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

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

General

Deep DownKoil Energy is a leadingan energy services company providingthat provides equipment and support services to the world’s energy and offshore industries. Deep DownThe Company provides innovative solutions to complex customer challenges presented between the production facility and the energy source. Deep Down'sKoil Energy’s core services and technological solutions include distribution system installation support and engineering services, umbilical terminations, loose-tube steel flying leads, and related services. Additionally, Deep Down's highlyKoil Energy’s experienced teamprofessionals can support subsea engineering, manufacturing, installation, commissioning, and maintenance projects located anywhere in the world. The Company’s broad line of solutions are engineered and manufactured primarily for major integrated, large independent, and foreign national energy companies in offshore areas throughout the world. These products are often developed in direct response to customer requests for solutions to critical needs in the field. The Company primarily serves the offshore oil and gas market; however, the Company’s product offerings and service capabilities are based on core competencies that are energy source agnostic and can be applied to additional markets, including offshore wind, offshore wave energy, hydrogen, and liquefied natural gas.

Industry and Executive Outlook

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

In March 2020,Global oil prices began to ease toward the end of 2023 due to higher-than-expected OPEC supply and lower demand from the Middle East, Russia, India, and Europe, which was partially offset by stronger demand from the US and China. However, per the International Energy Agency’s February 2024 Oil Market Report, demand is still expected to increase by 1.2 million barrels per day in 2024. Additionally, we believe a convergence of economic, geopolitical, trade and policy factors have exacerbated the issue of years of underinvestment in upstream hydrocarbon production and appear to have triggered a general shift returning focus on increasing production. As a result, the Company anticipates global offshore oil production to continue its pivotal role in meeting the world’s energy industry encountered a significant economic disruption causeddemands this year as evidenced by the COVID-19 pandemic, which continues to impact markets globally. 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 inincreased utilization rates (80%+) for offshore drilling rigs/vessels. We believe that several key regions, including the Gulf of Mexico, the North Sea, and areas off the coasts of Brazil and West Africa, will contribute significantly to this production activity resulted in lower contract volumes or delays in significant contracts, which negatively impacted our earnings and cash flows. Oil and gas prices have rebounded to healthier levels sinceoutput. Despite the onsetrecent emphasis on alternative energy sources, we expect the offshore extraction of the pandemic, but future surges in COVID-19 infections or other unforeseen market factorshydrocarbons will continue to cause commodityprovide a vital component of the global energy mix, and we believe 2024 is poised to see continued steady growth in the sector. Our participation in this supply-driven cycle is essential for our business to achieve a sustained level of growth.

The 18% year-over-year increase in our revenues for 2023 is characteristic of the recovery in the industry, especially in the deepwater segments. We continued to experience the effects of price fluctuations remainspressures we faced during the recent downturn. These pressures led us to strategically price some projects at lower than ideal margins, which is reflected in our bottom-line results for 2023. These results fell short of our expectations, but we maintain a positive outlook for 2024 as these lower margins projects are anticipated to conclude in the first half of the year.

Our growth efforts have been concentrated on further developing the systems, technology, and therefore could presenttechniques that address the critical needs of our customers, and we have started to realize success with this strategy. Earlier this year, we announced the receipt of an ongoing riskaward for the provision of 70+ multi quick connect plates, which are critical pieces of subsea infrastructure used to enable the transfer of different fluids between subsea systems that will be qualified for 20,000 psi applications. We also made several announcements in the second half of 2023 regarding the receipt of several contract awards involving the design, engineering, and manufacturing of hose and steel tube flying leads and electrical and hydraulic distribution manifolds for various locations in the Gulf of Mexico. We are dedicated to capitalizing on our earningsrecent achievements and cash flows. Our primary focus sincesystematically exploring further opportunities, fueled by the beginningcontinued strength in bidding activity.

During 2023, we also entered into a factoring agreement with Amegy Bank, which provides us the ability from time to time to sell our accounts receivable to the bank. This agreement is expected to provide us with additional access to capital, should the need arise, as some of this global economic disruption has beenthese fixed-price contracts may require significant lead time and investment.

We continue progressing towards achieving our goal of becoming the premier provider of integrated subsea distribution systems. We look forward to improve our cost structure and manage our cash flows, which will remain a prioritysharing additional details in due course as we look towardwork with our team to accomplish our vision of having the future.most experienced, professional, and dependable team, who seek to develop the most innovative solutions, including the most efficient and reliable equipment, with the ultimate goal of increasing profitability and providing best-in-class returns for our stockholders.

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

We have seen an increase in bidding activity and execution of contract awards this year as operators mobilize to complete a backlog of projects, especially in the current favorable oil price environment. The Company received an order at the beginning of the year for the rental of one of our two carousels that are suitable for large umbilical or cable projects. Certain aspects of this project have not been performed before, which further solidifies our reputation as a service provider of choice for unique offshore installation projects. We envisioned that the successful execution of this project will provide further opportunities to utilize our carousels in the future, and our visions turned into reality when we received a contract award for the rental of the second carousel and associated umbilical spooling services in the fourth quarter of 2021. We remain 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 this current environment. We are keenly focused on the levers within our control, and we are experiencing an increase in requests for short-cycle service work, an area where we have a proven track record. We also believe customers will continue to be heavily focused on efficiency and shorter lead times without sacrificing quality and safety. As such, we are confident our streamlined operations and continued focus on our core strengths will enable us to be the primary choice for our customers.

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. We have now received confirmation of the forgiveness for both loans, which solidifies our working capital position as we push towards future growth opportunities. One area we have been able to capitalize on has been the workforce reductions at other organizations, which has provided us the opportunity to add high caliber individuals to our team who possess a wealth of industry knowledge and experience.

Looking towards the future, we are actively engaged 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

Revenues

The 3318 percent increase in revenues was primarily the result ofdriven by an increase in demand forproduct oriented, fixed price contracts as well as a slight increase in projects utilizing our subsea equipment, support services and rental solutions.

Cost of sales and Gross profit

The increase in gross profit was due to higher revenues fromprimarily driven by increased project activity for the year ended December 31, 2021.revenues. The decrease in gross profit as a percentage is driven by increases in labor andof sales was due to incurring higher materials costs related to certain projects that were strategically priced at lower margin passthrough service costs. Additionally, the Company received rent abatements during the year ended December 31, 2020, which were not recurring during the year ended December 31, 2021.margins.

The Company records depreciation expense related to revenue-generating property, plant and equipment as cost of sales, which totaled $663$497 and $830$496 for the years ended December 31, 20212023 and 2020,2022, respectively. The year-over-year decrease in depreciation was primarily due to recording depreciation in the prior year for certain idle, long-lived assets before taking an impairment charge on the remaining undepreciated amount during the second quarter of 2020.

Selling, general and administrative expenses

The decreasereduction in selling, general, and administrative expenses (“SG&A”) primarily resulted from the expenses incurred for relocating the year ended December 31, 2021 was primarily dueCompany to incurring a one-time $245 severance charge relatednew facility and rebranding it from Deep Down, Inc. to the elimination of the Company’s COO positionKoil Energy Solutions, Inc. during the year ended December 31, 2020. The Company also2022, which were not incurred lower administrative payroll costs and charges to stock based compensationagain during the year ended December 31, 2021 as compared2023. This reduction was partially offset by increased research and development expenses and rental expenses related to the yearCompany’s furniture lease.

The Company records depreciation and amortization expense related to administrative property, plant and equipment and intellectual property as SG&A, which totaled $108 and $186 for the years ended December 31, 2020.2023 and 2022, respectively.

Asset impairment

For the year ended December 31, 2021,2023, no charges were recorded for the impairment of long-lived assets.

For the year ended December 31, 2020,2022, the Company recorded impairment charges of $4,490$820 for the impairment of certain idle, long-lived assets.its right-of-use operating lease asset (“ROU asset”) related to the lease for its prior operating facility (the “Beaumont Hwy facility”). The impairment was the result of an analysis of the carrying value of the assets and our inability to objectively project future cash flowsrelocating from the sale or lease of these assets, particularlyBeaumont Hwy facility to the Company’s new Rankin Rd. facility in light of the impact of the COVID-19 pandemic and resulting global economic disruption.October 2022.

Interest expense (income), net

Net interest expenseincome for the year ended December 31, 20212023 was $12$7 compared to net interest expense of $7$15 for the year ended December 31, 2020.2022. The increase of $5$22 is mainly due to an increase ofin interest expensereceived on insurance premium financing forthe Company’s interest bearing financial instruments during the year ended December 31, 2021.2023.

Other income, net

The Company recorded net other income of $2,869 during$50 and $55 for the yearyears ended December 31, 2021,2023 and December 31, 2022, respectively, which was primarily related to the forgivenessconsists of its two PPP loans and employee retention credits.insurance policyholder dividends.

LossGain/loss on sale of assets

During the year ended December 31, 2021, theThe Company recorded lossesgains of $76$4 and $40 related to equipment sold by the Company. DuringCompany during the yearyears ended December 31, 2020, the Company did not record any gains or losses related to vehicles2023 and equipment sold by the Company.December 31, 2022, respectively.

Modified EBITDA

Deep Down managementManagement evaluates Company performance based on a non-US GAAP measure that is not in accordance with accounting principles generally accepted in the United States of America (“US GAAP”), 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 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)loss to Modified EBITDA for the years ended December 31, 20212023 and 2020:2022:

The $756 improvement$75 increase in Modified EBITDA was due toprimarily resulted from revenue and gross profit growth stemming from an increaseuptick in revenuesboth fixed-price and decrease in SG&A forservice projects during the year ended December 31, 20212023 as compared to the year ended December 31, 2020.2022.

Liquidity and Capital Resources

As an offshore energy services 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 the completion of our contracts for any reason.

The Company believes it will have adequate liquidity to meet its future operating requirements. 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. On May 24, 2023, the Company entered into a Purchase and Sale Agreement/Security Agreement with Zions Bancorporation, N.A., d/b/a Amegy Bank Business Credit (“Amegy”), which provides for Koil Energy from time to time to sell its accounts receivable and other rights to payment to Amegy, subject to Amegy’s right to approve or reject future accounts receivable and other rights proposed for sale, in its sole discretion. At December 31, 2023, the Company had no outstanding sales of accounts receivable to Amegy.

The principal liquidity needs of the Company are to fund ongoing operations, working capital, and capital expenditures. During the year ended December 31, 2023, the Company reported a $323 decrease in cash. The Company generated $203 of net cash from operating activities, primarily driven by changes in operating assets and liabilities of $1,234 and other adjustments to reconcile net loss to net cash provided by operating activities of $523, which includes items such as non-cash lease expense, gain on sale of property, plant and equipment, share-based compensation, bad debt expense (recovery), and depreciation and amortization. This was partially offset by a net loss of $1,554. The Company used $226 of net cash for investing activities, primarily to fund capital expenditures. The Company also used $300 of net cash in financing activities for principal payments made under its finance lease obligations.

During the year ended December 31, 2022, the Company generated $1,242 of net cash from operating activities, primarily driven by changes in operating assets and liabilities of $2,229 and other adjustments to reconcile net loss to net cash provided by operating activities of $1,941, partially offset by a net loss of $2,928. The Company used $2,262 of net cash for investing activities, primarily to fund capital expenditures. The Company also used $303 of net cash in financing activities for the repurchase of common stock and principal payments made under its finance lease obligation, which resulted in a $1,323 decrease in cash for the period.

The Company maintains a positive outlook on current tender volume and views this as an opportunity to capitalize on its product, service, and rental offerings to address the subsea distribution and cable management needs of its customers. The reasons for this expected increase are set forth in the “Industry and Executive Outlook” section above. As such, 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.

&E. Given the inherent volatility in oil prices and global economic activity, caused by COVID-19 in 2020, the Company cannot predict this with certaintycertainty. To mitigate this uncertainty and preserve liquidity, the future impactCompany will concentrate capital investments on the Company’s operationskey growth needs and cash flows. The Company has taken steps to mitigate the challenges presented by the current macro environment, includingpursue opportunistic cost containment initiatives, which can include workforce alignment, wage reductions, rent abatements,restricting overhead spending and limiting capital expendituresresearch and R&Ddevelopment 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.

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 driven 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.

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, plantPlant and equipmentEquipment

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 yearyears ended December 31, 2021,2023 and December 31, 2022, 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.

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 contractsPrice 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 a contract modificationsmodification 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 increasedcan increase to 45, 60, or 6090 days depending on the customer.

Contract balancesBalances

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 ended December 31, 20212023 and 2020,2022, there were no contracts with terms that extended beyond one year.

Allowance for Doubtful AccountsCredit Losses

The Company providesestimation of anticipated credit losses that may be incurred as we work through the invoice collection process with our customers requires us to make judgments and estimates regarding our customers’ ability to pay amounts due. We monitor our customers’ payment history and current credit worthiness, if needed, to determine that collectability is reasonably assured. We provide an allowance on trade receivablesfor credit losses based on a specific review ofby reviewing each customer’s accounts receivable balance with respect to itsa debtor’s ability to make payments. We also evaluate historical loss rates as well as consider forward-looking factors specific to the debtors, the overall economic environment, and management expectations to determine expected losses. When specificcertain accounts are determined to require an allowance, they are expensed by a provision for bad debts in that period.  At December 31, 20212023 and 2020, the Company2022, we estimated the allowance for doubtful accountscredit losses requirement to be $525 and $84, respectively.$0. Bad debt expense (recovery) totaled $442$1 and $238$(9) for the years ended December 31, 20212023 and 2020,2022, respectively. We believe that our allowance for credit losses is adequate to cover the anticipated credit losses under current conditions; however, uncertainties regarding changes in the financial condition of our customers, either adverse or positive, could impact the amount and timing of any additional credit losses that may be required.

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 financialaccounting 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 financialaccounting officer, with assistance from other members of management, evaluated the effectiveness of the design and operation of the Company’s disclosure controls and procedures as of December 31, 2021,2023, as required by Rule 13a-15(e) of the Exchange Act. Based upon that evaluation, the principal executive and the principal financialaccounting officer have concluded that the Company’s disclosure controls and procedures were effective as of December 31, 2021.2023.

Management’s Report on Internal Control Over Financial Reporting.  The Company’s management is responsible for establishing and maintaining adequate internal controlscontrol over financial reporting, as defined in Rule 13a-15(f) of the Exchange Act. Our internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. GAAP.

Although the internal controls over financial reporting were not audited, the Company’s management, including the principal executive and principal financialaccounting officer, assessed the effectiveness of internal controlscontrol over financial reporting as of December 31, 2021,2023, 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,

As disclosed in Part II Item 9A, Controls and Procedures, in our Annual Report on Form 10-K for the year ended December 31, 2022, we identified a material weakness in internal control related to the controls designed to assess the subsequent measurement of our ROU assets based on a newly adopted accounting principle.

During 2022, management implemented our previously disclosed remediation plan that included: (i) enhancing the Company’s management has concluded that the Company’squarterly analysis of impairment indicators for its remaining long-lived assets by including an assessment of impairment indicators for its remaining ROU assets; (ii) improving documentation of underlying internal controls over financialto promote knowledge transfer upon personnel and function changes; and (iii) enhanced quarterly reporting were effectiveon the remediation measures to the Audit Committee of the Board of Directors.

During the fourth quarter of 2023, we completed our testing of the operating effectiveness of the implemented controls and found them to be effective. As a result, we have concluded the material weakness has been remediated as of December 31, 2021.2023.

Changes in Internal Control Over Financial Reporting.  TheExcept for the changes in connection with our implementation of the remediation plan discussed above, the Company’s management, with the participation of the principal executive and principal financialaccounting officer, have concluded that there were no other changes in our internal control over financial reporting during the fiscal quarter ended December 31, 2021.2023.

Not ApplicableDuring the quarter ended December 31, 2023, none of our directors or officers (as defined in Rule 16a-1(f) of the Exchange Act) adopted or terminated a “Rule 10b5-1 trading arrangement” or “non-Rule 10b5-1 trading arrangement,” as each term is defined in Item 408 of Regulation S-K.

Not Applicable.

PART III

Current Directors and Executive Officers

The following table sets forth the names, ages and positions of our directors and executive officer as of December 31, 2021:2023:

Biographical information regarding each of our currentthese 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 Committee and Chairman of the Compensation Committees.Committee.

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.

Changes in Directors and Executive Officers Following December 31, 2023

On March 4, 2024, Mr. Njuguna resigned as President, Chief Executive Officer, Chief Financial Officer and as a member of the Board, effective as of March 31, 2024.

On March 6, 2024, the Board appointed Erik Wiik as the Company’s Chief Executive Officer, effective April 1, 2024. Mr. Wiik, age 60, served as President of ReAdapt Inc., an engineering consultancy firm providing subject matter expertise within subsea technology, since July 2018. From March 2015 to June 2018, he was Group President of CIRCOR Energy, a manufacturer of products for the oil and gas industry. Prior to that, he served in various capacities over 24 years with Aker Solutions, a provider of integrated solutions, products and services to the global energy industry. His most recent position with Aker was as Regional President of North America, and he also served as president of business units within subsea controls and umbilicals, marine contracting, well services, engineering and floating production within Aker. Mr. Wiik also served on the Board of Directors of the United Stated National Ocean Industry Association, Spindletop Charities and the Norwegian American Chamber of Commerce. Mr. Wiik was commissioned as an officer in the Norwegian Navy and has an Engineering degree from Texas A&M University.

On March 8, 2024, the Board appointed Mr. Wiik as a member of the Board, effective immediately. Mr. Wiik is qualified to serve as a director based on his significant industry experience.

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 theseThese Codes of Ethical Conduct and they can be located pursuant to the information shown in the Exhibit list itemsare filed as Exhibits 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.comwww.koilenergy.com, or by written request addressed to the Corporate Secretary, Deep Down,Koil Energy Solutions, Inc., PO Box 1389, Crosby,1310 Rankin Rd., Houston, TX 77532.77073. 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'sCompany’s financial statements and other services provided by the Company’s independent public accountants. The Board of Directors reviews the Company'sCompany’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, 20212023 were satisfied.

The following table sets forth information concerning total compensation earned in the years ended December 31, 20212023 and 20202022 by our Principal Executive Officer (“PEO”) and our other executive officer (collectively, our(our “Named Officers”Officer”).

Summary Compensation TablesTable for the years ended December 31, 20212023 and 20202022

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. On September 1, 2023, Mr. Njuguna’s employment agreement was automatically renewed for another year. The employment agreement provides that Mr. Njuguna receivereceives annual cash compensation of $325,000.

On September 12, 2019, Due to his resignation, the Company entered into an employment agreement with Mr. Simmons for a termNjuguna has been terminated effective as of three years effective September 23, 2019. The employment agreement provided 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 was required to pay Mr. Simmons one time his contractual annual base salary of $245,000, which was paid over 12 months.March 31, 2024.

Outstanding Equity Awards

The following table summarizes information with respect to unexercised options for theour Named Officer holding options as of December 31, 2021.2023.

Benefits payable upon change in control

Mr. Njuguna’s employment agreement contains provisions related to a 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 20212023 compensation awarded or earned by our Independent Directors who served in such a capacity during the year.

Set forth below is certain information with respect to beneficial ownership of Common Stock as of March 28, 2022,27, 2024, 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 DownKoil Energy 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.

__________________

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 tofees billed by Moss Adams for audit services rendered in connection with the Company’s consolidated financial statements and reports for the years ended December 31, 20212023 and 20202022 and for other services rendered during those years on behalf of Deep DownKoil Energy and its subsidiaries:

Audit Fees: Consists of fees and expenses billed for professional services rendered for the audit of Deep Down’sKoil Energy’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’sKoil Energy’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 and expenses 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. NjugunaErik Wiik 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,

Koil Energy Solutions, Inc.

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of Deep Down,Koil Energy Solutions, Inc. (the “Company”) as of December 31, 20212023 and 2020,2022, 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, 20212023 and 2020,2022, 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 audits 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 Matter

The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that (1) relates 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 matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which 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 $6,867,000$6,951,000 for the year ended December 31, 20212023 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,

/s/ Moss Adams, LLP

Houston, Texas

March 28, 2022

65927, 2024

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

DEEP DOWN,

KOIL ENERGY SOLUTIONS, INC.

CONSOLIDATED BALANCE SHEETS

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

DEEP DOWN,KOIL ENERGY SOLUTIONS, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS