
ended December 31, 2017, our five largest customers accounted for 61 percent, 11 percent, 10 percent, 3 percent and 3 percent
of total revenues. 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. The loss of one or more of these
customers could have a material impact on our results of operations and cash flows. Long-Lived
Assets Property,
plant and equipment is stated at cost, net of accumulated depreciation and amortization. Depreciation and amortization is computed
using the straight-line method over the estimated useful lives of the respective assets. Replacements and betterments are capitalized,
while maintenance and repairs are expensed as incurred. It is our policy to include amortization expense on assets acquired under
capital leases with depreciation expense on owned assets. Additionally, we record depreciation and amortization expense related
to revenue-generating assets as a component of cost of sales in the accompanying consolidated statements of operations. 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. 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 transferred
our lease to our subtenant and no longer have monthly lease costs. Deep Down Delaware leases indoor manufacturing space and leases
office, warehouse and operating space in Houston, Texas, under non-cancellable operating leases. 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 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, 2017, we
had one type 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 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 is effective for
us beginning January 1, 2018. The standard provides for different application methods during adoption. We evaluated the potential
impact this new pronouncement will have on our financial statements, and reviewed our existing contracts to identify any that
may be impacted by this standard. We are also evaluating new contracts we are negotiating to ensure compliance with this standard. We formed
a project team to implement the new revenue recognition standard and the team has scoped, identified the relevant revenue streams
and documented the procedures and control changes required to address the impacts that ASU 2014-09 may have on our business. Our
implementation efforts included the identification of revenue streams with similar contract structures, performing a detailed
review of key contracts by revenue stream and comparing historical policies and practices to the new standard. From our analyses,
we have identified two main revenue streams from contracts with customers: fixed-price contracts and service contracts. The Company’s
revenue recognition methodology for fixed price contracts does not materially change by the adoption of the new standard (over
time using cost to cost as an input measure of performance) and for service contracts (over time as services are incurred), which
principally charge on a day rate basis and are primarily short-term in nature. Therefore, based on the assessment, the Company
has determined the adoption of this ASU will not have a material impact on its consolidated financial statements. We have adopted
the new standard effective January 1, 2018 using the modified retrospective method of adoption. 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 2016-02 will have a material effect on our results
of operations. We are still evaluating the full impact on our financial position, but currently expect to change the way we account
for long-term leases. Upon adoption of the new standard, we expect to reflect leased assets and related lease liabilities on the
balance sheet. 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. The adoption of ASU 2016-16
will not have a material effect on our 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 evaluated the effect of ASU No. 2017-05 on our consolidated
financial statements and adopted ASU 2017-05 in conjunction with ASU 2014-09 effective January 1, 2018. The adoption of ASU 2017-05
will not have a material impact on our consolidated financial position or results of operations. 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. |
