UNITED STATES SECURITIES AND EXCHANGE
COMMISSION

Washington D.C., 20549



FORM
10-K





xANNUAL
REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31,
2014



oTRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File No. 0-30351



DEEP DOWN, INC.

(Exact name of registrant as specified
in its charter)



|Nevada                                                    | 75-2263732                          
|--------------------------------------------------------- | ------------------------------------
|(State of other jurisdiction of incorporation)            | (I.R.S. Employer Identification No.)
|                                                          |                                     
|8827 W. Sam Houston Pkwy North, Suite 100, Houston, Texas | 77040                               
|(Address of Principal Executive Office)                   | (Zip Code)                          



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



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



Securities registered pursuant to Section
12(g) of the Act: Common Stock $0.001 par value



Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o
  No þ



Indicate by check mark whether the issuer is not required to
file reports pursuant to Section 13 or 15(d) of the Act. Yes o  No þ



Indicate by check mark whether the registrant
(1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
12 months (or such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes þ   No  o



Indicate by check mark whether the registrant
has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted
and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such
shorter period that the registrant was required to submit and post such files). Yes þ  No o



Indicate by check mark if disclosures of delinquent filers in
response to Item 405 of Regulations S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge,
in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.   o



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



Large accelerated filer o     Accelerated
filer o     Non-accelerated filer o     Smaller reporting company þ



Indicate by checkmark whether the registrant is a shell company
(as defined in Rule 12b-2 of the Exchange Act) Yes o   No þ



As of June 30, 2014, the aggregate market
value of the voting and non-voting common equity held by non-affiliates, computed by reference to the price at which the common
equity was sold, was $22,665,630.



At March 25, 2015, the issuer had 15,130,601 shares outstanding
of common stock, par value $0.001 per share.



DOCUMENTS INCORPORATED BY REFERENCE

None.














TABLE OF CONTENTS



|PART I  
|--------
|        
|Item 1  
|Item 2  
|Item 3  
|        
|PART II 
|        
|Item 5  
|Item 7  
|Item 8  
|Item 9  
|Item 9A 
|Item 9B 
|        
|PART III
|        
|Item 10 
|Item 11 
|Item 12 
|Item 13 
|Item 14 
|        
|Item 15 
|        









2







Forward-Looking Information



Unless otherwise indicated, the terms “Deep
Down, Inc.”, “Deep Down”, “Company”, “we”, “our” and “us” are
used in this report to refer to Deep Down, Inc., a Nevada corporation, and its directly and indirectly wholly-owned subsidiaries.



In this Annual Report on Form 10-K (the
“Report”), we may make certain forward-looking statements (“Statements”), including statements regarding
our plans, strategies, objectives, expectations, intentions and resources that are made pursuant to the safe harbor provisions
of the Private Securities Litigation Reform Act of 1995. We do not undertake to update, revise or correct any of the Statements.
The following discussion should also be read in conjunction with the audited consolidated financial statements and the notes thereto.



The Statements contained in this Report
that are not historical fact are forward-looking statements (as such term is defined in the Private Securities Litigation Reform
Act of 1995), within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange
Act of 1934, as amended. The Statements contained herein are based on current expectations that involve a number of risks and uncertainties.
These Statements can be identified by the use of forward-looking terminology such as “believes”, “expects”,
“may”, “will”, “should”, “intend”, “plan”, “could”, “is
likely”, or “anticipates”, or the negative thereof or other variations thereon or comparable terminology, or
by discussions of strategy that involve risks and uncertainties. We wish to caution the reader that these Statements are only predictions.
No assurances can be given that the future results indicated, whether expressed or implied, will be achieved. While sometimes presented
with numerical specificity, these projections and other Statements are based upon a variety of assumptions relating to the business
of the Company, which, although considered reasonable by us, may not be realized. Because of the number and range of assumptions
underlying our projections and Statements, many of which are subject to significant uncertainties and contingencies that are beyond
the reasonable control of us, some of the assumptions inevitably will not materialize, and unanticipated events and circumstances
may occur subsequent to the date of this report. These Statements are based on current expectations and we assume no obligation
to update this information. Therefore, our actual experience and the results achieved during the period covered by any particular
projections or Statements may differ substantially from those projected. Consequently, the inclusion of projections and other Statements
should not be regarded as a representation by us or any other person that these estimates and projections will be realized, and
actual results may vary materially. There can be no assurance that any of these expectations will be realized or that any of the
Statements contained herein will prove to be accurate.









3





PART I



ITEM 1.                   Business.



History



Deep Down, Inc. is a Nevada corporation
engaged in the oilfield services industry. As used herein, “Deep Down”, “Company”, “we”, “our”
and “us” refers to Deep Down, Inc. and/or its subsidiaries. Deep Down, Inc. (OTCQX: DPDW), a publicly traded Nevada
corporation, was incorporated on December 14, 2006, through a reverse merger with MediQuip Holdings, Inc. (“MediQuip”),
a publicly-traded Nevada corporation.



Deep Down is the parent company to the
following directly and indirectly wholly-owned subsidiaries: Deep Down, Inc., a Delaware corporation (“Deep Down Delaware”);
Deep Down International Holdings, LLC, a Nevada limited liability company (“DDIH”), and Deep Down Brasil - Solucoes
em Petroleo e Gas, Ltda, a Brazilian limited liability company (“Deep Down Brasil”).



Our current operations are primarily conducted
under Deep Down Delaware.  In addition to our strategy of continuing to grow and strengthen our operations, including
by expanding our services and products in response to our customers’ demands, we intend to continue to seek strategic acquisitions
of complementary service providers, product manufacturers and technologies that are focused primarily on supporting deepwater and
ultra-deepwater offshore exploration, development and production of oil and gas reserves and other maritime operations.



Our website address is www.deepdowninc.com.We make available, free of charge on or through our website, copies of our Annual Reports on Form 10-K, Quarterly Reports
on Form 10-Q, Current Reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d)
of the Securities Exchange Act of 1934 as soon as reasonable after we electronically file such material with, or furnish it to,
the Securities and Exchange Commission (“SEC”). Paper or electronic copies of such material may be requested by contacting
the Company at our corporate offices. Information filed with the SEC is also available at www.sec.gov or may be read and copied
at the SEC’s Public Reference Room at 100 F. Street, NE, Washington, DC 20549. Information regarding operations of the Public
Reference Room may be obtained by calling the SEC at 1-800-SEC-0330.



Business Overview



We are a global provider of specialized
services to the offshore energy industry to support deepwater and ultra-deepwater exploration, development and production of oil
and gas and other maritime operations.  While we are primarily a service company, we also produce custom engineered products
that assist us in fulfilling service objectives for specific projects on a contractual basis.  We design and manufacture
a broad line of deepwater and ultra-deepwater, surface and offshore equipment solutions which are used by major integrated, large
independent and foreign national oil and gas companies in offshore areas throughout the world.  Our products are often
developed in direct response to customer requests for solutions to critical problems in the field.  We serve the growing
offshore petroleum and maritime industries with technical management and support services.  One of our greatest strengths
is the extensive knowledge base of our service, engineering and management personnel in many aspects of the deepwater and ultra-deepwater
industry. Set forth below is a more detailed description of important services and products we provide.



Our goal is to provide superior services
and products to our customers in a safe, cost-effective and timely manner.  We believe there is significant demand for,
and brand name recognition of, our established products due to the technological capabilities, reliability, cost-effectiveness,
timeliness of delivery and operational efficiency features of these products. Since our formation, we have introduced many new
products that continue to broaden the market we currently serve.



Segments



See Note 1, “Description of Business
and Summary of Significant Accounting Policies and Estimates”, of the Notes to Consolidated Financial Statements included
in this Report for additional information.



Services and Products



Services. We provide a wide
variety of engineering and management services, including the design, installation and retrieval of subsea equipment and systems,
connection and termination operations, well-commissioning services, as well as construction support and Remotely Operated Vehicle
(“ROV”) operations support. We pride ourselves in our ability to collaborate with the engineering functions of oil
and gas operators, installation contractors and subsea equipment manufacturers to determine the fastest, safest, and most cost-effective
solutions to the full spectrum of complex issues which arise in our industry.



4







Project Management and Engineering.
Our project management teams specialize in deepwater subsea developments. Our services are centered on the utilization of standardized
hardware, proven, well-tested installation techniques, and experienced, consistent teams that have proven to be safe and skilled
in all aspects of the installation process. Many installation contractors find it beneficial to utilize our services
to help reduce on-board personnel since our specialized technicians can perform multiple tasks.  Our teams have vast
experience with the installation of flexible and rigid risers and flowlines, umbilicals, flexible and rigid jumpers, steel tube
and thermoplastic hose flying leads, pipeline end terminations and manifolds. Our engineers have experience ranging from the initial
conceptual design phases through manufacturing and installation, and concluding with topside connections and commissioning.  Our
experience provides us with a level of “hands on” and practical understanding that has proven to be indispensable in
enabling us to offer custom solutions to the many problems encountered both subsea and topside.  Because of our wide
knowledge base, our engineering team is often hired by oil and gas operators, installation contractors and subsea equipment manufacturers
to provide installation management and engineering support services.  Our engineering team has been involved in several
of the innovative solutions used today in deepwater subsea systems.  We specialize in offshore installation engineering
and the writing of practical installation procedures. We deal with issues involving flying leads, compliant umbilical
splices, bend stiffener latchers, umbilical hardware, hold-back clamps, and the development of distribution system components.  We
are heavily involved in the fabrication of installation aids to simplify offshore executions, and offer hydraulic, fiber optic,
and electrical testing services and various contingency testing tools.



Spooling Services.  Our
experienced personnel are involved in the operation of spooling equipment on many projects, including operations for other companies
to run their spooling equipment.  We have developed a very efficient (in both time and cost) system for spooling, utilizing
our horizontal drive units, under-rollers, tensioners, carousels and rapid deployment cartridges.



Testing and Commissioning Services.
Umbilical manufacturers, control suppliers, installation contractors, and oil and gas operators utilize our services to perform
all aspects of testing, including initial Factory Acceptance Testing (“FAT”), extended factory acceptance testing and
System Integration Testing (“SIT”), related to the connecting of the umbilical termination assemblies, the performing
of installations, and the completion of the commissioning of the system thereafter.  To execute these services, we have
assembled a variety of personnel and equipment to ensure that all testing operations are done in a safe and time-efficient manner,
ensuring a reduced overall project cost.  We also work hard to utilize the most detailed digital testing and monitoring
equipment to ensure that the most accurate data is provided to our clients.  We have been hired to perform coiled tubing
flushing, cleaning, and hydro testing, umbilical filling, flushing, pressure, flow rate, and cleanliness testing, load out monitoring
and testing, installation monitoring, post installation testing, system commissioning, umbilical intermediate testing, and umbilical
termination assembly cleanliness, flow, and leak testing. We employ a variety of different pumping systems to meet industry needs
and offer maximum flexibility.  Our philosophy is to flush through the maximum number of lines at the highest flow rate
possible to maximize efficiency.   Due to the different requirements for testing and commissioning of subsea systems,
we have an assortment of pumps and equipment to deploy to ensure a safe and efficient commissioning program.  We have
experience handling all types of commissioning fluids, including asphaltine dispersants, diesel, methanol, xylene, corrosion inhibitors,
water-based control fluids, oil-based control fluids, 100 percent glycol, paraffin inhibitors, and alcohol.  We have
been involved in the design, procurement, testing, installation, and operation of the testing equipment.  Our engineers
and service technicians can also assist in writing the testing procedures and sequences from simple FAT to very extensive multiple
pressures and fluids testing up to full system SIT procedures. We work closely with the project managers and production platform
engineers to help ensure that all aspects of the installation or retrieval project, including potential risks and dangers, are
identified, planned for, and eliminated prior to arrival on the production platform.



Storage Management. Our facility
in Channelview, TX covers more than 50,000 square feet of internal high quality warehousing capacity and 300,000 square feet of
external storage and is strategically located in Houston's Ship Channel area. Our warehouse is designed to provide clients with
flexible and cost effective warehousing and storage management alternatives. Our professional and experienced warehouse staff,
combined with the very latest in information technology, results in a fully integrated warehousing package designed to deliver
effective solutions to client needs. Among other capabilities, we are capable of providing long-term specialized contract warehousing;
long and short-term storage; modern materials handling equipment; covered loading areas; quality security systems; integrated inventory
management; packing and repacking; computerized stock controls; and labeling.



Our shore-based facility located at Core
Industries, Inc. in Mobile, AL has 6,500 square feet and houses our 3,400-ton carousel system, used to store customers’ products.
The site is sufficient to allow for full system integration testing of our customers’ equipment prior to deployment offshore.



ROV and ROV Tooling Services.  As
part of our ROV services, we have observation and light work class ROV units capable of operating in depths of 10,000 feet. Our
services include offering these vehicles to strategic alliance partners who lease our vehicles and provide the actual services
of platform inspection, platform installation and abandonment, search and recovery, salvage, subsea sampling, subsea intervention,
telecommunication cable inspections, anchor handling, ROV consulting and project management, ROV pilots and technicians, and underwater
cinematography.  We provide an extensive line of ROV intervention tooling, both used to support our own operations and
for rental to our customers.  Our ROV Tooling equipment includes flying lead orientation tools, class 1-5 torque tools, hot
stabs, pipe cutting systems, dredging and pumping systems, ROV clamps and ROV-friendly hooks and shackles that are state-of-the-art
in design.



5







Deep Down Marine Technologies.Deep
Down Marine Technologies (“DDMT”) is a specialized division of Deep Down, Inc. primarily focused on the refurbishment
and repurposing of recovered subsea distribution assets and providing support for offshore interventions.



Items refurbished and repurposed for clients
include Logic Caps (“LC(s)”), intermediate logic caps, and Hydraulic Distribution Manifolds (“HDM(s)”).
Once a recovered asset is received, it is cleaned, any production fluids are flushed out with a water-based control fluid, and
the asset is moved into storage. As an emergency or intervention arises, we pull the stored asset, reroute and weld the tubing,
and then perform an FAT per client specifications. Finally, we send out our service technicians and equipment to support the offshore
campaign.



Additionally, we perform various tasks
in support of offshore interventions. We reconfigure Deep Down Hydrate Remediation Frames and Hydraulic Flying Leads (“HFL(s)”)
at either of our facilities or in the field. Our service technicians go offshore to pre-charge and make any changes to the frame
needed to remediate hydrates.



We also developed the Fast Response Box
(“FRB”), a concept cultivated from our vast offshore campaign experience. Our team identified the necessary components
for an emergency reroute of a chemical or hydraulic line performed on the deck of a vessel. After the subsea distribution hardware
is brought up, our service technicians safely depressurize, flush, cut out tubing, and reroute as required to get the well or field
back up and producing. We then pre-charge the system and assist in overboarding and reinstallation. Our ability to provide a fully
functional temporary solution is designed to bring the well or field back into production immediately and allows time for a permanent
solution to be developed.



Our capabilities further include in-house
software and hardware engineering to provide innovative solutions from wireless testing and monitoring equipment, to Dynamic Positioning
(“DP”) systems. We have also developed camera systems that can be set up at any site, enabling our clients to witness
FATs, SITs or vessel load-outs in real-time, from any location in the world.



Products. We provide installation
support equipment and component parts and assemblies for subsea distribution systems. We believe the key to successful installations
of hardware is to design the subsea system by considering installation issues first, working backwards to the design of the hardware
itself. This is why we have been instrumental in the development of hardware and techniques to simplify deepwater installations.
We design, manufacture, fabricate, inspect, assemble and test subsea equipment, surface equipment and offshore equipment that is
used by major integrated, large independent and foreign national oil and gas companies in offshore areas throughout the world.  Our
products are used during oil and gas exploration, development and production operations on offshore drilling rigs, such as floating
rigs and jack-ups, and for drilling and production of oil and gas wells on offshore platforms, tension leg platforms and moored
vessels such as floating production storage and offloading vessels (“FPSO”).



Flying Leads. Deep Down is a leader
in flying lead design, manufacture and installation; in particular steel tube flying leads. Our flagship product, the Loose Steel
Tube Flying Lead (“LSFL®”), was developed to eliminate the residual memory left in traditional flying leads due
to the bundling process. The loose lay of the tubes significantly reduces stiffness of the assembly, allows the bundle to
lay flat on the sea floor, follow the prescribed lay path precisely, bend in a tight radius with minimal resistance and offers
maximum compliance for easy makeup in lengths up to 1,000’. When greater lengths up to 10,000’ are required, we utilize
our patented Non-Helical Umbilical (“NHU®”) in conjunction with a complaint section on each end of the assembly
to achieve the same result. We also offer hybrid LSFL® assemblies which can include any number and combination of electrical,
optical, hose and steel tube elements. Hybrid LSFL® technology provides installation savings in both time and money as fewer
operations are required to install the combined unit.



Deep Down employs the patented
Moray® termination system on each end of the LSFL®. The Moray® termination is a light weight, high-strength,
configurable and field serviceable framework used to connect any commercially available Multi-Quick Connect
(“MQC”) plate to the LSFL® bundle. The Moray® termination assembly allows the installation load from the
steel tubes or strength member to be transmitted directly to the framework and through to the installation rigging while
isolating couplers from the load to maintain maximum compliance. The Moray® termination with compliant section is ideal
for umbilical end terminations; it eliminates the need for bulky armor pots and is more manageable than a traditional
umbilical end termination. In this application, the Moray® termination can be used to house multiple electrical, optical
and auxiliary hydraulic interfaces in integrated ROV panels. Moray® termination assemblies can be outfitted with
integrated buoyancy allowing quicker installation times by eliminating the need to recover buoyancy modules. Additionally,
this allows for the use of a smaller class ROV on a vessel of opportunity should the need for rework arise.



6







Umbilical Hardware. Our blend of
experiences with umbilical manufacturers, subsea engineers and installation contractors has been effective, giving us a unique
perspective when fabricating and designing terminations for umbilical manufacturers.  Members of our team were involved
with the designs for the armored thermo plastic umbilicals at Multiflex, the first steel tube umbilical in the Gulf of Mexico for
the Shell Popeye® umbilical, and the standardization of many steel tube umbilical terminations.  Our designs are often
much lighter in weight and smaller than the typical hardware that has been created and used in the past by our competitors.  Our
engineering team has designed and fabricated bending restrictors, armor pots, split barrels, tubing fittings and unions, hinging
umbilical splices and topside terminations with our unique threaded welded fittings, umbilical compliant splice, and the bend stiffener
latcher.  We offer both polymer and steel bend limiters.  The compliant splice is a patented method of converting
spare umbilicals into actual production umbilicals by splicing spare umbilicals together to produce any length required or to repair
a damaged umbilical.  This termination system eliminates the burdens of dealing with umbilical splices during installation
and is capable of housing both electrical and fiber optic fiber termination assemblies while still allowing for the splice to be
spooled up onto a reel or carousel.  Our Umbilical Termination Assembly (“UTA”) and new compliant UTA allows us
to terminate the umbilical with a higher degree of quality and place the critical components of the base unit on the reel or on
the carousel and handle it with additional ease and safety. Then it is combined with the mud mat assembly easily and offers
both first end stab and hangover features as well as Yoke second end landing. The new compliant version allows the UTA to
be expanded for multiple J-plates and yet feature the same compliant features in our compliance splicing increasing the ease of
handling on the deployment equipment – overboarding – and landing on the seafloor.  Our termination services are
becoming popular because they offer the ability to take existing umbilical hang offs from multiple manufacturers, which may have
been exposed to terrible environmental conditions, and add them to temporary handling clamps – lifting up the umbilical and
providing a completely new hangoff arrangement and thus extending the life of the umbilical and the subsea field.  This service
is being utilized on a project now.  Bend Stiffener LatchersTM (“BSLTM”) are still the leaders in the
industry allowing bend stiffeners to be carried by the umbilical topside termination assembly in a more compact and overlapping
configuration. BSLs are overboarded with the highest strength and can be installed into an existing I-tube with existing flange
or an I-tube with the DDI mating bell mouth and be latched in by ROV allowing the bend stiffener to be securely attached to the
I-tube transferring all the dynamic bending moment while the umbilical is pulled up and hung off and eliminating the handling of
two major pieces of hardware, and the need to have measurements between the components as the system is fully extending and adjustable.



Riser Isolation Valves and Subsea Isolation
Valve Services.Deep Down's new Riser Isolation Valve (“RIV”)
and Subsea Isolation Valve (“SSIV”) control systems are unique solutions providing platform personnel the hydraulic
control and electrical indication for subsea production valve manipulation. These systems provide numerous advantages to the client
including: Emergency Shutdown (“ESD”) capabilities, valve positioning monitoring systems, and auxiliary positions for
spare and/or future field development.



In addition to fabrication of these systems,
Deep Down provides subsea installation engineering, consulting, and service personnel to support clients, installation contractors,
valve vendors and more. Our expertise ensures scope is fully defined and delegated allowing for safe and successful installations.
The Deep Down team provides commissioning and technical assistance to clients and platform personnel ensuring the systems are working
properly and all operational information is handed over to the end users.



Capitalizing on our expertise in umbilical
manufacturing, Subsea and Topside Umbilical Termination Assemblies (“SUTA” / “TUTA”), hydraulic and electrical
flying leads, and super duplex welding, we provide quality products our clients can depend on. Project designs are guaranteed to
be installation friendly and client specifications met. When Deep Down’s expert installation team is on the job, product
integrity is preserved, ensuring successful installations.



Installation
Aids.  To help our customers and to meet our own internal needs, we have developed
an extensive array of installation aids, including steel flying lead installation systems, tensioners, lay chutes, many varieties
of buoyancy, clump weights, Vortex Induced Vibration (“VIV”) strakes, mud mats,
dual tank skids, gang boxes, work vans, pumping and testing skids, control booths, fluid drum carriers, crimping systems, load
cells,  300 and 340-ton under-rollers, powered reels, 200-ton, 400-ton and 3,400-ton and 3,500 – ton  carousel,
UTA and bridging jumper running and parking deployment frames, termination shelters, pipe straighteners, ROV hooks and shackles,
stackable SeaStax® tanks, baskets, Subsea Deployment Basket System (SDB®), Horizontal Drive Units (“HDU”) and
Rapid Deployment Cartridges (“RDC”).



Buoyancy Products. We design, engineer
and manufacture deepwater buoyancy systems and support hardware essential to installation and operational requirements. Deep Down's
rotational molding operations produce high density polyethylene products including bend restrictors, VIV suppression strakes and
fairings, protective outer shells for distributed buoyancy modules and other flotation products. Our unique distributed buoyancy
module clamps are designed for quick and easy installation for both "over the stinger" and vertical lay system methods.



Further expansion of our flotation product
line includes drilling riser buoyancy support hardware and installation services and development of a “Buoyant Rod”
concept that we hope to have significant applications in the flotation industry.



7







Non-Helical Umbilical®.Deep Down's patented Non-Helical Umbilical® (“NHU®”) combines our experience manufacturing miles of
loose steel tube flying leads, terminating conventional steel umbilicals, and observing installation behavior of all umbilicals.
The NHU® can be manufactured in lengths up to 10 miles using super duplex tubes in standard sizes and in any configuration
of hydraulic, electrical or optical elements.  It is intended for long-term infield (static) or short-term dynamic service
applications.



Multiple tubes are fed into the patented
Deep Down NHU® manufacturing mechanism, bundled, then extruded with a HDPE outer jacket. Umbilicals are not torque balanced
on their own, so rather than expending resources to balance and imparting stresses to helically wind them, the NHU® uses the
imbalance to its advantage, resulting in a standard bundle.



The proprietary NHU® manufacturing
concept is fully containerized, portable and easily transported for setup anywhere in the world. The ability to manufacture in
close proximity to subsea fields offers the benefits of reduced lead times, the use of smaller installation vessels, use of compact
Deep Down equipment, the incorporation of the appropriate percentages of local content, and more favorable economics.



Manufacturing



For over a decade, our primary manufacturing
facility was in Channelview, Texas, a suburb of Houston. In June of 2013, we reorganized our manufacturing efforts in order to
maximize production and satisfy the increasing demand in the oil and gas industry. We are now operational at our new 215,000 sq.
ft. facility on 20 acres off Beaumont Highway, conveniently located 10 minutes from our Channelview facility.



In addition to increasing our production
capacity, this move also provided the space to build our Steel Tube Flying Lead (“STFL”) Overhead Tracking System.
This system will allow us to easily move STFLs from station to station during production for welding, X-ray and FAT. We have also
significantly expanded our clean, stainless steel welding and tube bending environment, which is separated from all carbon steel
fabrication.



We have a 12’x60’ wet testing
tank, adding the capability to test our products and rigging with buoyancy scenarios in the water. Featuring filtered water and
underwater lighting, it will also enable us to launch and test small ROV’s and ROV operations.



The most substantial benefit to the new
facility is expected to be realized when the dock on the property is completed. This will allow us to move large equipment and
fabricated items by barge, eliminating the costs and limitations of highway transportation.



Our manufacturing plant is ISO 9001 certified.
We continue to improve our standards and product quality through the use of quality assurance specialists working with our product
manufacturing personnel throughout the manufacturing process. We have the capacity to complete large turn-key projects and still
have reserve space for unforeseen emergency projects requiring immediate service and attention oil companies are accustomed to.



Customers



Demand for our deepwater and ultra-deepwater
services, surface equipment and offshore rig equipment is dependent on the condition of the oil and gas industry and its ability
and need to invest in capital expenditures as well as continual maintenance and improvements on its offshore exploration, drilling
and production operations. The level of these expenditures is generally dependent upon various factors such as expected prices
of oil and gas, exploration and production costs of oil and gas, and the level of offshore drilling and production activity.  The
prevailing view of future oil and gas prices are influenced by numerous factors affecting the supply and demand for oil and gas.  These
factors include worldwide economic activity, interest rates, cost of capital, environmental regulation, tax policies, and production
levels and prices set and maintained by producing nations and OPEC.  Capital expenditures are also dependent on the cost
of exploring for and producing oil and gas, the sale and expiration dates of domestic and international offshore leases, the discovery
rate of new oil and gas reserves in offshore areas and technological advances. Oil and gas prices and the level of offshore drilling
and production activity have historically been characterized by significant volatility.



Our principal customers are major integrated
oil and gas companies, large independent oil and gas companies, foreign national oil and gas companies, subsea equipment manufacturers
and subsea equipment installation contractors involved in offshore exploration, development and production. Offshore
drilling contractors, engineering and construction companies, and other companies involved in maritime operations represent a smaller
customer base.



We are not dependent on any one customer
or group of customers. The number and variety of our products required in a given period by a customer depends upon its capital
expenditure budget as well as the results of competitive bids. Consequently, a customer may account for a material portion of revenues
in one period and may represent an immaterial portion of revenues in a subsequent period. While we are not dependent on any one
customer or group of customers, the loss of one or more of our significant customers could, at least on a short-term basis, have
an adverse effect on the results of our operations.



8







Marketing and Sales



We market our services and products
throughout the world directly through our sales personnel in our Channelview, Texas office. We periodically advertise in
trade and technical publications targeting our customer base.  We also participate in industry conferences and
trade shows to enhance industry awareness of our products and services.  Our customers generally order products and
services after consultation with us on their project. Orders are typically completed within two weeks to three months
depending on the type of product or service. Larger and more complex products may require four to six months to
complete, though we have accepted several longer-term projects, requiring significantly more time to complete. Our customers
select our products and services based on the quality, reliability and reputation of the product or service, price, timely
delivery and advanced technology. For large production system orders, we engage our project management team to coordinate
customer needs with engineering, manufacturing and service organizations, as well as with subcontractors and
vendors.  Our profitability on projects is dependent on performing accurate and cost-effective bids as well as
performing efficiently in accordance with bid specifications.  Various factors can adversely affect our performance
on individual projects that could potentially adversely affect the profitability of a project.



Backlog



Information regarding our backlog is incorporated
herein by reference from the section entitled, “Industry and Executive Outlook” in Part II, Item 7 of this Report.



Product Development and Engineering



The technological demands of the oil and
gas industry continue to increase as offshore exploration and drilling operations expand into deeper and more hostile environments.  Conditions
encountered in these environments include well pressures of up to 15,000 psi, mixed flows of oil and gas under high pressure that
may also be highly corrosive, and water depths in excess of 5,000 feet.  We are continually engaged in product development
activities to generate new products and to improve existing products and services to meet our customers’ specific needs.  We
also focus our activities on reducing the overall cost to the customer, which includes not only the initial capital cost but also
operating costs associated with our products.



We have an established track record of
introducing new products and product enhancements.  Our product development work is conducted at our facilities in Houston
and Channelview, Texas, and in the field.  Our application engineering staff also provides engineering services to customers
in connection with the design and sales of our products.  Our ability to develop new products and maintain technological
advantages is important to our future success.



We believe that the success of our business
depends more on the technical competence, creativity and marketing abilities of our employees than on any individual patent, trademark
or copyright.  Nevertheless, as part of our ongoing product development and manufacturing activities, our policy is to
seek patents when appropriate on inventions concerning new products and product improvements.  All patent rights for
products developed by employees are assigned to us.



Competition



The principal competitive factors in the
petroleum drilling, development and production and maritime equipment markets are quality, reliability and reputation of the product,
price, technology, and timely delivery.  We face significant competition from other manufacturers of exploration, production,
and maritime equipment.  Several of our primary competitors are diversified multinational companies with substantially
larger operating staffs and greater capital resources and have a longer history in the manufacturing of these types of equipment.



Employees



At March 1, 2015, we had a total of 90
employees, of which all 90 were full-time employees.  Our employees are not covered by collective bargaining agreements
and we generally consider our employee relations to be good.  Our operations depend in part on our ability to attract
a skilled labor force. While we believe that our wage rates are competitive and that our relationship with our skilled
labor force is good, a significant increase in the wages paid by competing employers could result in a reduction of our skilled
labor force, increases in the wage rates that we pay or both.



9







Governmental Regulations



A significant portion of our business activities
are subject to federal, state, local and foreign laws and regulations and similar agencies of foreign governments. The technical
requirements of these laws and regulations are becoming increasingly expensive, complex and stringent. These regulations
are administered by various federal, state and local health and safety and environmental agencies and authorities, including the
Occupational Safety and Health Administration of the U.S. Department of Labor and the U.S. Environmental Protection Agency. From
time to time, we are also subject to a wide range of reporting requirements, certifications and compliance as prescribed by various
federal and state governmental agencies. Expenditures relating to such regulations are made in the normal course of our business
and are neither material nor place us at any competitive disadvantage. We do not currently expect that compliance with such laws
will require us to make material additional expenditures.



We are also affected by tax policies, price
controls and other laws and regulations generally relating to the oil and gas industry, including those specifically directed to
offshore operations. Adoption of laws and regulations that curtail exploration and development drilling for oil and
gas could adversely affect our operations by limiting demand for our services or products.



Increased concerns about the
environment have resulted in offshore drilling in certain areas being opposed by environmental groups, and certain areas have
been restricted. To the extent that new or additional environmental protection laws that prohibit or restrict offshore
drilling are enacted and result in increased costs to the oil and gas industry in general, our business could be materially
affected.  In addition, these laws may provide for "strict liability" for damages to natural resources or
threats to public health and safety, rendering a party liable for the environmental damage without regard to negligence or
fault on the part of such party.  Sanctions for noncompliance may include revocation of permits, corrective action
orders, administrative or civil penalties and criminal prosecution.  Certain environmental laws provide for joint and
several strict liabilities for remediation of spills and releases of hazardous substances. In addition, companies may
be subject to claims alleging personal injury or property damage as a result of alleged exposure to hazardous substances, as
well as damage to natural resources.  Such laws and regulations may also expose us to liability for the conduct of or
conditions caused by others, or for our acts that were in compliance with all applicable laws at the time such acts were
performed.  Compliance with environmental laws and regulations may require us to obtain permits or other authorizations
for certain activities and to comply with various standards or procedural requirements.



We cannot determine to what extent
our future operations and earnings may be affected by new legislation, new regulations or changes in existing regulations.
We believe that our facilities are in substantial compliance with current regulatory standards. Based on our
experience to date, we do not currently anticipate any material adverse effect on our business or consolidated financial
position as a result of future compliance with existing environmental laws and regulations controlling the discharge of
materials into the environment. However, future events, such as changes in existing laws and regulations or their
interpretation, more vigorous enforcement policies of regulatory agencies, or stricter or different interpretations of
existing laws and regulations, may require additional expenditures which may be material.



Intellectual Property



While we are the holder of various patents,
trademarks and licenses relating to our business, we do not consider any individual intellectual property to be material to our
business operations.



10













|ITEM 2. | Description of Property
|------- | -----------------------



Our principal corporate offices are located
at 8827 W. Sam Houston Parkway North, Suite 100, Houston, TX 77040. The 89-month lease term began in February 2009 and includes
an allowance for leasehold improvements by the landlord, plus a charge for monthly common area expenses (“CAM charges”)
on a pro-rata basis of the total building expenses (including insurance, security, maintenance, property taxes and utilities).
Monthly lease costs range from $12,177 to $14,391 plus CAM charges, due to a rent escalation clause over the term of the lease.
Effective September 1, 2013, we sub-leased approximately 50% of our space for $9,000 per month for the remainder of the lease term.



Our operating facilities for Deep Down
Delaware are located at 15473 East Freeway, Channelview, Texas 77530 (“Channelview”) and at 18511-810 Beaumont Highway,
Houston, Texas 77049 (“Highway 90”). Channelview consists of approximately 11 acres of land that houses 60,000 square
feet of manufacturing space and 7,000 square feet of office space.   These manufacturing facilities in Channelview,
Texas, are subject to the liens of our lender, Whitney Bank, under our credit agreement. Highway 90 consists of approximately 20
acres of land, which includes 215,000 sq. ft. of indoor manufacturing space. We believe that our current space is suitable, adequate
and of sufficient capacity to support our current operations. The 10-year lease commenced in June 2013 at a base rate of $60,000
per month for the first 7 months and $90,000 per month for the remainder of the lease term. Additionally, we lease 6,500 square
feet of storage space in Mobile, AL to house our 3,400 ton carousel system. The 5-year lease commenced in August 2010 at a base
rate of $5,000 per month.



Deep Down Delaware also leases property
and buildings from Sutton Industries at a base rate of $8,122 per month.  The property is located at 125 Mako Lane, Morgan
City, LA 70380. The 5-year lease term commenced on June 1, 2006, and was renewed for five additional years in June 2011. As
a result of our closure of Mako Technology, LLC’s operations in Morgan City in August 2012, on December 13, 2012, this property
was subleased for the remainder of the lease term.



|ITEM 3. | Legal Proceedings
|------- | -----------------





From time to time, we may be involved in
legal proceedings arising in the normal course of business. As of the date of this Report, we are currently not involved in any
pending, material legal proceedings.







11







PART II





|ITEM 5. | MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER
    MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
|------- | ----------------------------------------------------------------------------------------------------------------





Price Range for Common Stock



Our common stock trades on the OTC Markets
Group (OTCQX) under the symbol (OTCQX: DPDW). The following table sets forth, for the periods indicated, the high and low bid quotations
for our common stock as reported by the OTC Markets.



|                   |  | High |      |  | Low |  
|------------------ |  | ---- | ---- |  | --- | -
|Fiscal Year 2014:  |  |      |      |  |     |  
|December 31, 2014  |  | $    | 1.39 |  |     | $
|September 30, 2014 |  | $    | 1.90 |  |     | $
|June 30, 2014      |  | $    | 2.10 |  |     | $
|March 31, 2014     |  | $    | 2.25 |  |     | $
|Fiscal Year 2013:  |  |      |      |  |     |  
|December 31, 2013  |  | $    | 2.63 |  |     | $
|September 30, 2013 |  | $    | 2.70 |  |     | $
|June 30, 2013      |  | $    | 2.17 |  |     | $
|March 31, 2013     |  | $    | 2.18 |  |     | $



Stockholders of Record



As of March 25, 2015, there were 1,087
stockholders of record of our common stock. All common stock held in street names are recorded in the Company’s stock register
as being held by one stockholder.



Dividend Policy



To date, we have not paid any cash dividends
and our present policy is to retain earnings for working capital use.  Under the terms of our credit agreement with Whitney
Bank, we are restricted from paying cash dividends on our common stock, unless no default under the credit agreement exists at
the time of or would arise after giving effect to any such distribution. We intend to retain operating capital for the growth of
the Company operations.



Equity Compensation Plan Information



The following table sets forth information regarding our equity
compensation plans as of December 31, 2014:



|Plan Category                                                  |  | Number of securities to be issued upon exercise
    of outstanding options, warrants and rights |         |     | Weighted-average exercise price of outstanding
    options, warrants and rights |   |      | Number of securities remaining available for future issuance under equity compensation
    plans (excluding securities reflected in first column) | 
|-------------------------------------------------------------- |  | ----------------------------------------------------------------------------------------------- | ------- | --- | ------------------------------------------------------------------------------- | - | ---- | ------------------------------------------------------------------------------------------------------------------------------------------------- | 
|                                                               |  |                                                                                                 |         |     |                                                                                 |   |      |                                                                                                                                                   | 
|Equity compensation plans approved by security holders         |  |                                                                                                 | 325,000 | (1) |                                                                                 | $ | 1.80 |                                                                                                                                                   | 
|                                                               |  |                                                                                                 |         |     |                                                                                 |   |      |                                                                                                                                                   | 
|Equity compensation plans not approved by
    security holders |  |                                                                                                 | –       |     |                                                                                 |   |      |                                                                                                                                                   | 
|TOTAL                                                          |  |                                                                                                 | 325,000 |     |                                                                                 |   |      |                                                                                                                                                   | 



| | (1) | Represents 325,000 shares of common stock that may be issued upon
exercise of outstanding options, pursuant to equity awards granted as of December 31, 2014 under the 2003 Directors, Officers and
Consultants Stock Option, Stock Warrant and Stock Award Plan (the “Plan”) plus 2,269,590 additional shares of common
stock available for future grant under the Plan. The total number of shares subject to grants and awards is 15 percent of issued
and outstanding shares of common stock. The Plan was approved by security holders of our predecessor MediQuip Holdings, Inc.
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------





12









|ITEM 7. | Management’s
Discussion and Analysis of Financial Condition and Results of Operations
|------- | -------------------------------------------------------------------------------------



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.



In this Part II, Item 7, “Management’s
Discussion and Analysis of Financial Condition and Results of Operations”, all dollar and share amounts are in thousands
of dollars and shares, unless otherwise indicated.



General



We are an oilfield services company specializing
in complex deepwater and ultra-deepwater oil production distribution system support services, serving the worldwide offshore exploration
and production industry. Our services and technological solutions include distribution system installation support and engineering
services, umbilical terminations, loose-tube steel flying leads, ROVs and related services. We support subsea engineering, installation,
commissioning, and maintenance projects through specialized, highly experienced service teams and engineered technological solutions.
Our primary focus is on more complex deepwater and ultra-deepwater oil production distribution system support services and technologies,
used between the platform and the wellhead.



Industry and Executive Outlook



The price of oil has fallen from over $100
per barrel early in 2014 to approximately $45 per barrel in March of 2015, and it is still uncertain at what level the price will
stabilize. The major impact of falling oil prices has been on the drilling side of business, both on land and offshore. We believe
that the instability of oil prices caused the delays in our projects in process during the first half of 2014.



The outlook for 2015 remains
uncertain; however, there are two leading indicators utilized by most subsea products and service companies.  These are
floating rig demand and the demand for subsea completions.  According to data published by HIS Petrodata, there are 323
floating drilling rigs in the world.  At the end of 2014, there were 275 rigs with contracts.  However, there are
only 193 under contract at mid-March. With the drop in oil prices, our clients are announcing cost cutting measures,
including reductions in capital spending budgets and personnel reductions. They are streamlining their operations and
preparing to weather this cycle.  The second indicator is the announced subsea tree completions.  We believe this
is the best sign for predicting the strength of the deepwater market, especially when focused on subsea product lines and
services, as we are. Quest Offshore Resources, Inc. published industry data as recently as November 2014 expecting subsea
tree orders to increase 43% from 2014 to 2018 as compared to the previous five years.  This is also an increase of 32%
above the five years before that.  There is a planned increase of 1,100 trees.



Depending on the direction of oil prices,
many believe there could be future tree installation delays.  We agree with this, but even with some delays, we still expect
an overall significant increase in subsea tree installations over the next four years. Additionally, previous periods of falling
oil prices resulted in increased awareness of our company and the innovative subsea service and technology we provide. We expect
the same to be true for this downturn as operators move more quickly to get subsea problems resolved.  Recently, several operators
have moved to use us. Due to the positive results that we achieved together, we are now in discussions with several operators for
even more of their service work.



We believe the outlook for deepwater
and ultra-deepwater products and service continues to be very strong despite the current price of oil. Our current backlog
has grown to approximately $31,000. We define backlog as the dollar value of unfilled orders where we have a firm contract
and/or purchase order plus any orders where we believe the receipt of a contract or purchase order is imminent. Currently,
our backlog includes approximately $18,000 in orders where we have a purchase order and/or contract in hand, and
approximately $13,000 in orders we consider to be imminent. We believe that the expected subsea activity will be strong
enough for us to maintain our goals in the deepwater and ultra-deepwater sectors in 2015 and 2016. However, in light of the
uncertainties in our market, we have commenced a cost containment and cost reduction program, and have already reduced our
head count by approximately 10 percent during the first quarter of 2015.



The reduction in oil prices
and the impact it had on the energy market, caused our goodwill on the balance sheet to be fully impaired at year-end. As a result,
we recorded $4,916 of goodwill impairment expense in 2014, which had a noncash impact of increasing our net loss from $887 to $5,803.



13







Our company remains strong, and we
are  very pleased with our continued success in obtaining new orders. Our steel flying lead business continues to do
well along with our installation services.  SSIV and RIV services are increasing. Our offshore remediation service is
increasing. DDI Brazil is increasing. The 3,400 MT carousel in Mobile is under consideration for a large umbilical
spooling operation and six months of storage for an upcoming subsea project. We believe all this will continue to positively
impact future growth. We remain cautiously optimistic for 2015, and we believe there is a real opportunity to continue to expand
our service offerings.



Results of Operations



Revenues



|         |  | Year Ended December 31, |        |  | Increase (Decrease) |  
|-------- |  | ----------------------- | ------ |  | ------------------- | -
|         |  | 2014                    |        |  | 2013                |  
|Revenues |  | $                       | 28,630 |  |                     | $



The 2014 revenues of $28,630 were essentially
flat compared to the 2013 revenues of $29,593. The $963 decrease is primarily the result of delays in certain projects caused by
the recent drop in oil prices.



Cost of sales and gross profit



|               |  | Year Ended December 31, |        |  | Increase (Decrease) |  
|-------------- |  | ----------------------- | ------ |  | ------------------- | -
|               |  | 2014                    |        |  | 2013                |  
|Cost of sales  |  | $                       | 20,033 |  |                     | $
|Gross Profit   |  | $                       | 8,597  |  |                     | $
|Gross Profit % |  |                         | 30%    |  |                     |  



The 2014 gross profit of $8,597 (30 percent
of revenues) was slightly improved over the 2013 gross profit of $8,714 (29 percent of revenues).



We record depreciation expense related
to revenue-generating property, plant and equipment as cost of sales, which totaled $1,423 and $1,425 for the years ended December
31, 2014 and 2013, respectively.



Selling, general and administrative
expenses



|                                                     |  | Year Ended December 31, |       |  | Increase (Decrease) |  
|---------------------------------------------------- |  | ----------------------- | ----- |  | ------------------- | -
|                                                     |  | 2014                    |       |  | 2013                |  
|Selling, general & administrative                    |  | $                       | 9,440 |  |                     | $
|Selling, general & administrative as a % of revenues |  |                         | 33%   |  |                     |  



The $671 increase in selling, general and
administrative expenses (“SG&A”) was due primarily to increased security expense of $340 associated with our new
Highway 90 facility. Additionally, we incurred $188 in exit costs associated with the closure of our Panama office. We also incurred
a $143 increase in equipment rental costs, also associated with our new Highway 90 facility.



Goodwill impairment



There was no impairment of goodwill for
the year ended December 31, 2013.  The quantitative assessment of goodwill we performed as of December 31, 2014, which was
a Level 3 fair value determination (based on estimated discounted cash flows), indicated that goodwill was impaired. This result
occurred primarily due to the adverse impact of recently declining oil prices on current and future oil and gas development activity.
We recorded goodwill impairment expense of $4,916 for the year ended December 31, 2014.



Net interest expense



Net interest expense for the year ended
December 31, 2014 was $205. Net interest expense for the year ended December 31, 2013 was $195. Net interest expense increased
$10, due to slightly higher interest-bearing debt balances.  Net interest expense for each period was generated by our outstanding
bank debt, capital leases and a note payable, and was offset by interest income on invested cash balances.

14







Other income (expense), net



Net other income for the year ended December 31, 2014 was $315,
and included $301 of gains on the sale of property, plant and equipment. Net other expense for the year ended December 31, 2013
was $189 and included $225 of technology investment expense.



Modified EBITDA



Our management evaluates our performance
based on a non-GAAP measure, which consists of earnings (net income or loss) available to common shareholders before net interest
expense, income taxes, non-cash share-based compensation expense, equity in net income or loss of joint venture, non-cash impairments,
depreciation and amortization, 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. The measure should not be considered in isolation or as a substitute for operating income, 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 useful to
investors in evaluating our operating performance because it is widely used to measure 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); actions that do not affect liquidity (share-based compensation expense, equity in net income or
loss of joint venture) from our operating results; and it helps investors identify items that are within our operational control.
Depreciation and amortization charges, while a component of operating income, are fixed at the time of the asset purchase or acquisition
in accordance with the depreciable lives of the related asset and as such are not a directly controllable period operating charge.



The following is a reconciliation of net
loss to Modified EBITDA for the years ended December 31, 2014 and 2013 (certain prior year amounts have been excluded to conform
to the current year presentation):



|                                                                               |  | Year Ended December 31, |       
|------------------------------------------------------------------------------ |  | ----------------------- | ------
|                                                                               |  | 2014                    |       
|Net loss                                                                       |  | $                       | (5,803
|Add back interest expense, net of interest income                              |  |                         | 205   
|Add back depreciation and amortization                                         |  |                         | 1,599 
|Add back income tax expense (benefit)                                          |  |                         | 10    
|Add back share-based compensation                                              |  |                         | 693   
|Add back goodwill impairment                                                   |  |                         | 4,916 
|Add back Panama exit costs                                                     |  |                         | 188   
|Add back inventory obsolescence expense                                        |  |                         | 205   
|Adjustment for estimated revenue reduction due to buy-back of fabricated asset |  |                         | –     
|Add back technology investment expense                                         |  |                         | –     
|Modified EBITDA                                                                |  | $                       | 2,013 



Modified EBITDA decreased $1,405 from $3,418
in 2013 to $2,013 in 2014. Gross profit before depreciation and inventory obsolescence decreased $1,332 primarily because 2013
included an assumed estimated $1,418 addition to revenue, which may have been recognized were it not for the buy-back of a fabricated
asset. In addition, actual revenues were slightly unfavorable ($963) in 2014 compared to 2013 primarily as the result of customer
delays in certain projects caused by the recent drop in oil prices. Offsetting these year-to-year decreases was a $1,049 decrease
in cost of sales before depreciation and inventory obsolescence due to slightly improved margins in 2014 compared to 2013.



SG&A before share-based compensation
and Panama exit costs increased $400, due primarily to increased security of $340 associated with our new Highway 90 facility.
Lastly, other income (expense) before technology investment expense increased $327, primarily as the result of gains on sales of
property, plant and equipment of $301 in 2014.



15







Liquidity and Capital Resources



Overview



Historically, we have supplemented the
financing of our capital needs primarily through debt and equity financings.





Credit Facility



Since 2008, we have maintained a credit
facility (the “Facility”) with Whitney.  The Facility has been amended and restated several times, most recently
effective March 30, 2015 when we entered into the seventh amendment (“Seventh Amendment”).



The relevant terms of the Seventh Amendment
include:



| | · | a change to the definition of earnings
before interest, taxes, depreciation and amortization (“EBITDA”) to permit in the calculation, in the quarter ended
December 31, 2014, the add-back of a non-recurring charge of $4,916 related to the impairment of our goodwill;
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | a waiver, for the quarter ended December
31, 2014, for our noncompliance with the fixed charge coverage ratio covenant under the Facility;
| | - | ------------------------------------------------------------------------------------------------------------------------------------------



| | · | that we maintain a compensating balance
of $3,900 in our existing interest-bearing account at Whitney, to continue until such time as we have regained compliance with
all of our covenants under the Facility  subsequent to the quarter ended December 31, 2014.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Other current relevant terms of the Facility
include:



| | · | a committed amount of $5,000 under the
revolving credit facility (“Revolving Credit Facility”), maturing June 30, 2015, subject to a borrowing base limitation
based on eligible trade accounts receivable;  the Revolving Credit Facility may be used to borrow cash (at  an interest
rate of 3.5 percent per annum) or to issue bank letters of credit (at a fee of 1 percent per annum);  both cash borrowings
and the issuance of bank letters of credit reduce the available capacity under the commitment; the available borrowing and letter
of credit capacity under the Revolving Credit Facility at December 31, 2014 was $1,971;
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | a real estate term facility (“RE
Term Facility”) of $2,000, at an interest rate of 4.0 percent per annum, maturing April 15, 2018, with the Company being
obligated to make monthly increasing repayments of principal (along with accrued and unpaid interest thereon) starting at $8, beginning
April 1, 2013;
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | a carousel term facility (“Carousel
Term Facility”) of $2,200, at an interest rate of 3.5 percent per annum, maturing October 15, 2016, with the Company being
obligated to make monthly repayment of principal of $65 (along with accrued and unpaid interest thereon) beginning July 1, 2014;
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | outstanding balances under the Facility
are secured by all of the Company’s assets.
| | - | -----------------------------------------------------------------------------------



As of December 31, 2014, the Company’s
indebtedness under the Facility consisted of the Revolving Credit Facility, the RE Term Facility, and the Carousel Term Facility
was $2,000, $1,815, and $ 1,745, respectively.  Additionally, a bank letter of credit issued under the Revolving Credit Facility
in the amount of $415 was outstanding at December 31, 2014 and 2013. See Note 11 “Commitments and Contingencies”,
of the Notes to Consolidated Financial Statements.



As mentioned above, our Facility obligates
us to comply with certain financial covenants. They are as follows:



| | · | Leverage Ratio - The ratio of total debt
to consolidated EBITDA must be less than 3.0 to 1.0; actual Leverage Ratio as of December 31, 2014:  2.69 to 1.0.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | Fixed Charge Coverage Ratio - The ratio
of consolidated EBITDA to consolidated net interest expense, plus principal payments on total debt, must be greater than 1.5 to
1.0; actual Fixed Charge Coverage Ratio as of December 31, 2014:  1.43 to 1.0. As mentioned previously, the Seventh Amendment
provided a waiver for our noncompliance with this covenant.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | Tangible Net Worth - Our consolidated
net worth, after deducting other assets as are properly classified as “intangible assets,” plus 50 percent of net income,
after provision for taxes, must be in excess of $16,700; actual Tangible Net Worth as of December 31, 2014:  $24,884.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | Moreover, we continue to have obligations
for other covenants, including, among others, limitations on issuance of common stock, liens, transactions with affiliates, additional
indebtedness and permitted investments.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



As of December 31, 2013, we were in compliance
with all of our financial covenants. As of December 31, 2014, we were in compliance with all of our financial covenants, except
for the Fixed Charge Coverage Ratio. Whitney has provided us with a waiver for our noncompliance with this covenant. Because we
do not believe that it is probable that we will be in compliance with all of our covenants under the Facility for the fiscal quarter
ending March 31, 2015, we have classified all of our debt under the Facility as current as of December 31, 2014.







16







Note Payable



On November 5, 2013, we entered into a
Purchase and Sale Agreement (“PSA”) with a customer to buy back a 3.5 metric ton portable umbilical carousel, which
we had fabricated specifically for this customer. The PSA calls for purchase price of $3,293 to be paid in 24 monthly installments
of approximately $137, commencing November 5, 2013 through October 5, 2015. We used the proceeds of the Whitney Carousel Term Facility
to retire this obligation, and the balance at December 31, 2014 was $0.



Private Placement



During the third quarter of 2013, we issued
an additional 4,444 shares of common stock in a private placement resulting in net cash proceeds of $7,628.



As a result of our Facility, the private
placement and cash we expect to generate from operations, we believe we will have adequate liquidity to meet our future operating
requirements.



Summary of Critical Accounting Policies
and Estimates



Use of Estimates



The preparation of financial statements
in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements
and reported amounts of revenues and expenses during the reporting period. The most significant estimates used in our financial
statements relate to revenuerecognition where we use percentage-of completion accounting on our
large fixed-price contracts, goodwill and the allowance for doubtful accounts. These estimates require judgments, which we base
on historical experience and on various other assumptions, as well as specific circumstances. Estimates may change as new events
occur, additional information becomes available or operating environments change.



Goodwill



Goodwill is the excess of cost of an acquired
entity over the amounts assigned to identifiable assets acquired and liabilities assumed in a business combination. Goodwill is
not subject to amortization, but is tested for impairment annually at year-end, or more frequently if an event occurs or circumstances
change that would indicate a potential impairment. These circumstances may include an adverse change in the business climate or
a change in the assessment of future operations of a reporting unit.



The Company assesses whether a goodwill
impairment exists using both qualitative and quantitative assessments. The qualitative assessment involves determining whether
events or circumstances exist that indicate it is more likely than not that the fair value of a reporting unit is less than its
carrying amount, including goodwill. If, based on this qualitative assessment, it is determined that it is not more likely than
not that the fair value of a reporting unit is less than its carrying amount, the Company does not perform a quantitative assessment.



If the qualitative assessment indicates
that it is more likely than not that the fair value of a reporting unit is less than its carrying amount or if the Company elects
not to perform a qualitative assessment, a quantitative assessment or two-step impairment test is performed to determine whether
goodwill impairment exists at the reporting unit.



The first step is to compare the estimated
fair value of each reporting unit with goodwill to its carrying amount, including goodwill. To determine fair value estimates,
the Company uses the income approach based on discounted cash flow analyses, combined with a market-based approach. The market-based
approach considers valuation comparisons of recent public sale transactions of similar businesses and earnings multiples of publicly
traded businesses operating in industries consistent with the reporting unit. If the fair value of a reporting unit is less than
its carrying amount, the second step of the impairment test is performed to determine the amount of impairment loss, if any. The
second step compares the implied fair value of the reporting unit goodwill with the carrying amount of that goodwill. If the carrying
amount of the reporting unit’s goodwill exceeds its implied fair value, an impairment loss is recognized in an amount equal
to that excess.



There was no impairment of goodwill for
the year ended December 31, 2013.  The quantitative assessment of goodwill we performed as of December 31, 2014, which was
a Level 3 fair value determination (based on estimated discounted cash flows), indicated that goodwill was impaired. This result
occurred primarily due to the adverse impact of recently declining oil prices on current and future oil and gas development activity.
We recorded goodwill impairment expense of $4,916 for the year ended December 31, 2014.



17







Revenue Recognition



We recognize revenue once the following
four criteria are met: (i) persuasive evidence of an arrangement exists; (ii) delivery of the equipment has occurred or services
have been rendered, (iii) the price of the equipment or service is fixed or determinable and (iv) collectability of the related
receivable is reasonably assured. Service revenue is recognized as the service is provided, and time and materials contracts are
billed on a bi-weekly or monthly basis as costs are incurred. Customer billings for shipping and handling charges are included
in revenue. Revenues are recorded net of sales taxes.



From time to time, we enter into fixed-price
contracts. The percentage-of-completion method is used as a basis for recognizing revenue on these contracts. We recognize revenue
as costs are incurred because we believe the incurrence of cost reasonably reflects progress made toward project completion.



Provisions for estimated losses on uncompleted
fixed-price contracts (if any) are recorded in the period in which it is determined it is more likely than not a loss will be incurred. 
Changes in job performance, job conditions, and total contract values may result in revisions to costs and income and are recognized
in the period in which the revisions are determined.  Unapproved change orders are accounted for in revenue and cost when
it is probable that the costs will be recovered through a change in the contract price. In circumstances where recovery is considered
probable but the revenues cannot be reliably estimated, costs attributable to change orders are deferred pending determination
of contract price.



Costs and estimated earnings in excess
of billings on uncompleted contracts arise when revenues are recorded on a percentage-of-completion basis 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 and liabilities related to costs
and estimated earnings in excess of billings on uncompleted contracts, as well as 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.



Allowance for Doubtful Accounts



We provide an allowance for doubtful trade
receivables based on a specific review of each customer’s trade receivable balance with respect to their 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, 2014 and 2013, we estimated the allowance for doubtful accounts requirement to be $498 and $1,006,
respectively. Bad debt (credit) expense totaled $(19) and $61 for the years ended December 31, 2014 and 2013, respectively.



Income Taxes



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



18







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”, 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.





|ITEM 8. | Financial
Statements
|------- | --------------------



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



|Report of Independent Registered Public Accounting Firm                                                     | F-1
|----------------------------------------------------------------------------------------------------------- | ---
|                                                                                                            |    
|Consolidated Balance Sheets – December 31, 2014 and 2013                                                    | F-2
|                                                                                                            |    
|Consolidated Statements of Operations – Years ended December 31, 2014 and 2013                              | F-3
|                                                                                                            |    
|Consolidated Statements of Changes in Stockholders’ Equity
        – Years ended December 31, 2014 and 2013 | F-4
|                                                                                                            |    
|Consolidated Statements of Cash Flows– Years ended December 31, 2014 and 2013                               | F-5
|                                                                                                            |    
|Notes to Consolidated Financial Statements– Years ended December 31, 2014 and 2013                          | F-6





|ITEM 9. | Changes
in and Disagreements with Accountants on Accounting and Financial Disclosure
|------- | ------------------------------------------------------------------------------------



None.



19







Item9A.                 Controls and Procedures



Evaluation of Disclosure Controls and
Procedures.   The Company’s disclosure controls and procedures are designed to ensure that such information
required to be disclosed by the Company in reports filed or submitted under the Exchange Act, as amended, 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, 2014, 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, 2014.



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, 2014,
based on criteria issued in 1992 by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) 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, 2014.

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, 2014.



Item9B.                 Other Information



None.



20







PART III



Item10.                  Directors, Executive Officers and Corporate
Governance



The following table sets forth the names, ages and positions
of our directors and executive officers.



|Name                 | Age |  | Position Held With Deep Down                    
|-------------------- | --- |  | ------------------------------------------------
|Ronald E. Smith (1)  | 56  |  | President, Chief Executive Officer and Director 
|Eugene L. Butler     | 73  |  | Executive Chairman and Chief Financial Officer  
|Mary L. Budrunas (1) | 63  |  | Vice President, Corporate Secretary and Director
|Randolph W. Warner   | 67  |  | Director                                        
|Mark Carden          | 56  |  | Director                                        

_________________________

(1) 	Ronald E. Smith and Mary L. Budrunas are married to
each other.



Biographical information regarding each
of our directors and named executive officers 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:



Ronald E. Smith, President, Chief
Executive Officer and Director.  Mr. Smith co-founded Deep Down in 1997 and has served as our Chief Executive Officer, President
and Director since December 2006. Prior to December 2006, Mr. Smith was Deep Down’s President. Mr. Smith graduated from Texas
A&M University with a Bachelor of Science degree in Ocean Engineering in 1981. Mr. Smith worked both onshore and offshore in
management positions for Ocean Drilling and Exploration Company (ODECO), Oceaneering Multiflex, Mustang Engineering and Kvaerner
before founding Deep Down. Mr. Smith’s interests include all types of offshore technology, nautical innovations, state of
the art communications, diving technology, hydromechanics, naval architecture, dynamics of offshore structures, diving technology
and marketing of new or innovative concepts. Mr. Smith is directly responsible for the invention or development of many innovative
solutions for the offshore industry, including the first steel tube flying lead installation system. Mr. Smith is also credited
for the new patented Steel Flying leads – Subsea deployment systems – New subsea J-plates – and the recently
patented NHU (Non Helical umbilical), which is mobile steel tube umbilical production facility employing a new concept to build
Steel Tube Umbilicals.



Mr. Smith is qualified for service on the
Board due to his extensive background in many aspects of the offshore industry, spanning almost three decades. Mr. Smith’s
wide range of knowledge and experience with the various technologies and platforms in the deepwater industry brings invaluable
expertise to our Board.



Eugene L. Butler, Executive Chairman
and Chief Financial Officer.  Mr. Butler has served as Chief Financial Officer and Director with Deep Down since
June 2007, and was appointed Executive Chairman of the Board effective September 1, 2009. Mr. Butler was Managing Director
of CapSource Services, Inc., an investment banking firm specializing in mergers, acquisitions and restructurings, from 2002 until
2007. Prior to this, Mr. Butler served in various capacities as a director, president, chief executive officer, chief financial
officer and chief operating officer for Weatherford International, Inc., a multi-billion dollar multinational service and equipment
corporation serving the worldwide energy market, from 1974 to 1991.  He was elected to Weatherford’s Board of Directors
in May of 1978, elected president and chief operating officer in 1979, and president and chief executive officer in 1984.  He
successfully developed and implemented a turnaround strategy eliminating debt and returning the company to profitability during
a severe energy recession.  Mr. Butler also expanded operations into international markets allowing Weatherford to become
a major worldwide force with its offshore petroleum products and services.  Mr. Butler graduated from Texas A&M
University in 1963, and served as an officer in the U.S. Navy until 1969 when he joined Arthur Andersen & Co.  Mr.
Butler is distinguished by numerous medals and decorations, including the Bronze Star with combat “V” and the
Presidential Unit Citation for his service with the river patrol force in Vietnam. Mr. Butler has also served on the Board of Powell
Industries, Inc. (Nasdaq: POWL) since 1990, where he is the Chairman of the Audit Committee and member of the Governance Committee.
Mr. Butler is a Certified Public Accountant.



In addition to his extensive knowledge
of Deep Down, Mr. Butler is qualified for service on the Board based on his leadership skills and long-standing senior management
experience in the energy and petroleum industries. Additionally, his background in public accounting and investment banking, familiarity
with complex accounting issues and financial statements, as well as his service on the board, including various committees, of
another public company, provide invaluable financial expertise and overall insight to our Board.



21







Mary L. Budrunas, Vice-President,
Corporate Secretary and Director. Ms. Budrunas, co-founder of Deep Down, Inc. along with current chief executive
officer Ronald E. Smith, has served as our Vice-President, Corporate Secretary and Director since December 2006. Ms.
Budrunas is responsible for our administrative functions, including human resources and accounting. Ms. Budrunas has
more than 30 years of logistical management experience in manufacturing, fabrication, and industrial sourcing in the oil and gas
industry. Prior to Ms. Budrunas co-founding Deep Down in 1997, she managed the purchasing efforts of many projects over a 10-year
period for Mustang Engineering, and previously directed procurement for a large petroleum drilling and production facility project
in Ulsan, Korea.



Ms. Budrunas is qualified for service on
the Board based on her extensive oil and gas industry experience. Such expertise provides valuable insight to the Board.



Randolph W. Warner, Director.
Mr. Warner joined the Board as an independent director effective May 28, 2013, and is the Chairman of the Compensation Committee
of the Board of Directors. Mr. Warner is currently President and Chief Excutive Officer of WHC, LLC. (“WHC”), a multi-state
service company which provides pipeline and facilities construction; a position he has held since January 2005. Prior to WHC, Mr.
Warner served as Principal of R.W. Warner Consulting Services from July 2000 to January 2005 and was elected to the board of directors
of the Houston Chapter of the Associated Builders and Contractors in February 2000. Mr. Warner graduated from the Air Force Academy
and served as a captain in the United States Air Force from 1970 to 1976. He served in Vietnam and received numerous awards including
the Distinguished Flying Cross. He also received an MBA from University of Houston in 1980.



Mr. Warner is qualified for service on
the Board based on his senior management experience and expertise in the construction industry, and qualifies as an Audit Committee
financial expert as defined in Item 407(d)(5)(ii) of Regulation S-K.



Mark Carden, Director. 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 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.



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 financial 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., 8827 W. Sam Houston Pkwy North, Suite 100, Houston,
Texas 77040. 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, Chief Financial Officer 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 Messrs. Warner and Carden qualify as independent audit committee financial experts as
defined in Item 407(d)(5)(ii) of Regulation S-K.



Section 16(a) Beneficial Ownership Reporting
Compliance



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.



22







Based solely on the Company’s review
of the copies of such forms received by it, or written representations from certain reporting persons that no Form 5 reports were
required for those persons, 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, 2014 were in compliance, except Mr.
Carden did not timely file a Form 4 with respect to a grant of restricted stock on May 1, 2014.



Item11.                 Executive Compensation



The following table sets forth information
concerning total compensation earned in the years ended December 31, 2014 and 2013 by our Principal Executive Officer (“PEO”),
our two highest compensated executive officers other than our PEO (collectively, our “Named Officers”).



Summary Compensation Tables for the years
ended December 31, 2014 and 2013



|Name and Principal Position                    |  |  | Year |  |  | Salary |         |  | Bonus (1) |   |       | Stock Awards |  |   | Option Awards |  |  | All Other Compensation (2) |   |  | Total |  
|---------------------------------------------- |  |  | ---- |  |  | ------ | ------- |  | --------- | - | ----- | ------------ |  | - | ------------- |  |  | -------------------------- | - |  | ----- | -
|Ronald E. Smith,                               |  |  | 2014 |  |  | $      | 434,250 |  |           | $ | 9,200 |              |  | $ | –             |  |  | $                          | – |  |       | $
|President and Chief Executive Officer          |  |  | 2013 |  |  | $      | 412,096 |  |           | $ | –     |              |  | $ | 812,000       |  |  | $                          | – |  |       | $
|Eugene L. Butler,                              |  |  | 2014 |  |  | $      | 373,500 |  |           | $ | –     |              |  | $ | –             |  |  | $                          | – |  |       | $
|Executive Chairman and Chief Financial Officer |  |  | 2013 |  |  | $      | 362,423 |  |           | $ | –     |              |  | $ | 609,000       |  |  | $                          | – |  |       | $
|Ira B. Selya,                                  |  |  | 2014 |  |  | $      | 197,477 |  |           | $ | –     |              |  | $ | –             |  |  | $                          | – |  |       | $
|Corporate Controller                           |  |  | 2013 |  |  | $      | 184,404 |  |           | $ | –     |              |  | $ | –             |  |  | $                          | – |  |       | $



| | (1) | Amount represents cash bonuses paid in respect to time the Company requires of its employees to
spend offshore.
| | --- | ---------------------------------------------------------------------------------------------------------------

| | (2) | Amounts in 2014 represent:
| | --- | --------------------------

| | · | Automobile allowance of $19,500 to Messrs. Smith and Butler;
| | - | ------------------------------------------------------------

| | · | Payments for vacation not taken in 2014 of $33,404 and $64,644 for Messrs. Smith and Butler, respectively;
| | - | ----------------------------------------------------------------------------------------------------------

| | · | Reimbursement of $22,995 to Mr. Butler for federal and state payroll withholdings customarily withheld
for an employee; and
| | - | ---------------------------------------------------------------------------------------------------------------------------

| | · | Reimbursement of $13,800 to Mr. Butler for healthcare premiums.
| | - | ---------------------------------------------------------------



Narrative Disclosure to Summary Compensation
Table



Employment agreements with Named Executive Officers



All of the compensation described in the
foregoing table, other than those amounts shown in the “Bonus”, “Stock Awards” and “Option Awards”
columns, was paid to the Named Officers pursuant to agreements with Deep Down.



Agreement with Mr. Smith. On January
1, 2010, the Company entered into an employment agreement with Mr. Smith for a term of three years, and is subject to further 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. Smith receive an annual cash compensation of $434,250.



Agreement with Mr. Butler. On January
1, 2010, the Company entered into an employment agreement with Mr. Butler for a term of three years, and is subject to further
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. Butler receive an annual cash compensation
of $373,500, including, but not limited to, reimbursement for healthcare premiums and federal and state payroll withholdings customarily
withheld for an employee.



23







Outstanding Equity Awards at December
31, 2014



The following table summarizes outstanding
stock option awards classified as exercisable and unexercisable as of December 31, 2014 for our Named Officers. The table also
summarizes nonvested stock awards assuming a market value of $0.80 per share (the closing market price of the Company’s stock
on December 31, 2014). See Note 9, “Share-Based Compensation”, of the Notes to Consolidated Financial Statements included
in this Report for additional information.



|                 |  | OPTION AWARDS                                       |         | STOCK AWARDS |                                                                                                                        
|---------------- |  | --------------------------------------------------- | ------- | ------------ | -----------------------------------------------------------------------------------------------------------------------
|                 |  | Number of Securities Underlying Unexercised Options |         |              | Number of 
Securities 
Underlying Unexercised
                                                                  Options
|Name             |  | Exercisable (#)                                     |         |              | Unexercisable (#)                                                                                                      
|Ronald E. Smith  |  |                                                     | 125,000 |              |                                                                                                                        
|Eugene L. Butler |  |                                                     | 125,000 |              |                                                                                                                        
|Ira B. Selya     |  |                                                     | 37,500  |              |                                                                                                                        



| | (1) | The exercise price is equal to the closing price of Deep Down’s common stock on the grant
date. These options vested in three equal increments on each anniversary of the grant date.
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (2) | Each option grant has a five-year term.
| | --- | ---------------------------------------



| | (3) | The restrictions on these shares of nonvested stock will lapse in one-third increments on each
anniversary of the grant date, subject to achievement of service-based conditions. The service-based condition requires that the
employee must remain employed by the Company continuously through the anniversary date.
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Benefits payable upon change in control



Each of Mr. Butler’s and Mr. Smith’s
(the “Executive”) employment agreements contain provisions related to change in control.



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



(i) a
lump sum in cash equal to one times the Executive’s 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 three 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 the Executive 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 the Executive 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 the Executive’s annual bonus for the previous fiscal year; but if no previous annual bonus has been
paid to the Executive, then the lump sum cash payment for this current pro rata annual bonus obligation shall be no less than fifty
percent of Executive’ annual base salary; and



(iv) if
the Executive’s termination occurs prior to the date that is twelve months following a change of control, then each and every
share option, restricted share award and other equity-based award that is outstanding and held by the Executive shall immediate
vest and become exercisable.



24







Each of the Executives have agreed to not,
during the respective term of his employment and for a one-year period after his termination, engage in “Competition”
(as defined in the Employment Agreement) with us, solicit business from any of our customer 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.



The Employment Agreements also provide
that we, to the extent permitted by applicable law and our by-laws, will defend, indemnify and hold harmless the Executive from
any and all claims, demands or causes of action, including reasonable attorneys’ fees and expenses, suffered or incurred
by the Executive 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 the Executive pursuant to the Employment Agreement or in the course and scope of the
Executive’s 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 the Executives, to
the fullest extent permitted by applicable law.



Compensation of Directors



Determining Director Compensation



The Company’s Audit Committee of
the Board of Directors makes all decisions regarding director compensation. Only directors, who are not employees 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 and Audit Committee meetings.



The Company uses a combination of cash
and equity-based compensation, in the form of restricted stock and options to purchase common shares, 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.



We pay our Independent Directors meeting
fees of $1,500 per meeting attended of the Board of Directors.



The following table provides certain information
with respect to the 2014 compensation of our directors who served in such capacity during the year. The 2014 compensation of those
directors who are also our Named Officers is disclosed in the Summary Compensation Table above. Compensation for our Independent
Directors consists of equity and cash as described below. Our Independent Directors as of the date of this Report are Messrs. Randolph
W. Warner and Mark Carden.



|Name                 |  | Fees Earned or Paid in Cash ($) |        |  | Stock Awards
                                                                                ($) (1) |   |        | Option Awards
                                                                                ($) |  |   | All Other Compensation ($) |  |  | Total |  
|-------------------- |  | ------------------------------- | ------ |  | ---------------------------------------------------------------------------------------------------- | - | ------ | ------------------------------------------------------------------------------------------------- |  | - | -------------------------- |  |  | ----- | -
|Eugene L. Butler(2)  |  | $                               | –      |  |                                                                                                      | $ | –      |                                                                                                   |  | $ | –                          |  |  | $     | –
|Ronald E. Smith (2)  |  | $                               | –      |  |                                                                                                      | $ | –      |                                                                                                   |  | $ | –                          |  |  | $     | –
|Mary L. Budrunas (2) |  | $                               | –      |  |                                                                                                      | $ | –      |                                                                                                   |  | $ | –                          |  |  | $     | –
|Randolph W. Warner   |  | $                               | 10,500 |  |                                                                                                      | $ | –      |                                                                                                   |  | $ | –                          |  |  | $     | –
|Mark Carden          |  | $                               | 9,000  |  |                                                                                                      | $ | 53,100 |                                                                                                   |  | $ | –                          |  |  | $     | –



| | (1) | Included in the “Stock Awards” column is the aggregate grant date fair value of restricted
stock awards made to one of our Independent Directors in 2014. The grant date fair value of the award was computed in accordance
with FASB ASC Topic 718. For a discussion of the assumptions and methodologies used to value the stock and option awards reported
in the table above, see Note 9, “Share-Based Compensation”, of the Notes to Consolidated Financial Statements included
in this Report for additional information. Stock awards are grants of restricted stock representing time-vesting shares.
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



In May 2014, we granted 30,000
restricted shares, par value $0.001 per share, to Mr. Carden.  The shares were valued at $1.77 per share and vest over
three years in equal tranches on the grant date anniversary, with continued service on our Board of Directors; we are amortizing
the related share-based compensation of $53,100 over the three-year requisite service period.



| | (2) | Each of our directors who also serve as our executive officers, do not receive any additional
                                                                 compensation for their performance of services as directors. We may agree to provide compensation to these directors in the
                                                                 future.
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



25









|ITEM 12. | Security
    Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
|-------- | --------------------------------------------------------------------------------------------------



Security Ownership of Certain Beneficial Owners and Management



Set forth below is certain information
with respect to beneficial ownership of Common Stock as of December 31, 2014 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; (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.



|Name                                                                                                             |  | Number of Shares of Common Stock Beneficially Owned |           |  | Number of Shares That May Be Acquired By Options Exercisable Within 60 Days (1) |  |         | Total |  |  | Percent of Outstanding Common Stock
|---------------------------------------------------------------------------------------------------------------- |  | --------------------------------------------------- | --------- |  | ------------------------------------------------------------------------------- |  | ------- | ----- |  |  | -----------------------------------
|                                                                                                                 |  |                                                     |           |  |                                                                                 |  |         |       |  |  |                                    
|Goldman Capital Management, Inc.                                                                                 |  |                                                     | 1,318,000 |  |                                                                                 |  | –       |       |  |  | 1,318,000                          
|PVAM Perlus Microcap Fund L.P.                                                                                   |  |                                                     | 1,404,526 |  |                                                                                 |  | –       |       |  |  | 1,404,526                          
|Wellington Trust Company, National Association Multiple
    Common Trust Funds Trust, Micro Cap Equity Portfolio |  |                                                     | 1,776,800 |  |                                                                                 |  | –       |       |  |  | 1,776,800                          
|                                                                                                                 |  |                                                     |           |  |                                                                                 |  |         |       |  |  |                                    
|Directors and Executive Officers:                                                                                |  |                                                     |           |  |                                                                                 |  |         |       |  |  |                                    
|Ronald E. Smith (5)                                                                                              |  |                                                     | 1,540,996 |  |                                                                                 |  | 125,000 |       |  |  | 1,665,996                          
|Mary L. Budrunas (5)                                                                                             |  |                                                     | 930,651   |  |                                                                                 |  | –       |       |  |  | 930,651                            
|Eugene L. Butler                                                                                                 |  |                                                     | 342,839   |  |                                                                                 |  | 125,000 |       |  |  | 467,839                            
|Randolph W. Warner                                                                                               |  |                                                     | 30,000    |  |                                                                                 |  | –       |       |  |  | 30,000                             
|Mark Carden                                                                                                      |  |                                                     | 30,000    |  |                                                                                 |  | –       |       |  |  | 30,000                             
|Ira B. Selya                                                                                                     |  |                                                     | –         |  |                                                                                 |  | 37,500  |       |  |  | 37,500                             
|All directors and officers as a group (6 persons)                                                                |  |                                                     | 2,874,486 |  |                                                                                 |  | 287,500 |       |  |  | 3,161,986                          

______________

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



| | (1) | As defined by the rules of the SEC, securities beneficially owned for this purpose include securities
that the above persons have the right to acquire at any time within 60 days after December 31, 2014.
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (2) | Based on a Schedule 13F-HR filed with the SEC dated February 12, 2015, Goldman Capital
                                                                 Management Inc., 767 Third Ave, New York, NY 10017, may be deemed the beneficial owners of 1,318,000 shares outstanding as
                                                                 of                                                                  December
                                                                 31,                                                                                                        2014.
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (3) | Based on a Schedule 13G/A filed with the SEC dated February 13, 2015. PVAM Perlus Microcap
                                                                 Fund L.P. (formerly the Perlus Microcap Fund L.P.), 5th Floor, 37 Esplanade, St. Helier, Jersey, Channel Islands JE1 2TR, may
                                                                 be                                                                  deemed
                                                                 the                                                                                                          beneficial
                                                                 owners                                                                  of
                                                                 1,404,526                                                                                                            shares
                                                                 outstanding                                                                         as of
                                                                 December 31, 2014.
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (4) | Based on a Schedule 13G filed with the SEC dated April 10, 2014, Wellington Trust Company,
                                                                 National Association Multiple Common Trust Funds Trust, Micro Cap Equity Portfolio c/o Wellington Trust Company, 280
                                                                 Congress                                                                  Street, Boston, MA 02210, may be deemed the
                                                                 beneficial                                                                  owners
                                                                 of 1,776,800 shares outstanding as of December 31,
                                                                 2014.
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (5) | Mr. Smith and Ms. Budrunas are married and hold an aggregate of 2,471,647 shares of common stock,
or approximately 17 percent of outstanding common stock.
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------

| | (6) | Includes 266,667 shares of restricted stock which will vest in two equal installments on June 5,
2015 and June 5, 2016.
| | --- | -----------------------------------------------------------------------------------------------------------------------

| | (7) | Includes 200,000 shares of restricted stock which will vest in two equal installments on June 5,
2015 and June 5, 2016.
| | --- | -----------------------------------------------------------------------------------------------------------------------

| | (8) | Includes 20,000 shares of restricted stock, which will vest in two equal installments on May 28, 2015 and May 28, 2016.
| | --- | -----------------------------------------------------------------------------------------------------------------------

| | (9) | Includes 30,000 shares of restricted stock, which will vest in three equal installments on May 1, 2015, May 1, 2016 and May
1, 2017.
| | --- | ------------------------------------------------------------------------------------------------------------------------------------



Disclosure regarding our equity compensation
plans as required by this item is incorporated by reference to the information set forth under Item 5 “Market for the Registrant’s
Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities” in Part II of this Report.



26







ITEM 13.                  Certain
Relationships and Related Transactions, and Director Independence



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. Warner and Carden
are “independent” under the requirements of Rule 303A.02 of the NYSE Listed Company Manual.



ITEM 14.                Principal
Accountant Fees and Services



We retained Hein & Associates LLP (“HEIN”)
as our principal accountant in 2011. We had no relationship with HEIN prior to their retention as our principal accountant. The
following table sets forth the aggregate fees paid to HEIN for audit services rendered in connection with the Company’s consolidated
financial statements and reports for the years ended December 31, 2014 and 2013, and for other services rendered during those years
on behalf of Deep Down and its subsidiaries:



|                        |  | December 31, 2014 |         |  | December 31, 2013 |  
|----------------------- |  | ----------------- | ------- |  | ----------------- | -
|(i) Audit Fees          |  | $                 | 169,835 |  |                   | $
|(ii) Audit Related Fees |  |                   | –       |  |                   |  
|(iii) Tax Fees          |  |                   | 49,348  |  |                   |  
|(iv) All Other Fees     |  |                   | –       |  |                   |  



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 HEIN. 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.





27







PART IV



ITEM 15.                 EXHIBITS, FINANCIAL
STATEMENT SCHEDULES



| | (a) | The following consolidated financial statements of Deep Down, Inc. and subsidiaries are filed as part of this Report under
Item 8 – Financial Statements and Supplementary Data:
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|Report of Independent Registered Public Accounting Firm                                             | F-1
|--------------------------------------------------------------------------------------------------- | ---
|                                                                                                    |    
|Consolidated Balance Sheets – December 31, 2014 and 2013                                            | F-2
|                                                                                                    |    
|Consolidated Statements of Operations – Years ended December 31, 2014 and 2013                      | F-3
|                                                                                                    |    
|Consolidated Statements of Changes in Stockholders’
Equity – Years ended December 31, 2014 and 2013 | F-4
|                                                                                                    |    
|Consolidated Statements of Cash Flows– Years ended December 31, 2014 and 2013                       | F-5
|                                                                                                    |    
|Notes to Consolidated Financial Statements– Years ended December 31, 2014 and 2013                  | F-6



| | (b) | Exhibits.
| | --- | ---------



|2.1  | Agreement and Plan of Reorganization among MediQuip Holdings, Inc., Deep Down, Inc., and the majority shareholders of Deep Down, Inc. (incorporated by reference from Exhibit 2.1 to our Form 10-KSB/A filed on May 1, 2008).                                                                                                                                                                                                                                                     
|---- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|3.1  | Articles of Incorporation of Deep Down, Inc. (conformed to include the amendment of the Articles of Incorporation filed with the Secretary of State of the State of Nevada on September 29, 2008 (incorporated by reference from Exhibit A to our Schedule 14C filed on August 15, 2008).                                                                                                                                                                                         
|3.2  | Amended and Restated By-Laws of Deep Down, Inc. (incorporated by reference from Exhibit B to our Schedule 14C filed on August 15, 2008).                                                                                                                                                                                                                                                                                                                                          
|4.1  | Securities Purchase Agreement, dated September 9, 2013, between Deep Down, Inc. and the purchaser parties thereto (incorporated by reference from Exhibit 10.1 to our Form 8-K filed on September 16, 2013).                                                                                                                                                                                                                                                                      
|4.2  | Registration Rights Agreement, dated September 9, 2013, between Deep Down, Inc. and the purchaser parties thereto (incorporated by reference from Exhibit 10.2 to our Form 8-K filed on September 16, 2013).                                                                                                                                                                                                                                                                      
|10.1 | Amended and Restated Credit Agreement, entered into as of April 14, 2010, between Deep Down, Inc., as borrower, and Whitney National Bank, as lender, including the Guarantor’s Consent and Agreement as signed on behalf of ElectroWave USA, Inc., Flotation Technologies, Inc., Mako Technologies, LLC, Deep Down, Inc. and Deep Down International Holdings, LLC (incorporated herein by reference from Exhibit 10.31 to our Form 10-K filed on April 15, 2010).               
|10.2 | First Amendment to Amended and Restated Credit Agreement, dated December 31, 2010, by and among Deep Down, Inc., as borrower, and Whitney National Bank, as lender, including the Guarantor’s Consent and Agreement as signed on behalf of ElectroWave USA, Inc., Flotation Technologies, Inc., Mako Technologies, LLC, Deep Down, Inc. and Deep Down International Holdings, LLC (incorporated herein by reference from Exhibit 10.4 to our Form 8-K filed on January 5, 2011).10
|10.3 | Second Amendment to Amended and Restated Credit Agreement, dated April 12, 2011, by and among Deep Down, Inc., as borrower, and Whitney National Bank, as lender, including the Guarantor’s Consent and Agreement as signed on behalf of ElectroWave USA, Inc., Flotation Technologies, Inc., Mako Technologies, LLC, Deep Down, Inc. and Deep Down International Holdings, LLC (incorporated by reference from Exhibit 10.42 to our Form 10-K filed on April 15, 2011).          
|10.4 | Third Amendment to Amended and Restated Credit Agreement, dated as of June 9, 2011, by and among Deep Down, Inc. and Whitney Bank (incorporated by reference from Exhibit 10.1 to our Form 8-K filed on June 15, 2011).                                                                                                                                                                                                                                                           
|10.5 | Fourth Amendment to Amended and Restated Credit Agreement, dated April 15, 2012, by and among Deep Down, Inc. and Whitney Bank (incorporated by reference from Exhibit 10.1 to our Form 10-Q filed on May 15, 2012).                                                                                                                                                                                                                                                              
|10.6 | Fifth Amendment to Amended and Restated Credit Agreement, dated as of March 5, 2013, by and among Deep Down, Inc. and Whitney Bank (incorporated by reference from Exhibit 10.1 to our Form 8-K filed on March 12, 2013).                                                                                                                                                                                                                                                         



28







|10.7   | Sixth Amendment to Amended and Restated Credit Agreement, dated as of April 15, 2014, by and among Deep Down, Inc. and Whitney Bank (incorporated by reference from Exhibit 10.1 to our Form 8-K filed on May 22, 2014).                                                                                                                                                                                                                                            
|------ | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.8   | Seventh Amendment to Amended and Restated Credit Agreement and Waiver, dated as of March 30, 2015, by and among Deep Down, Inc. and Whitney Bank.                                                                                                                                                                                                                                                                                                                   
|10.9   | Guaranty, dated as of November
11, 2008, by ElectroWave USA, Inc., Flotation Technologies, Inc., Mako Technologies, LLC and Deep Down, Inc. for the benefit of
Whitney National Bank (incorporated herein by reference from Exhibit 10.2 to our Form 10-Q filed on November 14, 2008).                                                                                                                                                                              
|10.10  | Joinder to Guaranty, dated as
of February 13, 2009, by Deep Down International Holdings, LLC (incorporated herein by reference from Exhibit 10.5 to our Form
10-K filed on March 16, 2009).                                                                                                                                                                                                                                                                         
|10.11  | Security Agreement, dated as of
November 11, 2008, among Deep Down, Inc., ElectroWave USA, Inc., Flotation Technologies, Inc., Mako Technologies, LLC and Deep
Down, Inc. for the benefit of Whitney National Bank (incorporated herein by reference from Exhibit 10.3 to our Form 10-Q filed
on November 14, 2008).                                                                                                                                                
|10.12  | Joinder to Security Agreement,
dated as of February 13, 2009, by Deep Down International Holdings, LLC (incorporated herein by reference from Exhibit 10.7 to
our Form 10-K filed on March 16, 2009).                                                                                                                                                                                                                                                               
|10.13  | First Amendment to Security Agreement,
dated as of December 18, 2008, by Deep Down, Inc., ElectroWave USA, Inc., Flotation Technologies, Inc., Mako Technologies, LLC
and Deep Down, Inc. for the benefit of Whitney National Bank (incorporated herein by reference from Exhibit 10.3 to our Form 8-K
filed on December 19, 2008).                                                                                                                                 
|10.14  | Second Amendment to Security Agreement, executed as of May 29, 2009, by Deep Down, Inc., ElectroWave USA, Inc., Flotation Technologies, Inc., Mako Technologies, LLC and Deep Down, Inc., for the benefit of Whitney National Bank (incorporated by reference from Exhibit 10.4 to our Form 8-K filed on June 2, 2009).                                                                                                                                             
|10.15  | Deed of Trust, Security Agreement and UCC Financing Statement for Fixture Filing, executed as of May 29, 2009, by Deep Down, Inc., as grantor, in favor of Gary M. Olander, as trustee, for the benefit of Whitney National Bank, as beneficiary (incorporated by reference from Exhibit 10.2 to our Form 8-K filed on June 2, 2009).                                                                                                                               
|10.16  | Ratification of Guaranty, Security Agreement, and Intercreditor Agreement, dated April 14, 2010, among Deep Down, Inc., a Nevada corporation, as borrower, and ElectroWave USA, Inc., Flotation Technologies, Inc., Mako Technologies, LLC, Deep Down, Inc., a Delaware corporation, each a guarantor, and Whitney National Bank, a national banking association, as lender (incorporated by reference from Exhibit 10.36 to our Form 10-K filed on April 15, 2011).
|10.17  | First Modification to Deed of Trust, dated April 14, 2010, executed by Deep Down, Inc., as grantor, for the benefit of Whitney National Bank, as lender (incorporated by reference from Exhibit 10.37 to our Form 10-K filed on April 15, 2010).                                                                                                                                                                                                                    
|10.18  | First Modification to Assignment of Leases and Rents, dated April 14, 2010, executed by Deep Down, Inc., as assignor, and Whitney National Bank, as assignee (incorporated by reference from Exhibit 10.38 to our Form 10-K filed on April 15, 2010).                                                                                                                                                                                                               
|10.19  | Office Building Lease, dated November 24, 2008, between Deep Down, Inc. and A-K-S-L 49 Beltway 8, L.P. (incorporated herein by reference from Exhibit 10.18 to our Form 10-K filed on March 16, 2009).                                                                                                                                                                                                                                                              
|10.20  | Purchase and Sale Agreement, dated May 22, 2009, by and between Deep Down, Inc. and JUMA Properties, LLC (incorporated by reference from Exhibit 10.1 to our Form 8-K filed on June 2, 2009).                                                                                                                                                                                                                                                                       
|10.21† | Employment Agreement, dated effective as of January 1, 2010, between Deep Down, Inc. and Eugene L. Butler (incorporated by reference from Exhibit 10.2 to our Form 8-K filed on January 15, 2010).                                                                                                                                                                                                                                                                  
|10.22† | Amended and Restated Employment
Agreement, dated effective as of January 1, 2010, between Deep Down, Inc. and Ronald E. Smith (incorporated by reference from
Exhibit 10.1 to our Form 8-K filed on January 15, 2010).                                                                                                                                                                                                                                              
|10.23  | Stock Option, Stock Warrant and
Stock Award Plan (incorporated by reference from Exhibit 4.10 to our Form S-1 Registration Statement (file no. 333-152435) filed
on July 21, 2008).                                                                                                                                                                                                                                                                                 
|10.24  | Stock Purchase Agreement, dated May 3, 2010, among Deep Down, Inc., Cuming Corporation and the Selling Stockholders named therein (incorporated by reference from Exhibit 10.1 to our Form 8-K filed on May 5, 2010).                                                                                                                                                                                                                                               



29







|10.25    | Amendment No. 1 to Stock Purchase Agreement, dated July 13, 2010, among Deep Down, Inc., Cuming Corporation and the Selling Stockholders named therein (incorporated by reference from Exhibit 10.1 to our Form 8-K filed on July 14, 2010).                                                   
|-------- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.26    | Amendment No. 2 to Stock Purchase Agreement, dated October 4, 2010, among Deep Down, Inc., Cuming Corporation and the Selling Stockholders named therein (incorporated by reference from Exhibit 10.1 to our Form 8-K filed on October 4, 2010).                                               
|10.27    | Amendment No. 3 to Stock Purchase Agreement, dated effective as of October 31, 2010, among Deep Down, Inc., Cuming Corporation and the Selling Stockholders named therein (incorporated by reference from Exhibit 10.1 to our Form 8-K filed on November 8, 2010).                             
|10.28    | Agreement and Amendment No. 4 to Stock Purchase Agreement, dated effective as of November 30, 2010, among Deep Down, Inc., Cuming Corporation and the Selling Stockholders named therein (incorporated by reference from Exhibit 10.1 to our Form 8-K filed on December 9, 2010).              
|10.29    | Contribution Agreement, dated December 31, 2010, by and among Deep Down, Inc., Flotation Technologies, Inc., Cuming Flotation Technologies, LLC and Flotation Investor, LLC (incorporated by reference from Exhibit 10.1 to our Form 8-K filed on January 5, 2011).                            
|10.30    | Contract Assignment and Amendment Agreement, dated December 31, 2010, by and among Deep Down, Inc., Cuming Flotation Technologies, LLC and Cuming Corporation (incorporated by reference from Exhibit 10.2 to our Form 8-K filed on January 5, 2011).                                          
|10.31    | Amended and Restated Limited Liability Company Agreement of Cuming Flotation Technologies, LLC, dated December 31, 2010 (incorporated by reference from Exhibit 10.5 to our Form 8-K filed on January 5, 2011).                                                                                
|10.32    | Management Services Agreement, dated effective as of January 1, 2011, by and among Deep Down, Inc. and Cuming Flotation Technologies, LLC (incorporated by reference from Exhibit 10.6 to our Form 8-K filed on January 5, 2011).                                                              
|10.33    | First Amendment to Management Services Agreement, dated effective as of March 1, 2011, by and among Deep Down, Inc. and Cuming Flotation Technologies, LLC (incorporated by reference from Exhibit 10.1 to our Form 8-K filed on March 8, 2011).                                               
|10.34    | Stock Repurchase Agreement, dated as of June 9, 2011, by and among Deep Down, Inc. and Whitney Bank (incorporated by reference from Exhibit 10.2 to our Form 8-K filed on June 15, 2011).                                                                                                      
|10.35    | Acquisition Term Note, dated June 9, 2011, by and among Deep Down, Inc. and Whitney Bank (incorporated by reference from Exhibit 10.2 to our Form 8-K filed on June 15, 2011).                                                                                                                 
|10.36    | Indemnification and Contribution Agreement, dated October 7, 2011, by and among Deep Down, Inc., York Special Opportunities Fund, L.P., Flotation Investor, LLC and Cuming Flotation Technologies, LLC (incorporated by reference from Exhibit 10.1 to our Form 8-K filed on October 14, 2011).
|10.37    | Carousel Term Note, dated April 15, 2014, by and among Deep Down, Inc. and Whitney Bank (incorporated by reference from Exhibit 10.2 to our Form 8-K filed on May 22, 2014).                                                                                                                   
|10.38    | Equipment Term Note, dated as of March 5, 2013, made by Deep Down, Inc. to the order of Whitney Bank (incorporated by reference from Exhibit 10.2 to our Form 8-K filed on March 12, 2013).                                                                                                    
|10.39    | Building and Land Lease Agreement between W&P Development Corporation, as Landlord, and Deep Down, Inc., as Tenant, dated effective June 1, 2013 (incorporated by reference from Exhibit 10.1 to our Form 8-K filed on June 21, 2013).                                                         
|14.1     | Directors Code of Business Conduct (incorporated by reference from Exhibit 14.1 to our Form 10-K filed on April 15, 2010).                                                                                                                                                                     
|14.2     | Financial Officer’s Code of Business Conduct. (incorporated by reference from Exhibit 14.2 to our Form 10-K filed on April 15, 2010).                                                                                                                                                          
|21.1*    | Subsidiary list.                                                                                                                                                                                                                                                                               
|31.1*    | Rule 13a-14(a)/15d-14(a) Certification of the President and Chief Executive Officer of Deep Down, Inc.                                                                                                                                                                                         
|31.2*    | Rule 13a-14(a)/15d-14(a) Certification of the Chief Financial Officer of Deep Down, Inc.                                                                                                                                                                                                       
|32.1#    | Section 1350 Certification of the President and Chief Executive Officer of Deep Down, Inc.                                                                                                                                                                                                     
|32.2#    | Section 1350 Certification of the Chief Financial Officer of Deep Down, Inc.                                                                                                                                                                                                                   
|101.INS* | XBRL Instance Document                                                                                                                                                                                                                                                                         
|101.SCH* | XBRL Schema Document                                                                                                                                                                                                                                                                           
|101.CAL  | XBRL Calculation Linkbase Document                                                                                                                                                                                                                                                             
|101.DEF  | XBRL Definition Linkbase Document                                                                                                                                                                                                                                                              
|101.LAB  | XBRL Label Linkbase Document                                                                                                                                                                                                                                                                   
|101.PRE  | XBRL Presentation Linkbase Document                                                                                                                                                                                                                                                            



* Filed herewith.

# Furnished herewith.

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





30







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.





| | DEEP DOWN, INC.                                | 
| | ---------------------------------------------- | 
| |                                                | 
| | By: /s/ Ronald E. Smith                        | 
| | Ronald E. Smith                                | 
| | President and Chief Executive Officer          | 
| | (Principal Executive Officer)                  | 
| |                                                | 
| |                                                | 
| | By: /s/ Eugene L. Butler                       | 
| | Eugene L. Butler                               | 
| | Executive Chairman and Chief Financial Officer | 
| | (Principal Financial Officer)                  | 
| |                                                | 
| |                                                | 
| | By: /s/ Ira B. Selya                           | 
| | Ira B. Selya                                   | 
| | Corporate Controller                           | 
| | (Principal Accounting Officer)                 | 





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:



|Signature              |  | Title                                            | 
|---------------------- |  | ------------------------------------------------ | 
|                       |  |                                                  | 
|/s/ Ronald E. Smith    |  | President, Chief Executive Officer and Director  | 
|Ronald E. Smith        |  | (Principal Executive Officer                     | 
|                       |  |                                                  | 
|                       |  |                                                  | 
|/s/ Eugene L. Butler   |  | Executive Chairman and Chief Financial Officer   | 
|Eugene L. Butler       |  | (Principal Financial Officer)                    | 
|                       |  |                                                  | 
|                       |  |                                                  | 
|/s/ Mary L. Budrunas   |  | Vice-President, Corporate Secretary and Director | 
|Mary L. Budrunas       |  |                                                  | 
|                       |  |                                                  | 
|                       |  |                                                  | 
|/s/ Randolph W. Warner |  | Director                                         | 
|Randolph W. Warner     |  |                                                  | 
|                       |  |                                                  | 
|                       |  |                                                  | 
|/s/ Mark Carden        |  | Director                                         | 
|Mark Carden            |  |                                                  | 
|                       |  |                                                  | 
|                       |  |                                                  | 
|Date:  March 31, 2015  |  |                                                  | 



31







EXHIBIT INDEX





|Exhibit Number | Description of Exhibit                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|-------------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|2.1            | Agreement and Plan of Reorganization among MediQuip Holdings, Inc., Deep Down, Inc., and the majority shareholders of Deep Down, Inc. (incorporated by reference from Exhibit 2.1 to our Form 10-KSB/A filed on May 1, 2008).                                                                                                                                                                                                                                                     
|3.1            | Articles of Incorporation of Deep Down, Inc. (conformed to include the amendment of the Articles of Incorporation filed with the Secretary of State of the State of Nevada on September 29, 2008 (incorporated by reference from Exhibit A to our Schedule 14C filed on August 15, 2008).                                                                                                                                                                                         
|3.2            | Amended and Restated By Laws of Deep Down, Inc. (incorporated by reference from Exhibit B to our Schedule 14C filed on August 15, 2008).                                                                                                                                                                                                                                                                                                                                          
|4.1            | Securities Purchase Agreement, dated September 9, 2013, between Deep Down, Inc. and the purchaser parties thereto (incorporated by reference from Exhibit 10.1 to our Form 8-K filed on September 16, 2013).                                                                                                                                                                                                                                                                      
|4.2            | Registration Rights Agreement, dated September 9, 2013, between Deep Down, Inc. and the purchaser parties thereto (incorporated by reference from Exhibit 10.2 to our Form 8-K filed on September 16, 2013).                                                                                                                                                                                                                                                                      
|10.1           | Amended and Restated Credit Agreement, entered into as of April 14, 2010, between Deep Down, Inc., as borrower, and Whitney National Bank, as lender, including the Guarantor’s Consent and Agreement as signed on behalf of ElectroWave USA, Inc., Flotation Technologies, Inc., Mako Technologies, LLC, Deep Down, Inc. and Deep Down International Holdings, LLC (incorporated herein by reference from Exhibit 10.31 to our Form 10-K filed on April 15, 2010).               
|10.2           | First Amendment to Amended and Restated Credit Agreement, dated December 31, 2010, by and among Deep Down, Inc., as borrower, and Whitney National Bank, as lender, including the Guarantor’s Consent and Agreement as signed on behalf of ElectroWave USA, Inc., Flotation Technologies, Inc., Mako Technologies, LLC, Deep Down, Inc. and Deep Down International Holdings, LLC (incorporated herein by reference from Exhibit 10.4 to our Form 8-K filed on January 5, 2011).10
|10.3           | Second Amendment to Amended and Restated Credit Agreement, dated April 12, 2011, by and among Deep Down, Inc., as borrower, and Whitney National Bank, as lender, including the Guarantor’s Consent and Agreement as signed on behalf of ElectroWave USA, Inc., Flotation Technologies, Inc., Mako Technologies, LLC, Deep Down, Inc. and Deep Down International Holdings, LLC (incorporated by reference from Exhibit 10.42 to our Form 10-K filed on April 15, 2011).          
|10.4           | Third Amendment to Amended and Restated Credit Agreement, dated as of June 9, 2011, by and among Deep Down, Inc. and Whitney Bank (incorporated by reference from Exhibit 10.1 to our Form 8-K filed on June 15, 2011).                                                                                                                                                                                                                                                           
|10.5           | Fourth Amendment to Amended and Restated Credit Agreement, dated April 15, 2012, by and among Deep Down, Inc. and Whitney Bank (incorporated by reference from Exhibit 10.1 to our Form 10-Q filed on May 15, 2012).                                                                                                                                                                                                                                                              
|10.6           | Fifth Amendment to Amended and Restated Credit Agreement, dated as of March 5, 2013, by and among Deep Down, Inc. and Whitney Bank (incorporated by reference from Exhibit 10.1 to our Form 8-K filed on March 12, 2013).                                                                                                                                                                                                                                                         
|10.7           | Sixth Amendment to Amended and Restated Credit Agreement, dated as of April 15, 2014, by and among Deep Down, Inc. and Whitney Bank (incorporated by reference from Exhibit 10.1 to our Form 8-K filed on May 22, 2014).                                                                                                                                                                                                                                                          
|10.8           | Seventh Amendment to Amended and Restated Credit Agreement and Waiver, dated as of March 30, 2015, by and among Deep Down, Inc. and Whitney Bank.                                                                                                                                                                                                                                                                                                                                 
|10.9           | Guaranty, dated as of November
11, 2008, by ElectroWave USA, Inc., Flotation Technologies, Inc., Mako Technologies, LLC and Deep Down, Inc. for the benefit of
Whitney National Bank (incorporated herein by reference from Exhibit 10.2 to our Form 10-Q filed on November 14, 2008).                                                                                                                                                                                            
|10.10          | Joinder to Guaranty, dated as
of February 13, 2009, by Deep Down International Holdings, LLC (incorporated herein by reference from Exhibit 10.5 to our Form
10-K filed on March 16, 2009).                                                                                                                                                                                                                                                                                       
|10.11          | Security Agreement, dated as of
November 11, 2008, among Deep Down, Inc., ElectroWave USA, Inc., Flotation Technologies, Inc., Mako Technologies, LLC and Deep
Down, Inc. for the benefit of Whitney National Bank (incorporated herein by reference from Exhibit 10.3 to our Form 10-Q filed
on November 14, 2008).                                                                                                                                                              





32









|10.12  | Joinder to Security Agreement,
dated as of February 13, 2009, by Deep Down International Holdings, LLC (incorporated herein by reference from Exhibit 10.7 to
our Form 10-K filed on March 16, 2009).                                                                                                                                                                                                                                                               
|------ | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.13  | First Amendment to Security Agreement,
dated as of December 18, 2008, by Deep Down, Inc., ElectroWave USA, Inc., Flotation Technologies, Inc., Mako Technologies, LLC
and Deep Down, Inc. for the benefit of Whitney National Bank (incorporated herein by reference from Exhibit 10.3 to our Form 8-K
filed on December 19, 2008).                                                                                                                                 
|10.14  | Second Amendment to Security Agreement, executed as of May 29, 2009, by Deep Down, Inc., ElectroWave USA, Inc., Flotation Technologies, Inc., Mako Technologies, LLC and Deep Down, Inc., for the benefit of Whitney National Bank (incorporated by reference from Exhibit 10.4 to our Form 8-K filed on June 2, 2009).                                                                                                                                             
|10.15  | Deed of Trust, Security Agreement and UCC Financing Statement for Fixture Filing, executed as of May 29, 2009, by Deep Down, Inc., as grantor, in favor of Gary M. Olander, as trustee, for the benefit of Whitney National Bank, as beneficiary (incorporated by reference from Exhibit 10.2 to our Form 8-K filed on June 2, 2009).                                                                                                                               
|10.16  | Ratification of Guaranty, Security Agreement, and Intercreditor Agreement, dated April 14, 2010, among Deep Down, Inc., a Nevada corporation, as borrower, and ElectroWave USA, Inc., Flotation Technologies, Inc., Mako Technologies, LLC, Deep Down, Inc., a Delaware corporation, each a guarantor, and Whitney National Bank, a national banking association, as lender (incorporated by reference from Exhibit 10.36 to our Form 10-K filed on April 15, 2011).
|10.17  | First Modification to Deed of Trust, dated April 14, 2010, executed by Deep Down, Inc., as grantor, for the benefit of Whitney National Bank, as lender (incorporated by reference from Exhibit 10.37 to our Form 10-K filed on April 15, 2010).                                                                                                                                                                                                                    
|10.18  | First Modification to Assignment of Leases and Rents, dated April 14, 2010, executed by Deep Down, Inc., as assignor, and Whitney National Bank, as assignee (incorporated by reference from Exhibit 10.38 to our Form 10-K filed on April 15, 2010).                                                                                                                                                                                                               
|10.19  | Office Building Lease, dated November 24, 2008, between Deep Down, Inc. and A-K-S-L 49 Beltway 8, L.P. (incorporated herein by reference from Exhibit 10.18 to our Form 10-K filed on March 16, 2009).                                                                                                                                                                                                                                                              
|10.20  | Purchase and Sale Agreement, dated May 22, 2009, by and between Deep Down, Inc. and JUMA Properties, LLC (incorporated by reference from Exhibit 10.1 to our Form 8-K filed on June 2, 2009).                                                                                                                                                                                                                                                                       
|10.21† | Employment Agreement, dated effective as of January 1, 2010, between Deep Down, Inc. and Eugene L. Butler (incorporated by reference from Exhibit 10.2 to our Form 8-K filed on January 15, 2010).                                                                                                                                                                                                                                                                  
|10.22† | Amended and Restated Employment
Agreement, dated effective as of January 1, 2010, between Deep Down, Inc. and Ronald E. Smith (incorporated by reference from
Exhibit 10.1 to our Form 8-K filed on January 15, 2010).                                                                                                                                                                                                                                              
|10.23  | Stock Option, Stock Warrant and
Stock Award Plan (incorporated by reference from Exhibit 4.10 to our Form S-1 Registration Statement (file no. 333-152435) filed
on July 21, 2008).                                                                                                                                                                                                                                                                                 
|10.24  | Stock Purchase Agreement, dated May 3, 2010, among Deep Down, Inc., Cuming Corporation and the Selling Stockholders named therein (incorporated by reference from Exhibit 10.1 to our Form 8-K filed on May 5, 2010).                                                                                                                                                                                                                                               
|10.25  | Amendment No. 1 to Stock Purchase Agreement, dated July 13, 2010, among Deep Down, Inc., Cuming Corporation and the Selling Stockholders named therein (incorporated by reference from Exhibit 10.1 to our Form 8-K filed on July 14, 2010).                                                                                                                                                                                                                        
|10.26  | Amendment No. 2 to Stock Purchase Agreement, dated October 4, 2010, among Deep Down, Inc., Cuming Corporation and the Selling Stockholders named therein (incorporated by reference from Exhibit 10.1 to our Form 8-K filed on October 4, 2010).                                                                                                                                                                                                                    
|10.27  | Amendment No. 3 to Stock Purchase Agreement, dated effective as of October 31, 2010, among Deep Down, Inc., Cuming Corporation and the Selling Stockholders named therein (incorporated by reference from Exhibit 10.1 to our Form 8-K filed on November 8, 2010).                                                                                                                                                                                                  
|10.28  | Agreement and Amendment No. 4 to Stock Purchase Agreement, dated effective as of November 30, 2010, among Deep Down, Inc., Cuming Corporation and the Selling Stockholders named therein (incorporated by reference from Exhibit 10.1 to our Form 8-K filed on December 9, 2010).                                                                                                                                                                                   



33











|10.29    | Contribution Agreement, dated December 31, 2010, by and among Deep Down, Inc., Flotation Technologies, Inc., Cuming Flotation Technologies, LLC and Flotation Investor, LLC (incorporated by reference from Exhibit 10.1 to our Form 8-K filed on January 5, 2011).                            
|-------- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.30    | Contract Assignment and Amendment Agreement, dated December 31, 2010, by and among Deep Down, Inc., Cuming Flotation Technologies, LLC and Cuming Corporation (incorporated by reference from Exhibit 10.2 to our Form 8-K filed on January 5, 2011).                                          
|10.31    | Amended and Restated Limited Liability Company Agreement of Cuming Flotation Technologies, LLC, dated December 31, 2010 (incorporated by reference from Exhibit 10.5 to our Form 8-K filed on January 5, 2011).                                                                                
|10.32    | Management Services Agreement, dated effective as of January 1, 2011, by and among Deep Down, Inc. and Cuming Flotation Technologies, LLC (incorporated by reference from Exhibit 10.6 to our Form 8-K filed on January 5, 2011).                                                              
|10.33    | First Amendment to Management Services Agreement, dated effective as of March 1, 2011, by and among Deep Down, Inc. and Cuming Flotation Technologies, LLC (incorporated by reference from Exhibit 10.1 to our Form 8-K filed on March 8, 2011).                                               
|10.34    | Stock Repurchase Agreement, dated as of June 9, 2011, by and among Deep Down, Inc. and Whitney Bank (incorporated by reference from Exhibit 10.2 to our Form 8-K filed on June 15, 2011).                                                                                                      
|10.35    | Acquisition Term Note, dated June 9, 2011, by and among Deep Down, Inc. and Whitney Bank (incorporated by reference from Exhibit 10.2 to our Form 8-K filed on June 15, 2011).                                                                                                                 
|10.36    | Indemnification and Contribution Agreement, dated October 7, 2011, by and among Deep Down, Inc., York Special Opportunities Fund, L.P., Flotation Investor, LLC and Cuming Flotation Technologies, LLC (incorporated by reference from Exhibit 10.1 to our Form 8-K filed on October 14, 2011).
|10.37    | Carousel Term Note, dated April 15, 2014, by and among Deep Down, Inc. and Whitney Bank (incorporated by reference from Exhibit 10.2 to our Form 8-K filed on May 22, 2014).                                                                                                                   
|10.38    | Equipment Term Note, dated as of March 5, 2013, made by Deep Down, Inc. to the order of Whitney Bank (incorporated by reference from Exhibit 10.2 to our Form 8-K filed on March 12, 2013).                                                                                                    
|10.39    | Building and Land Lease Agreement between W&P Development Corporation, as Landlord, and Deep Down, Inc., as Tenant, dated effective June 1, 2013 (incorporated by reference from Exhibit 10.1 to our Form 8-K filed on June 21, 2013).                                                         
|14.1     | Directors Code of Business Conduct (incorporated by reference from Exhibit 14.1 to our Form 10-K filed on April 15, 2010).                                                                                                                                                                     
|14.2     | Financial Officer’s Code of Business Conduct. (incorporated by reference from Exhibit 14.2 to our Form 10-K filed on April 15, 2010).                                                                                                                                                          
|21.1*    | Subsidiary list.                                                                                                                                                                                                                                                                               
|31.1*    | Rule 13a-14(a)/15d-14(a) Certification of the President and Chief Executive Officer of Deep Down, Inc.                                                                                                                                                                                         
|31.2*    | Rule 13a-14(a)/15d-14(a) Certification of the Chief Financial Officer of Deep Down, Inc.                                                                                                                                                                                                       
|32.1#    | Section 1350 Certification of the President and Chief Executive Officer of Deep Down, Inc.                                                                                                                                                                                                     
|32.2#    | Section 1350 Certification of the Chief Financial Officer of Deep Down, Inc.                                                                                                                                                                                                                   
|101.INS* | XBRL Instance Document                                                                                                                                                                                                                                                                         
|101.SCH* | XBRL Schema Document                                                                                                                                                                                                                                                                           
|101.CAL  | XBRL Calculation Linkbase Document                                                                                                                                                                                                                                                             
|101.DEF  | XBRL Definition Linkbase Document                                                                                                                                                                                                                                                              
|101.LAB  | XBRL Label Linkbase Document                                                                                                                                                                                                                                                                   
|101.PRE  | XBRL Presentation Linkbase Document                                                                                                                                                                                                                                                            



__________________

* Filed herewith.

# Furnished herewith.

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







34







REPORT OF INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM





To the Board of Directors and Stockholders



Deep Down, Inc.



Houston, Texas





We have audited the accompanying consolidated
balance sheets of Deep Down, Inc. and subsidiaries (the “Company”) as of December 31, 2014 and 2013, and the related
consolidated statements of operations, changes in stockholders' equity and cash flows for the years then ended. These consolidated
financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.



We conducted our audits in accordance with
the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform
the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement.
The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting.
Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, 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.
An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial
statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall
consolidated financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.



In our opinion, the consolidated financial
statements referred to above present fairly, in all material respects, the consolidated financial position of Deep Down, Inc. and
subsidiaries as of December 31, 2014 and 2013, and the results of their consolidated operations and their consolidated cash flows
for the years then ended, in conformity with U.S. generally accepted accounting principles.



/s/ Hein & Associates LLP



Houston, Texas



March 31, 2015





F-1





DEEP DOWN, INC.

CONSOLIDATED BALANCE SHEETS



|(In thousands, except par value amounts)                                                                                |  |                   |         |   |                   |  
|----------------------------------------------------------------------------------------------------------------------- |  | ----------------- | ------- | - | ----------------- | -
|ASSETS                                                                                                                  |  |                   |         |   |                   |  
|Current assets:                                                                                                         |  | December 31, 2014 |         |   | December 31, 2013 |  
|Cash (included in the December 31, 2014 balance is a
    compensating balance of $3,900) (Note 7)                       |  | $                 | 5,312   |   |                   | $
|Accounts receivable, net of allowance of $498 and $1,006, respectively                                                  |  |                   | 6,488   |   |                   |  
|Inventory, net                                                                                                          |  |                   | 3,127   |   |                   |  
|Costs and estimated earnings in excess of billings on uncompleted contracts                                             |  |                   | 6,808   |   |                   |  
|Prepaid expenses and other current assets                                                                               |  |                   | 280     |   |                   |  
|Total current assets                                                                                                    |  |                   | 22,015  |   |                   |  
|Property, plant and equipment, net                                                                                      |  |                   | 11,732  |   |                   |  
|Investment in joint venture                                                                                             |  |                   | –       |   |                   |  
|Intangibles, net                                                                                                        |  |                   | 82      |   |                   |  
|Goodwill                                                                                                                |  |                   | –       |   |                   |  
|Other assets                                                                                                            |  |                   | 891     |   |                   |  
|Total assets                                                                                                            |  | $                 | 34,720  |   |                   | $
|                                                                                                                        |  |                   |         |   |                   |  
|LIABILITIES AND STOCKHOLDERS' EQUITY                                                                                    |  |                   |         |   |                   |  
|Current liabilities:                                                                                                    |  |                   |         |   |                   |  
|Accounts payable and accrued liabilities                                                                                |  | $                 | 4,139   |   |                   | $
|Billings in excess of costs and estimated earnings on uncompleted contracts                                             |  |                   | –       |   |                   |  
|Current portion of long-term debt                                                                                       |  |                   | 5,615   |   |                   |  
|Total current liabilities                                                                                               |  |                   | 9,754   |   |                   |  
|Long-term debt, net                                                                                                     |  |                   | –       |   |                   |  
|Total liabilities                                                                                                       |  |                   | 9,754   |   |                   |  
|                                                                                                                        |  |                   |         |   |                   |  
|Commitments and contingencies (Note 11)                                                                                 |  |                   |         |   |                   |  
|                                                                                                                        |  |                   |         |   |                   |  
|Stockholders' equity:                                                                                                   |  |                   |         |   |                   |  
|Preferred stock, $0.001 par value, 10,000 shares
    authorized, 0 shares issued and outstanding                        |  |                   | –       |   |                   |  
|Common stock, $0.001 par value, 24,500 shares authorized, 15,130 and 15,261 shares issued and outstanding, respectively |  |                   | 15      |   |                   |  
|Additional paid-in capital                                                                                              |  |                   | 72,532  |   |                   |  
|Accumulated deficit                                                                                                     |  |                   | (47,581 | ) |                   |  
|Total stockholders' equity                                                                                              |  |                   | 24,966  |   |                   |  
|Total liabilities and stockholders' equity                                                                              |  | $                 | 34,720  |   |                   | $



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



F-2







DEEP DOWN, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE YEARS ENDED DECEMBER 31, 2014
and 2013



|                                             |  | Year Ended   |       
|-------------------------------------------- |  | ------------ | ------
|                                             |  | December 31, |       
|(In thousands, except per share amounts)     |  | 2014         |       
|                                             |  |              |       
|Revenues                                     |  | $            | 28,630
|Cost of sales:                               |  |              |       
|Cost of sales                                |  |              | 18,610
|Depreciation expense                         |  |              | 1,423 
|Total cost of sales                          |  |              | 20,033
|Gross profit                                 |  |              | 8,597 
|Operating expenses:                          |  |              |       
|Selling, general and administrative          |  |              | 9,440 
|Goodwill impairment                          |  |              | 4,916 
|Depreciation and amortization                |  |              | 176   
|Total operating expenses                     |  |              | 14,532
|Operating loss                               |  |              | (5,935
|Other income (expense):                      |  |              |       
|Interest expense, net                        |  |              | (205  
|Equity in net income (loss) of joint venture |  |              | 32    
|Other, net                                   |  |              | 315   
|Total other income (expense)                 |  |              | 142   
|Loss before income taxes                     |  |              | (5,793
|Income tax (expense) benefit                 |  |              | (10   
|Net loss                                     |  | $            | (5,803
|                                             |  |              |       
|Net loss per share:                          |  |              |       
|Basic                                        |  | $            | (0.38 
|Diluted                                      |  | $            | (0.38 
|                                             |  |              |       
|Weighted-average shares outstanding:         |  |              |       
|Basic                                        |  |              | 15,179
|Diluted                                      |  |              | 15,179



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





F-3







DEEP DOWN, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

FOR THE YEARS ENDED DECEMBER 31, 2014 and 2013



|                                                                  |  |              |        |   |            |   |    | Additional  |  |   |         |   |  |       |        
|----------------------------------------------------------------- |  | ------------ | ------ | - | ---------- | - | -- | ----------- |  | - | ------- | - |  | ----- | -------
|                                                                  |  | Common Stock |        |   | Paid-in    |   |    | Accumulated |  |   |         |  
|(In thousands)                                                    |  | Shares (#)   |        |   | Amount ($) |   |    | Capital     |  |   | Deficit |   |  | Total |        
|                                                                  |  |              |        |   |            |   |    |             |  |   |         |   |  |       |        
|Balance at December 31, 2012                                      |  |              | 10,152 |   |            | $ | 10 |             |  | $ | 63,970  |   |  | $     | (41,183
|                                                                  |  |              |        |   |            |   |    |             |  |   |         |   |  |       |        
|Net loss                                                          |  |              | –      |   |            |   | –  |             |  |   | –       |   |  |       | (595   
|Restricted stock awards                                           |  |              | 730    |   |            |   | 1  |             |  |   | (1      | ) |  |       | –      
|Issuance of common stock, net                                     |  |              | 4,444  |   |            |   | 4  |             |  |   | 7,624   |   |  |       | –      
|Nonvested restricted stock award shares forfeited and retired     |  |              | (33    | ) |            |   | –  |             |  |   | –       |   |  |       | –      
|Shares surrendered to settle employee tax liabilities and retired |  |              | (32    | ) |            |   | –  |             |  |   | (61     | ) |  |       | –      
|Share-based compensation                                          |  |              | –      |   |            |   | –  |             |  |   | 610     |   |  |       | –      
|Balance at December 31, 2013                                      |  |              | 15,261 |   |            | $ | 15 |             |  | $ | 72,142  |   |  | $     | (41,778
|                                                                  |  |              |        |   |            |   |    |             |  |   |         |   |  |       |        
|Net loss                                                          |  |              | –      |   |            |   | –  |             |  |   | –       |   |  |       | (5,803 
|Restricted stock awards                                           |  |              | 30     |   |            |   | –  |             |  |   | –       |   |  |       | –      
|Shares purchased from an employee and retired                     |  |              | (66    | ) |            |   | –  |             |  |   | (125    | ) |  |       | –      
|Shares surrendered to settle employee tax liabilities and retired |  |              | (95    | ) |            |   | –  |             |  |   | (178    | ) |  |       | –      
|Share-based compensation                                          |  |              | –      |   |            |   | –  |             |  |   | 693     |   |  |       | –      
|Balance at December 31, 2014                                      |  |              | 15,130 |   |            | $ | 15 |             |  | $ | 72,532  |   |  | $     | (47,581





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





F-4







DEEP DOWN, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE YEARS ENDED DECEMBER 31, 2014
and 2013



|                                                                                                                         |  | Year Ended   |       
|------------------------------------------------------------------------------------------------------------------------ |  | ------------ | ------
|                                                                                                                         |  | December 31, |       
|(In thousands)                                                                                                           |  | 2014         |       
|Cash flows from operating activities:                                                                                    |  |              |       
|Net loss                                                                                                                 |  | $            | (5,803
|Adjustments to reconcile net loss to net cash used in operating activities:                                              |  |              |       
|Depreciation and amortization                                                                                            |  |              | 1,599 
|Goodwill impairment                                                                                                      |  |              | 4,916 
|Share-based compensation                                                                                                 |  |              | 693   
|Inventory obsolescence                                                                                                   |  |              | 205   
|Bad debt (credit) expense                                                                                                |  |              | (19   
|Equity in net (income) loss of joint venture                                                                             |  |              | (32   
|Gain on sales of property, plant and equipment                                                                           |  |              | (301  
|Changes in operating assets and liabilities:                                                                             |  |              |       
|Accounts receivable                                                                                                      |  |              | (1,668
|Inventory                                                                                                                |  |              | 39    
|Costs and estimated earnings in excess of billings on uncompleted contracts                                              |  |              | (961  
|Prepaid expenses and other current assets                                                                                |  |              | (6    
|Other assets                                                                                                             |  |              | 43    
|Accounts payable and accrued liabilities                                                                                 |  |              | 1,351 
|Deferred revenues                                                                                                        |  |              | –     
|Billings in excess of costs and estimated earnings on uncompleted contracts                                              |  |              | (201  
|Net cash used in operating activities                                                                                    |  |              | (145  
|                                                                                                                         |  |              |       
|Cash flows from investing activities:                                                                                    |  |              |       
|Proceeds from sale of property, plant and equipment                                                                      |  |              | 921   
|Payments received on notes receivable                                                                                    |  |              | 20    
|Cash paid for deposits, net                                                                                              |  |              | –     
|Purchases of property, plant and equipment                                                                               |  |              | (1,755
|Cash distribution received from joint venture                                                                            |  |              | 500   
|Net cash used in investing activities                                                                                    |  |              | (314  
|                                                                                                                         |  |              |       
|Cash flows from financing activities:                                                                                    |  |              |       
|Proceeds from long-term debt                                                                                             |  |              | 4,700 
|Principal payments on long-term debt                                                                                     |  |              | (4,019
|Compensating balance                                                                                                     |  |              | (3,900
|Deferred financing costs on bank term loan                                                                               |  |              | (45   
|Proceeds from issuance of common stock, net                                                                              |  |              | –     
|Cash paid for purchase of our common stock                                                                               |  |              | (125  
|Net cash (used in) provided by financing activities                                                                      |  |              | (3,389
|(Decrease) increase in cash and cash equivalents                                                                         |  |              | (3,848
|Cash and cash equivalents, beginning of year                                                                             |  |              | 5,260 
|Cash and cash equivalents, end of year                                                                                   |  | $            | 1,412 
|                                                                                                                         |  |              |       
|Supplemental schedule of operating, investing and financing activities:                                                  |  |              |       
|Cash paid for interest                                                                                                   |  | $            | 208   
|Property, plant and equipment acquired via debt                                                                          |  | $            | –     
|Shares of common stock surrendered to settle employee payroll tax liabilities                                            |  | $            | 178   
|Reclassification of equipment from property, plant and equipment to finished goods inventory                             |  | $            | 3,117 
|Reclassification of land and buildings purchase price from deposits in other assets to property,
    plant and equipment |  | $            | 500   
|Sale of land and buildings to an employee in exchange for note receivable in other assets                                |  | $            | 600   



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



F-5





Notes to Consolidated Financial Statements
for the Years ended December 31, 2014 and 2013

(In thousands, except per share amounts)





NOTE 1:	DESCRIPTION OF BUSINESS
AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND ESTIMATES



Description of Business



Deep Down, Inc., a Nevada corporation (“Deep
Down Nevada”), and its directly and indirectly wholly-owned subsidiaries, Deep Down, Inc., a Delaware corporation (“Deep
Down Delaware”); Deep Down International Holdings, LLC, a Nevada limitedliability company; and Deep Down Brasil - Solucoes
em Petroleo e Gas, Ltda, a Brazilian limited liability company (“Deep Down Brasil”), (collectively referred to as “Deep
Down”, “we”, “us” or the “Company”) is an oilfield services company specializing in complex
deepwater and ultra-deepwater oil production distribution system support services, serving the worldwide offshore exploration and
production industry. Our services and technological solutions include distribution system installation support and engineering
services, umbilical terminations, loose-tube steel flying leads, flotation and Remote Operated Vehicles (“ROVs”) and
related services. We support subsea engineering, installation, commissioning, and maintenance projects through specialized, highly
experienced service teams and engineered technological solutions. Deep Down’s primary focus is on more complex deepwater
and ultra-deepwater oil production distribution system support services and technologies, used between the platform and the wellhead.



Liquidity



As a deepwater service provider, our revenues,
profitability, cash flows, and future rate of growth are dependent on the condition of the global oil and gas industry generally,
and our customers’ ability to invest capital for offshore exploration, drilling and production and maintain or increase levels
of expenditures for maintenance of offshore drilling and production facilities. Oil and gas prices and the level of offshore drilling
and production activity have historically been characterized by significant volatility. We enter into large, fixed-price contracts
which may require significant lead time and investment. A decline in offshore drilling and production activity could result in
lower contract volume or delays in significant contracts which could negatively impact our earnings and cash flows. Our earnings
and cash flows could also be negatively affected by delays in payments by significant customers or delays in completion of our
contracts for any reason. While our objective is to enter into contracts with our customers that are cash flow positive, we may
not always be able to achieve this objective. We are 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 capital.



During the fiscal years ended December
31, 2014 and 2013, we supplemented the financing of our capital needs primarily through debt and equity financings. Since 2008,
we have maintained a credit facility with Whitney Bank, a state chartered bank (“Whitney”); see additional discussion
in Note 7, “Long-Term Debt”, of the Notes to Consolidated Financial Statements. During the third quarter of 2013, we
issued an additional 4,444 shares of common stock in a private placement resulting in net cash proceeds of $7,628.



Summary of Significant Accounting Policies
and Estimates



Principles of Consolidation



The consolidated financial statements include
the accounts of Deep Down and its wholly-owned subsidiaries for the years ended December 31, 2014 and 2013. All intercompany transactions
and balances have been eliminated.



Reclassifications



Certain prior period amounts have been
reclassified to conform to the current period presentation. These reclassifications have not resulted in any changes to previously
reported net income (loss) or cash flows.



Use of Estimates



The preparation of financial statements
in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements
and reported amounts of revenues and expenses during the reporting period. The most significant estimates used in our financial
statements relate to revenuerecognition where we use percentage-of completion accounting on our
large fixed-price contracts, goodwill and the allowance for doubtful accounts. These estimates require judgments, which we base
on historical experience and on various other assumptions, as well as specific circumstances. Estimates may change as new events
occur, additional information becomes available or operating environments change. Actual results may differ from our estimates.



F-6







Notes to Consolidated Financial Statements
for the Years ended December 31, 2014 and 2013

(In thousands, except per share amounts)





Segments



For the years ended December 31, 2014 and
2013, we only had one operating and reporting segment, Deep Down Delaware.



Cash and Cash Equivalents



We consider all highly liquid investments
with maturities from date of purchase of three months or less to be cash equivalents. Cash and cash equivalents consist of cash
on deposit with domestic banks and, at times, may exceed federally insured limits.



Fair Value of Financial Instruments



Fair value is defined as the exchange price
that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market
for the asset or liability in an orderly transaction between market participants on the measurement date.  We utilize
a fair value hierarchy, which maximizes the use of observable inputs and minimizes the use of unobservable inputs when measuring
fair value.  The fair value hierarchy has three levels of inputs that may be used to measure fair value:



Level 1 - Unadjusted quoted prices in active markets
that are accessible at the measurement date for identical, unrestricted assets or liabilities.



Level 2 - Quoted prices in markets that are not active;
or other inputs that are observable, either directly or indirectly, for substantially the full term of the asset or liability.



Level 3 - Prices or valuation techniques that require
inputs that are both significant to the fair value measurement and unobservable.



Our financial instruments consist primarily
of cash equivalents, trade receivables and payables, and debt instruments.  The carrying values of cash equivalents and
trade receivables and payables approximated their fair values at December 31, 2014 and 2013 due to their short-term maturities.
The carrying values of our debt instruments approximate their fair values at December 31, 2014 and 2013 because the interest rates
approximate current market rates.



Accounts Receivable



Trade receivables are uncollateralized
customer obligations due under normal trade terms. We provide an allowance for doubtful trade receivables based on a specific review
of each customer’s trade receivable balance with respect to their 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, 2014 and 2013, we
estimated the allowance for doubtful accounts requirement to be $498 and $1,006, respectively. Bad debt (credit) expense totaled
$(19) and $61 for the years ended December 31, 2014 and 2013, respectively.



Concentration of Credit Risk



As of December 31, 2014, three of our customers
accounted for 34 percent, 26 percent and 14 percent of total trade accounts receivable. As of December 31, 2013, five of our customers
accounted for 31 percent, 14 percent, 14 percent, 12 percent and 9 percent of total trade accounts receivable.



For the year ended December 31, 2014, our
five largest customers accounted for 26 percent, 19 percent, 11 percent, 7 percent and 7 percent of total revenues. For
the year ended December 31, 2013, our five largest customers accounted for 38 percent, 13 percent, 11 percent, 8 percent and 7
percent of total revenues.



The loss of one or more of these customers could have a material
impact on our results of operations.



Inventory



Inventory, which consists of finished goods,
work-in-progress and spare parts and materials used in our operations, is stated at the lower of cost or market, net of reserve
for obsolescence. The obsolescence reserve was $205 as of December 31, 2014 and $0 as of December 31, 2013.



F-7







Notes to Consolidated Financial Statements
for the Years ended December 31, 2014 and 2013

(In thousands, except per share amounts)





Long-Lived Assets



Property, plant and equipment. Property,
plant and equipment is stated at cost, net of accumulated depreciation and amortization. Depreciation and amortization is 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
capital 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 statements of operations.



Goodwill. Goodwill
is the excess of cost of an acquired entity over the amounts assigned to identifiable assets acquired and liabilities assumed in
a business combination. Goodwill is not subject to amortization, but is tested for impairment annually at year-end or more frequently
if an event occurs or circumstances change that would indicate a potential impairment. These circumstances may include an adverse
change in the business climate or a change in the assessment of future operations of a reporting unit.



The Company assesses whether a goodwill
impairment exists using both qualitative and quantitative assessments. The qualitative assessment involves determining whether
events or circumstances exist that indicate it is more likely than not that the fair value of a reporting unit is less than its
carrying amount, including goodwill. If, based on this qualitative assessment, it is determined that it is not more likely than
not that the fair value of a reporting unit is less than its carrying amount, the Company does not perform a quantitative assessment.



If the qualitative assessment indicates
that it is more likely than not that the fair value of a reporting unit is less than its carrying amount or if the Company elects
not to perform a qualitative assessment, a quantitative assessment or two-step impairment test is performed to determine whether
goodwill impairment exists at the reporting unit.



The first step is to compare the estimated
fair value of each reporting unit with goodwill to its carrying amount, including goodwill. To determine fair value estimates,
the Company uses the income approach based on discounted cash flow analyses, combined with a market-based approach. The market-based
approach considers valuation comparisons of recent public sale transactions of similar businesses and earnings multiples of publicly
traded businesses operating in industries consistent with the reporting unit. If the fair value of a reporting unit is less than
its carrying amount, the second step of the impairment test is performed to determine the amount of impairment loss, if any. The
second step compares the implied fair value of the reporting unit’s goodwill with the carrying amount of that goodwill. If
the carrying amount of the reporting unit’s goodwill exceeds its implied fair value, an impairment loss is recognized in
an amount equal to that excess.



There was no impairment of goodwill for
the year ended December 31, 2013.  The quantitative assessment of goodwill we performed as of December 31, 2014, which was
a Level 3 fair value determination (based on estimated discounted cash flows), indicated that goodwill was impaired. This result
occurred primarily due to the adverse impact of recently declining oil prices on current and anticipated future oil and gas development
activity. We recorded goodwill impairment expense of $4,916 for the year ended December 31, 2014.



Equity Method Investments



Equity method investments in joint ventures
are reported as investments in joint venture on the consolidated balance sheets, and our share of earnings or losses in the joint
venture is reported as equity in net income or loss of joint venture in the consolidated statements of operations.



Lease Obligations



We lease land, buildings, vehicles and
certain equipment under non-cancellable operating leases.  Since February 2009, we have leased our corporate headquarters
in Houston, Texas, under a non-cancellable operating lease. Deep Down Delaware leases indoor manufacturing space and leases office,
warehouse and operating space in Channelview, Texas, Houston, Texas and in Morgan City, Louisiana, under non-cancellable operating
leases. As a result of the consolidation of Mako Technology, LLC’s operations into Deep Down Delaware in August 2012, in
December 2012, we sub-leased our leased property in Morgan City, Louisiana to a third party. We also lease certain office and other
operating equipment under capital leases; the related assets are included with property, plant and equipment on the consolidated
balance sheets.



F-8







Notes to Consolidated Financial Statements
for the Years ended December 31, 2014 and 2013

(In thousands, except per share amounts)





At the inception of a lease, we evaluate
the agreement to determine whether the lease will be accounted for as an operating or capital lease. The term of the lease used
for such an evaluation includes renewal option periods only in instances in which the exercise of the renewal option can be reasonably
assured and failure to exercise such option would result in an economic penalty.



Revenue Recognition



We recognize revenue once the following
four criteria are met: (i) persuasive evidence of an arrangement exists; (ii) delivery of the equipment has occurred or services
have been rendered, (iii) the price of the equipment or service is fixed or determinable and (iv) collectability of the related
receivable is reasonably assured. Service revenue is recognized as the service is provided, and time and materials contracts are
billed on a bi-weekly or monthly basis as costs are incurred. Customer billings for shipping and handling charges are included
in revenue. Revenues are recorded net of sales taxes.



From time to time, we enter into fixed-price
contracts. The percentage-of-completion method is used as a basis for recognizing revenue on these contracts. We recognize revenue
as costs are incurred because we believe the incurrence of cost reasonably reflects progress made toward project completion.



Provisions for estimated losses on uncompleted
large fixed-price contracts (if any) are recorded in the period in which it is determined it is more likely than not a loss will
be incurred.  Changes in job performance, job conditions, and total contract values may result in revisions to costs and income
and are recognized in the period in which the revisions are determined.  Unapproved change orders are accounted for in revenue
and cost when it is probable that the costs will be recovered through a change in the contract price. In circumstances where recovery
is considered probable but the revenues cannot be reliably estimated, costs attributable to change orders are deferred pending
determination of contract price.



Costs and estimated earnings in excess
of billings on uncompleted contracts arise when revenues are recorded on a percentage-of-completion basis 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 and liabilities 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.



Income Taxes



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



F-9







Notes to Consolidated Financial Statements
for the Years ended December 31, 2014 and 2013

(In thousands, except per share amounts)





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.



Share-Based Compensation



We record share-based awards exchanged
for employee service at fair value on the date of grant and expense the awards in the consolidated statements of operations over
the requisite employee service period.  Share-based compensation expense includes an estimate for forfeitures and is
generally recognized over the expected term of the award on a straight-line basis.  At December 31, 2014, we had two
types of share-based employee compensation: stock options and restricted stock.



Key assumptions used in the Black-Scholes
model for stock option valuations include (1) expected volatility (2) expected term (3) discount rate and (4) expected dividend
yield. Volumes are low and small trades can have a major impact on prices, so we based our estimates of volatility on a representative
peer group consisting of companies in the same industry, with similar market capitalizations and similar stage of development.
Additionally, we continue to use the simplified method related to employee option grants.



Earnings or Loss per Common Share



Basic earnings or loss per common share
(“EPS”) is calculated by dividing net earnings or loss by the weighted average number of common shares outstanding
for the period. Diluted EPS is calculated by dividing net earnings or loss by the weighted average number of common shares and
dilutive common stock equivalents (stock options) outstanding during the period. Diluted EPS reflects the potential dilution that
could occur if stock options and warrants to purchase common stock were exercised for shares of common stock. In periods where
losses are reported, the weighted-average number of common shares outstanding excludes common stock equivalents, because their
inclusion would be anti-dilutive.



Recent Accounting Pronouncements



In May 2014, the FASB issued ASU 2014-09,
“Revenue from Contracts with Customers”. This standard provides a five-step approach to be applied to all contracts
with customers and requires expanded disclosures about the nature, amount, timing and uncertainty of revenue (and the related cash
flows) arising from customer contracts, significant judgments and changes in judgments used in applying the revenue model and the
assets recognized from costs incurred to obtain or fulfill a contract. This new standard is effective for us beginning in the year
2017. Early application is not permitted. The standard permits the use of either the retrospective or cumulative effect transition
method, therefore we are evaluating the effect that this new guidance will have on our consolidated financial statements and related
disclosures. We have not yet selected a transition method nor have we determined the effect of the standard on our ongoing financial
reporting.



In August 2014, the FASB issued ASU No.
2014-15, “Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern”. This standard
requires an entity to evaluate whether conditions or events, in the aggregate, raise substantial doubt about the entity’s
ability to continue as a going concern for one year from the date the financial statements are issued or are available to be issued.
The guidance will become effective January 1, 2017. The adoption of ASU 2014-15 is not expected to have an impact on the Company’s
consolidated financial statements.



F-10







Notes to Consolidated Financial Statements
for the Years ended December 31, 2014 and 2013

(In thousands, except per share amounts)





NOTE 2:                 INVENTORY



The components of inventory are summarized
below:



|                         |  | December 31, 2014 |       |   | December 31, 2013 |  
|------------------------ |  | ----------------- | ----- | - | ----------------- | -
|Spare parts              |  | $                 | 205   |   |                   | $
|Reserve for obsolescence |  |                   | (205  | ) |                   |  
|Work in progress         |  |                   | 10    |   |                   |  
|Finished goods           |  |                   | 3,117 |   |                   |  
|Inventory, net           |  | $                 | 3,127 |   |                   | $



The finished goods inventory balance of
$3,117 at December 31, 2014 consists of a 3.5 metric ton portable umbilical carousel which we fabricated and bought back from a
customer in November 2013 and are currently holding for sale.



NOTE 3:                 COSTS, ESTIMATED EARNINGS
AND BILLINGS ON UNCOMPLETED CONTRACTS



Costs, estimated earnings and billings
on uncompleted contracts are summarized below:



|                                                                                       |  | December 31, 2014 |        |   | December 31, 2013 |  
|-------------------------------------------------------------------------------------- |  | ----------------- | ------ | - | ----------------- | -
|Costs incurred on uncompleted contracts                                                |  | $                 | 10,500 |   |                   | $
|Estimated earnings on uncompleted contracts                                            |  |                   | 3,893  |   |                   |  
|                                                                                       |  |                   | 14,393 |   |                   |  
|Less: Billings to date on uncompleted contracts                                        |  |                   | (7,585 | ) |                   |  
|                                                                                       |  | $                 | 6,808  |   |                   | $
|                                                                                       |  |                   |        |   |                   |  
|Included in the accompanying consolidated balance sheets under the following captions: |  |                   |        |   |                   |  
|Costs and estimated earnings in excess of billings on uncompleted contracts            |  | $                 | 6,808  |   |                   | $
|Billings in excess of costs and estimated earnings on uncompleted contracts            |  |                   | –      |   |                   |  
|                                                                                       |  | $                 | 6,808  |   |                   | $



The balance in costs and estimated earnings
in excess of billings on uncompleted contracts at December 31, 2014 and 2013 consisted primarily of earned but unbilled revenues
related to fixed-price projects.



The balance in billings in excess of costs
and estimated earnings on uncompleted contracts at December 31, 2013 consisted primarily of unearned billings related to fixed-price
projects.



NOTE 4:                 INVESTMENT
IN JOINT VENTURE



Effective December 31, 2010, we engaged
in a transaction in which all of the operating assets and substantially all of the liabilities of a former subsidiary were contributed,
along with other contributions we made, to the Cuming Flotation Technologies, LLC joint venture (“CFT”) in return for
a 20 percent common unit ownership interest.



F-11







Notes to Consolidated Financial Statements
for the Years ended December 31, 2014 and 2013

(In thousands, except per share amounts)





On October 7, 2011, CFT consummated a transaction
pursuant to that certain Stock Purchase Agreement (the “Purchase Agreement”), by and between CFT and a Houston-based
company (“Buyer”)  pursuant to which Buyer purchased from CFT (i) all of the issued and outstanding shares
of capital stock of Cuming Corporation (“Cuming”), the principal operating subsidiary of CFT, (ii) the shares of 230
Bodwell Corporation, a Massachusetts corporation and subsidiary of Cuming, and (iii) certain assets that, immediately prior to
closing, were acquired by Cuming, for a purchase price of $60,000 (less certain debt and subject to purchase price adjustment for
working capital and potential earn-out payments).



The components of our investment
in joint venture are summarized below:



|Investment in joint venture, December 31, 2012                   |  | $ | 984  |  
|---------------------------------------------------------------- |  | - | ---- | -
|Equity in net loss of CFT for the year ended December 31, 2013   |  |   | (16  | )
|Cash distribution from CFT for the year ended December 31, 2013  |  |   | (500 | )
|Investment in joint venture, December 31, 2013                   |  | $ | 468  |  
|Equity in net income of CFT for the year ended December 31, 2014 |  |   | 32   |  
|Cash distribution from CFT for the year ended December 31, 2014  |  |   | (500 | )
|Investment in joint venture, December 31, 2014                   |  | $ | –    |  



NOTE 5:                 PROPERTY,
PLANT AND EQUIPMENT



Property, plant and equipment consisted of the following as
of December 31, 2014 and 2013:



|                                                |  |                   |        |   |                   |   |        | Range of   
|----------------------------------------------- |  | ----------------- | ------ | - | ----------------- | - | ------ | -----------
|                                                |  | December 31, 2014 |        |   | December 31, 2013 |   |        | Asset Lives
|Land                                            |  | $                 | 1,582  |   |                   | $ | 1,582  |            
|Buildings and improvements                      |  |                   | 1,447  |   |                   |   | 1,571  |            
|Leasehold improvements                          |  |                   | 696    |   |                   |   | 602    |            
|Equipment                                       |  |                   | 14,015 |   |                   |   | 17,840 |            
|Furniture, computers and office equipment       |  |                   | 1,289  |   |                   |   | 1,329  |            
|Construction in progress                        |  |                   | 1,413  |   |                   |   | 189    |            
|Total property, plant and equipment             |  |                   | 20,442 |   |                   |   | 23,113 |            
|Less: Accumulated depreciation and amortization |  |                   | (8,710 | ) |                   |   | (7,718 | )          
|Property, plant and equipment, net              |  | $                 | 11,732 |   |                   | $ | 15,395 |            



Included in property, plant and equipment
are assets under capital lease of $253 at December 31, 2014 and 2013, with related accumulated amortization of $72 and $55 at December
31, 2014 and 2013, respectively. See Note 7, “Long-term Debt”, of the Notes to Consolidated Financial Statements for
debt associated with these capital leases.



Depreciation expense excluded from cost
of sales in the accompanying consolidated statements of operations was $158 and $139 for the years ended December 31, 2014 and
2013, respectively. Depreciation expense included in cost of sales in the accompanying consolidated statements of operations was
$1,423 and $1,425 for the years ended December 31, 2014 and 2013, respectively.



Construction in progress represents assets
that are not ready for service or are in the construction stage. Assets begin being depreciated once they are placed in service.



NOTE 6:                 GOODWILL



Goodwill represents the excess of the cost
over the net tangible and identifiable intangible assets of acquired businesses.



There was no impairment of goodwill for
the year ended December 31, 2013.  The quantitative assessment of goodwill we performed as of December 31, 2014, which was
a Level 3 fair value determination (based on estimated discounted cash flows), indicated that goodwill was impaired. This result
occurred primarily due to the adverse impact of recently declining oil prices on current and anticipated future oil and gas development
activity. We recorded goodwill impairment expense of $4,916 for the year ended December 31, 2014.



F-12







Notes to Consolidated Financial Statements
for the Years ended December 31, 2014 and 2013

(In thousands, except per share amounts)





NOTE 7:                 LONG-TERM DEBT



Long-term debt consisted of the following:



|                                        |  | December 31, 2014 |        |   | December 31, 2013 |  
|--------------------------------------- |  | ----------------- | ------ | - | ----------------- | -
|Whitney Credit Facility                 |  | $                 | 5,560  |   |                   | $
|Note payable                            |  |                   | –      |   |                   |  
|Capital lease obligations               |  |                   | 55     |   |                   |  
|Total long-term debt                    |  |                   | 5,615  |   |                   |  
|Less: Current portion of long-term debt |  |                   | (5,615 | ) |                   |  
|Long-term debt, net of current portion  |  | $                 | –      |   |                   | $



Credit Facility



Since 2008, we have maintained a credit
facility (the “Facility”) with Whitney.  The Facility has been amended and restated several times, most recently
effective March 30, 2015 when we entered into the seventh amendment (“Seventh Amendment”).



The relevant terms of the Seventh Amendment
include:



| | · | a change to the definition of earnings
before interest, taxes, depreciation and amortization (“EBITDA”) to permit in the calculation, in the quarter ended
December 31, 2014, the add-back of  a non-recurring charge of $4,916 related to the impairment of our goodwill;
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | a waiver, for the quarter ended December
31, 2014, for our noncompliance with the fixed charge coverage ratio covenant under the Facility;
| | - | ------------------------------------------------------------------------------------------------------------------------------------------



| | · | that we maintain a compensating balance
of $3,900 in our existing interest-bearing account at Whitney, to continue until such time as we have regained compliance with
all of our covenants under the Facility subsequent to the quarter ended December 31, 2014.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Other current relevant terms of the Facility
include:



| | · | a committed amount of $5,000 under the
revolving credit facility (“Revolving Credit Facility”), maturing June 30, 2015, subject to a borrowing base limitation
based on eligible trade accounts receivable;  the Revolving Credit Facility may be used to borrow cash (at  an interest
rate of 3.5 percent per annum) or to issue bank letters of credit (at a fee of 1 percent per annum);  both cash borrowings
and the issuance of bank letters of credit reduce the available capacity under the commitment; the available borrowing and letter
of credit capacity under the Revolving Credit Facility at December 31, 2014 was $1,971;
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | a real estate term facility (“RE
Term Facility”) of $2,000, at an interest rate of 4.0 percent per annum, maturing April 15, 2018, with the Company being
obligated to make monthly increasing repayments of principal (along with accrued and unpaid interest thereon) starting at $8, beginning
April 1, 2013;
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | a carousel term facility (“Carousel
Term Facility”) of $2,200, at an interest rate of 3.5 percent per annum, maturing October 15, 2016, with the Company being
obligated to make monthly repayment of principal of $65 (along with accrued and unpaid interest thereon) beginning July 1, 2014;
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | outstanding balances under the Facility
are secured by all of the Company’s assets.
| | - | -----------------------------------------------------------------------------------



As of December 31, 2014, the Company’s
indebtedness under the Facility consisted of the Revolving Credit Facility, the RE Term Facility, and the Carousel Term Facility
was $2,000, $1,815, and $ 1,745, respectively.  Additionally, a bank letter of credit issued under the Revolving Credit Facility
in the amount of $415 was outstanding at December 31, 2014 and 2013.  See Note 11 “Commitments and Contingencies”,
of the Notes to Consolidated Financial Statements.



As mentioned above, our Facility obligates
us to comply with certain financial covenants. They are as follows:



| | · | Leverage Ratio - The ratio of total debt
to consolidated EBITDA must be less than 3.0 to 1.0; actual Leverage Ratio as of December 31, 2014:  2.69 to 1.0.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | Fixed Charge Coverage Ratio - The ratio
of consolidated EBITDA to consolidated net interest expense, plus principal payments on total debt, must be greater than 1.5 to
1.0; actual Fixed Charge Coverage Ratio as of December 31, 2014:  1.43 to 1.0. As mentioned previously, the Seventh Amendment
provided a waiver for our noncompliance with this covenant.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | Tangible Net Worth - Our consolidated
net worth, after deducting other assets as are properly classified as “intangible assets,” plus 50 percent of net income,
after provision for taxes, must be in excess of $16,700; actual Tangible Net Worth as of December 31, 2014:  $24,884.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | Moreover, we continue to have obligations
for other covenants, including, among others, limitations on issuance of common stock, liens, transactions with affiliates, additional
indebtedness and permitted investments.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



As of December 31, 2013, we were in compliance
with all of our financial covenants. As of December 31, 2014, we were in compliance with all of our financial covenants, except
for the Fixed Charge Coverage Ratio. Whitney has provided us with a waiver for our noncompliance with this covenant. Because we
do not believe that it is probable that we will be in compliance with all of our covenants under the Facility for the fiscal quarter
ending March 31, 2015, we have classified all of our debt under the Facility as current as of December 31, 2014.





F-13







Notes to Consolidated Financial
Statements for the Years ended December 31, 2014 and 2013

(In thousands, except per share
amounts)





Note Payable



On November 5, 2013, we entered into a
Purchase and Sale Agreement (“PSA”) with a customer to buy back a 3.5 metric ton portable umbilical carousel, which
we had fabricated specifically for this customer. The PSA calls for purchase price of $3,293 to be paid in 24 monthly installments
of approximately $137, commencing November 5, 2013 through October 5, 2015. We used the proceeds of the Whitney Carousel Term Facility
to retire this obligation, and the balance at December 31, 2014 was $0.



Debt Maturities



Maturities of long-term debt as of December
31, 2014 were as follows:



|                          |  | Debt Maturities |      
|------------------------- |  | --------------- | -----
|Years ended December 31,: |  |                 |      
|2015                      |  | $               | 5,615
|2016                      |  |                 | –    
|2017                      |  |                 | –    
|2018                      |  |                 | –    
|2019                      |  |                 | –    
|                          |  | $               | 5,615



NOTE 8:                 EARNINGS OR LOSS PER
COMMON SHARE



The following is a reconciliation of the
number of shares used in the basic and diluted net earnings or loss per common share calculation:



|                                                         |  | Year Ended   |       
|-------------------------------------------------------- |  | ------------ | ------
|                                                         |  | December 31, |       
|                                                         |  | 2014         |       
|Numerator:                                               |  |              |       
|Net loss                                                 |  | $            | (5,803
|                                                         |  |              |       
|Denominator:                                             |  |              |       
|Weighted average number of common shares outstanding     |  |              | 15,179
|Effect of dilutive securities                            |  |              | –     
|Denominator for diluted earnings per share               |  |              | 15,179
|                                                         |  |              |       
|Net loss per common share outstanding,
basic and diluted |  | $            | (0.38 



At December 31, 2014 and 2013, there were
outstanding stock options convertible to 325 and 945 shares of common stock, respectively.



F-14







Notes to Consolidated Financial Statements
for the Years ended December 31, 2014 and 2013

(In thousands, except per share amounts)





NOTE 9:                 SHARE-BASED COMPENSATION



We have a share-based compensation plan,
the “2003 Directors, Officers and Consultants Stock Option, Stock Warrant and Stock Award Plan” (the “Plan”).
Awards of stock options and stock granted under the Plan have vesting periods of three years. Some awards of stock have performance
criteria as an additional condition of vesting. Once vested, stock options may be exercised for up to five years. Share-based compensation
expense related to awards is based on the fair value at the date of grant, and is recognized over the requisite expected service
period, net of estimated forfeitures. Under the Plan, the total number of options permitted is 15 percent of issued and outstanding
common shares.



Summary of Nonvested Shares of Restricted
Stock



The following table summarizes the activity
of our nonvested restricted stock for the years ended December 31, 2014 and 2013.



|                               |  | Restricted Shares |      |   | Weighted-Average Grant-Date Fair Value |  
|------------------------------ |  | ----------------- | ---- | - | -------------------------------------- | -
|Nonvested at December 31, 2012 |  |                   | 250  |   |                                        | $
|Granted                        |  |                   | 730  |   |                                        |  
|Forfeited                      |  |                   | (33  | ) |                                        |  
|Vested                         |  |                   | (108 | ) |                                        |  
|Nonvested at December 31, 2013 |  |                   | 839  |   |                                        | $
|Granted                        |  |                   | 30   |   |                                        |  
|Vested                         |  |                   | (352 | ) |                                        |  
|Nonvested at December 31, 2014 |  |                   | 517  |   |                                        | $



In May 2014, we granted 30 shares of restricted
stock to an independent director.  These restricted shares will vest over three years in equal tranches on the grant
date anniversary, with continued service on our Board of Directors; we are amortizing the related share-based compensation of $53
over the three-year requisite service period.



For the years ended December 31,
2014 and 2013, we recognized a total of $624 and $460, respectively, of share-based compensation expense related to
restricted stock awards, which is included in selling, general and administrative expenses in the accompanying consolidated
statements of operations. The unamortized estimated fair value of nonvested shares of restricted stock awards was $744 at
December 31, 2014. These costs are expected to be recognized as expense over a weighted average period of 1.48 years.



Summary of Stock Options



Based on the shares of common stock
outstanding at December 31, 2014, there were approximately 2,270 options available for grant under the Plan as of that date. We
determine the fair value of stock options on the date of the grant using the Black-Scholes option pricing model.



For the years ended December 31, 2014 and
2013, we recognized a total of $69 and $150, respectively, of share-based compensation expense related to outstanding stock option
awards, which is included in selling, general and administrative expenses in the accompanying consolidated statements of operations.
The unamortized portion of the estimated fair value of outstanding stock options was $0 at December 31, 2014.



F-15







Notes to Consolidated Financial Statements
for the Years ended December 31, 2014 and 2013

(In thousands, except per share amounts)





The following table summarizes our stock
option activity for the years ended December 31, 2014 and 2013:





|                                 |  | Shares Underlying Options |       |   | Weighted- Average Exercise Price |   |      | Weighted- Average Remaining Contractual Term (in years) | 
|-------------------------------- |  | ------------------------- | ----- | - | -------------------------------- | - | ---- | ------------------------------------------------------- | 
|Outstanding at December 31, 2012 |  |                           | 1,008 |   |                                  | $ | 2.00 |                                                         | 
|Cancellations & Forfeitures      |  |                           | (63   | ) |                                  |   | 1.93 |                                                         | 
|Outstanding at December 31, 2013 |  |                           | 945   |   |                                  | $ | 1.98 |                                                         | 
|Cancellations & Forfeitures      |  |                           | (620  | ) |                                  |   | 2.08 |                                                         | 
|Outstanding at December 31, 2014 |  |                           | 325   |   |                                  | $ | 1.80 |                                                         | 
|Exercisable at December 31, 2014 |  |                           | 325   |   |                                  | $ | 1.80 |                                                         | 





The aggregate intrinsic value is based
on the closing price of $0.80 on December 31, 2014. As of December 31, 2014, the aggregate intrinsic value of stock options outstanding
and stock options exercisable was $0. The total fair value of stock options vested during the year ended December 31, 2014 was
$0.



NOTE 10:               INCOME
TAXES



The provision for income taxes is comprised
of the following for the years ended December 31, 2014 and 2013.



|                                   |  | Year Ended   |     
|---------------------------------- |  | ------------ | ----
|                                   |  | December 31, |     
|                                   |  | 2014         |     
|Federal:                           |  |              |     
|Current                            |  | $            | 19  
|Deferred                           |  |              | (202
|Total                              |  | $            | (183
|State:                             |  |              |     
|Current                            |  | $            | (9  
|Deferred                           |  |              | 202 
|Total                              |  | $            | 193 
|Total income tax expense (benefit) |  | $            | 10  



The provision for income taxes differs from the amount computed
by applying the U.S. statutory income tax rate before income taxes for the reasons set forth below for the years ended December
31, 2014 and 2013.





|                                             |  | Year Ended   |        
|-------------------------------------------- |  | ------------ | -------
|                                             |  | December 31, |        
|                                             |  | 2014         |        
|Income tax benefit at federal statutory rate |  |              | 34.00% 
|State taxes, net of federal expense          |  |              | (3.39% 
|Return to provision adjustments              |  |              | 2.06%  
|Goodwill impairment                          |  |              | (28.86%
|Valuation allowance                          |  |              | (9.16% 
|Research and development credits             |  |              | 6.49%  
|Other permanent differences                  |  |              | (0.19% 
|Other , net                                  |  |              | (1.12% 
|Total effective rate                         |  |              | (0.17% 





F-16







Notes to Consolidated Financial Statements
for the Years ended December 31, 2014 and 2013

(In thousands, except per share amounts)





Deferred income taxes reflect the net tax
effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the
amounts used for income tax purposes, as well as operating loss and tax credit carry forwards.  The tax effects of the temporary
differences and carry forwards are as follow at December 31, 2014 and 2013:



|                                                               |  | Year Ended   |       
|-------------------------------------------------------------- |  | ------------ | ------
|                                                               |  | December 31, |       
|                                                               |  | 2014         |       
|Deferred tax assets:                                           |  |              |       
|Allowance for doubtful accounts                                |  | $            | 172   
|Net operating loss                                             |  |              | 4,814 
|Share-based compensation                                       |  |              | 1,071 
|Investment in joint venture                                    |  |              | 4,063 
|Other                                                          |  |              | 579   
|Total deferred tax assets                                      |  | $            | 10,699
|Deferred tax liabilities:                                      |  |              |       
|Depreciation and amortization on property, plant and equipment |  | $            | (1,797
|Amortization of intangibles                                    |  |              | 58    
|Total deferred tax liabilities                                 |  | $            | (1,739
|Less: valuation allowance                                      |  |              | (8,960
|Net deferred tax position                                      |  | $            | –     



We have $13,912 in net operating loss (“NOL”)
carry forwards available to offset future taxable income. These federal NOL’s will expire at various dates through 2029.
Management analyzed its current operating results and future projections and determined that a full valuation allowance was needed
due to our cumulative losses in recent years. We have no uncertain tax positions at December 31, 2014. Our tax returns from the
tax years ended December 31, 2010 through December 31, 2013 are open to examination by the IRS.



NOTE 11:               COMMITMENTS
AND CONTINGENCIES



Litigation



We are from time to time involved in legal
proceedings arising from the normal course of business. As of the date of this Report, we are not currently involved in any material
legal proceedings.



Operating Leases



We lease certain offices, facilities, equipment
and vehicles under non-cancellable operating and capital leases expiring at various dates through 2023.



F-17







Notes to Consolidated Financial Statements
for the Years ended December 31, 2014 and 2013

(In thousands, except per share amounts)





At December 31, 2014, future minimum contractual lease obligations
were as follows:



|Years ending December 31,:                           |  | Capital Leases |     |   | Operating Leases |  
|---------------------------------------------------- |  | -------------- | --- | - | ---------------- | -
|2015                                                 |  | $              | 58  |   |                  | $
|2016                                                 |  |                | –   |   |                  |  
|2017                                                 |  |                | –   |   |                  |  
|2018                                                 |  |                | –   |   |                  |  
|2019                                                 |  |                | –   |   |                  |  
|Thereafter                                           |  |                | –   |   |                  |  
|Total minimum lease payments                         |  | $              | 58  |   |                  | $
|Residual principal balance                           |  |                | –   |   |                  |  
|Amount representing interest                         |  |                | (3  | ) |                  |  
|Present value of minimum lease payments              |  | $              | 55  |   |                  |  
|Less current maturities of capital lease obligations |  |                | (55 | ) |                  |  
|Long-term contractual obligations                    |  | $              | –   |   |                  |  



Rent expense for the years ended December
31, 2014 and 2013 was $1,508 and $1,007, respectively.



Letters of Credit



Certain customers could require us to issue
standby letters of credit in the normal course of business to ensure performance under terms of contracts or as a form of product
warranty. The beneficiary of a letter of credit could demand payment from the issuing bank for the amount of the outstanding letter
of credit. Letters of credit outstanding at December 31, 2014 and 2013 under the Fifth Amendment with Whitney were $415



Employment Agreements



Certain of our Executives are employed
under employment agreements containing severance provisions. In the event of termination of an Executive’s employment for
any reason, the Executive will be entitled to receive all accrued, unpaid salary and vacation time through the date of termination
and all benefits to which the Executive is entitled or vested under the terms of all employee benefit and compensation plans, agreements
and arrangements in which the Executive is a participant as of the date of termination.



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



NOTE 12: 	SUBSEQUENT EVENTS



We have evaluated subsequent events through the date the consolidated
financial statements were filed with the Securities and Exchange Commission.



On March 30, 2015, we entered into a Seventh
Amendment with Whitney. See additional discussion in Note 7, “Long-Term Debt”, of the Notes to Consolidated Financial
Statements.



F-18