The 33 percent increase in thousandsrevenues was primarily the result of dollarsan increase in demand for our subsea equipment, support services, and shares, unless otherwise indicated.rental solutions.

Cost of sales and Gross profit

Results of Operations

Revenues

The 31 percent decrease in revenues was primarily the result of fewer projects in process, COVID-19 related travel restrictions, and the recent developments in the global oil and gas markets.

Cost of sales and Gross profit

The decreaseincrease in gross profit was due to reducedhigher revenues as a result offrom increased project activity for the COVID-19 pandemic and resulting global economic disruption.year ended December 31, 2021. The increasedecrease in gross profit percentage is due to receivingdriven by increases in labor and lower margin passthrough service costs. Additionally, the Company received rent abatements and having a larger proportion of higher margin service work and equipment rental during the year ended December 31, 2020.2020, which were not recurring during the year ended December 31, 2021.

The Company records depreciation expense related to revenue-generating property, plant and equipment as cost of sales, which totaled $830$663 and $1,105$830 for the years ended December 31, 20202021 and 2019,2020, respectively. The year-over-year decrease in depreciation was primarily due to recording depreciation in the Company recording increased impairment charges relating toprior year for certain idle, long-lived assets before taking an impairment charge on the remaining undepreciated amount during 2020, rather than depreciation.the second quarter of 2020.

Selling, general and administrative expenses

The decrease in selling, general and administrative expenses (“SG&A”) for the year ended December 31, 20202021 was primarily due to workforce reductions and limiting overhead spending and research and development effortsincurring a one-time $245 severance charge related to only critical items in response to a renewed focus onthe elimination of the Company’s core business. In addition, the Company recorded several accruals related to various legal matters forCOO position during the year ended December 31, 2019 that were not recurrent for2020. The Company also incurred lower administrative payroll costs and charges to stock based compensation during the year ended December 31, 2021 as compared to the year ended December 31, 2020.

Asset impairment

For the year ended December 31, 2021, no charges were recorded for the impairment of long-lived assets.

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

Interest expense (income), net

Net interest expense for the year ended December 31, 20202021 was $7$12 compared to net interest incomeexpense of $12$7 for the year ended December 31, 2019.2020. The decreaseincrease of $19$5 is due to a lower balancean increase of interest expense on certain interest-bearing accountsinsurance premium financing for the year ended December 31, 2020.2021.

Other income, net

The Company recorded net other income of $2,869 during the year ended December 31, 2021, which was primarily related to the forgiveness of its two PPP loans and employee retention credits.

GainLoss on sale of assets

During the year ended December 31, 2021, the Company recorded losses of $76 related to equipment sold by the Company. During the year ended December 31, 2020, the Company did not record any gains related to vehicles and equipment sold by the Company. During the year ended December 31, 2019, the Company recorded gains of $7or losses related to vehicles and equipment sold by the Company.

Modified EBITDA

Deep Down management evaluates companyCompany performance based on a non-US GAAP measure which consists of earnings (net income or loss) available to common shareholdersstockholders 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, Plantproperty, plant and Equipmentequipment (“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 and is not a measure of performance calculated in accordance with US GAAP.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 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 lossincome (loss) to Modified EBITDA (Loss) for the years ended December 31, 20202021 and 2019:2020:

The $618 decrease$756 improvement in Modified EBITDA was due to decreasedan increase in revenues resulting from the declineand decrease in offshore activity triggered by the COVID-19 pandemic coupled with a net $238 reserve for doubtful accounts receivable due to prolonged customer payment terms and uncertainty around certain customers’ liquidity affected by the pandemicSG&A for the twelve monthsyear ended December 31, 20202021 as compared to the twelve monthsyear ended December 31, 2019.2020.

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 $7,098 as of December 31, 2021, and potential opportunistic sales of PP&E in addition to pursuing a disciplined approach to making capital investments.

Given the 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, including securing a credit facility.

The Company obtained a $1,111 PPP loan in April 2020 (“April 2020 PPP Loan”). The April 2020 PPP Loan was used to finance covered payroll expenses during the second and third quarters of 2020. The Company applied for forgiveness of the April 2020 PPP Loan in October 2020 and received forgiveness of $1,111 from the SBA on June 29, 2021. The amount of loan forgiveness, including accrued interest, is presented as a component of other income on the consolidated statements of operations for the year ended December 31, 2021.

The Company obtained a second $1,111 PPP loan in March 2021 (“March 2021 PPP Loan”). The March 2021 PPP Loan was used to finance covered payroll expenses during the first and second quarters of 2021. The Company applied for 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 forgiveness, including accrued interest, is presented as a component of other income on the consolidated statement of operations for the year ended December 31, 2021.

Liquidity and Capital Resources

As a deepwater service provider, our revenues, profitability, cash flows, and future rate of growth are generally dependent on the condition of the global oil and gas industry and our customers’ ability to invest capital for offshore exploration, drilling and production, and maintenance of offshore drilling and production facilities. Oil and gas prices and the level of offshore drilling and production activity have historically been characterized by significant volatility. At times, we enter into large, fixed-price contracts which may require significant lead time and investment. A decline in offshore drilling and production activity could result in lower contract volume or delays in significant contracts which could negatively impact our earnings and cash flows. Our earnings and cash flows could also be negatively affected by delays in payments by significant customers or delays in completion of our contracts for any reason. We are generally dependent on our cash flows from operations to fund our working capital requirements, and the uncertainties noted above create risks that we may not achieve our planned earnings or cash flow from operations, which may require us to raise additional debt or equity capital. There can be no assurance that we could raise additional debt or equity capital.

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

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

The principal liquidity needs of the Company are to fund ongoing operations, working capital, and capital expenditures. During the fiscal year ended December 31, 2021, the Company reported a decrease of $69 in cash. The Company used $1,067 of net cash from operating activities primarily driven by an increase in accounts receivable and other components of working capital. The Company also used $113 in net cash for investing activities, primarily for purchases of PP&E. The Company generated $1,111 of net cash from financing activities, from PPP loan proceeds.

During the fiscal year ended December 31, 2020, the Company reported an increase of $222 in cash. The Company used $206 of net cash from operating activities primarily fromdriven by an increase in accounts receivable and other components of working capital. The Company also used $158 in net cash for investing activities, primarily for purchases of PP&E. The Company generated $586 of net cash from financing activities, primarily through $1,111 of PPP loan proceeds, which was partially offset by $525 of share repurchases that occurred prior to the onset of the COVID-19 pandemic and receipt of the initial PPP loan.

During the fiscal year ended December 31, 2019, the Company reported an increase of $1,508 in cash. The Company generated $237 in net cash provided by operating activities primarily due to improvements in cost containment measures. The Company generated $1,549 in net cash provided by investing activities, primarily from $1,035 received on the maturity of a short-term investment, and $517 received from payment of a note receivable. The Company also used $278 of net cash in financing activities, which included $222 for the repurchase of outstanding stock and $56 for payments on a motor vehicle loan. 

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, cash received from a second PPP loan, potential opportunistic sales of PP&E, and the pursuit of a disciplined approach to making capital investments. However, given the abrupt decline in oil prices and global economic activity caused by COVID-19 in 2020, the Company cannot predict this with certainty. To mitigate this uncertainty and preserve liquidity, the Company will continue to pursue opportunistic cost containment initiatives, which can include workforce reductions, limiting overhead spending and research and development efforts to only critical items, and actively pursuing further cost reduction opportunities as they become available.

Summary of Critical Accounting Estimates

Use of Estimates

The preparation of financial statements in accordance with US GAAP requires us to make estimates and judgments that may affect assets and liabilities. On an ongoing basis, we evaluate our estimates, including those related to revenue recognition and related allowances, contract assets and liabilities, impairments of long-lived assets, including intangibles, income taxes including the valuation allowance for deferred tax assets, contingencies and litigation, and share-based payments. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable, the results of which form the basis for making judgments about the carrying values of assets and liabilities. Actual results may differ from these estimates under different assumptions or conditions.

Property, plant and equipment

PP&E is stated at cost, net of accumulated depreciation, amortization, and related impairments. Depreciation and amortization are computed using the straight-line method over the estimated useful lives of the respective assets. Replacements and betterments are capitalized, while maintenance and repairs are expensed as incurred. It is our policy to include amortization expense on assets acquired under finance leases with depreciation expense on owned assets. Additionally, we record depreciation and amortization expense related to revenue-generating assets as a component of cost of sales in the accompanying consolidated statements of operations.

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

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

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

During the year ended December 31, 2021, the Company conducted assessments of whether impairment indicators were present that indicate the carrying amount of its long-lived asset group might not be recoverable and determined that no such events or changes in circumstances were present.

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

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

Revenue Recognition

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

For most of our fixed price contracts, the customer contracts with us to provide a significant service of integrating a complex set of tasks and components into a single project or capability 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.

Fixed price contracts

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

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

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

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

Service Contracts

We recognize revenue for service contracts measuring progress toward satisfying the performance obligation in a manner that best depicts the transfer of goods or services to the customer. The control over services is transferred over time when the services are rendered to the customer on a daily basis. Specifically, we recognize revenue as the services are provided as we have the right to invoice the customer for the services performed. Services are billed and paid on a monthly basis. Payment terms for services are usually 30 days from invoice receipt but have increased to 45 or 60 days duringdepending on the recent industry downturn.customer.

Contract balances

Costs and estimated earnings in excess of billings on uncompleted contracts arise when revenues are recorded based on the extent of progress towards completion but cannot be invoiced under the terms of the contract. Such amounts are invoiced upon completion of contractual milestones. Billings in excess of costs and estimated earnings on uncompleted contracts arise when milestone billings are permissible under the contract, but the related costs have not yet been incurred. All contract costs are recognized currently on jobs formally approved by the customer and contracts are not shown as complete until virtually all anticipated costs have been incurred and the risk of loss has passed to the customer.

Assets related to costs and estimated earnings in excess of billings on uncompleted contracts, as well as liabilities related to billings in excess of costs and estimated earnings on uncompleted contracts, have been classified as current. The contract cycle for certain long-term contracts may extend beyond one year, thus complete collection of amounts related to these contracts may extend beyond one year, though such long-term contracts include contractual milestone billings as discussed above. For the years endingended December 31, 2021 and 2020, and 2019, there were no contracts with terms that extended beyond one year.

Allowance for Doubtful Accounts

The Company provides an allowance on trade receivables based on a specific review of each customer’s accounts receivable balance with respect to its ability to make payments. When specific accounts are determined to require an allowance, they are expensed by a provision for bad debts in that period.  At December 31, 20202021 and 2019,2020, the Company estimated the allowance for doubtful accounts requirement to be $84$525 and $50,$84, respectively.  Bad debt expense totaled $238$442 and $20$238 for the years ended December 31, 2021 and 2020, and 2019, respectively.

Income Taxes

We follow the asset and liability method of accounting for income taxes. This method considers the differences between financial statement treatment and tax treatment of certain transactions. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect of a change in tax rates is recognized as income or expense in the period that includes the enactment date.

We record a valuation allowance to reduce the carrying value of our deferred tax assets when it is more likely than not that some or all of the deferred tax assets will expire before realization of the benefit or that future deductibility is not probable. The ultimate realization of the deferred tax assets depends upon our ability to generate sufficient taxable income of the appropriate character in the future. This requires management to use estimates and make assumptions regarding significant future events such as the taxability of entities operating in the various taxing jurisdictions. In evaluating our ability to recover our deferred tax assets, we consider all reasonably available positive and negative evidence, including our past operating results, the existence of cumulative losses in the most recent years and our forecast of future taxable income. In estimating future taxable income, we develop assumptions, including the amount of future state, and federal pre-tax operating income, the reversal of temporary differences and the implementation of feasible and prudent tax planning strategies. These assumptions require significant judgment. When the likelihood of the realization of existing deferred tax assets changes, adjustments to the valuation allowance are charged in the period in which the determination is made, either to income or goodwill, depending upon when that portion of the valuation allowance was originally created.

We record an estimated tax liability or tax benefit for income and other taxes based on what we determine will likely be paid in the various tax jurisdictions in which we operate. We use our best judgment in the determination of these amounts. However, the liabilities ultimately realized and paid are dependent upon various matters, including resolution of tax audits, and may differ from amounts recorded. An adjustment to the estimated liability would be recorded as a provision or benefit to income tax expense in the period in which it becomes probable that the amount of the actual liability or benefit differs from the recorded amount.

Our future effective tax rates could be adversely affected by changes in the valuation of our deferred tax assets or liabilities or changes in tax laws or interpretations thereof. If and when our deferred tax assets are no longer fully reserved, we will begin to provide for taxes at the full statutory rate. In addition, we are subject to the examination of our income tax returns by the Internal Revenue Service and other tax authorities. We regularly assess the likelihood of adverse outcomes resulting from these examinations to determine the adequacy of our provision for income taxes.

Recent Accounting Pronouncements

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

Inflation and Seasonality

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

Not Applicable

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

None

Evaluation of Disclosure Controls and Procedures.  The Company’s disclosure controls and procedures are designed to ensure that such information required to be disclosed by the Company in reports filed or submitted under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms. The Company’s disclosure controls and procedures are also designed to ensure that such information is accumulated and communicated to management, including the principal executive and the principal financial officer, as appropriate to allow timely decisions regarding required disclosures. There are inherent limitations to the effectiveness of any system of disclosure controls and procedures, including the possibility of human error and the circumvention or overriding of controls and procedures. Accordingly, even effective disclosure controls and procedures can only provide reasonable assurance that control objectives are attained. The Company’s disclosure controls and procedures are designed to provide such reasonable assurance.

The Company’s management, with the participation of the principal executive and principal financial officer, evaluated the effectiveness of the design and operation of the Company’s disclosure controls and procedures as of December 31, 2020,2021, 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 December 31, 2020.2021.

Management’s Report on Internal Control Over Financial Reporting.  The Company’s management is responsible for establishing and maintaining adequate internal controls over financial reporting, as defined in Rule 13a-15(f) of the Exchange Act. Although the internal controls over financial reporting were not audited, the Company’s management, including the principal executive and principal financial officer, assessed the effectiveness of internal controls over financial reporting as of December 31, 2020,2021, based on revisions and updates issued in 2013 by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) to its report entitled “Internal Control-Integrated Framework.” Upon evaluation, the Company’s management has concluded that the Company’s internal controls over financial reporting were effective as of December 31, 2020.2021.

Changes in Internal Control Over Financial Reporting.  The Company’s management, with the participation of the principal executive and principal financial officer, have concluded that there were no changes in internal control over financial reporting during the fiscal quarter ended December 31, 2020.2021.

Not Applicable

Not ApplicableApplicable.

PART III

The following table sets forth the names, ages and positions of our directors and executive officer as of December 31, 2020:2021:

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

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

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

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

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

David J. Douglas, Director.

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

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

Neal I. Goldman, Director.

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

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

Corporate Governance

Code of Ethics

The Company has adopted Codes of Ethical Conduct that apply to all its directors, officers (including its chief executive officer, chief operating officer, controller and any person performing such functions) and employees. The Company has previously filed copies of these Codes of Ethical Conduct and they can be located pursuant to the information shown in the Exhibit list items 14.1 and 14.2 to this Report. Copies of the Company’s Codes of Ethical Conduct may also be obtained at the Investors section of the Company’s website, www.deepdowninc.com, or by written request addressed to the Corporate Secretary, Deep Down, Inc., PO Box 1389, Crosby, TX 77532. The Company intends to satisfy the requirements under Item 5.05 of Form 8-K regarding disclosure of amendments to, or waivers from, provisions of its code of ethics that apply to the Chief Executive Officer, Vice President of Finance or Controller by posting such information on the Company’s website. Information contained on the website is not part of this Report.

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

Delinquent Section 16(a) Reports

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

Based solely on the Company’s review of the copies of such forms received by it, the Company believes that all Section 16(a) filing requirements applicable to its officers and directors and greater-than ten percent beneficial owners during the year ended December 31, 20202021 were satisfied.

The following table sets forth information concerning total compensation earned in the years ended December 31, 20202021 and 20192020 by our Principal Executive Officer (“PEO”) during 2020, and our other executive officer during the year ended December 31, 2020 (collectively, our “Named Officers”).

Summary Compensation Tables for the years ended December 31, 20202021 and 20192020

Narrative Disclosure to Summary Compensation Table

On September 18, 2019, the Company amended the existing employment agreement with Mr. Njuguna for a term of three years, effective September 1, 2019, and subject to automatic annual renewals, unless at least 90 days prior to the applicable renewal date, the Company shall give notice that the employment agreement shall not be extended. The employment agreement provides that Mr. Njuguna receive annual cash compensation of $325,000.

On September 12, 2019, the Company entered into an employment agreement with Mr. Simmons for a term of three years effective September 23, 2019, and subject to automatic annual renewals, unless at least 90 days prior to the applicable renewal date, the Company shall give notice that the employment agreement shall not be extended.2019. The employment agreement providesprovided that Mr. Simmons receive annual cash compensation of $245,000. On April 1, 2020, the Company eliminated the position of Chief Operating Officer (“COO”) and relieved Mr. Simmons 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, the Company iswas required to pay Mr. Simmons one time his contractual annual base salary of $245,000, payablewhich was paid over 12 months.

Outstanding Equity Awards

The following table summarizes information with respect to unexercised options for the Named Officer holding options as of December 31, 2020.2021.

Benefits payable upon change in control

Mr. Njuguna’s employment agreement contains provisions related to change in control.

In the event of termination of Mr. Njuguna’s employment for any reason, he will be entitled to receive all accrued, unpaid salary and vacation time through the date of termination and all benefits to which he is entitled or vested under the terms of all employee benefit and compensation plans, agreements, and arrangements in which he is a participant as of the date of termination. In addition, subject to executing a general release in favor of us, Mr. Njuguna will be entitled to receive certain severance payments in the event his employment is terminated by the Company “other than for cause” or by him with “good reason.” These severance payments include the following:

(i) a lump sum in cash equal to one times his annual base salary (at the rate in effect on the date of termination), provided, however, that if such termination occurs prior to the date that is twelve months following a change of control, then such payment will be equal to two times the Executive’s annual base salary (at the rate in effect on the date of termination);

(ii) a lump sum in cash equal to the average annual bonus paid to him for the prior two full fiscal years preceding the date of termination; provided, however, that if such termination occurs prior to the date that is twelve months following a change of control, then such payment will be equal to two times the average annual bonus paid to him 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 our annual incentive bonus arrangement; provided, however, that such pro rata portion shall be calculated based on his annual bonus for the previous fiscal year; but if no previous annual bonus has been paid to him, then the lump sum cash payment for this current pro rata annual bonus obligation shall be no less than fifty percent of his annual base salary; and

(iv) if his 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 Executive shall immediately vest and become exercisable.

Mr. Njuguna has agreed to not, during the term of his employment and for a one-year period after his termination, engage in “Competition” (as defined in his employment agreement) with us, solicit business from any of our customers or potential customers, solicit the employment or services of any person employed by or a consultant to us on the date of termination or within six months prior thereto, or otherwise knowingly interfere with our business or accounts or any of our subsidiaries.

Mr. Njuguna’s employment agreement also provides that we, to the extent permitted by applicable law and our by-laws, will defend, indemnify and hold harmless him from any and all claims, demands or causes of action, including reasonable attorneys’ fees and expenses, suffered or incurred by him as a result of the assertion or filing of any claim, demand, litigation or other proceedings based upon statements, acts or omissions made by or on behalf of him pursuant to his employment agreement or in the course and scope of his employment with us. We will also maintain and pay all applicable premiums for directors’ and officers’ liability insurance which shall provide full coverage for the defense and indemnification of Mr. Njuguna, to the fullest extent permitted by applicable law.

Compensation of Directors

The Compensation Committee of the Board of Directors makes all decisions regarding director compensation. Only directors who are not employees, independent contractors, or consultants of the Company or any of its subsidiaries or affiliates (“Independent Directors”), are entitled to receive a fee, plus reimbursement of reasonable out-of-pocket expenses incurred to attend Board meetings.

The Company uses equity-based compensation, in the form of restricted stock or stock options, to attract and retain qualified candidates to serve on the Board. We believe our compensation arrangement for Independent Directors is comparable to the standards of peer companies within our industry and geographical location.

The following table provides certain information with respect to the 20202021 compensation awarded or earned by our Independent Directors who served in such capacity during the year.

Set forth below is certain information with respect to beneficial ownership of Common Stock as of March 30, 2021,28, 2022, except as otherwise noted below, by (i) each person known by us to beneficially own more than 5 percent of the outstanding shares of our common stock; (ii) each Director as of such date; (iii) our “Named Officers” (as determined under Item 402(m) of Regulation S-K); and (iv) all directors and executive officers of Deep Down as a group. To our knowledge, all persons listed in the table have sole voting and investment power with respect to their shares, except to the extent that authority is shared with their respective spouse under applicable law.

__________________

______________

* Indicates ownership of less than 1% of Common Stock outstanding.

Certain Relationships and Related Transactions

Our Board of Directors and management recognize that related person transactions present a heightened risk of conflicts of interest, and therefore we review all relationships and transactions in which we and our directors, director nominees and executive officers or their immediate family members, as well as holders of more than 5 percent of any class of our voting securities and their family members, have a direct or indirect material interest. As required under SEC rules, transactions that are determined to be directly or indirectly material to us or a related person are disclosed in the appropriate annual and/or quarterly statements filed with the SEC.

Director Independence

We believe that Messrs. Carden, Douglas, and Goldman are “independent” under the requirements of Rule 303A.02 of the NYSE Listed Company Manual.

The Company’s independent registered public accounting firm is Moss Adams LLP (“Moss Adams”); issuing office is Houston, TX; PCAOB ID: 659. The following table sets forth the aggregate payments made to Moss Adams for audit services rendered in connection with the Company’s consolidated financial statements and reports for the years ended December 31, 20202021 and 20192020 and for other services rendered during those years on behalf of Deep Down and its subsidiaries:

Audit Fees: Consists of fees billed for professional services rendered for the audit of Deep Down’s consolidated financial statements, the review of interim condensed consolidated financial statements included in quarterly reports, services that are normally provided in connection with statutory and regulatory filings or engagements and attest services, except those not required by statute or regulation.

Audit-Related Fees: Consists of fees billed for assurance and related services that are reasonably related to the performance of the audit and review of Deep Down’s consolidated financial statements and are not reported under “Audit Fees.”

Tax Fees: Consists of tax compliance, tax preparation and other tax services. Tax compliance and tax preparation consists of fees billed for professional services related to assistance with tax returns. Other tax services consist of fees billed for other miscellaneous tax consulting.

All Other Fees: None.

Pre-Approval of Audit and Permissible Non-Audit Services of Independent Auditors

The Board of Directors pre-approves all audit and permissible non-audit services provided by Moss Adams. These services may include audit services, audit-related services, tax services and other services. The Board of Directors may also pre-approve particular services on a case-by-case basis and may delegate pre-approval authority to one or more directors. If so delegated, the director must report any pre-approval decision to the Board of Directors at its first meeting after the pre-approval was obtained.

PART IV

Information required by this item is incorporated herein by reference from the section entitled “Exhibit Index” of this Report.

None

SIGNATURES

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

POWER OF ATTORNEY

KNOW ALL PERSONS BY THESE PRESENTS that each individual whose signature appears below constitutes and appoints Charles K. Njuguna and Mark Carden and each of them, his true and lawful attorneys-in-fact and agents, with full power of substitution, for him and in his name, place and stead, in any and all capacities, to sign any and all amendments to this Annual Report on Form 10-K and to file the same, with all exhibits thereto and all documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents or any of them, or his or their substitute or substitutes, may lawfully do or cause to be done by virtue hereof.

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the registrant and in the capacities and on the date indicated:

EXHIBIT INDEX

_________________________

* Filed herewith.

# Furnished herewith.

† Exhibit constitutes a management contract or compensatory plan or arrangement.

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Report of Independent Registered Public Accounting Firm

To the Stockholders and the Board of Directors of

Deep Down, Inc.

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of Deep Down, Inc. (the “Company”) as of December 31, 20202021 and 2019,2020, the related consolidated statements of operations, changes in stockholders’ equity, and cash flows for the years then ended, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the consolidated financial position of the Company as of December 31, 20202021 and 2019,2020, and the consolidated results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.

Basis for Opinion

These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our auditaudits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.

Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures to respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.

Critical Audit MattersMatter

The critical audit mattersmatter communicated below are mattersis a matter arising from the current period audit of the consolidated financial statements that werewas communicated or required to be communicated to the audit committee and that (1) relaterelates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit mattersmatter below, providing a separate opinion on the critical audit mattersmatter or on the accounts or disclosures to which they relate.it relates.

Revenue Recognition - Determination of Estimated Costs to Complete for Fixed Price Contracts

As described in Note 3 to the consolidated financial statements, total revenue of approximately $8,664,000$6,867,000 for the year ended December 31, 20202021 is generated from fixed price contracts. For the Company’s fixed price contracts, 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. The Company uses the cost-to-cost measure of progress for its contracts because it best depicts the transfer of control to the customer which occurs as the Company incurs costs on the 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. Management’s estimation of total cost at completion is subject to many variables and requires significant judgment. There are many factors which impact management’s estimate, including, but not limited to, the ability to properly execute the engineering, design and fabrication phases consistent with customers’ expectations, the availability and costs of labor and materials resources, productivity, weather, and level of success in the installation phase. Each of these factors can affect the accuracy of cost estimates, and ultimately, future profitability.

The principal considerations in our determination that revenue recognition, -specifically determination of estimated costs to complete for fixed price contracts, is a critical audit matter are the complexity of these estimates and exercise of significant judgment by management when developing these estimates for fixed price contracts. This in turn led to a high degree of auditor judgment, subjectivity, and effort in performing procedures and evaluating audit evidence related to the estimates of costs to complete.

The primary procedures we performed to address this critical audit matter included:

and testing management’s ability to reasonably estimate costs to complete for fixed price contracts,

Long-Lived Asset Impairments

As described in Notes 2 and 4 to the consolidated financial statements, the Company’s consolidated right-of-use operating lease assets and net property, plant and equipment were approximately $3,174,000 and $2,604,000, respectively, as of December 31, 2020. Management conducts impairment tests on long-lived assets whenever significant events or changes in circumstances indicate the carrying value may not be recoverable. The carrying value of a long-lived asset or asset group is not recoverable if it exceeds the sum of the undiscounted cash flows expected to result from the use and eventual disposition of the asset or asset group. Downturn in the offshore energy sector and its negative financial impact on the Company’s operations led management to conclude the carrying amount of its long-lived assets, which are evaluated as asset groups, required an impairment review to be performed as of June 30, 2020. The Company recorded an impairment charge of approximately $4,490,000 during the quarter ended June 30, 2020 related to its certain idle fixed assets, which were evaluated for impairment at the asset level. Impairment review of the remaining long-lived assets resulted in management’s conclusion that those assets were not impaired.

The principal consideration in our determination that long-lived asset impairments is a critical audit matter was the significant judgment used by management when estimating the revenue component of the future undiscounted cash flows of the group of assets. This in turn led to a high degree of auditor judgment, subjectivity, and effort in performing procedures and evaluating audit evidence obtained related to management’s significant assumptions, including the amount and timing of the revenue component of the net future undiscounted cash flows.

The primary procedures we performed to address this critical audit matter included:

/s/ Moss Adams, LLP

Houston, Texas

March 30, 202128, 2022

659

We have served as the Company’s auditor since 2017.

DEEP DOWN, INC.

CONSOLIDATED BALANCE SHEETS

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

DEEP DOWN, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

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

DEEP DOWN, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITYOPERATIONS

FOR THE YEARS ENDED DECEMBER 31, 2020 and 2019

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

DEEP DOWN, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWSCHANGES IN STOCKHOLDERS’ EQUITY

FOR THE YEARS ENDED DECEMBER 31, 2021 and 2020

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

DEEP DOWN, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS