Koil Energy Solutions, Inc. - Quarter Report: 2012 March (Form 10-Q)

deep_10q-033112.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

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

For the quarterly period ended March 31, 2012

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

Commission File No. 0-30351

DEEP DOWN, INC.

(Exact name of registrant as specified in its charter)

Nevada		75-2263732
(State or other jurisdiction of incorporation)		(I.R.S. Employer Identification No.)

8827 W. Sam Houston Pkwy N., Suite 100 Houston, Texas		77040
(Address of Principal Executive Office)		(Zip Code)

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

Not applicable

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

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ No ¨

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

Large accelerated filer ¨	Accelerated filer ¨

Non-accelerated filer ¨	Smaller reporting company þ

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).Yes ¨ No þ

At May 10, 2012, there were 204,073,732 shares outstanding of Common Stock, par value $0.001 per share.

IMPORTANT INFORMATION REGARDING THIS FORM 10-Q

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

Deep Down is the parent company to the following wholly-owned subsidiaries: Deep Down, Inc., a Delaware corporation (“Deep Down Delaware”); Mako Technologies, LLC, a Nevada limited liability company (“Mako”), since its acquisition effective December 1, 2007; Flotation Technologies, Inc., a Maine corporation (“Flotation”), since its acquisition effective May 1, 2008; and Deep Down International Holdings, LLC, a Nevada limited liability company (“DDIH”), since its formation in February 2009. Effective December 31, 2010, we engaged in a transaction in which all of the operating assets and substantially all of the liabilities of Flotation were contributed, along with other contributions we made, to a joint venture entity named Cuming Flotation Technologies, LLC (“CFT”), in return for a 20 percent common unit ownership interest in CFT. For a more detailed explanation of this transaction, refer to our Annual Report on Form 10-K for the fiscal year ended December 31, 2010, filed with the Securities and Exchange Commission (“SEC” or the “Commission”) on April 15, 2011 and to our Current Report on Form 8-K, filed with the SEC on October 14, 2011. This transaction impacts the presentation of our financial condition and results of operations because it means that the operations of Flotation are no longer included in such presentation for periods beginning January 1, 2011, except on the basis of our 20 percent common unit ownership interest in CFT. However, the operations of Flotation will continue to be fully included in our presentation of historical information for periods ended December 31, 2010 and prior (since the acquisition of Flotation in 2008).

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

Readers should consider the following information as they review this Quarterly Report on Form 10-Q:

Forward-Looking Statements

The statements contained or incorporated by reference in this Quarterly Report on Form 10-Q that are not historical facts are “forward-looking statements” (as such term is defined in the Private Securities Litigation Reform Act of 1995), within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). All statements other than statements of historical fact are, or may be deemed to be, forward-looking statements. Forward-looking statements include any statement that may project, indicate or imply future results, events, performance or achievements. The forward-looking statements contained herein are based on current expectations that involve a number of risks and uncertainties. These statements can be identified by the use of forward-looking terminology such as “believes,” “expect,” “may,” “will,” “should,” “intend,” “plan,” “could,” “estimate” or “anticipate” or the negative thereof or other variations thereon or comparable terminology, or by discussions of strategy that involve risks and uncertainties.

Given the risks and uncertainties relating to forward-looking statements, investors should not place undue reliance on such statements. Forward-looking statements included in this Quarterly Report on Form 10-Q speak only as of the date of this Report and are not guarantees of future performance. Although we believe that the expectations reflected in the forward-looking statements are reasonable, such expectations may prove to be incorrect. All subsequent written and oral forward-looking statements attributable to us, or persons acting on our behalf, are expressly qualified in their entirety by these cautionary statements.

Document Summaries

Descriptions of documents and agreements contained in this Quarterly Report on Form 10-Q are provided in summary form only, and such summaries are qualified in their entirety by reference to the actual documents and agreements filed as exhibits to our Annual Report on Form 10-K for the year ended December 31, 2011, other periodic and current reports we file with the SEC or this Quarterly Report on Form 10-Q.

Access to Filings

Access to our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments thereto, filed with or furnished to the SEC pursuant to Section 13(a) of the Exchange Act, as well as reports filed electronically pursuant to Section 16(a) of the Exchange Act, may be obtained through our website (http://www.deepdowncorp.com) as soon as reasonably practicable after we have electronically filed or furnished such material with the SEC. The contents of our website are not, and shall not be deemed to be, incorporated into this Report.

TABLE OF CONTENTS

PART I. FINANCIAL INFORMATION

		Page No.

Item 1.	Financial Statements
	Unaudited Condensed Consolidated Balance Sheets at March 31, 2012 and December 31, 2011	1
	Unaudited Condensed Consolidated Statements of Operations for the Three Months Ended March 31, 2012 and 2011	2
	Unaudited Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2012 and 2011	3
	Notes to Unaudited Condensed Consolidated Financial Statements	4
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	10
Item 4.	Controls and Procedures	14

PART II. OTHER INFORMATION

Item 1.	Legal Proceedings	15
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	15
Item 5.	Other Information	15
Item 6.	Exhibits	16

Signatures		17
Exhibit Index		18

iii

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

DEEP DOWN, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

(In thousands, except par value amounts)
ASSETS
Current assets:	March 31, 2012			December 31, 2011
Cash and cash equivalents	$	4,231		$	4,979
Accounts receivable, net of allowance of $48 and $27, respectively		4,692			5,854
Inventory		232			232
Costs and estimated earnings in excess of billings on uncompleted contracts		315			84
Prepaid expenses and other current assets		174			262
Total current assets		9,644			11,411
Property, plant and equipment, net		13,409			12,036
Investment in joint venture		1,055			1,163
Intangibles, net		2,421			2,502
Goodwill		4,916			4,916
Other assets		473			416
Total assets	$	31,918		$	32,444

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities	$	2,112		$	2,566
Billings in excess of costs and estimated earnings on uncompleted contracts		1,847			1,767
Deferred revenues		58			260
Current portion of long-term debt		1,156			2,893
Total current liabilities		5,173			7,486
Long-term debt, net		2,177			173
Total liabilities		7,350			7,659

Commitments and contingencies (Note 10)

Stockholders' equity:
Preferred stock, $0.001 par value, 10,000 shares authorized, 0 shares issued and outstanding, respectively		-			-
Common stock, $0.001 par value, 490,000 shares authorized, 204,074 and 204,874 shares, respectively, issued and outstanding		204			205
Additional paid-in capital		63,393			63,309
Accumulated deficit		(39,029	)		(38,729	)
Total stockholders' equity		24,568			24,785
Total liabilities and stockholders' equity	$	31,918		$	32,444

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

DEEP DOWN, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

		For the Three Months Ended
		March 31,
(In thousands, except per share amounts)		2012			2011

Revenues		$	4,873		$	6,284
Cost of sales:
	Cost of sales		2,622			4,814
	Depreciation expense		316			282
	Total cost of sales		2,938			5,096
Gross profit			1,935			1,188
Operating expenses:
	Selling, general and administrative		1,969			2,572
	Depreciation and amortization		149			166
	Total operating expenses		2,118			2,738
Operating loss			(183	)		(1,550	)
Other income (expense):
	Interest expense, net		(52	)		(90	)
	Equity in net loss of joint venture		(108	)		(114	)
	Other, net		47			10
	Total other expense		(113	)		(194	)
Loss before income taxes			(296	)		(1,744	)
Income tax expense			(4	)		(15	)
Net loss		$	(300	)	$	(1,759	)

Net loss per share, basic and diluted		$	(0.00	)	$	(0.01	)
Weighted-average common shares outstanding, basic and diluted			204,619			206,655

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

DEEP DOWN, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

	For the Three Months Ended
	March 31,
(In thousands)	2012			2011
Cash flows from operating activities:
Net loss	$	(300	)	$	(1,759	)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Equity in net loss of joint venture		108			114
Share-based compensation		131			131
Forgiveness of debt		(10	)		-
Bad debt expense		45			-
Depreciation and amortization		465			448
Gain on disposal of property, plant and equipment		(47	)		(10	)
Changes in assets and liabilities:
Accounts receivable		1,117			1,038
Inventory		-			53
Costs and estimated earnings in excess of billings on uncompleted contracts		(231	)		(53	)
Prepaid expenses and other current assets		88			(8	)
Other assets		68			11
Accounts payable and accrued liabilities		(454	)		(1,505	)
Deferred revenues		(202	)		85
Billings in excess of costs and estimated earnings on uncompleted contracts		80			(216	)
Net cash provided by (used in) operating activities		858			(1,671	)

Cash flows from investing activities:
Purchases of property, plant and equipment		(550	)		(499	)
Proceeds from sale of property, plant and equipment		67			10
Cash paid for patents		(27	)		-
Cash paid for exclusive product rights		(125	)		-
Cash paid for capitalized software		-			(19	)
Repayments on note receivable		-			4
Net cash used in investing activities		(635	)		(504	)

Cash flows from financing activities:
Cash paid for purchase of common stock		(48	)		-
Repayments of long-term debt		(923	)		(274	)
Net cash used in financing activities		(971	)		(274	)
Change in cash and equivalents		(748	)		(2,449	)
Cash and cash equivalents, beginning of period		4,979			3,730
Cash and cash equivalents, end of period	$	4,231		$	1,281

Supplemental schedule of significant noncash transactions:
Property, plant and equipment acquired via capital lease	$	1,200		$	-

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

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands except per share amounts)

NOTE 1: BASIS OF PRESENTATION

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements of Deep Down, Inc. and its 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 footnotes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2011, filed on March 29, 2012 with the Commission.

Preparation of financial statements in conformity with US GAAP requires 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 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.

Principles of Consolidation

The unaudited condensed consolidated financial statements presented herein include the accounts of Deep Down, Inc. and its wholly-owned subsidiaries. Our investment in a joint venture is accounted for using the equity method. All material intercompany accounts and transactions have been eliminated in consolidation.

Segments

For the three months ended March 31, 2012 and 2011, our operating segments, Deep Down Delaware and Mako, have been aggregated into a single reporting segment. While the operating segments have different product lines, they are very similar. They are both service-based operations revolving around our personnel’s expertise in the deepwater and ultra-deepwater industry, and any equipment is produced to a customer specified design and engineered using Deep Down personnel’s expertise, with installation and project management as part of our service revenue to the customer. Additionally, the operating segments have similar customers and distribution methods, and their economic characteristics are similar with regard to their gross margin percentages. Our operations are located in the United States, although we occasionally generate sales to international customers.

Subsequent Events

We have evaluated subsequent events from April 1, 2012 through the date of this Report. See Note 13, “Subsequent Events”, for a discussion of an event which occurred subsequent to March 31, 2012 which requires additional disclosure in this Report.

NOTE 2: LIQUIDITY AND FINANCIAL CONDITION

On October 12, 2011, we received a cash distribution of $6,375 from Cuming Flotation Technologies, LLC, a Delaware limited liability company (“CFT”) in which we own a 20 percent common unit ownership interest. We believe the receipt of this cash distribution, in addition to cash we expect to generate from operations, should ensure that we will have adequate liquidity to meet our future operating requirements.

Historically, we have supplemented the financing of our capital requirements through a combination of debt and equity transactions. Most significant in this regard has been the credit facility we have maintained with Whitney Bank (“Whitney”). Our loans outstanding under our existing credit agreement with Whitney became due April 15, 2012. We have negotiated an extension of the due date of our loans from Whitney to April 15, 2013. We believe we will have sufficient liquidity to be able to repay these loans, plus accrued interest thereon, monthly as scheduled through April 15, 2013.

We had working capital of $4,471 at March 31, 2012.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands except per share amounts)

NOTE 3: 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 and cash equivalents, trade receivables and payables, and debt instruments. The carrying values approximate their fair values due to the short-term maturities of these instruments.

NOTE 4: BILLINGS IN EXCESS OF COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS AND DEFERRED REVENUES

The components of billings in excess of costs and estimated earnings on uncompleted contracts are summarized below:

	March 31, 2012			December 31, 2011
Costs incurred on uncompleted contracts	$	1,320		$	473
Estimated earnings on uncompleted contracts		654			179
		1,974			652
Less: Billings to date on uncompleted contracts		(3,506	)		(2,335	)
	$	(1,532	)	$	(1,683	)

Included in the accompanying condensed consolidated balance sheets under the following captions:
Costs and estimated earnings in excess of billings on uncompleted contracts	$	315		$	84
Billings in excess of costs and estimated earnings on uncompleted contracts		(1,847	)		(1,767	)
	$	(1,532	)	$	(1,683	)

The balance in billings in excess of costs and estimated earnings on uncompleted contracts at March 31, 2012 and December 31, 2011 consisted of significant unearned milestone billings on fixed-price contracts.

NOTE 5: INVESTMENT IN JOINT VENTURE

Effective December 31, 2010, we engaged in a transaction in which all of the operating assets and substantially all of the liabilities of Flotation were contributed, along with other contributions we made, to a joint venture entity named Cuming Flotation Technologies, LLC, in return for a 20 percent common unit ownership interest in CFT.

The components of our Investment in joint venture are summarized below:

Investment in joint venture, December 31, 2011	$	1,163
Equity in net loss of CFT for the three months ended March 31, 2012		(108	)
Investment in joint venture, March 31, 2012	$	1,055

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands except per share amounts)

Summary joint venture financial data is as follows:

	For the Three Months Ended
	March 31,
	2012		2011

Revenues	$	1,344	$	31,528

Gross profit	$	135	$	7,200

Net loss	$	540	$	569

NOTE 6: PROPERTY, PLANT AND EQUIPMENT

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

							Range of
	March 31, 2012			December 31, 2011			Asset Lives
Land	$	1,492		$	1,492			-
Buildings and improvements		1,540			1,540		7 - 36 years
Leasehold improvements		221			221		2 - 5 years
Equipment		13,359			12,113		2 - 30 years
Furniture, computers and office equipment		1,167			1,101		2 - 8 years
Construction in progress		822			440			-
Total property, plant and equipment		18,601			16,907
Less: Accumulated depreciation		(5,192	)		(4,871	)
Property, plant and equipment, net	$	13,409		$	12,036

NOTE 7: LONG-TERM DEBT

The components of long-term debt are summarized below:

	March 31, 2012			December 31, 2011
Secured credit agreement - Whitney Bank	$	1,970		$	2,342
6% Subordinated debenture		-			210
Capital lease obligations		1,363			514
Total debt		3,333			3,066
Less: Current portion of long-term debt		(1,156	)		(2,893	)
Long-term debt, net of current portion	$	2,177		$	173

Whitney Credit Agreement

We originally entered into our credit agreement with Whitney in November 2008 to provide us with revolving and letter of credit facilities for our operations. In December 2008, we amended the credit agreement to add a term loan in the principal amount of $1,150 to purchase certain equipment. Thereafter, we further amended the credit agreement in May 2009 to add another term loan in the principal amount of $2,100 to purchase our operating facility in Channelview, Texas (the “RE Term Loan”). Whitney possesses a first priority lien on all of our and our subsidiaries’ assets and properties, including the real property in Channelview, to secure all of the outstanding indebtedness under the credit agreement.

In April 2010, we amended and restated our credit agreement with Whitney. As part of such amendment and restatement we generally established new maturity dates and payment terms regarding the outstanding indebtedness under the credit agreement. Pursuant to the terms of such amendment and restatement, interest for all principal amounts outstanding under the credit agreement accrued at a rate of 6.5 percent per annum.

At the time of such amendment and restatement, we had $850 outstanding under the revolving line of credit of the credit agreement. Per the terms of the amended and restated credit agreement this amount was converted to a further term loan requiring repayment in monthly installments of $40, plus the amount of accrued and unpaid interest, with a final balloon payment of unpaid amounts to be made at maturity on April 15, 2011.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands except per share amounts)

With regard to the RE Term Loan, the amended and restated credit agreement further established a monthly payment of $18, and a final balloon payment of unpaid amounts to be made at maturity on April 15, 2011.

Under the amended and restated credit agreement, the repayment terms of the December 2008 term loan required a monthly payment of $35, and a final balloon payment of unpaid amounts to be made at maturity on April 15, 2011.

On April 14, 2011, we further amended and restated the credit agreement to extend the maturity dates of the indebtedness thereunder from April 15, 2011 to April 15, 2012. Under such extensions, the final payments of the December 2008 and April 2010 term loans were made during the three months ended March 31, 2012. Under the terms of the extension, the RE Term Loan required a balloon payment of approximately $1,820 on April 15, 2012.

On June 9, 2011, we further amended and restated the credit agreement with Whitney to extend further credit in the form of a single advance term loan in the amount of $800 for the purpose of effecting the purchase of 8,350 shares of the Company’s outstanding common stock (the “Acquisition Term Loan”). Once purchased, these shares were retired and removed from the number of shares outstanding. Outstanding principal of the additional term loan accrued interest at a rate of 6.5 percent per annum; the Company was obligated to make repayment in monthly installments of $65, plus the amount of accrued and unpaid interest beginning July 1, 2011. The Acquisition Term Loan, the balance of which was $150 as of March 31, 2012, was scheduled to mature on April 15, 2012, along with all of the indebtedness outstanding at such time under the amended and restated credit agreement. In addition, under this amendment, Whitney agreed to reduce the requirement of the tangible net worth covenant under the credit agreement to be $13,000 from a previous amount of $15,000.

On May 14, 2012, we further amended our existing credit agreement with Whitney. See Note 13, “Subsequent Events” for further information.

As of March 31, 2012, the outstanding principal balances of the Acquisition Term Loan and RE Term Loan were $150 and $1,820, respectively.

The amended and restated credit agreement obligates us to comply with the following financial covenants:

Leverage Ratio - The ratio of total debt to consolidated EBITDA must be less than 3.0 to 1.0.

Fixed Charge Coverage Ratio - The ratio of consolidated EBITDA to consolidated net interest expense, plus principal payments on total debt, must be greater than 1.5 to 1.0.

Tangible Net Worth - Our consolidated net worth, after deducting other assets as are properly classified as “intangible assets,” plus 50 percent of net income, after provision for taxes, must be in excess of $13,000.

Moreover, we continue to have obligations for other covenants, including, among others, limitations on issuance of common stock, liens, transactions with affiliates, additional indebtedness and permitted investments.

As of March 31, 2012, we were in compliance with all of the aforementioned financial covenants.

Other Debt

We had a subordinated debenture in the original outstanding principal amount of $500 that originated from the exchange of preferred stock in a prior year. The subordinated debenture had a fixed interest rate of 6.0 percent per annum, and interest was required to be paid annually on March 31st. The subordinated debenture matured on March 31, 2011 and we made the payment of accrued interest as required. However, we agreed to terms for an extension of the maturity of the subordinated debenture to May 2012. On February 8, 2012, we settled the remaining $160 balance of the subordinated debenture for a cash payment of $150. The holder of the subordinated debenture forgave the remaining $10 principal balance.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands except per share amounts)

NOTE 8: SHARE-BASED COMPENSATION

We have a share-based compensation plan, the “2003 Directors, Officers and Consultants Stock Option, Stock Warrant and Stock Award Plan” (the “Plan”). Share-based compensation, and the corresponding income tax benefit related to the expense, is recognized as provided under the applicable authoritative guidance which requires all share-based payments to employees, including grants of employee stock options, to be recognized as compensation expense over the requisite vesting periods based on their fair values. The impact of forfeitures that may occur prior to vesting is also estimated and considered in the amount recognized. In addition, the realization of tax benefits in excess of amounts recognized for financial reporting purposes will be recognized as a financing activity. The options granted under the Plan have vesting periods that range from immediate vesting to vesting over five years, and the contract terms of the options granted are up to ten years. We expense all stock options on a straight-line basis, net of estimated forfeitures, over the requisite vesting periods.

Summary of Shares of Non-Vested Stock (also commonly referred to as restricted stock)

For the three months ended March 31, 2012 and 2011, we recognized a total of $30 and $28, respectively, of share-based compensation expense related to all outstanding shares of non-vested stock, which is included in selling, general and administrative expenses in the accompanying condensed consolidated statements of operations. The unamortized portion of the estimated fair value of non-vested stock was $23 at March 31, 2012.

Summary of Stock Options

During the three months ended March 31, 2012, 333 unexercised stock options, previously granted to an executive in May 2010, were cancelled due to the resignation of the executive in November 2011. For the three months ended March 31, 2012 and 2011, we recognized a total of $101 and $103, respectively, of share-based compensation expense related to all outstanding options, which is included in selling, general and administrative expenses in the accompanying condensed consolidated statements of operations. The unamortized portion of the estimated fair value of outstanding stock options was $301 at March 31, 2012.

NOTE 9: INCOME TAXES

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, at March 31, 2012 management has recorded a full deferred tax asset valuation allowance.

NOTE 10: COMMITMENTS AND CONTINGENCIES

Litigation

From time to time, we are involved in legal proceedings arising in the normal course of business. As of the date of this Report, we are not currently involved in any material actual or pending legal proceedings.

Operating Leases

We lease certain offices, facilities, equipment and vehicles under non-cancellable operating and capital leases expiring at various dates through 2016.

Letters of Credit

Certain of our customers could require us to issue a standby letter of credit (“LC”) in the ordinary course of business to ensure performance under terms of a contract or as a form of product warranty. The beneficiary could demand payment from the issuing bank for the amount of the outstanding letter of credit. There were $500 in performance-related LC’s outstanding and $592 in warranty-related LC’s outstanding at both March 31, 2012 and December 31, 2011.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands except per share amounts)

NOTE 11: EARNINGS PER COMMON SHARE

Basic earnings per share (“EPS”) is calculated by dividing net income (loss) by the weighted-average number of common shares outstanding for the period. Diluted EPS is calculated by dividing net income (loss) by the weighted-average number of common shares and dilutive common stock equivalents (warrants, 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. There were no potentially dilutive securities for the three months ended March 31, 2012 and 2011 that were included in the computation of diluted earnings per share because their effect would have been anti-dilutive or the exercise price for the outstanding warrants and options exceeded the average market price for our common stock.

NOTE 12: STOCKHOLDERS’ EQUITY

Common Stock

The number of shares of common stock outstanding is as follows:

Balance, December 31, 2011	204,874

Shares purchased and retired, March 2, 2012	(800	)

Balance, March 31, 2012	204,074

On March 2, 2012, we completed the acquisition of 800 shares of our common stock in a private purchase transaction. We paid $48 from cash on hand, to the seller in consideration for all of such seller’s shares of stock in Deep Down. The per share purchase price of $0.06 represented a per share amount 14 percent below the closing price of Deep Down’s common stock on that day.

NOTE 13: SUBSEQUENT EVENTS

On May 14, 2012, we entered into a Fourth Amendment to Amended and Restated Credit Agreement (“Fourth Amended Credit Agreement”) with Whitney effective as of April 15, 2012. The Fourth Amended Credit Agreement (i) converted the term loan of $1,150 to a revolving loan and increased the amount to $2,000 (“Revolving Loan”), (ii) extended the maturity dates of the Revolving Loan, the RE Term Loan and the Acquisition Term Loan to April 15, 2013, (iii) and lowered the interest rate of all loans from 6.5 percent to a 4 percent fixed rate.

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 Form 10-K for the fiscal year ended December 31, 2011, filed with the Securities and Exchange Commission on March 29, 2012 and our unaudited condensed consolidated financial statements and notes thereto included with this Quarterly Report on Form 10-Q in Part I. Item 1. “Financial Statements.”

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. Our 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.

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, unless otherwise indicated.

Industry and Executive Outlook

During the three months ended March 31, 2012, our subsea solutions services performed robustly due to continued strong demand for our technologically innovative solutions. We expect this strong demand to continue during the remainder of 2012 and beyond, as evidenced by the addition of more than $10,000 of backlog.

During the three months ended March 31, 2012, our ROV and topside equipment rental services was adversely affected by decreased demand caused by the slow permitting process impacting offshore installation and construction activities in the Gulf of Mexico. We believe the permitting process is improving, which we anticipate will benefit our operating results for the remainder of 2012 and beyond.

Although the financial markets, which are critical to the funding of major offshore and deepwater projects, have displayed signs of instability, we continue to see a general increase in demand for our suite of products and services, both domestically and internationally.

The deepwater and ultra-deepwater industry remains one of the best frontiers for adding large hydrocarbon reserves with high production flow rates. We are well positioned to supply services and products required to support safe offshore and deepwater projects of our customers. We anticipate demand for our deepwater and ultra-deepwater services and products will continue to grow and we will continue to focus on this sector of the industry worldwide.

For the remainder of 2012 and beyond, our focus remains on successful execution of our projects, obtaining new project awards and effective cash management.

Recent Events

On May 14, 2012, we amended our existing credit agreement, to be effective as of April 15, 2012, to extend the maturity dates of the respective loans and a letter of credit facility under the Restated Credit Agreement by one year to April 15, 2013. In addition, the bank has lowered the rate of the loans from 6.5 percent to a 4.0 percent fixed rate and changed the $2,000 Revolving Line of Credit from a term loan to a revolving loan subject to availability under the agreement.

Results of Operations

Three Months Ended March 31, 2012 Compared to Three Months Ended March 31, 2011

Revenues. Revenues for the three months ended March 31, 2012 were $4,873. Revenues for the three months ended March 31, 2011 were $6,284. The $1,411 decrease in revenues in the 2012 period compared to the 2011 period was due primarily to a $925 reduction caused by decreased demand for our ROV and topside equipment rental services. During the three months ended March 31, 2011, we were still renting equipment and performing services related to the Macondo well spill cleanup activities.

Gross Profit. Gross profit for the three months ended March 31, 2012 was $1,935, or 40 percent of revenues. Gross profit for the three months ended March 31, 2011 was $1,188, or 19 percent of revenues. The $747, or 21 percentage-point, increase in gross profit in the 2012 period compared to the 2011 period was due primarily to a $1,153 increase related to our subsea solutions operating segment, due to strong demand for our services. This was partially offset by a $406 decrease related to our ROV and topside equipment rental operating segment due, as previously mentioned, to much weaker demand in the 2012 period than in the 2011 period.

Selling, general and administrative expenses. Selling, general and administrative expenses (“SG&A”) for the three months ended March 31, 2012 was $1,969. SG&A for the three months ended March 31, 2011 was $2,572. The $603 decrease in SG&A in the 2012 period compared to the 2011 period was due primarily to a reduction in accounting and auditing fees. The 2011 period included accounting and auditing fees associated with the restatement of the company’s 2010 quarterly financial statements and resultant increased scope related to the 2010 audit of the company’s annual financial statements.

Depreciation and amortization expense. Depreciation and amortization expense (“D&A”) for the three months ended March 31, 2012 was $149, consisting of amortization expense of $108, and non-cost of sales depreciation expense of $41. D&A for the three months ended March 31, 2011 was $166, consisting of amortization expense of $103, and non-cost of sales depreciation expense of $63. The amortization relates to our intangible assets and the depreciation relates to property, plant and equipment not used in the generation of revenue.

Interest expense, net. Interest expense, net was $52 for the three months ended March 31, 2012. Interest expense, net was $90 for the three months ended March 31, 2011. Net interest expense for each period was generated by outstanding bank debt, capital lease obligations and our subordinated debenture, offset by interest income earned on cash and short-term investments. The $38 decrease in the 2012 period compared to the 2011 period is due primarily to the company having lower average interest-bearing obligations in the 2012 period than in the 2011 period.

Equity in net loss of joint venture. Equity in net loss of joint venture was $108 for the three months ended March 31, 2012. Equity in net loss of joint venture was $114 for the three months ended March 31, 2011. The CFT joint venture lost $540 during the first three months of 2012. The $540 was comprised of approximately $180 in loss incurred by the joint venture parent, plus an additional $360 in losses incurred by the joint venture’s operating subsidiaries.

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 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, 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 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 loss to Modified EBITDA for the three months ended March 31, 2012 and 2011:

	For the Three Months Ended
	March 31,
	2012			2011
Net loss	$	(300	)	$	(1,759	)
Add back interest expense, net of interest income		52			90
Add back depreciation and amortization		465			448
Add back income tax expense		4			15
Add back share-based compensation		131			131
Add back equity in net loss of joint venture		108			114
Modified EBITDA	$	460		$	(961	)

Modified EBITDA for the three months ended March 31, 2012 was $460. Modified EBITDA for the three months ended March 31, 2011 was $(961). Modified EBITDA increased $1,421 from the 2011 period to the 2012 period primarily due to increased gross profit before depreciation expense of $781 and reduced SG&A before share-based compensation expense of $603.

Liquidity and Capital Resources

Overview

As a deepwater service provider, our revenue, profitability, cash flows, and future rate of growth are substantially dependent on the condition of the oil and gas industry generally, and our customers’ ability to invest capital for offshore exploration, drilling and production, and to 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 payment by a significant customer 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.

Our credit agreement with Whitney obligates us to comply with the following financial covenants, which we were in compliance with as of March 31, 2012:

Leverage Ratio - The ratio of total debt to consolidated EBITDA must be less than 3.0 to 1.0; actual Leverage Ratio at March 31, 2012: 0.47 to 1.0.

Fixed Charge Coverage Ratio - The ratio of consolidated EBITDA to consolidated net interest expense, plus principal payments on total debt, must be greater than 1.5 to 1.0; actual Fixed Charge Coverage Ratio as of March 31, 2012: 2.62 to 1.0.

We had working capital of $4,471 at March 31, 2012.

Critical Accounting Policy Updates

The discussion and analysis of our financial condition and results of operations is based on our unaudited condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. 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 and estimated earnings incurred in excess of billings on uncompleted contracts, impairments of long-lived assets, including intangibles and goodwill, income taxes including the valuation allowance for deferred tax assets, billings in excess of costs 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.

Refer to Part II. Item 2 “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, 2011 for a discussion of our Critical Accounting Policies.

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 is material to investors.

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.

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 March 31, 2012, 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 March 31, 2012.

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 of March 31, 2012, based on criteria issued 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 of March 31, 2012.

Changes in Internal Control Over Financial Reporting. The Company’s management, with the participation of the principal executive and principal financial officer, have concluded that there were no changes in internal control over financial reporting during the fiscal quarter ended March 31, 2012.

PART II. – OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

From time to time, we are involved in legal proceedings arising in the normal course of business. As of the date of this Quarterly Report on Form 10-Q, we are currently not involved in any pending, material legal proceedings.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

ISSUER PURCHASES OF EQUITY SECURITIES

Period	Total Number of Shares (or Units) Purchased (1)	Average Price Paid per Share (or Unit)	Total Number of Shares (or Units) Purchased as Part of Publicly Announced Plans or Programs	Maximum Number (or Approximate Dollar Amount) of Shares (or Units) that May Yet Be Purchased Under the Plans or Programs
Jan 2012 (1/1-1/31)	--	--	--	--
Feb 2012 (2/1-2/29)	--	--	--	--
Mar 2012 (3/1-3/31) (1)	800,000	$ 0.06	--	--
Total	800,000	$ 0.06	--	--

(1) On March 2, 2012, Deep Down completed the acquisition of 800,000 shares of its common stock in a private purchase transaction. Deep Down paid $48,000 to the seller in consideration for all of such seller’s shares of stock in Deep Down. The per share purchase price of $0.06 represented a per share amount 14 percent below the $0.07 current market price of our common stock in the over-the-counter market on March 2, 2012. Deep Down paid the entire purchase price from cash on hand.

ITEM 5. OTHER INFORMATION

On May 14, 2012, Deep Down entered into a Fourth Amendment to Amended and Restated Credit Agreement (“Fourth Amended Credit Agreement”) with Whitney effective as of April 15, 2012. The Fourth Amended Credit Agreement (i) converted the term loan of $1,150,000 to a revolving loan and increased the amount to $2,000,000 (“Revolving Loan”), (ii) extended the maturity dates of the Revolving Loan, the RE Term Loan and the Acquisition Term Loan to April 15, 2013, and (iii) and lowered the interest rate of all loans from six and one-half percent (6.5%) to a four percent (4%) fixed rate.

ITEM 6. EXHIBITS

Exhibits required to be attached by Item 601 of Regulation S-K are listed in the Index of Exhibits of this Quarterly Report on Form 10-Q, which is incorporated herein by reference.

3.1	Articles of Incorporation of Deep Down, Inc. (conformed to include the amendment of the Articles of Incorporation filed with the Secretary of State of the State of Nevada on September 29, 2008) (incorporated by reference from Exhibit A to our Schedule 14C filed on August 15, 2008).

3.2	Amended and Restated ByLaws of Deep Down, Inc. (incorporated by reference from Exhibit B to our Schedule 14C filed on August 15, 2008).

10.1*

Fourth Amendment to Amended and Restated Credit Agreement, dated as of April 15, 2012, by and among Deep Down, Inc. and Whitney Bank.

31.1*

Certification of Ronald E. Smith, President and Chief Executive Officer, furnished pursuant to Rules 13a-14(a) and 15d-14(a) of the Securities Exchange Act of 1934, as amended.

31.2*

Certification of Eugene L. Butler, Chief Financial Officer, furnished pursuant to Rules 13a-14(a) and 15d-14(a) of the Securities Exchange Act of 1934, as amended.

32*	Statement of Ronald E. Smith, President and Chief Executive Officer and Eugene L. Butler, Chief Financial Officer, furnished pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

101.INS*

XBRL Instance Document

101.SCH*

XBRL Schema Document

101.CAL

XBRL Calculation Linkbase Document

101.DEF

XBRL Definition Linkbase Document

101.LAB

XBRL Label Linkbase Document

101.PRE

XBRL Presentation Linkbase Document

______________________________

* Filed or furnished herewith.

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

DEEP DOWN, INC.

(Registrant)

Date: May 15, 2012

/s/ Eugene L. Butler

Eugene L. Butler

Executive Chairman and Chief Financial Officer

(Principal Financial Officer and Principal Accounting Officer)

INDEX TO EXHIBITS

3.1	Articles of Incorporation of Deep Down, Inc. (conformed to include the amendment of the Articles of Incorporation filed with the Secretary of State of the State of Nevada on September 29, 2008) (incorporated by reference from Exhibit A to our Schedule 14C filed on August 15, 2008).

3.2	Amended and Restated ByLaws of Deep Down, Inc. (incorporated by reference from Exhibit B to our Schedule 14C filed on August 15, 2008).

10.1*

Fourth Amendment to Amended and Restated Credit Agreement, dated as of April 15, 2012, by and among Deep Down, Inc. and Whitney Bank.

31.1*

Certification of Ronald E. Smith, President and Chief Executive Officer, furnished pursuant to Rules 13a-14(a) and 15d-14(a) of the Securities Exchange Act of 1934, as amended.

31.2*

Certification of Eugene L. Butler, Chief Financial Officer, furnished pursuant to Rules 13a-14 and 15d-14(a) of the Securities Exchange Act of 1934, as amended.

32*	Statement of Ronald E. Smith, President and Chief Executive Officer and Eugene L. Butler, Chief Financial Officer, furnished pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

101.INS*

XBRL Instance Document

101.SCH*

XBRL Schema Document

101.CAL

XBRL Calculation Linkbase Document

101.DEF

XBRL Definition Linkbase Document

101.LAB

XBRL Label Linkbase Document

101.PRE

XBRL Presentation Linkbase Document

______________________________

* Filed or furnished herewith.