Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

For the quarterly period ended September 30, 20202021

OR

Commission File No. 000-30351

DEEP DOWN, INC.

(Exact name of registrant as specified in its charter)

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)

Securities registered pursuant to Section 12(b) of the Act: None

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.  þYes¨No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files). YesþNo ¨

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

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨Noþ

At November 9, 2020,12, 2021, there were 12,388,865 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 (“Report”) refer collectively to Deep Down, Inc., a Nevada corporation (“Deep Down”), and its wholly-ownedwholly owned subsidiary Deep Down, Inc., a Delaware corporation (“Deep Down Delaware”). Our current operations are primarily conducted under Deep Down Delaware.

Readers should consider the following information as they review this Report:

Forward-Looking Statements

The statements contained or incorporated by reference in this Report 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 several 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 Report 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. The risks and uncertainties mentioned previously relate to, among other matters, the following:

Document Summaries

Descriptions of documents and agreements contained in this Report 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, 2019,2020, other periodic and current reports we have filed with the SEC, or this Report.

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 by our executive officers and directors pursuant to Section 16(a) of the Exchange Act, may be obtained through our website (www.deepdowninc.com) as soon as reasonably practicable after we, or our executive officers and directors, have 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

ITEM 1.  FINANCIAL STATEMENTS

DEEP DOWN, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(UNAUDITED)

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

DEEP DOWN, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

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

DEEP DOWN, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

(UNAUDITED)

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

DEEP DOWN, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

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

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Amounts in thousands except per share amounts)

Basis of Presentation

Unless otherwise indicated, the terms “Deep Down, Inc.”, “Deep Down”, “Company”, “we”, “our” and “us” are used in this Report to refer to Deep Down, Inc., a Nevada corporation (“Deep Down Nevada”), and its directly wholly owned subsidiary, Deep Down, Inc., a Delaware corporation (“Deep Down Delaware”). The accompanying unaudited condensed consolidated financial statements of Deep Down, Inc. and its wholly-owned subsidiary (“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 notes or other financial information that are normally required by United States generally accepted accounting principles (“US GAAP”) can be condensed or omitted. Therefore, these statements should be read in conjunction with the audited consolidated financial statements, and notes thereto, included in our Annual Report on Form 10-K for the year ended December 31, 2019.2020.

Preparation of financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosed amounts of contingent assets and liabilities, and the reported amounts of revenues and expenses. If the underlying estimates and assumptions upon which the financial statements are based change in future periods, then the actual amounts may differ from those included in the accompanying unaudited condensed consolidated financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included.

Liquidity

The Company’s cash on hand was $4,045$3,708 and working capital was $4,497$5,796 as of September 30, 2020.2021. As of December 31, 2019,2020, cash on hand and working capital was $3,523$3,745 and $4,939,$4,080, respectively. The Company does not have a credit facility in place and generally depends on cash on hand, cash flows from operations, and the potential opportunistic sales of property, plant and equipment (“PP&E”) to meet its liquidity needs..

The Company cannot predict with certainty the long-term impact of the abrupt decline in oil prices and global economic disruption caused by COVID-19 on the Company’s operations and cash flows. The Company took steps to mitigate the challenges presented by the current macro environment, including workforce reductions, wage reductions, rent abatement, and limiting capital expenditures and research and development efforts to only critical items. The Company continues to seek further cost reduction opportunities to preserve liquidity.

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, and on April 29, 2020, the Company received a loan (“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 to be effective as of 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 commencing 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 whereas payments for PPP loans are to be deferred for at least ten months after the end of the loan forgiveness covered period. Additionally, if the loan forgiveness application is submitted within ten months after the end of the loan forgiveness covered period, payments will be further deferred until such loan forgiveness application is processed by the SBA. 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. Therefore, due to the uncertain timing of payments, the Company did not carry a portion of its PPP loan balance as a current liability at September 30, 2020.

The Company believes it will have adequate liquidity to meet its future operating requirements arising in the normal course of business for the next twelve months through a combination of current cash on hand, cash expected to be generated from operations, current working capital, and potential opportunistic sales of PP&E in addition to pursuing a disciplined approach to making capital investments.

However, given the volatility in oil prices and the impact on global economic activity caused by the COVID-19 pandemic, as well as recent increases in raw materials costs and ongoing supply chain constraints, the Company cannot predict this with certainty. To mitigate this uncertainty and preserve liquidity, the Company will continue to pursue opportunistic cost containment initiatives, which can include workforce alignment, limiting overhead spending and research and development efforts to only critical items, and actively pursuing further cost reduction opportunities as they become available.

Principles of Consolidation

The unaudited condensed consolidated financial statements presented herein include the accounts of Deep Down, Inc. and its wholly owned subsidiary. AnyAll intercompany transactions and balances have been eliminated.

Segments

For the three and nine months ended September 30, 2021 and 2020, and 2019, the Companywe had one1 operating and reporting segment, Deep Down Delaware.segment.

In February 2016, the Financial Accounting Standards Board (“FASB”) issued ASU 2016-02, Leases (“ASC Topic 842”). Under this guidance, lessees are required to recognize on the balance sheet a lease liability and a right-of-use (“ROU”) asset for all leases, except for short-term leases with terms of twelve months or less. The lease liability represents the lessee’s obligation to make lease payments arising from a lease and willis initially be measured as the present value of the lease payments. The ROU asset represents the lessee’s right to use a specified asset for the lease term, and will beis measured at the lease liability amount, adjusted for lease prepayment, lease incentives received and the lessee’s initial direct costs.

ASC Topic 842 provides for certain practical expedients when adopting the guidance. The Company elected the package of practical expedients allowing the Company, for all leases that commenced prior to the adoption date, to not reassess whether any expired or existing contracts are, or contain, leases, the lease classification for any expired or existing leases, or initial direct costs for any expired or existing leases.

The Company utilizes the land easements practical expedient allowing the Company to not assess whether any expired or existing land easements are, or contain, leases if they were not previously accounted for as leases under the existingthen-existing leasing guidance. Instead, the Company will continue to apply its existing accounting policies to historical land easements. The Company elects to apply the short-term lease exception; therefore, the Company will not record an ROU asset or corresponding lease liability for leases with an initial term of twelve months or less that are not reasonably certain of being renewed and instead will recognize a single lease cost allocated over the lease term, generally on a straight-line basis. The Company elects to apply the practical expedient to not separate lease components from non-lease components and instead account for both as a single lease component for all asset classes.

The Company elects to not capitalize any lease in which the estimated value of the underlying asset at the commencement date is less than the Company’s capitalization threshold. A lease would need to qualify for the low value exception based on various criteria.

ROU assets and lease liabilities are recognized at the lease commencement date based on the present value of lease payments over the lease term and include options to extend or terminate the lease when they are reasonably certain to be exercised. The present value of lease payments is determined primarily using the incremental borrowing rate based on the information available at the lease commencement date. Lease agreements with lease and non-lease components are generally accounted for as a single lease component. The Company’s operating lease expense is recognized on a straight-line basis over the lease term and a portion is recorded in cost of sales, and the remainder is recorded in selling, general and administrative expenses. The accounting for some leases may require significant judgment, which includes determining whether a contract contains a lease, determining the incremental borrowing rate to utilize in our net present value calculation of lease payments for lease agreements which do not provide an implicit rate, and assessing the likelihood of renewal or termination options.

As of September 30, 2021, we do not have any finance lease assets or liabilities, nor do we have any subleases.

As of September 30, 2020, the Company does not have any finance lease assets or liabilities, nor does the Company have any subleases.

The following tables present information about our operating leases:

The components of the Company’sour lease expense arewere as follows:

Lease term and discount rate:

During the quarterthree months ended September 30, 2020,2021, the Company did not have any sale/leaseback transactions.

Present value of lease liabilities:

NOTE 3: REVENUE FROM CONTRACTS WITH CUSTOMERS

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 giveneach 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 even if that single project results in the delivery of multiple units. Hence, the entire contract is accounted for as one performance obligation. We account for a contract when it has approval and commitment from both parties, the rights of the parties are identified, payment terms are identified, the contract has commercial substance and collectability of consideration is probable.

Disaggregation of Revenue

The following table presents the Company’s revenues disaggregated by fixed price and service contracts. Sales taxes are excluded from revenues.

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 billedinvoiced and paidare payable on a monthly basis. Payment terms for services are usually 30 days from invoice receipt but have increased to 45 days during the recent industry downturn.receipt.

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. At September 30, 20202021 and December 31, 2019,2020, there were no contracts with terms that extended beyond one year.

The following table summarizes the Company’sour contract assets, which are “Costs and estimated earnings in excess of billings on uncompleted contracts” and our contract liabilities, which are “Billings in excess of costs and estimated earnings on uncompleted contracts”.

The contract asset and liability balances at September 30, 20202021 and December 31, 2019 are2020 consisted primarily associated withof revenue related to fixed-price projects.

Remaining Performance Obligations

Remaining performance obligations represent the transaction price of firm orders for which work has not been performed and excludes unexercised contract options, potential orders, and any remaining performance obligations for any sales arrangements that had not fully satisfied the criteria to be considered a contract with a customer pursuant to the requirements of ASC 606.

Practical Expedients and Exemptions

We generally expense sales commissions when incurred because the amortization period would have been one year or less. These costs are recorded within selling, general and administrative expenses.

Many of our services contracts are short-term in nature with a contract term of one year or less. For those contracts, we have utilized the practical expedient in ASC 606-10-50-14 exempting the Company from disclosure of the transaction price allocated to remaining performance obligations if the performance obligation is part of a contract that has an original expected duration of one year or less.

Additionally, our payment terms are short-term in nature with settlements of one year or less. We have, therefore, utilized the practical expedient in ASC 606-10-32-18 exempting the Company from adjusting the promised amount of consideration for the effects of a significant financing component given that the period between when the entityCompany transfers a promised good or service to a customer and when the customer pays for that good or service willis expected to be one year or less.

Further, in many of our service contracts, we have a right to consideration from a customer in an amount that corresponds directly with the value to the customer of our performance completed to date (for example, a service contract in which we bill a fixed amount for each hour of service provided). For those contracts, we have utilized the practical expedient in ASC 606-10-55-18, which allows us to recognize revenue in the amount for which we have the right to invoice.

Accordingly, we do not disclose the value of unsatisfied performance obligations for (i) contracts with an original expected length of one year or less and (ii) contracts for which we recognize revenue at the amount to which we have the right to invoice for services performed.

Property, plant and equipment consisted of the following:

Impairment of Long-lived Assets

As a result of unfavorable market conditions primarily due to the COVID-19 pandemic and developments in global oil markets, which triggered historically low crude oil prices and decreases in our customers’ capital budgets, the Company determined the carrying amount of certain idle long-lived assets exceeded their respective expected cash flows and therefore recorded an impairment charge of $4,490 related to idle fixed assets during the second quarter of 2020.

The Company owns, and routinely invests in, a portfolio of long-lived assets which are used both internally for product manufacturing and externally to perform services in the field. We evaluate for impairment our property and equipment that is held and used whenever changes in circumstances indicate that the carrying amount of an asset group may not be recoverable. Recoverability is assessed based on estimated undiscounted future net cash flows. Estimating future net cash flows requires us to make assumptions and estimates including, but not limited to, cash flows associated with future use and eventual disposal of the asset group and determination of the primary asset of the group. Should the review indicate that the carrying value is not fully recoverable, the amount of the impairment loss is determined by comparing the carrying value to the estimated fair value. No impairment was recorded related to the long-lived assets held and used during the three months ended September 30, 2020.

Share-based compensation is included in selling, general and administrative expenses in the accompanying unaudited condensed consolidated statements of operations and additional paid inpaid-in capital in the accompanying unaudited consolidated balance sheets. On August 5, 2020,During the three non-employee membersand nine months ended September 30, 2021, the Company recognized a total of the Board$9 and $46 of Directors (the “Board”) were each granted an option to purchase 50 shares of the Company’s common stock at a price of $0.37 per share. Fair value of these stock options was $0.25 per share at the date of the grant. Options for 25% of the shares vested on August 31, 2020, with the remaining shares scheduled to vest in equal installments on November 30, 2020, February 28, 2021, and May 31, 2021, subject to the recipient’s continued service on the Board.share-based compensation expense, respectively. During the three and nine months ended September 30, 2020, the Company recognized a total of $39$39 and $113, respectively, of share-based compensation expense. During the three and nine months ended September 30, 2019, the Company recognized a total of $72 and $200,$113, respectively, of share-based compensation expense. The unamortized estimated fair value of nonvested shares of restricted stock and stock options was $69$2 and $134$48 at September 30, 20202021 and December 31, 2019,2020, respectively. These costs are expected to be recognized as expenses over a weighted-average period of 0.480.31 years.

On December 23, 2019, the Board authorized the repurchase of up to 500 shares of the Company’s outstanding common stock (the “Repurchase Program”). The Repurchase Program was funded from cash on hand and cash provided by operating activities. The Board separately authorized the repurchase of additional shares during the quarterthree months ended March 31, 2020, in a privately negotiated transaction. As of March 31, 2020, the repurchase program had been exhausted.

ForDuring the three months ended September 30,March 31, 2020, the Company purchased 3744 shares of common stock atwere purchased for an average priceaggregate amount of approximately $0.43 per share totaling $1 in a privately negotiated transaction. For the nine months ended September 30, 2020, the Company purchased 746 shares$524. The repurchase program was exhausted as of common stock at an average price of approximately $0.70 per share totaling $525 in privately negotiated transactions.

For the three months ended September 30, 2019, the Company received 300 shares of common stock from our former CEO in exchange for certain previously impaired Company equipment ($0 carrying value at the time of exchange). No value was recorded to treasury stock because the assets had approximately $0 fair value at the time of the exchange. For the nine months ended September 30, 2019, the Company purchased 588 shares of common stock at an average price of approximately $0.37 per share totaling $218.

March 31, 2020. Treasury shares are accounted for using the cost method.

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. At September 30, 20202021 and December 31, 2019,2020, management has recorded a full deferred tax asset valuation allowance.

Employment AgreementsLetters of Credit

Certain customers could require us to issue standby letters of credit in the normal course of business to ensure performance under terms of contracts or as a form of product warranty. The Company entered into employment agreements withbeneficiary of a letter of credit could demand payment from the issuing bank for the amount of the outstanding letter of credit. We had 0 outstanding letters of credit at September 30, 2021 or December 31, 2020.

Employment Agreement

Our Chief Executive Officer and former Chief Operating Officer (the “Executives”) on September 18, 2019 and September 23, 2019, respectively, which containedis employed under an employment agreement containing severance provisions. In the event of termination of the Executives’CEO’s employment for any reason, the Executives wouldCEO will be entitled to receive all accrued, unpaid salary and vacation time through the date of termination and all benefits to which the Executives areCEO is entitled or vested under the terms of all employee benefit and compensation plans, agreements, and arrangements in which the Executives areCEO participants as of the date of termination.

In addition, subject to executing a general release in favor of the Company, the Executives wouldCEO will be entitled to receive certain severance payments in the event of termination of the Executive’shis employment is terminated by the Company “other than for cause” or by the ExecutiveCEO with “good reason.” These severance payments include: (i) a lump sum in cash equal to one to two times the Executive’sCEO’s annual base salary; (ii) a lump sum in cash equal to one to two times the average annual bonus paid to the ExecutiveCEO for the prior two full fiscal years preceding the date of termination; (iii) a lump sum in cash equal to a pro rata portion of the annual bonus payable for the period in which the date of termination occurs based on the actual performance under the Company’s annual incentive bonus arrangement, but no less than fifty percent of Executive’sthe CEO’s annual base salary; and (iv) if the Executive’sCEO’s termination occurs prior to the date that is twelve months following a change of control, then each and every share option, restricted share award and other equity-based award that is outstanding and held by the ExecutiveCEO shall immediately vest and become exercisable.

On April 1, 2020, the Company eliminated the position of Chief Operating Officer (“COO”) and relieved the COO of his duties pursuant to the terms of his employment agreement. In addition to payment of accrued and unpaid salary, vacation time, and other benefits referred to above, the Company is requiredmade payments to pay the former COO equal to one time his contractual annual base salary of $245, payable$245 over 12 months. This amount is included in selling, general and administrative expenses in the accompanying unaudited condensed consolidated statements of operations for the nine months ended September 30, 2020.

Litigation

From time to time, the Company is party to various legal proceedings arising in the ordinary course of business. The Company expenses or accrues legal costs as incurred and is involved in only one material legal proceeding as of the date of this Report.

In November 2011, the Company delivered equipment to Aker Solutions, Inc. (“Aker”), but Aker declined to pay the final invoice in the aggregate amount of $270 alleging some warranty items needed to be repaired. The Company made repairs, but Aker continued to claim further work was required. The Company repeatedly attempted to collect on the receivable and ultimately filed suit on November 16, 2012, in the Harris County District Court. Aker subsequently filed a counterclaim on March 20, 2013 in the aggregate amount of $1,000 for reimbursement of insurance payments allegedly made for repairs. The parties have not reached a resolution on this matter. At this point, it is not clear as to whether an unfavorable outcome is either probable or remote, and the Company is unable to determine the likelihood of an unfavorable outcome or the amount or range of potential loss if the outcome should be unfavorable.

On August 6, 2018, GE Oil and Gas UK Ltd. (“GE”) requested that the Company mediate a dispute between the parties in the ICC International Centre for ADR (“ICC”). The dispute involved alleged delays and defects in products manufactured by the Company for GE dating back to 2013. During the second quarter of 2020, the parties finalized the terms of a definitive settlement agreement which is now final and binding. Per the terms of the settlement, the Company shall pay GE $750$750 in total, which shall be paid on a monthly basis through February 2022.December 2021. The Company accrued a liability related to this matter in the amount of $750$750 for the year ended December 31, 2019. The remaining liability was $90 at September 30, 2021.

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 the dilutive effect of common stock equivalents (warrants, nonvested stock awards and stock options) outstanding duringusing the period. Diluted EPS reflects the potential dilution that could occur if options to purchase common stock were exercised for shares of common stock and all nonvested stock awards vest.

At September 30, 2020 and 2019, all such securities were anti-dilutive.treasury method.

In each relevant period, the net income used in the basic and diluted EPS calculations is the same. The following table reconciles the weighted-average basic number of common shares outstanding and the weighted-average diluted number of common shares deemed outstanding for the purpose of calculating basic and diluted EPS.

On August 15, 2019, Mr. Ronald E. Smith, the Company's Founder, resigned as Chief Executive Officer and as a member of the Board, effective as of August 31, 2019. In connection with Mr. Smith's resignation, the Company and Mr. Smith entered into a Transition Agreement, effective as of September 1, 2019 (the “Transition Agreement”). The Transition Agreement provides for Mr. Smith to serve as an independent consultant to the Company from September 1, 2019 through December 31, 2021. The Company agreed to pay Mr. Smith $15$42 per month, from September 1, 2019 through December 31, 2019, and $15 per month, from January 1, 2020 through December 31, 2021, in exchange for his future services. The Company therefore recorded consulting expenses related to the Transition Agreement totaling $45$45 and $135$135 for the three and nine months ended September 30, 2020, respectively.2021.

In addition to the other payments provided for under the Transition Agreement, the Company also agreed to pay Mr. Smith 1.5% of the net sale or lease value of two carousels owned by Company, if such sale or lease occurs prior to December 31, 2021, unless those assets are sold or leased in conjunction with a sale of all or substantially all of the assets or stock of Deep Down, in which case no commission is due.Down.

As part of the Transition Agreement, Mr. Smith is bound by certain non-disclosure and confidentiality provisions, and a non-compete and non-hire agreement.

AsThe Company obtained a result of the abrupt decline in oil prices and global economic activity caused by COVID-19, the Company applied for a$1,111 loan under the Small Business Administration’s (“SBA”) Paycheck Protection Program and onin April 29, 2020 the Company received a loan (“April 2020 PPP loan”Loan”) in the amount of $1,111, which. The April 2020 PPP Loan was used to finance covered payroll expenses during the second and third quarters of 2020. The Company applied for forgiveness of the April 2020 PPP Loan in October 2020 and received forgiveness of $1,111 from the SBA on June 29, 2021. The amount of loan forgiveness, including accrued interest, is evidenced bypresented as a promissory note, dated to be effective ascomponent of April 27, 2020, betweenother income on the Company andcondensed consolidated statement of operations for 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 commencing on November 27, 2020.nine months ended September 30, 2021.

Subsequent to the effective date of the Company’sThe Company obtained a second $1,111 PPP loan in March 2021 (“March 2021 PPP Loan”). The March 2021 PPP Loan was used to finance covered payroll expenses during the U.S. Treasuryfirst and SBA refined its payment deferral guidance whereas payments for PPP loans are to be deferred for at least ten months after the endsecond quarters of the loan forgiveness covered period. Additionally, if the loan forgiveness application is submitted within ten months after the end of the loan forgiveness covered period, payments will be further deferred until such loan forgiveness application is processed by the SBA.2021. The Company applied for forgiveness of itsthe March 2021 PPP loanLoan in its entirety in October 2020, which falls within ten months afterAugust 2021 and received forgiveness of $1,111 from the endSBA on September 10, 2021. The amount 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. Therefore, due to the uncertain timing of payments, the Company did not carry a portion of its PPP loan balanceincluding accrued interest, is presented as a current liability atcomponent of other income on the condensed consolidated statement of operations for the three and nine months ended September 30, 2020.2021.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

(Amounts in thousands except per share amounts)

The following discussion and analysis provideprovides information that management believes is relevant for an assessment and understanding of Deep Down’s results of operations and financial condition. This information should be read in conjunction with the Company’s audited historical consolidated financial statements, which are included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 20192020 and which is available on the SEC’s website, and the Company’s unaudited condensed consolidated financial statements, and notes thereto, included with this Quarterly Report on Form 10-Q (“Report”) in Part I. Item 1. “Financial Statements.”

General

Deep Down is an oilfield product anda leading energy services company specializing in complex deepwateroffering subsea equipment and ultra-deepwater support services to the world’s energy and subsea distribution products usedoffshore industries. We provide innovative solutions to complex customer challenges presented between the production facility and the wellhead.energy source. 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 teamsteam can support subsea engineering, manufacturing, installation, commissioning, and maintenance projects located anywhere in the world.

Industry and Executive Outlook

The challenges presentedoilfield services industry is dependent on the capital and operating expenditure programs of oil and gas companies. The decision for oil and gas operators to cut back or accelerate their exploration, drilling, and production operations is substantially driven by the globaloverall condition of the oil and gas industry. This industry has historically been characterized by fluctuations in oil and gas prices, which are driven by a variety of market forces.

In March 2020, the energy industry encountered a significant economic disruption caused by the COVID-19 pandemic, andwhich continues to impact markets globally. The low oil price environment caused by the resulting sharp decline in oil prices continuepandemic, when coupled with restricted travel to disrupt our business and that of our customers. Although we have seen some relaxation in the actions taken by various governments and companies to preventmitigate against the spread of COVID-19, such actions initially caused the demandtriggered many exploration and production companies to either significantly reduce, delay, or cancel their operating and capital spending programs. This decline in offshore drilling and production activity resulted in lower contract volumes or delays in significant contracts, which negatively impacted our earnings and cash flows. Our earnings and cash flows could also be negatively impacted by delays in payments by significant customers or delays in completion of our contracts for oilany reason.

Oil and gas operators, equipment providers, and services companies had to decline atquickly adapt to overcome the challenges presented by these unprecedented ratestimes, and promptedDeep Down was no exception. Our primary focus since this global economic disruption has been to improve our customers to scale back their operations. The impact of these actions oncost structure and manage our business includes customers delaying new purchase orders, extending timelines for existing purchase orders, and delaying payment of outstanding invoices. We expect that customer activitycash flows, which will recover when oil prices further stabilize and there isremain a recovery inpriority as we look toward the global demand for oil and gas.future.

In responseThe initial loan we received under the Paycheck Protection Program (“PPP”) in April 2020 supplemented our cash flows to these new challenges,fund payroll as revenues declined, and our second PPP loan in March 2021 provided a needed buffer to fund working capital while we successfully adjustedcontinue to strengthen our strategyworkforce. We have now received confirmation of the forgiveness for both loans, which solidifies our working capital position as we evaluate future growth opportunities. One area we have been able to operate in this cycle of lower oil prices. Earlier this year, we implementedcapitalize on has been the workforce reductions wage reductions, rent abatement, and limited capital expenditures and R&D effortsat other organizations, which has provided us the opportunity to only critical items. We were not ableadd high caliber individuals to accomplish this without our team who possess a wealth of highly capable individuals who were able to respond quickly to the global pandemic pressures; however, there is much more work to do.industry knowledge and experience.

During the first nine months of 2021, oil prices progressively rebounded to healthier levels as demand continued to strengthen and travel restrictions continued to ease. As a result, we managed to safely send teams to various international locations. We are cautiously optimistic that the prevalence of vaccines and the downward trend in COVID cases will continue to encourage border controls to be loosened. However, the cautious return to increased activities by our customers has presented margin pressures to us, as evidenced by our reduced gross margins despite increased revenue levels. Aside from pricing pressure from customers, margin compression has also come in the form of low margin pass-through third-party costs on select projects.

We have seen an increase in bidding activity and execution of contract awards this year as operators mobilize to complete a backlog of projects, especially in the current favorable oil price environment. The Company received an order at the beginning of the year for the rental of one of our two carousels that are suitable for large umbilical or cable projects. 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 envisioned that the successful execution of this project will provide further opportunities to utilize our carousels in the future, and our visions turned into reality when we received a contract award for the rental of the second carousel and associated umbilical spooling services in the fourth quarter of 2020, the Company applied2021. We are also actively engaged in multiple conversations with different customers to discuss additional rental opportunities for our carousels and received a loan in the amount of $1,111 under the Small Business Administration’s Paycheck Protection Program. The loan proceeds were used to finance payroll during the second and third quarters of 2020. The Company applied for forgiveness of its PPP loan in its entirety in October 2020, but the Company has not received guidance from its lender regarding the timing or ultimate outcome of its forgiveness application.associated cable management services.

While increasing revenueThe growth of our business remains oura top priority and generating free cash flow and preservation of liquidity remains a high priorityof critical importance to achieve this desired growth, especially in thethis current environment. We are keenly focused on the levers within our control, and we are seeingexperiencing 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 on the other side of the downturn will continue to be heavily focused on efficiency and shorter lead times without sacrificing quality and safety, andsafety. As such, we are confident our streamlined operations and renewedcontinued focus on our cost driverscore strengths will enable us to be a solidthe primary choice for our customers.

Looking towards the future, we continue to engage with a variety of companies on different aspects of the transition to renewable energy with increasing interest in our installation capabilities, equipment, and knowledge of the subsea environment. There are several 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 leverage our core competencies to increase the market potential of our current product and service offerings. We are encouragedalso working on developing the next generation of our equipment by the future potential of the Company and look forwardincorporating designs that utilize a reduced carbon footprint.

We maintain our commitment to continuing to be a service provider of choiceensuring we continuously enhance value for our customers,stockholders, while being an employer of choice for our current and future employees, and a good value for shareholders. in the industry.

Results of Operations

Three Months Ended September 30, 20202021 Compared to Three Months Ended September 30, 20192020

Revenues. Revenues for the three months ended September 30, 20202021 were $3,136$3,550 compared to revenues of $4,397$3,136 for the three months ended September 30, 2019.2020. The $1,261,$414, or 2913 percent, decreaseincrease from the same period in 20192020 was primarily the result of fewer projectsthe progressive increase in process, COVID-19 related travel restrictions,demand for our subsea equipment, support services, and the recent developments in the global oil markets.rental solutions.

Gross profit.Cost of Sales. Gross profitCost of sales increased by $775, or 43 percent, to $2,569 for the three months ended September 30, 20202021 from $1,794 for the same period in 2020. The increase in cost of sales was $1,168, or 37 percentmainly a result of revenues, compared to $1,845, or 42 percent of revenues,increased project activity for the three months ended September 30, 2019. The 5 percent decrease in gross profit2021. Cost of sales as percentage was primarily dueof revenue increased to a lower proportion of service revenues resulting76% from COVID-19 disruptions and delays during63% for the three months ended September 30, 2021 and 2020, comparedrespectively, primarily due to the three months ended September 30, 2019.increases in labor and service costs.