UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

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

For the quarterly period ended ~~June~~September 30, 2021

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

Commission File No. 000-30351

DEEP DOWN, INC.

(Exact name of registrant as specified in its charter)

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

18511 Beaumont Highway, Houston, Texas		77049
(Address of Principal Executive Offices)		(Zip Code)

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

Not applicable

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

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

Title of each class	Trading Symbol(s)	Name of each exchange on which registered
N/A	N/A	N/A

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). Yes ☒ þNo ☐¨

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.

Large accelerated filer ☐¨	Accelerated filer ☐¨

Non-accelerated ~~Filer~~filer ☒þ	Smaller reporting company ☒

	Emerging growth company ☐¨

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 ☐ ¨No ☒þ

At ~~August~~November 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 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~~“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:

	•·	Economic uncertainty and financial market conditions may impact our customer base, suppliers and backlog;

	•·	The volatility of oil and natural gas prices;

	•·	Our use of percentage-of-completion accounting could result in volatility in our results of operations;

	•·	A portion of our contracts may contain terms with penalty provisions;

	•·	Fluctuations in the price and supply of raw materials used to manufacture our products may reduce our profits and could materially impact our ability to meet commitments to our customers;

	•·	Our operations could be adversely impacted by the continuing effects of government regulations;

	•·	International and political events may adversely affect our operations;

	•·	Our operating results may vary significantly from quarter to quarter;

	•·	We may be unsuccessful at generating profitable internal growth;

	•·	The departure of key personnel could disrupt our business;

	•·	Our business requires skilled labor, and we may be unable to attract and retain qualified employees;

	•·	Unfavorable legal outcomes could have a negative impact on our business; and

	•·	The impact of global health crises, including epidemics and pandemics.

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, 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

		Page No.

PART I. FINANCIAL INFORMATION

Item 1.	Condensed Consolidated Financial Statements	1
	~~Unaudited Condensed Consolidated~~ Balance Sheets ~~at June 30, 2021 and December 31, 2020~~	1
	~~Unaudited Condensed Consolidated~~ Statements of Operations ~~for the Three and Six Months Ended June 30, 2021 and 2020~~	2
	~~Unaudited Condensed Consolidated~~ Statements of Changes in Stockholders’ Equity ~~for the Three and Six Months Ended June 30, 2021 and 2020~~	3
	~~Unaudited Condensed Consolidated~~ Statements of Cash Flows ~~for the Six Months Ended June 30, 2021 and 2020~~	4
	Notes to Unaudited Condensed Consolidated Financial Statements	5
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	1415
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	20
Item 4.	Controls and Procedures	20

PART II. OTHER INFORMATION

Item 1.	Legal Proceedings	21
Item 6.	Exhibits	21

Signatures		22
~~Exhibit~~ Index to Exhibits		23

iii

PART I – FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

DEEP DOWN, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(UNAUDITED)

June 30, 2021 December 31, 2020
(In thousands, except share and per share amounts)
ASSETS
Current assets:
Cash $ 4,073 $ 3,745
Accounts receivable, net of allowance of $618 and $84, respectively 4,452 4,650
Inventory 217 187
Contract assets 502 189
Prepaid expenses and other current assets 101 151
Total current assets 9,345 8,922
Property, plant and equipment, net 2,268 2,604
Intangibles, net 41 44
Right-of-use operating lease assets 2,494 3,174
Other assets 264 195
Total assets $ 14,412 $ 14,939

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 1,788 $ 1,988
Contract liabilities 173 730
Current portion of PPP loan payable 0 863
Current lease liabilities 1,290 1,261
Total current liabilities 3,251 4,842

PPP loan payable 1,111 248
Operating lease liability, long-term 1,243 1,951
Total liabilities 5,605 7,041

Commitments and contingencies (Note 8) – –

Stockholders' equity:
Common stock, $0.001 par value, 24,500,000 shares authorized and 15,906,010 issued 16 16
Additional paid-in capital 73,675 73,638
Treasury stock, 3,367,145 shares, at cost (2,809 ) (2,809 )
Accumulated deficit (62,075 ) (62,947 )
Total stockholders' equity 8,807 7,898
Total liabilities and stockholders' equity $ 14,412 $ 14,939
~~The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.~~
1
~~DEEP DOWN, INC.~~
~~CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS~~
~~(UNAUDITED)~~

Three Months Ended Six Months Ended
June 30, June 30,
2021 2020 2021 2020
(In thousands, except per share amounts)
Revenues $ 4,528 $ 2,725 $ 8,450 $ 6,330
Cost of sales:
Cost of sales 2,938 1,216 4,949 3,458
Depreciation expense 184 242 367 482
Total cost of sales 3,122 1,458 5,316 3,940
Gross profit 1,406 1,267 3,134 2,390
Operating expenses:
Selling, general and administrative 1,752 2,005 3,287 3,698
Depreciation and amortization 78 61 155 122
Asset impairment 0 4,490 0 4,490
Total operating expenses 1,830 6,556 3,442 8,310
Operating loss (424 ) (5,289 ) (308 ) (5,920 )
Other (income) expense:
Interest expense, net 8 1 21 2
Other income, net (1,156 ) 0 (1,156 ) 0
Gain on sale of property, plant and equipment (6 ) 0 (55 ) 0
Total other (income) expense (1,154 ) 1 (1,190 ) 2
Income (loss) before income tax expense 730 (5,290 ) 882 (5,922 )
Income tax expense 6 – 10 5
Net income (loss) $ 724 $ (5,290 ) $ 872 $ (5,927 )

Net income (loss) per share:
Basic $ 0.06 $ (0.42 ) $ 0.07 $ (0.47 )
Fully diluted $ 0.06 $ (0.42 ) $ 0.07 $ (0.47 )

Weighted-average shares outstanding:
Basic 12,389 12,492 12,389 12,601
Fully diluted 12,444 12,492 12,439 12,601

September 30, 2021 December 31, 2020
(In thousands, except share and per share amounts)
ASSETS
Current assets:
Cash $ 3,708 $ 3,745
Accounts receivable, net of allowance of $618 and $84, respectively 5,094 4,650
Inventory 254 �� 187
Contract assets 92 189
Prepaid expenses and other current assets 91 151
Total current assets 9,239 8,922
Property, plant and equipment, net 1,853 2,604
Intangibles, net 39 44
Right-of-use operating lease assets 2,180 3,174
Other assets 198 195
Total assets $ 13,509 $ 14,939

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 1,667 $ 1,988
Contract liabilities 478 730
Current portion of PPP loan payable 0 863
Current lease liabilities 1,298 1,261
Total current liabilities 3,443 4,842

PPP loan payable 0 248
Operating lease liability, long-term 918 1,951
Total liabilities 4,361 7,041

Commitments and contingencies (Note 8)

Stockholders' equity:
Common stock, $0.001 par value, 24,500,000 shares authorized and 15,756,010 issued 16 16
Additional paid-in capital 73,684 73,638
Treasury stock, 3,517,145 shares, at cost (2,809 ) (2,809 )
Accumulated deficit (61,743 ) (62,947 )
Total stockholders' equity 9,148 7,898
Total liabilities and stockholders' equity $ 13,509 $ 14,939

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

1
DEEP DOWN, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)

Three Months Ended Nine Months Ended
September 30, September 30,
2021 2020 2021 2020
(In thousands, except per share amounts)

Revenues $ 3,550 $ 3,136 $ 12,000 $ 9,466
Cost of sales:
Cost of sales 2,569 1,794 7,518 5,252
Depreciation expense 144 174 511 656
Total cost of sales 2,713 1,968 8,029 5,908
Gross profit 837 1,168 3,971 3,558
Operating expenses:
Selling, general and administrative 1,336 1,351 4,623 5,049
Depreciation and amortization 65 65 220 187
Asset impairment 0 0 0 4,490
Total operating expenses 1,401 1,416 4,843 9,726
Operating loss (564 ) (248 ) (872 ) (6,168 )
Other (income) expense:
Interest expense, net 1 2 8 4
Other income, net (1,050 ) 0 (2,193 ) 0
Loss on sale of property, plant and equipment 148 0 94 0
Total other (income) expense (901 ) 2 (2,091 ) 4
Income (loss) before income tax expense 337 (250 ) 1,219 (6,172 )
Income tax expense 5 0 15 5
Net income (loss) $ 332 $ (250 ) $ 1,204 $ (6,177 )

Net income (loss) per share:
Basic $ 0.03 $ (0.02 ) $ 0.10 $ (0.49 )
Fully diluted $ 0.03 $ (0.02 ) $ 0.10 $ (0.49 )

Weighted-average shares outstanding:
Basic 12,389 12,390 12,389 12,531
Fully diluted 12,445 12,390 12,441 12,531
The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.
2

DEEP DOWN, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(UNAUDITED)

Additional
Common Stock Paid-in Treasury Accumulated
(In thousands) Shares (#) Amount ($) Capital Stock Deficit Total

Balance at December 31, 2019 15,906 $ 16 $ 73,521 $ (2,284 ) $ (56,890 ) $ 14,363

Net loss – – – – (637 ) (637 )
Treasury shares purchased – – – (524 ) – (524 )
Share-based compensation – – 50 – – 50

Balance at March 31, 2020 15,906 $ 16 $ 73,571 $ (2,808 ) $ (57,527 ) $ 13,252

Net loss – – – – (5,290 ) (5,290 )
Restricted stock awards forfeited (150 ) – – – – –
Share-based compensation – – 24 – – 24

Balance at June 30, 2020 15,756 $ 16 $ 73,595 $ (2,808 ) $ (62,817 ) $ 7,986

Net loss – – – – (250 ) (250 )
Treasury shares purchased – – – (1 ) – (1 )
Share-based compensation – – 39 – – 39

Balance at September 30, 2020 15,756 $ 16 $ 73,634 $ (2,809 ) $ (63,067 ) $ 7,774

Balance at December 31, 2020 15,756 $ 16 $ 73,638 $ (2,809 ) $ (62,947 ) 7,898

Net income – – – – 148 148
Share-based compensation – – 20 – – 20

Balance at March 31, 2021 15,756 $ 16 $ 73,658 $ (2,809 ) $ (62,799 ) $ 8,066

Net income – – – – 724 724
Share-based compensation – – 17 – – 17

Balance at June 30, 2021 15,756 $ 16 $ 73,675 $ (2,809 ) $ (62,075 ) $ 8,807

Net income – – – – 332 332
Share-based compensation – – 9 – – 9

Balance at September 30, 2021 15,756 $ 16 $ 73,684 $ (2,809 ) $ (61,743 ) $ 9,148

Additional
Common Stock Paid-in Treasury Accumulated
(In thousands) Shares (#) Amount ($) Capital Stock Deficit Total
Balance at December 31, 2019 15,906 $ 16 $ 73,521 $ (2,284 ) $ (56,890 ) $ 14,363
Net loss – – – – (637 ) (637 )
Treasury shares purchased – – – (524 ) – (524 )
Share-based compensation – – 50 – – 50
Balance at March 31, 2020 15,906 $ 16 $ 73,571 $ (2,808 ) $ (57,527 ) $ 13,252
Net loss – – – – (5,290 ) (5,290 )
Share-based compensation – – 24 – – 24
Balance at June 30, 2020 15,906 $ 16 $ 73,595 $ (2,808 ) $ (62,817 ) $ 7,986

Balance at December 31, 2020 15,756 $ 16 $ 73,638 $ (2,809 ) $ (62,947 ) 7,898
Net income – – – – 148 148
Share-based compensation – – 20 – – 20
Balance at March 31, 2021 15,756 $ 16 $ 73,658 $ (2,809 ) $ (62,799 ) $ 8,066
Net income – – – – 724 724
Share-based compensation – – 17 – – 17
Balance at June 30, 2021 15,756 $ 16 $ 73,675 $ (2,809 ) $ (62,075 ) $ 8,807
The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.
3
DEEP DOWN, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)

Nine Months Ended
September 30,
2021 2020
(In thousands)
Cash flows from operating activities:
Net income (loss) $ 1,204 $ (6,177 )
Adjustments to reconcile net income (loss) to net cash used in operating activities:
Share-based compensation 46 113
Depreciation and amortization 731 843
Loss on sale of property, plant and equipment 94 0
Bad debt expense 534 426
Non-cash lease expense (1 ) 10
Forgiveness of PPP loan (2,222 ) 0
Loss on asset impairment 0 4,490
Changes in operating assets and liabilities:
Accounts receivable, net (943 ) 126
Contract assets 97 539
Inventories (67 ) 0
Prepaid expenses and other current assets 50 45
Other assets (3 ) (136 )
Accounts payable and accrued expenses (321 ) (60 )
Contract liabilities (252 ) (175 )
Net cash (used in) provided by operating activities (1,053 ) 44

Cash flows from investing activities:
Proceeds from sale of property, plant and equipment 171 0
Purchases of property, plant and equipment (275 ) (118 )
Payments received on note receivable (included in Prepaid expenses and other current assets) 9 10
Net cash used in investing activities (95 ) (108 )

Cash flows from financing activities:
Proceeds from PPP loan 1,111 1,111
Repurchase of common shares 0 (525 )
Net cash provided by financing activities 1,111 586
Change in cash (37 ) 522
Cash, beginning of period 3,745 3,523
Cash, end of period $ 3,708 $ 4,045

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

3
~~DEEP DOWN, INC.~~
~~CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS~~
~~(UNAUDITED)~~

Six Months Ended
June 30,
2021 2020
(In thousands)
Cash flows from operating activities:
Net income (loss) $ 872 $ (5,927 )
Adjustments to reconcile net income (loss) to net cash used in operating activities:
Share-based compensation 37 74
Depreciation and amortization 522 604
Gain on sale of property, plant and equipment (55 ) 0
Bad debt expense 534 448
Non-cash lease expense 3 5
Forgiveness of PPP loan (1,111 ) 0
Loss on asset impairment 0 4,490
Changes in operating assets and liabilities:
Accounts receivable, net (337 ) (348 )
Contract assets (313 ) 229
Inventories (30 ) 0
Prepaid expenses and other current assets 44 51
Other assets (52 ) (200 )
Accounts payable and accrued expenses (200 ) (110 )
Contract liabilities (557 ) 333
Net cash used in operating activities (643 ) (351 )

Cash flows from investing activities:
Proceeds from sale of property, plant and equipment 56 0
Purchases of property, plant and equipment (202 ) (102 )
Payments received on note receivable (included in Prepaid expenses and other current assets) 6 7
Net cash used in investing activities (140 ) (95 )

Cash flows from financing activities:
Proceeds from PPP loan 1,111 1,111
Repurchase of common shares 0 (524 )
Net cash provided by financing activities 1,111 587
Change in cash 328 141
Cash, beginning of period 3,745 3,523
Cash, end of period $ 4,073 $ 3,664
~~The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.~~
4

~~DEEP DOWN, INC.~~
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except per share amounts)

NOTE 1: BASIS OF PRESENTATION

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. 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, 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 $~~4,073~~3,708 and working capital was $~~6,094~~5,796 as of ~~June~~September 30, 2021. As of December 31, 2020, cash on hand and working capital was $3,745 and $4,080, respectively. ~~Other than a remaining loan obtained under the Paycheck Protection Program (“PPP”), the~~The Company does not have a credit facility in place and depends on cash on hand, cash flows from operations, and the potential opportunistic sales of property, plant and equipment (“PP&E”). ~~See Note 11 for further discussion of the PPP loans.~~

The Company believes it will have adequate liquidity to meet its future operating requirements through a combination of cash on hand, cash expected to be generated from operations, and potential opportunistic sales of PP&E in addition to pursuing a disciplined approach to making capital investments. However, given the ~~abrupt decline~~volatility in oil prices and the impact on global economic activity caused by the COVID-19 pandemic, as well as recent increases in ~~2020,~~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. All intercompany transactions and balances have been eliminated.

Segments

For the three and ~~six~~nine months ended ~~June~~September 30, 2021 and 2020, we had one 1 operating and reporting ~~segment, Deep Down Delaware.~~
segment.

5

NOTE 2: LEASES

In February 2016, the ~~FASB~~Financial Accounting Standards Board 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 is initially 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 is 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 then-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 ~~June~~September 30, 2021, we do not have any finance lease assets or liabilities, nor do we have any subleases.

~~The following tables present information about our operating leases:~~
Operating lease right to use
June 30, 2021 December 31, 2020
(In thousands)
Assets:
Right-of-use assets $ 2,494 $ 3,174

Liabilities:
Current lease liabilities 1,290 1,261
Non-current lease liabilities 1,243 1,951
Total lease liabilities $ 2,533 $ 3,212

6

The following tables present information about our operating leases:
Operating lease right to use
September 30, 2021 December 31, 2020
(In thousands)
Assets:
Right-of-use assets $ 2,180 $ 3,174

Liabilities:
Current lease liabilities 1,298 1,261
Non-current lease liabilities 918 1,951
Total lease liabilities $ 2,216 $ 3,212
The components of our lease expense were as follows:

Components of lease expense
Three Months Ended Six Months Ended
June 30, June 30, Three Months Ended Nine Months Ended
2021 2020 2021 2020 September 30, September 30,
(In thousands) (In thousands) 2021 2020 2021 2020
Operating lease expense included in cost of sales $ 316 $ 80 $ 633 $ 388 $ 313 $ 271 $ 946 $ 659
Operating lease expense included in selling, general and administrative 35 14 108 74 35 26 143 100
Short term lease expense 68 53 113 87 97 37 210 124
Total lease expense $ 419 $ 147 $ 854 $ 549 $ 445 $ 334 $ 1,299 $ 883

Lease term and discount rate:

Lease term and discount rate
June 30, 2021 December 31, 2020
September 30,
2021

December 31,
2020
Weighted-average remaining lease terms on operating leases (yrs.) 1.92 2.43 1.71 2.43
Weighted-average discount rates on operating leases 5.374% 5.374% 5.374% 5.374%

During the three months ended ~~June~~September 30, 2021, the Company did not have any sale/leaseback transactions.

7
Present value of lease liabilities:

Future minimum lease payments
Operating Leases
July 1, 2021 - June 30, 2022 $ 1,389
July 1, 2022 - June 30, 2023 1,251
July 1, 2023 - June 30, 2024 14
July 1, 2024 - June 30, 2025 8
Thereafter 1
Total lease payments 2,663
Less: Interest (130 )
Present value of lease liabilities $ 2,533
Future minimum lease payments
Operating Leases
October 1, 2021 - September 30, 2022 $ 1,380
October 1, 2022 - September 30, 2023 919
October 1, 2023 - September 30, 2024 8
October 1, 2024 - September 30, 2025 7
Total lease payments $ 2,314
Less: Interest (98 )
Present value of lease liabilities $ 2,216

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 each 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.

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Disaggregation of Revenue

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

Disaggregation of Revenue - Contract Revenue
Three Months Ended Three Months Ended
June 30, September 30,
2021 2020 2021 2020
Fixed Price Contracts $ 2,011 $ 2,073 $ 1,866 $ 2,522
Service Contracts 2,517 652 1,684 614
Total $ 4,528 $ 2,725 $ 3,550 $ 3,136

Six Months Ended Nine Months Ended
June 30, September 30,
2021 2020 2021 2020
Fixed Price Contracts $ 3,305 $ 3,817 $ 5,170 $ 6,338
Service Contracts 5,145 2,513 6,830 3,128
Total $ 8,450 $ 6,330 $ 12,000 $ 9,466
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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.

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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 invoiced and are payable on a monthly basis. Payment terms for services are usually 30 days from invoice receipt.
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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 ~~June~~September 30, 2021 and December 31, 2020, there were no contracts with terms that extended beyond one year.

The following table summarizes our 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”.

Schedule of earnings in excess of billings on uncompleted contracts
June 30, 2021 December 31, 2020
Costs incurred on uncompleted contracts $ 3,293 $ 2,098
Estimated earnings on uncompleted contracts 4,021 3,153
Gross costs and estimated earnings 7,314 5,251
Less: Billings to date on uncompleted contracts (6,985 ) (5,792 )
Costs incurred plus estimated earning less billings on uncompleted contracts, net $ 329 $ (541 )

Included in the accompanying unaudited condensed consolidated balance sheets under the following captions:
Contract assets $ 502 $ 189
Contract liabilities (173 ) (730 )
Costs incurred plus estimated earning less billings on uncompleted contracts $ 329 $ (541 )
Schedule of earnings in excess of billings on uncompleted contracts
September 30, 2021 December 31, 2020
Costs incurred on uncompleted contracts $ 3,174 $ 2,098
Estimated earnings on uncompleted contracts 4,216 3,153
Gross costs and estimated earnings 7,390 5,251
Less: Billings to date on uncompleted contracts (7,776 ) (5,792 )
Costs incurred plus estimated earning less billings on uncompleted contracts $ (386 ) $ (541 )

Included in the accompanying unaudited condensed consolidated balance sheets under the following captions:
Contract assets $ 92 $ 189
Contract liabilities (478 ) (730 )
Costs incurred plus estimated earning less billings on uncompleted contracts $ (386 ) $ (541 )

The contract asset and liability balances at ~~June~~September 30, 2021 and December 31, 2020 consisted primarily of 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.

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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 Company transfers a promised good or service to a customer and when the customer pays for that good or service is 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.

NOTE 4: PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment consisted of the following:

Schedule of property, plant and equipment
Range of Range of
June 30, 2021 December 31, 2020 Asset Lives September 30, 2021 December 31, 2020 Asset Lives
Buildings and improvements $ 285 $ 285 7 - 36 years $ 285 $ 285 7 - 36 years
Leasehold improvements 906 906 2 - 5 years 906 906 2 - 5 years
Equipment 12,439 12,343 2 - 30 years 11,833 12,343 2 - 30 years
Furniture, computers and office equipment 907 907 2 - 8 years 907 907 2 - 8 years
Construction in progress 133 84 - 74 84 –

Total property, plant and equipment 14,670 14,525 14,005 14,525
Less: Accumulated depreciation and amortization (12,402 ) (11,921 ) (12,152 ) (11,921 )
Property, plant and equipment, net $ 2,268 $ 2,604 $ 1,853 $ 2,604

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NOTE 5: SHARE-BASED COMPENSATION

Share-based compensation is included in selling, general and administrative expenses in the accompanying unaudited condensed consolidated statements of operations and additional paid-in capital in the accompanying unaudited consolidated balance sheets. During the three and ~~six~~nine months ended ~~June~~September 30, 2021, the Company recognized a total of $179 and $3746 of share-based compensation expense, respectively. During the three and ~~six~~nine months ended ~~June~~September 30, 2020, the Company recognized a total of $2439 and $74113, respectively, of share-based compensation ~~expense, which includes $23 of credits to compensation expense related to the forfeiture of restricted stock awards of our former Chief Operating Officer in the second quarter of 2020.~~expense. The unamortized estimated fair value of nonvested shares of restricted stock and stock options was $112 and $48 at ~~June~~September 30, 2021 and December 31, 2020, respectively. These costs are expected to be recognized as expenses over a weighted-average period of 0~~.32~~0.31 years.
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NOTE 6: TREASURY STOCK

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 three months ended March 31, 2020, in a privately negotiated transaction. During the three months ended March 31, 2020, 744 shares of common stock were purchased for an aggregate amount of $524. The repurchase program was exhausted as of March 31, 2020. Treasury shares are accounted for using the cost method.

NOTE 7: INCOME TAXES

Income tax expense during interim periods is based on applying the estimated annual effective income tax rate to interim period operations. The estimated annual effective income tax rate may vary from the statutory rate due to the impact of permanent items relative to our pre-tax income, as well as by any valuation allowance recorded. We employ an asset and liability approach that results in the recognition of deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the financial basis and the tax basis of those assets and liabilities. A valuation allowance is established when it is more likely than not that some of the deferred tax assets will not be realized. At ~~June~~September 30, 2021 and December 31, 2020, management has recorded a full deferred tax asset valuation allowance.

NOTE 8: COMMITMENTS AND CONTINGENCIES

Letters 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 beneficiary 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 ~~June~~September 30, 2021 or December 31, 2020.

Employment Agreement

Our Chief Executive Officer is employed under an employment agreement containing severance provisions. In the event of termination of the CEO’s employment for any reason, the CEO will be entitled to receive all accrued, unpaid salary and vacation time through the date of termination and all benefits to which the CEO is entitled or vested under the terms of all employee benefit and compensation plans, agreements, and arrangements in which the CEO participants as of the date of termination.
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In addition, subject to executing a general release in favor of the Company, the CEO will be entitled to receive certain severance payments in the event his employment is terminated by the Company “other than for cause” or by the CEO with “good reason.” These severance payments include: (i) a lump sum in cash equal to one to two times the CEO’s annual base salary; (ii) a lump sum in cash equal to one to two times the average annual bonus paid to the CEO 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 the CEO’s annual base salary; and (iv) if the CEO’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 CEO 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 made payments to the former COO equal to one time his contractual annual base salary of $245over 12 months.
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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 in total, which shall be paid on a monthly basis through December 2021. The Company accrued a liability related to this matter in the amount of $750 for the year ended December 31, 2019. The remaining liability was $~~180~~90 at ~~June~~September 30, 2021.

NOTE 9: EARNINGS PER COMMON SHARE

Basic earnings per share (“EPS”) is calculated by dividing net income (loss) by the weighted-average number of common shares outstanding for the period. Diluted EPS is calculated by dividing net income (loss) by the weighted-average number of common shares and the dilutive effect of common stock equivalents (warrants, nonvested stock awards and stock options) using the treasury method.
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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.

Reconciliation of number of shares in earnings per share calculation
Three Months Ended Six Months Ended Three months ended Nine months ended
June 30, June 30, September 30, September 30,
2021 2020 2021 2020 2021 2020 2021 2020
Weighted average common shares outstanding - basic 12,389 12,492 12,389 12,601 12,389 12,390 12,389 12,531
Diluted effect of common stock equivalents 55 0 50 0
Dilutive effect of common stock equivalents 56 0 52 0
Weighted average common shares outstanding - diluted 12,444 12,492 12,439 12,601 12,445 12,390 12,441 12,531

NOTE 10: RELATED PARTY TRANSACTIONS

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 $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 and $90135 for the three and ~~six~~nine months ended ~~June~~September 30, 2021.
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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 the assets or stock of Deep 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.

NOTE 11. SMALL BUSINESS ADMINISTRATION’S PAYCHECK PROTECTION PROGRAM LOAN

The Company obtained a $1,111 loan under the Small Business Administration’s (“SBA”) Paycheck Protection Program in April 2020 (“April 2020 PPP ~~loan”~~Loan”). The April 2020 PPP ~~loan~~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~~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 presented as a component of other income on the condensed consolidated statement of operations for the ~~three and six~~nine months ended ~~June~~September 30, 2021.

The Company ~~applied for~~obtained a second $1,111PPP loan ~~and, on~~in March 1, 2021 ~~received a potentially forgivable loan~~ (“March 2021 PPP ~~loan”~~Loan”) ~~in the amount of $1,111~~. The March 2021 PPP ~~loan is evidenced by a promissory note, dated~~Loan was used to ~~be effective as~~finance covered payroll expenses during the first and second quarters of ~~March 1, 2021, between the Company and the lender. The promissory note matures on~~ ~~March 1, 2026~~ ~~and bears interest at a fixed rate of~~ 1.00 percent per annum, beginning on the date of advance until the loan maturity date. The PPP Flexibility Act of 2020 delayed repayment of principal and interest until the date that the forgiveness amount is remitted to the lender by the SBA. Under the terms of the Paycheck Protection Program, up to 100% of the loan and related interest may be forgiven if the proceeds are used for covered expenses and certain other requirements related to wage rates and maintenance of full-time equivalents are met.2021. The Company applied for ~~full~~ forgiveness of the March 2021 PPP Loan in August 2021 and received forgiveness of $1,111 from the SBA on September 10, 2021. The amount of loan ~~with~~forgiveness, including accrued interest, is presented as a component of other income on the ~~lender on August 5,~~condensed consolidated statement of operations for the three and nine months ended September 30, 2021.

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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 provides 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, 2020 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 a leading energy services company offering subsea equipment and support services to the world’s energy and offshore industries. We provide innovative solutions to complex customer challenges presented between the production facility and the 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 team can support subsea engineering, manufacturing, 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 operators to cut back or accelerate their exploration, drilling, and production operations is substantially driven by the overall 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, which continues to ~~have an~~ impact markets globally. The ~~Company acknowledges that the~~ low oil price environment caused by the pandemic, when coupled with restricted travel to mitigate against the spread of COVID-19, triggered 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 any reason.

Oil and gas operators, equipment providers, and services companies had to quickly adapt to overcome the challenges presented by these unprecedented times, and Deep Down was no exception. Our primary focus ~~throughout 2020 and the first half of 2021~~since this global economic disruption has been to improve our cost structure and manage our cash flows, and as a result of these efforts, we have been able to generate a profit for the past three consecutive quarters despite the offshore drilling environment continuing to recover at a measured pace. Our efforts to manage costs and cash flowswhich will remain a priority as we look toward the future.

The initial loan we received under the Paycheck Protection Program (“PPP”) in April 2020 supplemented our cash flows to fund payroll as revenues declined, and our second PPP loan in March 2021 provided a needed buffer to fund working capital while we continue to strengthen our workforce. ~~Last quarter,~~We have now received confirmation of the forgiveness for both loans, which solidifies our working capital position as we ~~viewed~~evaluate future growth opportunities. One area we have been able to capitalize on has been the workforce reductions at other organizations, ~~as an~~which has provided us the opportunity to add high caliber individuals to our team who ~~have~~possess a wealth of industry knowledge and experience.

During the first ~~half~~nine months of 2021, oil prices progressively rebounded to healthier levels as demand continued to strengthen and travel restrictions ~~began~~continued to ease. As a result, we managed to safely send teams to various international ~~locations over the past six months.~~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.

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~~In addition to the increased ability to travel, we~~We have ~~also~~ seen ~~a progressive~~an increase in bidding activity and execution of contract awards this year as operators mobilize to complete ~~previously delayed projects. In addition,~~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 ~~envision~~envisioned that the successful execution of this project will provide further opportunities to utilize our carousels in the ~~future.~~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 2021. We are also actively engaged in multiple conversations with different customers to discuss additional rental opportunities for our carousels and associated cable management services.

The growth of our business remains a top priority and generating free cash flow and preservation of liquidity remains of critical importance to achieve this desired growth, especially in ~~the~~this current environment. We are keenly focused on the levers within our control, and we are ~~seeing~~experiencing an increase in requests for short-cycle service work, an area where we have a proven track record. ~~We, therefore, see this continuing 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. WeAs such, we are confident our streamlined operations and ~~renewed~~continued focus on our ~~cost drivers~~core strengths will enable us to be the primary choice for our customers.

Looking towards the future, we continue to ~~actively~~ 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 also working on developing the next generation of our equipment by incorporating designs that utilize a reduced carbon footprint.

We maintain our commitment to ensuring we continuously enhance value for our stockholders, while being an employer of choice in the industry.

Results of Operations

Three Months Ended ~~June~~September 30, 2021 Compared to Three Months Ended ~~June~~September 30, 2020

Revenues. Revenues for the three months ended ~~June~~September 30, 2021 were ~~$4,528~~$3,550 compared to revenues of ~~$2,725~~$3,136 for the three months ended ~~June~~September 30, 2020. The ~~$1,803,~~$414, or 6613 percent, increase from the same period in 2020 was primarily the result of the progressive increase in demand for our subsea equipment, support services, and rental solutions.

Cost of Sales. Cost of sales increased by ~~$1,722,~~$775, or ~~142~~43 percent, to ~~$2,938~~$2,569 for the three months ended ~~June~~September 30, 2021 from ~~$1,216~~$1,794 for the same period in 2020. The increase in cost of sales was primarily due to increased costs for materials and higher utilization rates for service and fabrication personnel during the three months ended June 30, 2021 as compared to the three months ended June 30, 2020. Additionally, the Company received rent abatements of $251 during the three months ended June 30, 2020 asmainly a result of ~~the COVID-19 pandemic but did not receive any rent abatements during the three months ended June 30, 2021.~~
~~The Company records depreciation expense related to revenue-generating property, plant and equipment as cost of sales, which totaled $184 and $242~~increased project activity for the three months ended ~~June~~September 30, 2021. Cost of sales as percentage of revenue increased to 76% from 63% for the three months ended September 30, 2021 and 2020, ~~respectively. The comparative decrease in depreciation expense was~~respectively, primarily due to ~~recording increased impairment charges relating to certain idle, long-lived assets during 2020, which had the effect of reducing depreciation expense~~increases in ~~subsequent periods.~~labor and service costs.

Selling, general and administrative expenses. Selling, general and administrative expenses (“SG&A”) decreased by ~~$253,~~$15, or 131 percent, to ~~$1,752~~$1,336 for the three months ended ~~June~~September 30, 2021 from ~~$2,005~~$1,351 for the same period in 2020. The decrease in SG&A was primarily due to incurring a one-time $245 severance charge related to the elimination of the Company’s COO position during the three months ended June 30, 2020. Additionally, the Company recorded a $534 and $448 reserve for doubtful accounts receivable related to prolonged customer payment terms and uncertainty around certain customers’ liquidity for the three months ended June 30, 2021 and 2020, respectively.
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~~Asset Impairment.~~ During the three months ended June 30, 2020, the Company recorded 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. No impairment of long-lived assets was recorded during the three months ended June 30, 2021.
~~Interest expense, net.~~ Net interest expense for the three months ended June 30, 2021 was $8 compared to net interest expense of $1 for the three months ended June 30, 2020. The increase of $7 is due to recording interest accrued to date on the Company’s outstanding PPP loan balances.lower payroll costs.

Other income, net. During the three months ended ~~June~~September 30, 2021, the Company recorded net other income of ~~$1,156,~~$1,056, which was primarily related to the forgiveness of its ~~first~~second PPP loan obtained in ~~April 2020.~~March 2021.

~~Gain~~Loss on sale of assets. During the three months ended ~~June~~September 30, 2021, ~~gain~~loss on sales of assets was approximately $6$149 related to equipment sold by the Company. During the three months ended ~~June~~September 30, 2020, the Company did not record any gains or losses related to equipment and vehicles sold by the Company.
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Modified EBITDA. Deep Down management evaluates Company performance based on a non-US GAAP measure which consists of earnings (net income or loss) available to common stockholders before net interest income, income taxes, depreciation and amortization, non-cash share-based compensation expense, non-cash impairments, non-cash gains or losses on the sale of property, plant and equipment (“PP&E”), other non-cash items and one-time charges (“Modified EBITDA”). This measure may not be comparable to similarly titled measures employed by other companies. 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 condensed consolidated statements of operations.

We believe Modified EBITDA is a useful 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 actions that do not affect liquidity (share-based compensation expense) from our operating results. 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 income (loss) to Modified EBITDA ~~(loss)~~ for the three months ended ~~June~~September 30, 2021 and 2020:

Three Months Ended June 30,
2021 2020
Net income (loss) $ 724 $ (5,290 )

Add: Interest expense, net 8 1
Add: Income tax expense 6 –
Add: Depreciation and amortization 262 303
Add: Share-based compensation 17 24
Add: Asset impairment – 4,490
Add: One-time charges related to elimination of COO position – 245
Deduct: Gain on sale of asset (6 ) –
Deduct: Forgiveness of PPP loan (1,124 ) –

Modified EBITDA (loss) $ (113 ) $ (227 )
16
Three Months Ended
September 30,
2021 2020
Net income (loss) $ 332 $ (250 )

Add: Interest expense, net 1 2
Add: Income tax expense 5 –
Add: Depreciation and amortization 209 239
Add: Share-based compensation 9 39
Add: Loss on sale of property, plant and equipment 148 –
Deduct: Forgiveness of PPP loan (1,111 ) –

Modified EBITDA $ (407 ) $ 30

The ~~$114 improvement~~$437 decrease in Modified EBITDA ~~(loss)~~ for the three months ended ~~June~~September 30, 2021 was primarily due to ~~an increase in revenues and~~a decrease in ~~SG&A expenses~~gross margin as compared to the three months ended June 30, 2020. Modified EBITDA (loss) for the three months ended June 30, 2021 was also impacted by recording a $534 reserve for doubtful accounts receivable as compared to recording a $448 reserve for doubtful accounts receivable for the three months ended JuneSeptember 30, 2020.

~~Six~~Nine Months Ended ~~June~~September 30, 2021 Compared to ~~Six~~Nine Months Ended ~~June~~September 30, 2020

Revenues. Revenues for the ~~six~~nine months ended ~~June~~September 30, 2021 were ~~$8,450~~$12,000 compared to revenues of ~~$6,330~~$9,466 for the ~~six~~nine months ended ~~June~~September 30, 2020. The ~~$2,120,~~$2,534, or 3327 percent, increase from the same period in 2020 was primarily the result of the progressive increase in demand for our subsea equipment, support services, and rental solutions.

17
Cost of Sales. Cost of sales increased by ~~$1,491,~~$2,266, or 43 percent, to ~~$4,949~~$7,518 for the ~~six~~nine months ended ~~June~~September 30, 2021 from ~~$3,458~~$5,252 for the same period in 2020. The increase in cost of sales was primarily due to higher utilization rates for service and fabrication personnel and increased costs for materials during the six months ended June 30, 2021 as compared to the six months ended June 30, 2020. Additionally, the Company received rent abatements of $251 during the six months ended June 30, 2020 asmainly a result of increased project activity for the ~~COVID-19 pandemic but did not receive any rent abatements during the six~~nine months ended ~~June~~September 30, 2021.
~~The Company records depreciation expense related to revenue-generating property, plant and equipment as cost~~ Cost of sales ~~which totaled $367 and $482~~as percentage of revenue increased to 67% from 62% for the ~~six~~nine months ended ~~June~~September 30, 2021 and 2020, ~~respectively. The comparative decrease in depreciation expense was~~respectively, primarily due to ~~the Company recording increased impairment charges relating to certain idle, long-lived assets during 2020, which had the effect of reducing depreciation expense~~increases in ~~subsequent periods.~~labor and service costs.

Selling, general and administrative expenses. SG&A decreased by ~~$411,~~$426, or 118 percent, to ~~$3,287~~$4,623 for the ~~six~~nine months ended ~~June~~September 30, 2021 from ~~$3,698~~$5,049 for the same period in 2020. The decrease in SG&A was primarily due to incurring a one-time $245 severance charge related to the elimination of the Company’s COO position during the ~~six~~nine months ended ~~June~~September 30, 2020. ~~Additionally,~~The Company also incurred lower payroll costs during the ~~Company recorded a $534 and $448 reserve for doubtful accounts receivable related to prolonged customer payment terms and uncertainty around certain customers’ liquidity for the six~~nine months ended ~~June~~September 30, 2021 ~~and 2020, respectively.~~as compared to the nine months ended September 30, 2020.

Asset Impairment. During the ~~six~~nine months ended ~~June~~September 30, 2020, the Company recorded 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. No impairment of long-lived assets was recorded during the ~~six~~nine months ended ~~June~~September 30, 2021.
~~Interest expense, net~~. Net interest expense for the six months ended June 30, 2021 was $21 compared to net interest expense of $2 for the six months ended June 30, 2020. The increase of $19 is due to recording interest accrued to date on the Company’s outstanding PPP loan balances.

Other income, net. ~~During the six months ended June 30, 2021, the~~The Company recorded net other income of ~~$1,156,~~$2,212 during the nine months ended September 30, 2021, which was primarily related to the forgiveness of its ~~first~~two PPP ~~loan obtained in April 2020.~~loans.

~~Gain~~Loss on sale of assets. During the ~~six~~nine months ended ~~June~~September 30, 2021, ~~gain~~the net loss on sales of assets was approximately ~~$55~~$94 and related to equipment sold by the Company. During the ~~six~~nine months ended ~~June~~September 30, 2020, the Company did not record any gains or losses related to equipment and vehicles sold by the Company.
17

Modified EBITDA. The following is a reconciliation of net income (loss) to Modified EBITDA ~~(loss)~~ for the ~~six~~nine months ended ~~June~~September 30, 2021 and 2020:

Nine Months Ended
Six Months Ended June 30, September 30,
2021 2020 2021 2020
Net income (loss) $ 872 $ (5,927 ) $ 1,204 $ (6,177 )

Add: Interest expense, net 21 2 8 4
Add: Income tax expense 10 5 15 5
Add: Depreciation and amortization 522 604 731 843
Add: Share-based compensation 37 74 46 113
Add: Asset impairment – 4,490 – 4,490
Add: One-time charges related to elimination of COO position – 245 – 245
Deduct: Gain on sale of asset (55 ) –
Add: Loss on sale of property, plant and equipment 94 –
Deduct: Forgiveness of PPP loan (1,124 ) – (2,222 ) –

Modified EBITDA (loss) $ 283 $ (507 )
Modified EBITDA $ (124 ) $ (477 )

The ~~$790 increase~~$353 improvement in Modified EBITDA was due primarily to an increase in revenues and decrease in SG&A during the ~~six~~nine months ended ~~June~~September 30, 2021 as compared to the ~~six~~nine months ended ~~June~~September 30, 2020. Modified EBITDA for the ~~six~~nine months ended ~~June~~September 30, 2021 was also impacted by recording a $534 reserve for doubtful accounts receivable as compared to recording a $448 reserve for doubtful accounts receivable for the ~~six~~nine months ended ~~June~~September 30, 2020.
18

Liquidity and Capital Resources

The Company believes it will have adequate liquidity to meet its future operating requirements through a combination of cash on hand, cash expected to be generated from operations, working capital of ~~$6,094~~$5,796 as of ~~June~~September 30, 2021, and potential opportunistic sales of PP&E in addition to pursuing a disciplined approach to making capital investments.

Given the ~~abrupt decline~~volatility in oil prices and global economic activity caused by COVID-19 in 2020, the Company cannot predict with certainty the future impact on the Company’s operations and cash flows. The Company has taken steps to mitigate the challenges presented by the current macro environment, including workforce alignment, wage reductions, rent abatements, and limiting capital expenditures and R&D efforts to only critical items. The Company continues to seek further opportunities to preserve liquidity.

The Company obtained a $1,111 PPP loan ~~under the Small Business Administration’s (“SBA”) Paycheck Protection Program~~ in April 2020 (“April 2020 PPP ~~loan”~~Loan”). The April 2020 PPP ~~loan~~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~~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 presented as a component of other income on the condensed consolidated statements of operations for the ~~three and six~~nine months ended ~~June~~September 30, 2021.

The Company ~~applied for~~obtained a second $1,111 PPP loan ~~and, on~~in March 1, 2021 ~~received a potentially forgivable loan~~ (“March 2021 PPP ~~loan”~~Loan”) ~~in the amount of $1,111.~~. The March 2021 PPP ~~loan is evidenced by a promissory note, dated~~Loan was used to ~~be effective as~~finance covered payroll expenses during the first and second quarters of March 1, 2021, between the Company and the lender. The promissory note matures on March 1, 2026 and bears interest at a fixed rate of 1.00 percent per annum, beginning on the date of advance until the loan maturity date. The PPP Flexibility Act of 2020 delayed repayment of principal and interest until the date that the forgiveness amount is remitted to the lender by the SBA. Under the terms of the Paycheck Protection Program, up to 100% of the loan and related interest may be forgiven if the proceeds are used for covered expenses and certain other requirements related to wage rates and maintenance of full-time equivalents are met.2021. The Company applied for ~~full~~ forgiveness of the March 2021 PPP Loan in August 2021 and received forgiveness of $1,111 from the SBA on September 10, 2021. The amount of loan ~~with~~forgiveness, including accrued interest, is presented as a component of other income on the ~~lender on August 5,~~condensed consolidated statement of operations for the three and nine months ended September 30, 2021.
18

During the ~~six~~nine months ended ~~June~~September 30, 2021, the Company used ~~$643~~$1,053 of net cash in operating activities primarily to fund working capital. The Company also used ~~$140~~$95 of net cash in investing activities, primarily to fund capital expenditures. The Company generated $1,111 of net cash provided by financing activities from the March 2021 PPP ~~loan~~Loan proceeds, which resulted in a ~~$328 increase~~$37 decrease in cash for the period.

During the ~~six~~nine months ended ~~June~~September 30, 2020, the Company ~~used $351~~generated $44 of net cash infrom operating activities, which was primarily due to ~~lower revenues partially offset by~~ reductions in accounts receivable and ~~other~~contract assets. The Company also used ~~$95 of~~$108 in net cash for investing activities, primarily to fund capital expenditures. The Company generated ~~$587~~$586 of net cash from financing activities, primarily through the $1,111 in proceeds from the April 2020 PPP ~~loan proceeds,~~Loan, which was partially offset by ~~$524~~$525 of share repurchases. ~~This resulted in a $141 increase in cash for the period.~~

Inflation and Seasonality

The Company does not believe that its operations are significantly impacted by inflation, and its business is not significantly seasonal in nature.

Off-Balance Sheet Arrangements

The Company has no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on its financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to investors.
19

Critical Accounting Estimates

The 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 and disclosure of contingent assets and liabilities at the date of the financial statements and reported amounts of revenues and expenses during the reporting period. The most significant estimates used in the financial statements relate to revenue recognition where the Company measures progress towards completion on a cost-to-cost basis for fixed-price contracts, the allowance for doubtful accounts, and the valuation allowance for deferred income tax assets. These estimates require judgments, which are based on historical experience and on various other assumptions, as well as specific circumstances. Estimates may change as new events occur, additional information becomes available or operating environments change.

Refer to Part II. Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” in our Annual Report on Form 10-K for the year ended December 31, 2020 for a discussion of our critical accounting policies and estimates.

Recently Issued Accounting Standards

Refer to Note 1 in Part II. Item 8. “Financial Statements and Supplemental Data,” in our Annual Report on Form 10-K for the year ended December 31, 2020 for a discussion of recently issued accounting standards.

Share Repurchase Program

On December 23, 2019, the Board authorized the repurchase of up to 500 shares of the Company’s outstanding common stock. This 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 three months ended March 31, 2020, in a privately negotiated transaction. During the three months ended March 31, 2020, 744 shares of common stock were purchased for an aggregate amount of $524. The repurchase program was exhausted as of March 31, 2020.
19

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET ~~RISK.~~RISK

Not Applicable

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures. The Company’s disclosure controls and procedures are designed to ensure that such information required to be disclosed by the Company in reports filed or submitted under the Exchange Act 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 ~~June~~September 30, 2021, 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 ~~June~~September 30, 2021.

Changes in Internal Control Over Financial Reporting. The Company’s management, with the participation of the principal executive and principal financial officer, have concluded there were no changes in internal control over financial reporting during the three months ~~June~~September 30, 2021.

20

PART II. – OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

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 counter claim 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.

ITEM 6. EXHIBITS

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

21

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

DEEP DOWN, INC.
(Registrant)

Date: ~~August 16,~~November 12, 2021
By: /s/ Charles K. Njuguna
Charles K. Njuguna
President, Chief Executive Officer and Chief Financial Officer
(Principal Executive and Financial Officer)

By: /s/ Trevor L. Ashurst
Trevor L. Ashurst
Vice President of Finance
(Principal Accounting Officer)

22

INDEX TO EXHIBITS

31.1* Certification of Charles K. Njuguna, President, Chief Executive Officer and Chief Financial Officer, furnished pursuant to Rules 13a-14(a) and 15d-14(a) of the Securities Exchange Act of 1934, as amended.

31.2* Certification of Trevor L. Ashurst, Vice President of Finance, furnished pursuant to Rules 13a-14 and 15d-14(a) of the Securities Exchange Act of 1934, as amended.

32.1* Statement of Charles K. Njuguna, President, Chief Executive Officer and Chief Financial Officer, furnished pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2* Statement of Trevor L. Ashurst, VP of Finance, furnished pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

101.INS*101.INS* Inline XBRL Instance Document (the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document)

101.SCH* Inline XBRL Taxonomy Extension Schema Document

101.CAL* Inline XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF* Inline XBRL Taxonomy Extension Definition Linkbase Document

101.LAB* Inline XBRL Taxonomy Extension Label Linkbase Document

101.PRE* Inline XBRL Taxonomy Extension Presentation Linkbase Document

104* Cover Page Interactive Data File (formatted in IXBRL, and included in exhibit 101).

* Filed or furnished herewith.

23


	June 30, 2021			December 31, 2020
	(In thousands, except share and per share amounts)
ASSETS
Current assets:
Cash	$	4,073		$	3,745
Accounts receivable, net of allowance of $618 and $84, respectively		4,452			4,650
Inventory		217			187
Contract assets		502			189
Prepaid expenses and other current assets		101			151
Total current assets		9,345			8,922
Property, plant and equipment, net		2,268			2,604
Intangibles, net		41			44
Right-of-use operating lease assets		2,494			3,174
Other assets		264			195
Total assets	$	14,412		$	14,939

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses	$	1,788		$	1,988
Contract liabilities		173			730
Current portion of PPP loan payable		0			863
Current lease liabilities		1,290			1,261
Total current liabilities		3,251			4,842

PPP loan payable		1,111			248
Operating lease liability, long-term		1,243			1,951
Total liabilities		5,605			7,041

Commitments and contingencies (Note 8)		–			–

Stockholders' equity:
Common stock, $0.001 par value, 24,500,000 shares authorized and 15,906,010 issued		16			16
Additional paid-in capital		73,675			73,638
Treasury stock, 3,367,145 shares, at cost		(2,809	)		(2,809	)
Accumulated deficit		(62,075	)		(62,947	)
Total stockholders' equity		8,807			7,898
Total liabilities and stockholders' equity	$	14,412		$	14,939


	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2021			2020			2021			2020
	(In thousands, except per share amounts)
Revenues	$	4,528		$	2,725		$	8,450		$	6,330
Cost of sales:
Cost of sales		2,938			1,216			4,949			3,458
Depreciation expense		184			242			367			482
Total cost of sales		3,122			1,458			5,316			3,940
Gross profit		1,406			1,267			3,134			2,390
Operating expenses:
Selling, general and administrative		1,752			2,005			3,287			3,698
Depreciation and amortization		78			61			155			122
Asset impairment		0			4,490			0			4,490
Total operating expenses		1,830			6,556			3,442			8,310
Operating loss		(424	)		(5,289	)		(308	)		(5,920	)
Other (income) expense:
Interest expense, net		8			1			21			2
Other income, net		(1,156	)		0			(1,156	)		0
Gain on sale of property, plant and equipment		(6	)		0			(55	)		0
Total other (income) expense		(1,154	)		1			(1,190	)		2
Income (loss) before income tax expense		730			(5,290	)		882			(5,922	)
Income tax expense		6			–			10			5
Net income (loss)	$	724		$	(5,290	)	$	872		$	(5,927	)

Net income (loss) per share:
Basic	$	0.06		$	(0.42	)	$	0.07		$	(0.47	)
Fully diluted	$	0.06		$	(0.42	)	$	0.07		$	(0.47	)

Weighted-average shares outstanding:
Basic		12,389			12,492			12,389			12,601
Fully diluted		12,444			12,492			12,439			12,601


	September 30, 2021			December 31, 2020
	(In thousands, except share and per share amounts)
ASSETS
Current assets:
Cash	$	3,708		$	3,745
Accounts receivable, net of allowance of $618 and $84, respectively		5,094			4,650
Inventory		254	��		187
Contract assets		92			189
Prepaid expenses and other current assets		91			151
Total current assets		9,239			8,922
Property, plant and equipment, net		1,853			2,604
Intangibles, net		39			44
Right-of-use operating lease assets		2,180			3,174
Other assets		198			195
Total assets	$	13,509		$	14,939

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses	$	1,667		$	1,988
Contract liabilities		478			730
Current portion of PPP loan payable		0			863
Current lease liabilities		1,298			1,261
Total current liabilities		3,443			4,842

PPP loan payable		0			248
Operating lease liability, long-term		918			1,951
Total liabilities		4,361			7,041

Commitments and contingencies (Note 8)

Stockholders' equity:
Common stock, $0.001 par value, 24,500,000 shares authorized and 15,756,010 issued		16			16
Additional paid-in capital		73,684			73,638
Treasury stock, 3,517,145 shares, at cost		(2,809	)		(2,809	)
Accumulated deficit		(61,743	)		(62,947	)
Total stockholders' equity		9,148			7,898
Total liabilities and stockholders' equity	$	13,509		$	14,939


	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2021			2020			2021			2020
	(In thousands, except per share amounts)

Revenues	$	3,550		$	3,136		$	12,000		$	9,466
Cost of sales:
Cost of sales		2,569			1,794			7,518			5,252
Depreciation expense		144			174			511			656
Total cost of sales		2,713			1,968			8,029			5,908
Gross profit		837			1,168			3,971			3,558
Operating expenses:
Selling, general and administrative		1,336			1,351			4,623			5,049
Depreciation and amortization		65			65			220			187
Asset impairment		0			0			0			4,490
Total operating expenses		1,401			1,416			4,843			9,726
Operating loss		(564	)		(248	)		(872	)		(6,168	)
Other (income) expense:
Interest expense, net		1			2			8			4
Other income, net		(1,050	)		0			(2,193	)		0
Loss on sale of property, plant and equipment		148			0			94			0
Total other (income) expense		(901	)		2			(2,091	)		4
Income (loss) before income tax expense		337			(250	)		1,219			(6,172	)
Income tax expense		5			0			15			5
Net income (loss)	$	332		$	(250	)	$	1,204		$	(6,177	)

Net income (loss) per share:
Basic	$	0.03		$	(0.02	)	$	0.10		$	(0.49	)
Fully diluted	$	0.03		$	(0.02	)	$	0.10		$	(0.49	)

Weighted-average shares outstanding:
Basic		12,389			12,390			12,389			12,531
Fully diluted		12,445			12,390			12,441			12,531


						Additional
	Common Stock					Paid-in		Treasury			Accumulated
(In thousands)	Shares (#)			Amount ($)		Capital		Stock			Deficit			Total

Balance at December 31, 2019		15,906		$	16	$	73,521	$	(2,284	)	$	(56,890	)	$	14,363

Net loss		–			–		–		–			(637	)		(637	)
Treasury shares purchased		–			–		–		(524	)		–			(524	)
Share-based compensation		–			–		50		–			–			50

Balance at March 31, 2020		15,906		$	16	$	73,571	$	(2,808	)	$	(57,527	)	$	13,252

Net loss		–			–		–		–			(5,290	)		(5,290	)
Restricted stock awards forfeited		(150	)		–		–		–			–			–
Share-based compensation		–			–		24		–			–			24

Balance at June 30, 2020		15,756		$	16	$	73,595	$	(2,808	)	$	(62,817	)	$	7,986

Net loss		–			–		–		–			(250	)		(250	)
Treasury shares purchased		–			–		–		(1	)		–			(1	)
Share-based compensation		–			–		39		–			–			39

Balance at September 30, 2020		15,756		$	16	$	73,634	$	(2,809	)	$	(63,067	)	$	7,774

Balance at December 31, 2020		15,756		$	16	$	73,638	$	(2,809	)	$	(62,947	)		7,898

Net income		–			–		–		–			148			148
Share-based compensation		–			–		20		–			–			20

Balance at March 31, 2021		15,756		$	16	$	73,658	$	(2,809	)	$	(62,799	)	$	8,066

Net income		–			–		–		–			724			724
Share-based compensation		–			–		17		–			–			17

Balance at June 30, 2021		15,756		$	16	$	73,675	$	(2,809	)	$	(62,075	)	$	8,807

Net income		–			–		–		–			332			332
Share-based compensation		–			–		9		–			–			9

Balance at September 30, 2021		15,756		$	16	$	73,684	$	(2,809	)	$	(61,743	)	$	9,148

Operating lease right to use
	June 30, 2021		December 31, 2020
	(In thousands)
Assets:
Right-of-use assets	$	2,494	$	3,174

Liabilities:
Current lease liabilities		1,290		1,261
Non-current lease liabilities		1,243		1,951
Total lease liabilities	$	2,533	$	3,212

Components of lease expense
	Three Months Ended				Six Months Ended
	June 30,				June 30,				Three Months Ended				Nine Months Ended
	2021		2020		2021		2020		September 30,				September 30,
	(In thousands)				(In thousands)				2021		2020		2021		2020
Operating lease expense included in cost of sales	$	316	$	80	$	633	$	388	$	313	$	271	$	946	$	659
Operating lease expense included in selling, general and administrative		35		14		108		74		35		26		143		100
Short term lease expense		68		53		113		87		97		37		210		124
Total lease expense	$	419	$	147	$	854	$	549	$	445	$	334	$	1,299	$	883

Lease term and discount rate
	June 30, 2021	December 31, 2020	September 30, 2021	December 31, 2020
Weighted-average remaining lease terms on operating leases (yrs.)	1.92	2.43	1.71	2.43
Weighted-average discount rates on operating leases	5.374%	5.374%	5.374%	5.374%

Future minimum lease payments
	Operating Leases
July 1, 2021 - June 30, 2022	$	1,389
July 1, 2022 - June 30, 2023		1,251
July 1, 2023 - June 30, 2024		14
July 1, 2024 - June 30, 2025		8
Thereafter		1
Total lease payments		2,663
Less: Interest		(130	)
Present value of lease liabilities	$	2,533

Future minimum lease payments
	Operating Leases
October 1, 2021 - September 30, 2022	$	1,380
October 1, 2022 - September 30, 2023		919
October 1, 2023 - September 30, 2024		8
October 1, 2024 - September 30, 2025		7
Total lease payments	$	2,314
Less: Interest		(98	)
Present value of lease liabilities	$	2,216

Disaggregation of Revenue - Contract Revenue
	Three Months Ended				Three Months Ended
	June 30,				September 30,
	2021		2020		2021		2020
Fixed Price Contracts	$	2,011	$	2,073	$	1,866	$	2,522
Service Contracts		2,517		652		1,684		614
Total	$	4,528	$	2,725	$	3,550	$	3,136

Schedule of earnings in excess of billings on uncompleted contracts
	June 30, 2021			December 31, 2020
Costs incurred on uncompleted contracts	$	3,293		$	2,098
Estimated earnings on uncompleted contracts		4,021			3,153
Gross costs and estimated earnings		7,314			5,251
Less: Billings to date on uncompleted contracts		(6,985	)		(5,792	)
Costs incurred plus estimated earning less billings on uncompleted contracts, net	$	329		$	(541	)

Included in the accompanying unaudited condensed consolidated balance sheets under the following captions:
Contract assets	$	502		$	189
Contract liabilities		(173	)		(730	)
Costs incurred plus estimated earning less billings on uncompleted contracts	$	329		$	(541	)

Schedule of property, plant and equipment
							Range of							Range of
	June 30, 2021			December 31, 2020			Asset Lives	September 30, 2021			December 31, 2020			Asset Lives
Buildings and improvements	$	285		$	285		7 - 36 years	$	285		$	285			7 - 36 years
Leasehold improvements		906			906		2 - 5 years		906			906			2 - 5 years
Equipment		12,439			12,343		2 - 30 years		11,833			12,343			2 - 30 years
Furniture, computers and office equipment		907			907		2 - 8 years		907			907			2 - 8 years
Construction in progress		133			84		-		74			84			–

Total property, plant and equipment		14,670			14,525				14,005			14,525
Less: Accumulated depreciation and amortization		(12,402	)		(11,921	)			(12,152	)		(11,921	)
Property, plant and equipment, net	$	2,268		$	2,604			$	1,853		$	2,604

Reconciliation of number of shares in earnings per share calculation
	Three Months Ended				Six Months Ended				Three months ended				Nine months ended
	June 30,				June 30,				September 30,				September 30,
	2021		2020		2021		2020		2021		2020		2021		2020
Weighted average common shares outstanding - basic		12,389		12,492		12,389		12,601		12,389		12,390		12,389		12,531
Diluted effect of common stock equivalents		55		0		50		0
Dilutive effect of common stock equivalents										56		0		52		0
Weighted average common shares outstanding - diluted		12,444		12,492		12,439		12,601		12,445		12,390		12,441		12,531

	Three Months Ended June 30,
	2021			2020
Net income (loss)	$	724		$	(5,290	)

Add: Interest expense, net		8			1
Add: Income tax expense		6			–
Add: Depreciation and amortization		262			303
Add: Share-based compensation		17			24
Add: Asset impairment		–			4,490
Add: One-time charges related to elimination of COO position		–			245
Deduct: Gain on sale of asset		(6	)		–
Deduct: Forgiveness of PPP loan		(1,124	)		–

Modified EBITDA (loss)	$	(113	)	$	(227	)

							Nine Months Ended
	Six Months Ended June 30,						September 30,
	2021			2020			2021			2020
Net income (loss)	$	872		$	(5,927	)	$	1,204		$	(6,177	)

Add: Interest expense, net		21			2			8			4
Add: Income tax expense		10			5			15			5
Add: Depreciation and amortization		522			604			731			843
Add: Share-based compensation		37			74			46			113
Add: Asset impairment		–			4,490			–			4,490
Add: One-time charges related to elimination of COO position		–			245			–			245
Deduct: Gain on sale of asset		(55	)		–
Add: Loss on sale of property, plant and equipment								94			–
Deduct: Forgiveness of PPP loan		(1,124	)		–			(2,222	)		–

Modified EBITDA (loss)	$	283		$	(507	)
Modified EBITDA							$	(124	)	$	(477	)

	DEEP DOWN, INC.
	(Registrant)

Date: ~~August 16,~~November 12, 2021
	By:	/s/ Charles K. Njuguna
		Charles K. Njuguna
		President, Chief Executive Officer and Chief Financial Officer
		(Principal Executive and Financial Officer)

	By:	/s/ Trevor L. Ashurst
		Trevor L. Ashurst
		Vice President of Finance
		(Principal Accounting Officer)

31.1*	Certification of Charles K. Njuguna, President, Chief Executive Officer and Chief Financial Officer, furnished pursuant to Rules 13a-14(a) and 15d-14(a) of the Securities Exchange Act of 1934, as amended.

31.2*	Certification of Trevor L. Ashurst, Vice President of Finance, furnished pursuant to Rules 13a-14 and 15d-14(a) of the Securities Exchange Act of 1934, as amended.

32.1*	Statement of Charles K. Njuguna, President, Chief Executive Officer and Chief Financial Officer, furnished pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2*	Statement of Trevor L. Ashurst, VP of Finance, furnished pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

101.INS101.INS	Inline XBRL Instance Document (the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document)

101.SCH*	Inline XBRL Taxonomy Extension Schema Document

101.CAL*	Inline XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF*	Inline XBRL Taxonomy Extension Definition Linkbase Document

101.LAB*	Inline XBRL Taxonomy Extension Label Linkbase Document

101.PRE*	Inline XBRL Taxonomy Extension Presentation Linkbase Document

104*	Cover Page Interactive Data File (formatted in IXBRL, and included in exhibit 101).