Not Applicable

The following discussion of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and the notes to those consolidated financial statements appearing elsewhere in this Report. This discussion contains forward-looking statements that involve significant risks and uncertainties. As a result of many factors, our actual results may differ materially from those anticipated in our forward-looking statements.

General

Deep Down is an oilfield product and services company specializing in complex deepwater and ultra-deepwater support services and subsea distribution products used between the production facility and the wellhead. Our core services and technological solutions include distribution system installation support and engineering services, umbilical terminations, loose-tube steel flying leads, and related services.  Additionally, our highly experienced, specialized service teams can support subsea engineering, installation, commissioning, and maintenance projects located anywhere in the world. 

Industry and Executive Outlook

The oilfield services industry is dependent on the capital and operating expenditure programs of oil and gas companies. The decision for oil and gas companiesoperators to cut back or accelerate their exploration, drilling, and production operations is substantially driven by the overall condition of the oil and gas industry. TheThis industry has historically been characterized by fluctuations in oil and gas prices driven by a legionvariety of market forces; however, 2019 offered a glimpse of hope as offshore activity showed signs of recovery. The offshore drilling and production environment can be slower to react given the long-term nature of projects, but sustained periods of relative oil price stability permitted companies to move forward with certain offshore projects.forces.

AsBeginning in March of 2020, the energy industry encountered a result, the Company increased revenue and gross profitsignificant economic disruption caused by 17% and 42%, respectively, from 2018 to 2019. While we are encouraged by these improving results, the Company remains focused on continuing to grow revenue and exercise cost discipline.

The Company expects this progress will be challenged by recent global events that have applied significant pressure to oil prices. In particular, oil prices have reacted unfavorably to the spread of the COVID-19 virus, Russia’s decision notpandemic, which continues to follow the proposal to decrease oil production at the OPEC meeting in March 2020, and Saudi Arabia’s announcement shortly thereafter to flood the market with discounted oil.have an impact globally. The Company acknowledges that a sustained lowerthe low oil price environment could causecaused by the pandemic triggered exploration and production companies to either significantly reduce, delay, or delaycancel their operating and capital spending programs, especially when coupled with restricted travel to mitigate against the spread of COVID-19.

Deep Down’s revenue isrevenues are tied to offshore projects sanctioned by their customers, and these recent events could potentially cause delays for the Company’s existing projects as well as reduce the number of prospective projects awarded to the Company. A decline in offshore drilling and production activity could result in lower contract volumevolumes or delays in significant contracts, which could negatively impact our earnings and cash flows. During 2020, the Company’s operating performance was impacted by lower contract volume, customer project delays, travel restrictions, customer payment delays, and collectability issues. 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.

In light of recent developments in the oilOil and gas industry, with estimates of upoperators, equipment providers, and services companies had to a 35% reduction inquickly adapt to overcome the challenges presented by these unprecedented times. Deep Down was no exception. Our primary focus throughout 2020 was to control what we could control, which was our costs and our cash flows. During 2020, we implemented workforce reductions, temporary wage reductions, and rent abatements, and we limited capital expenditure budgets through the rest of the year, the Company has adjusted its strategy to prepare for a longer cycle of lower oil prices while maintaining adequate support for our existing projects.

In particular, the Company completed a strategic review in 2019, which included measures to manage costs by reducing its workforce and limiting overhead spendexpenditures and R&D efforts to only critical items. A key focus area was to streamline our selling, general and administrative (“SG&A”) expenses, which experienced a 30% decline year over year. Our efforts to improve our cost structure helped us generate a profit in the fourth quarter despite the economic environment continuing to slowly recover.

Additionally, the initial loan we received under the Paycheck Protection Program (“PPP”) in April 2020 supplemented our cash flows as revenues declined, and our second PPP loan in March 2021 is providing a needed buffer to fund working capital while we continue to strengthen our workforce. In addition,fact, we have been able to benefit from the Company is actively pursuing further cost reduction opportunitieslayoffs that occurred at other organizations and hire high caliber individuals who have a wealth of industry knowledge and experience, and who have already made a positive impact on ongoing operations.

During the first few months of 2021, we are beginning to preserve liquidity.see travel restrictions ease and have managed to safely send teams to different international locations. We are cautiously optimistic that the prevalence of vaccines will encourage different jurisdictions to continue easing travel requirements.

In July 2018,addition to the Company’s Boardincreased ability to travel for projects, we have also seen a progressive increase in bidding activity and execution of Directors initiatedcontract awards, the most notable of which has been the receipt of an order for the rental of one of our two carousels that are suitable for large umbilical or cable projects. The project will require us to erect the carousel on a reviewbarge and assist our customer with the transfer of strategic alternativesthree large umbilicals from the manufacturer’s facility to maximize shareholder value. Followinga different location where the conclusionumbilicals can be transferred to an installation vessel. From there, the umbilicals will be transported and installed offshore South America. Certain aspects of this project have not been performed before, which further solidifies our reputation as a service provider of choice for unique offshore installation projects. We envision a successful execution of this project will provide further opportunities to utilize our carousels in the future.

Looking towards the future, we continue to actively engage with a variety of companies on different aspects of the strategic review processtransition to renewable energy with increasing interest in August 2019,our installation capabilities, equipment, and knowledge of the Company’s founder resignedsubsea environment. There are a number of areas we see as potential growth opportunities, though the timing of these opportunities and associated cash flows is uncertain. As such, we are pursuing different partnerships especially around new technologies as we seek to pursue other business interests outsideleverage our core competencies to increase the oilmarket potential of our current product and gas industry. The Company subsequently made leadership changes, withservice offerings. We are also working on developing the next generation of our equipment by incorporating designs that utilize a reduced carbon footprint.

While increasing revenue remains our top priority, generating free cash flow and preservation of liquidity remains of critical importance in the current environment. We are keenly focused on the levers within our control, and we are seeing an increase in requests for short-cycle service work, an area where we have a proven track record. We, therefore, see this as an area of further growth for the Company. We also believe customers will continue to be heavily focused on efficiency and shorter lead times, without sacrificing quality and safety. We are confident our streamlined operations and renewed focus on growth ofour cost drivers will enable us to be the Company’s core business.primary choice for our customers.

Deep Down currently has a backlogWe maintain our commitment to ensuring we continuously enhance value for our shareholders, while being an employer of approximately $10 million worth of projects in-house, in addition to a number of projects which arechoice in the final stages of negotiations or yet to be awarded based on customer schedules. However, the Company notes that the service-related component of our revenue continues to increase compared to project-based work. Service-related work is typically short-term in nature and not represented in backlog. Even so, we are especially pleased by orders we have recently received from new customers, both domestic and international. Our efforts to increase the proportion of work we perform directly for operators and end-users have continued to bear fruit, with the majority of our new orders being directly from end-users.

The Company continues to invest, when appropriate, in a variety of assets for use in its production facility. Concurrently, the Company also reviews and evaluates its assets on a periodic basis to identify equipment that no longer meets the operational needs of the business. As such, the Company recorded impairment charges of $396,000 during the year ended December 31, 2019 related to equipment for products that are no longer aligned with our current strategy.

Moving forward, Deep Down is committed to continue providing unparalleled product and service solutions that exceed the expectations of its customers. The Company will utilize its enhanced sales efforts to strategically target new opportunities that align with its core competencies. This will enable the Company to continue exercising cost discipline and streamlining its product and service offerings to optimize project execution, increase competitiveness in the marketplace, and achieve financial success.industry.

All remaining dollar and share amounts in the remainder of this Management’s Discussion and Analysis of Financial Condition and Results of Operations are in thousands of dollars and shares, unless otherwise indicated.

Results of Operations

Revenues

The 1731 percent increasedecrease in revenue isrevenues was primarily the result of increased offshore activityfewer projects in 2019, compared toprocess, COVID-19 related travel restrictions, and the level of projects executedrecent developments in 2018.the global oil and gas markets.

Cost of sales and grossGross profit

The decrease in gross profit was due to reduced revenues as a result of the COVID-19 pandemic and resulting global economic disruption. The increase in gross profit percentage is primarily due to higher revenue relative to the Company’s cost of sales, some of which is fixed,receiving rent abatements and having a larger proportion of higher margin service work and equipment rental during the year ended December 31, 2019.2020.

The Company records depreciation expense related to revenue-generating property, plant and equipment as cost of sales, which totaled $1,105$830 and $1,590$1,105 for the years ended December 31, 20192020 and 2018,2019, respectively.  The year-over-year decrease in depreciation was primarily due to the prior year, including $430 of depreciation relatedCompany recording increased impairment charges relating to the Company’s determination that certain equipment had no remaining useful life.idle, long-lived assets during 2020, rather than depreciation.

Selling, general and administrative expenses

The increasedecrease in selling, general and administrative expenses (“SG&A”) for the year ended December 31, 20192020 was primarily due to charges of $940workforce reductions and $349 relatedlimiting overhead spending and research and development efforts to legal proceedings and expenses associated with the resignation of the Company’s founder, respectively. These expenses were partially offset by cost containment measures introducedonly critical items in response to a renewed focus on the Company’s core business. In addition, the Company recorded several accruals related to various legal matters for the year ended December 31, 2019 that were not recurrent for the year ended December 31, 2020.

Asset Impairmentimpairment

For the year ended December 31, 2020, the Company recorded impairment charges of $4,490 for the impairment of certain idle, long-lived assets. The impairment was the result of an analysis of the carrying value of the assets and our inability to objectively project future cash flows from the sale or lease of these assets, particularly in light of the impact of the COVID-19 pandemic and resulting global economic disruption. For the year ended December 31, 2019, the Company recorded impairment charges of $396 related to equipment identified as non-strategic to the core operations of the business. For the year ended December 31, 2018, the Company recorded impairment charges of $1,890 related to equipment classified as construction in progress, which was the result of an impairment analysis conducted by the Company.

Interest income,expense (income), net

Net interest incomeexpense for the year ended December 31, 20192020 was $12$7 compared to net interest income of $35$12 for the year ended December 31, 2018.2019. The decrease of $23$19 is due to a lower balance on certain notes receivable.interest-bearing accounts for the year ended December 31, 2020.

Gain on sale of assets

During the yearsyear ended December 31, 20192020, the Company did not record any gains related to vehicles and 2018,equipment sold by the Company. During the year ended December 31, 2019, the Company recorded gains of $7 and $439, respectively, related to vehicles and equipment sold by the Company.

Modified EBITDA

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

The Company believesWe believe Modified EBITDA is a useful to investors because it is widely used to measure of 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 and asset impairment);amortization), and actions that do not affect liquidity (share-based compensation expense, equity in net income or loss of joint venture)expense) from our operating results; andresults. Additionally, 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 (Loss) for the years ended December 31, 20192020 and 2018 (certain prior year amounts have been excluded2019:

The $618 decrease in Modified EBITDA was due to conformdecreased revenues resulting from the decline in offshore activity triggered by the COVID-19 pandemic coupled with a net $238 reserve for doubtful accounts receivable due to prolonged customer payment terms and uncertainty around certain customers’ liquidity affected by the pandemic for the twelve months ended December 31, 2020 as compared to the current year presentation):twelve months ended December 31, 2019.

Liquidity and Capital Resources

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 thatWe are cash flow positive, we may not always be able to achieve this objective. We aregenerally 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 debt or equity capital.

As a result of the abrupt decline in oil prices and global economic activity caused by COVID-19, the Company applied for a loan under the Small Business Administration’s (“SBA”) Paycheck Protection Program (“PPP”), and on April 29, 2020, the Company received a PPP loan in the amount of $1,111, which was used to finance payroll during the second and third quarters of 2020. The PPP loan is evidenced by a promissory note, dated April 27, 2020, between the Company and the lender. The promissory note matures on April 27, 2022 and bears interest at a fixed rate of 1.00 percent per annum, payable in 18 monthly payments originally scheduled to commence on November 27, 2020.

Subsequent to the effective date of the Company’s PPP loan, the U.S. Treasury and SBA refined its payment deferral guidance whereby payment of principal, interest, and fees for PPP loans are to be deferred until the amount of forgiveness determined under section 1106 of the CARES Act is remitted to the lender if the loan forgiveness application is submitted within ten months after the end of the loan forgiveness covered period. Additionally, certain conditions detailed in the loan agreement could cause the note to become immediately due and payable at the lender’s option. The Company applied for forgiveness of its PPP loan in its entirety in October 2020, which falls within ten months after the end of the Company’s loan forgiveness covered period. The Company has not received guidance from its lender regarding the timing or ultimate outcome of its forgiveness application.

The principal liquidity needs of the Company are to fund ongoing operations, working capital, and capital expenditures, andexpenditures. During the repurchasefiscal year ended December 31, 2020, the Company reported an increase of $222 in cash.  The Company used $206 of net cash from operating activities primarily from an increase in working capital. The Company also used $158 in net cash for investing activities, primarily for purchases of PP&E. The Company generated $586 of net cash from financing activities, primarily through $1,111 of PPP loan proceeds, which was partially offset by $525 of share repurchases that occurred prior to the onset of the Company’s shares. COVID-19 pandemic and receipt of the initial PPP loan.

During the fiscal year ended December 31, 2019, the Company reported an increase of $1,508 in cash and cash equivalents.cash. The Company generated $237 in net cash provided by operating activities primarily due to improvements in cost containment measures. The Company generated $1,549 in net cash provided by investing activities, which included $88 in proceedsprimarily from the sale of Property, Plant and Equipment (“PP&E”) offset by $91 in the purchase of PP&E, $1,035 received on the maturity of a short termshort-term investment, and $517 received from payment of a note receivable. The Company also used $278 of net cash in financing activities, which included $222 for the repurchase of outstanding stock and $56 for payments on a motor vehicle loan.

During the fiscal year ended December 31, 2018, the Company reported a decrease of $1,924 in cash and cash equivalents. The Company used $1,545 of net cash in operating activities primarily due to decreased customer orders. The Company used $346 of net cash in investing activities, which included $882 in purchases of PP&E offset by $538 in proceeds from the sale of equipment, and cash receipts from a note receivable. The Company also used $33 of net cash in financing activities, which included $22 for the repurchase of outstanding stock and $11 for payments on a motor vehicle loan.

The Company believes it will have adequate liquidity to meet its future operating requirements through a combination of cash on hand, and cash expected to be generated from operations, andcash received from a second PPP loan, potential opportunistic sales of PP&E, in addition to pursuingand the pursuit of a disciplined approach to making capital investments. However, given the abrupt decline in oil prices and global economic activity caused by COVID-19 in 2020, the Company cannot predict this with certainty. To mitigate this uncertainty and preserve liquidity, the Company will continue to pursue theopportunistic cost containment initiatives, resulting from the strategic review process concluded in 2019, which included measures to manage costs by reducing itscan include workforce andreductions, limiting overhead spendspending and R&Dresearch and development efforts to only critical items. In addition, the Company isitems, and actively pursuing further cost reduction opportunities to preserve liquidity.as they become available.

Summary of Critical Accounting Policies and Estimates

Use of Estimates

The preparation of financial statements in accordance with US GAAP requires us to make estimates and judgments that may affect assets and liabilities. On an ongoing basis, we evaluate our estimates, including those related to revenue recognition and related allowances, contract assets and liabilities, impairments of long-lived assets, including intangibles, income taxes including the valuation allowance for deferred tax assets, 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.

Property, plant and equipment

Property, plant and equipment (“PP&E”)&E is stated at cost, net of accumulated depreciation, amortization, and related impairments. Depreciation and amortization are 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 finance 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.

If circumstances associated with our PP&E have changed or a significant event has occurred that may affect the recoverability of the carrying amount of our PP&E, an impairment indicator exists, and we test the PP&E for impairment. Before testing for impairment, we group PP&E with other finite-lived long-lived assets (“long-lived assets”) at the lowest level of identifiable cash flows that are largely independent of cash flows from other assets or groups of assets. Testing long-lived assets for impairment is a two-step process:

Step 1 - We test the long-lived asset group for recoverability by comparing the carrying amount of the asset group with the sum of the undiscounted future cash flows from use and the eventual disposal of the asset group. If the carrying amount of the long-lived asset group is determined to be greater than the sum of the undiscounted future cash flows from use and disposal, we would need to perform step 2.

Step 2 - If the long-lived group of assets fails the recoverability test in step 1, we would record an impairment expense for the difference between the carrying amount and the fair value of the long-lived asset group.

During the year ended December 31, 2020, the Company recorded charges of $4,490 for the impairment of certain idle, long-lived assets, which were evaluated at the asset level. The impairment was the result of an analysis of the carrying value of the assets and our inability to objectively project future cash flows from the sale or lease of these assets, particularly in light of the impact of the COVID-19 pandemic and resulting global economic disruption.

Prior to performing the impairment analysis of our long-lived assets on a group level as of December 31, 2019, the Company conducted an evaluation of the carrying amount of certain specific long-lived assets that are non-strategic to the core operations of the business and recorded impairment charges of $396. The Company did not record any further impairment of its long-lived assets.

For the year ended December 31, 2018, the Company conducted an evaluation of the carrying amount of certain long-lived assets after considering the volatility in oil prices at the time, the Company’s performance over the past few years, and strategic focus on core business operations going forward. As such, the Company recorded impairment charges in an aggregate amount of $2,320 related to construction in progress and certain equipment, of which $1,890 is reported as an asset impairment and $430 as depreciation expense in cost of sales in the consolidated statements of operations.

Revenue Recognition

On January 1, 2018, we adopted ASC Topic 606 (“ASC 606”) using the modified retrospective method applied to those contracts which were not completed as of January 1, 2018. Results for reporting periods beginning after January 1, 2018 are presented under ASC 606.

There was no significant impact on the Company’s results of operations or financial position upon the adoption of ASC 606. We did not record any adjustments to opening accumulated deficit as of January 1, 2018 because the Company’s revenue recognition methodologies for both fixed price contracts (over time using cost to cost as an input measure of performance) and for service contracts (over time as services are incurred) do not materially change by the adoption of the new standard.

Revenues are recognized when control of the promised goods or services is transferred to our customers in an amount that reflects the consideration we expect to be entitled to in exchange for those goods or services. To determine the proper revenue recognition method for our customer contracts, we evaluate whether two or more contracts should be combined and accounted for as one single contract and whether the combined or single contract should be accounted for as more than one performance obligation. This evaluation requires significant judgment and the decision to combine a group of contracts or separate the combined or single contract into multiple performance obligations could change the amount of revenue and profit recorded in a given period.

For most of our fixed price contracts, the customer contracts with us to provide a significant service of integrating a complex set of tasks and components into a single project or capability (eveneven if that single project results in the delivery of multiple units).units. Hence, the entire contract is accounted for as one performance obligation.

We account for a contract when it has approval and commitment from both parties, the rights of the parties are identified, payment terms are identified, the contract has commercial substance and collectability of consideration is probable.

Fixed price contracts

For fixed price contracts, we generally recognize revenue over time as we perform because of continuous transfer of control to the customer. This continuous transfer of control to the customer is supported by clauses in the contract that allow the customer to unilaterally terminate the contract for convenience, pay us for costs incurred plus a reasonable profit and take control of any work in process. In our fixed price contracts, the customer either controls the work in process or we deliver products with no alternative use to the Company and have rights to payment for work performed to date plus a reasonable profit as evidenced by contractual termination clauses.

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

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

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

Service Contracts

We recognize revenue for service contracts measuring progress toward satisfying the performance obligation in a manner that best depicts the transfer of goods or services to the customer. The control over services is transferred over time when the services are rendered to the customer on a daily basis. Specifically, we recognize revenue as the services are provided as we have the right to invoice the customer for the services performed. Services are billed and paid on a monthly basis. Payment terms for services are usually 30 days from invoice receipt.receipt but have increased to 45 days during the recent industry downturn.

Contract balances

Costs and estimated earnings in excess of billings on uncompleted contracts arise when revenues are recorded based on the extent of progress towards completion 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. For the years ending 20192020 and 2018,2019, there were no contracts with terms that extended beyond one year.

Allowance for Doubtful Accounts

The Company provides an allowance on trade receivables based on a specific review of each customer’s accounts receivable balance with respect to its ability to make payments. When specific accounts are determined to require an allowance, they are expensed by a provision for bad debts in that period. At December 31, 20192020 and 2018,2019, the Company estimated the allowance for doubtful accounts requirement to be $50$84 and $10,$50, respectively.  Bad debt expense totaled $20$238 and $67$20 for the years ended December 31, 2020 and 2019, and 2018, respectively.

Income Taxes

We follow the asset and liability method of accounting for income taxes. This method takes into accountconsiders 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.

Recent Accounting Pronouncements

Recent Accounting Pronouncements are included in Note 1, “Description of Business and Summary of Significant Accounting Policies and Estimates”, Note 2, “Leases”, and Note 3, “Revenue from Contracts with Customers”, of the Notes to Consolidated Financial Statements included in this Report.

Inflation and Seasonality

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

Not Applicable

Not Applicable

The financial statements are included herewith commencing on page F-1.

None

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 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 December 31, 2019,2020, 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 December 31, 2019.2020.

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 December 31, 2019,2020, based on revisions and updates issued in 2013 by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) to its report 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 December 31, 2019.2020.

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 December 31, 2019.2020.

Not Applicable

PART III

The following table sets forth the names, ages and positions of our directors and executive officersofficer as of December 31, 2019:2020:

Biographical information regarding each of our current directors and executive officersofficer is as follows. The following paragraphs also include specific information about each director’s experience, qualifications, attributes, or skills that led the Board of Directors to the conclusion that the individual should serve on the Board as of the time of this filing, in light of our business and structure:

Charles K. Njuguna, President, Chief Executive Officer, Chief Financial Officer, and Director. Mr. Njuguna has served as the Company’s Chief Executive Officer since September 2019 following Mr. Ronald Smith’s resignation.2019. Since September 2017, Mr. Njuguna has served as the Company’s Chief Financial Officer. Mr. Njuguna joined the Company in early 2012 to manage the Company’s corporate accounting activities, was later appointed to manage all of the Company’s commercial activities, and was subsequently promoted to Business Manager, with oversight for a wide range of financial, operational, and administrative functions. Additionally, Mr. Njuguna has over 20 years of international business experience, including various operational and financial management roles in Africa, the UK, and the US. Mr. Njuguna holds an MBA from the University of Texas at Austin.

Mr. Njuguna is qualified to serve as a director based on his in-depth knowledge of the Company’s operations and his international business experience.

Micah Simmons, Chief Operating Officer.Mr. Simmons has served as the Company’s Chief Operating Officer since September 2019. Mr. Simmons was the Vice President of Project Management for Global Operations in Siemens Oil and Gas, based in Houston, Texas. Mr. Simmons led the global project organization, with responsibility for project strategy, execution, processes, and governance across ten factories. While at Siemens he was charged with building the project management organization to improve customer satisfaction and project results across legacy Siemens and Dresser-Rand factories. Prior to Siemens, Mr. Simmons spent 20 years with TechnipFMC most recently as a Vice President, Global Supply and led teams of hundreds of employees over the course of his career in Malaysia, Norway and Houston, including those focused on subsea manifolds and pipeline systems. Mr. Simmons earned an MBA from the Darden Graduate School of Business Administration at the University of Virginia and a Bachelor of Science in Mechanical Engineering at Texas A&M University. He is licensed as a professional engineer in Texas.

Mark Carden, Chairman of the Board of Directors. Mr. Carden has served as Chairman of the Board since September 30, 2017. Mr. Carden joined the Board as an independent director effective May 1, 2014 and was appointed Chairman of the Audit Committee of the Board of Directors. Mr. Carden was a Partner at Coopers & Lybrand, LLP, now PricewaterhouseCoopers, LLP and held multiple senior-level financial positions specializing in electric and gas utilities from 1981 to 1999; he most recently served as Chief Operating Officer, Global Energy Assurance Practice. Additionally, Mr. Carden was one of three CPAs in the US selected to serve a two-year fellowship at the Financial Accounting Standards Board from 1991 to 1993. Mr. Carden holds a BBA from Texas A&M University. He is currently the Executive Pastor and Elder at Clear Creek Community Church, in League City, Texas. Mr. Carden is also a member of the Compensation Committee.

Mr. Carden is qualified for service on the Board based on his experience and expertise in management, notably his knowledge of the energy market and business strategy, and is a financial expert as defined in Item 407(d)(5)(ii) of Regulation S-K.

David J. Douglas, Director.

Mr. Douglas joined the Board as an independent director effective April 16, 2019. Mr. Douglas is the Principal of Jamaka Capital Management, LLC, the Company’s largest institutional investor. Mr. Douglas has over 30 years of investment experience as a principal including 25 years in the family office industry. Mr. Douglas is a graduate of the University of Pennsylvania’s Wharton School earning a BS in Economics, Magna Cum Laude. Mr. Douglas is a member of the Audit and Compensation Committees.

Mr. Douglas is qualified to serve as a director based on his significant finance and investment experience.

Neal I. Goldman, Director.

Mr. Goldman joined the Board as an independent director effective April 16, 2019. Mr. Goldman is the President and Founder of Goldman Capital Management, Inc., a family office since 2018, which was previously an investment advisory firm founded in 1985. Mr. Goldman is a Chartered Financial Analyst (CFA). Mr. Goldman received his B.A. degree in Economics from The City University of New York (City College). Mr. Goldman is a member of the Audit and Compensation Committees.

Mr. Goldman is qualified to serve as a director based on his significant finance and investment background.

Corporate Governance

Code of Ethics

The Company has adopted Codes of Ethical Conduct that apply to all its directors, officers (including its chief executive officer, chief operating officer, controller and any person performing such functions) and employees. The Company has previously filed copies of these Codes of Ethical Conduct and they can be located pursuant to the information shown in the Exhibit list items 14.1 and 14.2 to this Report. Copies of the Company’s Codes of Ethical Conduct may also be obtained at the Investors section of the Company’s website,www.deepdowninc.com, or by written request addressed to the Corporate Secretary, Deep Down, Inc., PO Box 1389, Crosby, TX 77049.77532. The Company intends to satisfy the requirements under Item 5.05 of Form 8-K regarding disclosure of amendments to, or waivers from, provisions of its code of ethics that apply to the Chief Executive Officer, Vice President of Finance or Controller by posting such information on the Company’s website. Information contained on the website is not part of this Report.

The Company’s Board of Directors is responsible for reviewing and making recommendations concerning the selection of outside auditors, reviewing the scope, results, and effectiveness of the annual audit of the Company's financial statements and other services provided by the Company’s independent public accountants. The Board of Directors reviews the Company's internal accounting controls, practices, and policies. Our Board of Directors has determined that Mr. Carden qualifies as an independent audit committee financial expert as defined in Item 407(d)(5)(ii) of Regulation S-K.

Delinquent Section 16(a) Reports

Section 16(a) of the Exchange Act requires our officers and directors, and persons who own more than ten percent of a registered class of our equity securities, to file reports of securities ownership and changes in such ownership with the SEC. Officers, directors and greater than ten percent shareholders also are required by rules promulgated by the SEC to furnish us with copies of all Section 16(a) forms they file.

Based solely on the Company’s review of the copies of such forms received by it, the Company believes that all Section 16(a) filing requirements applicable to its officers and directors and greater-than ten percent beneficial owners during the year ended December 31, 20192020 were in compliance.satisfied.

The following table sets forth information concerning total compensation earned in the years ended December 31, 2020 and 2019 and 2018 by each person who served as our Principal Executive Officer (“PEO”) during 2019,2020, and our other executive officer during the year ended December 31, 20192020 (collectively, our “Named Officers”).

Summary Compensation Tables for the years ended December 31, 20192020 and 20182019