UNITED STATES


SECURITIES AND EXCHANGE COMMISSION


WASHINGTON D.C. 20549





FORM 10-Q/A


Amendment No.1








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





For the quarterly period ended March 31, 2010





OR





 ̈
TRANSITION REPORT PURSUANT TO 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 or other jurisdiction of incorporation)

(I.R.S. Employer Identification No.)8827 W. Sam Houston Pkwy N., Suite 100,

Houston, Texas

77040(Address of Principal Executive Office)

(Zip Code)





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





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





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   ̈No   ̈





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 the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):





Large accelerated filer   ̈
Accelerated filer   ̈Non-accelerated filer  ̈ (Do not check if a smaller reporting company)
Smaller reporting company x





Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).Yes  ̈ No  x





At May 17, 2010, there were 193,933,963 shares of common stock outstanding.







Explanatory Note
  Deep Down, Inc., a Nevada corporation (“Deep Down” or the “Company”), is filing this Amendment No. 1 (this “Amendment”) to its Quarterly Report on Form 10-Q as filed with the Securities and Exchange Commission on May 17, 2010 (the “Form 10-Q”).  This Amendment includes a restatement of the following previously filed unaudited consolidated financial statements and data (and related disclosures) (the “Restatement”): (1) the unaudited consolidated balance sheet as of March 31, 2010 and the related unaudited consolidated statements of operations and cash flows for the three months ended March 31, 2010; (2) management’s discussion and analysis of financial condition and results of operations as of and for our three months ended March 31, 2010, contained in Part I, Item 2 of this Quarterly Report on Form 10-Q/A; and (3) certain notes to unaudited consolidated financial statements in Part I, Item 1 of this Quarterly Report on Form 10-Q/A.
 
 As previously announced, in conjunction with an internal review meeting of Flotation Technologies, Inc., a Maine corporation (“Flotation”) and a wholly owned subsidiary of the Company, management of the Company (“Management”) reviewed the status of one of its long-term fixed price contracts (the “Contract”) that was entered into by the Company in November of 2008 and is scheduled to be completed in the third quarter of 2011. As a result of this review, Management identified errors in the percentage of completion accounting model for revenue recognition pertaining to this Contract. On January 14, 2011, the Audit Committee of the Company’s Board of Directors (the “Audit Committee”) concluded, based on recommendations from Management, that, as a result of these errors, the Company’s unaudited interim consolidated financial statements for the quarterly periods ended March 31, 2010, June 30, 2010 and September 30, 2010 should no longer be relied on and should be restated.  The Company considered the effect of the error to be immaterial to the consolidated financial statements as of and for the year ended December 31, 2009.
 The following table summarizes the financial statement caption adjustments to our previously reported unaudited consolidated statement of operations (in thousands):




Three Months EndedMarch 31, 2010Revenues

$
(370
)Cost of sales


-Operating expenses


-Effect on operating income

$
(370
)


For more information regarding the restatement, please refer to Part I, Item 2 “Management’s Discussion and Analysis of Financial Condition and Results of Operations”; Note 2, “Restatement of Previously Reported Unaudited Consolidated Financial Statements,” Note 7, “Costs and Estimated Earnings in Excess of Billings on Uncompleted Contracts,” and Note 14, “Earnings per Common Share” of the Notes to Unaudited Consolidated Financial Statements in Part I, Item 1; and Part I, Item 4, “Controls and Procedures.”
  This Amendment sets forth the Form 10-Q in its entirety; however, this Amendment only amends and restates the Items listed above, in each case, solely as a result of, and to reflect, the Restatement, and no other information in the Form 10-Q is amended hereby. This Quarterly Report on Form 10-Q/A continues to speak as of the dates described herein, and we have not updated the disclosures contained in this Quarterly Report on Form 10-Q/A to reflect any events that occurred subsequent to such dates. Accordingly, this Quarterly Report on Form 10-Q/A should be read in conjunction with our filings made with the Securities and Exchange Commission subsequent to May 17, 2010, as information in such filings may update or supersede certain information contained in this Quarterly Report on Form 10-Q/A. In addition, as required by Rule 12b-15 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), currently dated certifications by our principal executive officer and principal financial officer are included in this Amendment and apply to the Form 10-Q, as amended by this Amendment. The certifications of our principal executive officer and principal financial officer are attached to this Quarterly Report on Form 10-Q/A as Exhibits 31.1, 31.2, 32.1 and 32.2, respectively.









IMPORTANT INFORMATION REGARDING THIS FORM 10-Q/A





Unless otherwise indicated, references to “we,” “us,” and “our” in this Quarterly Report on Form 10-Q/A refer collectively to Deep Down, Inc., a Nevada corporation, and its wholly-owned subsidiaries.




Deep Down, Inc., a Nevada corporation (“Deep Down”), is the parent company to its wholly-owned subsidiaries: Deep Down, Inc., a Delaware corporation (“Deep Down Delaware”), ElectroWave USA, Inc., a Nevada corporation (“ElectroWave”), Mako Technologies, LLC, a Nevada limited liability company (“Mako”), Flotation Technologies, Inc., a Maine corporation (“Flotation”), and Deep Down International Holdings, LLC, a Nevada corporation (“DDIH”) since its formation in February 2009.





Readers should consider the following information as they review this Quarterly Report on Form 10-Q/A :





Forward-Looking Statements





The statements contained or incorporated by reference in this Quarterly Report on Form 10-Q/A that are not historical facts are “forward-looking statements” (as such term is defined in the Private Securities Litigation Reform Act of 1995), within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (“the “Exchange Act”).  All statements other than statements of historical fact are, or may be deemed to be, forward-looking statements.  Forward-looking statements include any statement that may project, indicate or imply future results, events, performance or achievements.  The forward-looking statements contained herein are based on current expectations that involve a number of risks and uncertainties. These statements can be identified by the use of forward-looking terminology such as “believes,” “expect,” “may,” “will,” “should,” “intend,” “plan,” “could,” “estimate” or “anticipate” or the negative thereof or other variations thereon or comparable terminology, or by discussions of strategy that involve risks and uncertainties.





Given the risks and uncertainties relating to forward-looking statements, investors should not place undue reliance on such statements.  Forward-looking statements included in this Quarterly Report on Form 10-Q/A speak only as of the date of this Report and are not guarantees of future performance.  Although we believe that the expectations reflected in the forward-looking statements are reasonable, such expectations may prove to have been incorrect.  All subsequent written and oral forward-looking statements attributable to us, or persons acting on our behalf, are expressly qualified in their entirety by these cautionary statements.





Subsequent Events





Except as modified for the effects of the Restatement, all statements contained in this Quarterly Report on Form 10-Q/A, including the forward-looking statements discussed above, are made as of May 17, 2010, unless those statements are expressly made as of another date.  We disclaim any responsibility for the accuracy of any information contained in this Quarterly Report on Form 10-Q/A to the extent such information is affected or impacted by events, circumstances or developments occurring after May 17, 2010 or by the passage of time after such date.  Except to the extent required by applicable securities laws, we expressly disclaim any obligation or undertakings to release publicly any updates or revisions to any statement or information contained in this Quarterly Report on Form 10-Q/A , including the forward-looking statements discussed above, to reflect any change in our expectations with regard thereto or any change in events, conditions or circumstances on which any statement or information is based.


Document Summaries





Descriptions of documents and agreements contained in this Quarterly Report on Form 10-Q/A are provided in summary form only, and such summaries are qualified in their entirety by reference to the actual documents and agreements filed as exhibits to our  Annual Report on Form 10-K for the year ended December 31, 2009, other periodic and current reports we file with the Securities and Exchange Commission (“SEC”) or this Quarterly Report on Form 10-Q/A .





Access to Filings





Access to our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to those reports, filed with or furnished to the SEC pursuant to Section 13(a) of the Exchange Act, as well as reports filed electronically pursuant to Section 16(a) of the Exchange Act, may be obtained through our website (http://www.deepdowncorp.com).  Our website provides a hyperlink to a third-party website where these reports may be viewed and printed at no cost as soon as reasonably practicable after we have electronically filed or furnished such material with the SEC. The contents of our website are not, and shall not be deemed to be, incorporated into this Report.














TABLE OF CONTENTS





PART I FINANCIAL INFORMATION








Page No.Item 1.
Financial StatementsUnaudited Consolidated Balance Sheets at March 31, 2010 and December 31, 2009
1Unaudited Consolidated Statements of Operations for the Three Months Ended March 31, 2010 and 2009
2Unaudited Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2010 and 2009
3Notes to Unaudited Consolidated Financial Statements
4Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
16Item 4.
Controls and Procedures
21PART II OTHER INFORMATIONItem 1.
Legal Proceedings
23Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
23Item 5.
Other Information
23Item 6.
Exhibits
23Signatures

25Exhibit Index
26













PART I. FINANCIAL INFORMATION


ITEM 1.  FINANCIAL STATEMENTS





DEEP DOWN, INC.


CONSOLIDATED BALANCE SHEETS


(Unaudited)






(In thousands, except par value amounts)

March 31,

2010


December 31,

2009ASSETS

(As restated)Current assets:Cash and cash equivalents

$
703


$
912Accounts receivable, net of allowance of $314 and $304, respectively


4,967



7,662Inventory


978



896Costs and estimated earnings in excess of billings on uncompleted contracts


733



267Prepaid expenses and other current assets


233



225Total current assets


7,614



9,962Property, plant and equipment, net


19,843



20,011Intangibles, net


11,817



12,166Goodwill


9,429



9,429Other assets, net


1,470



1,136Total assets

$
50,173


$
52,704LIABILITIES AND STOCKHOLDERS' EQUITYCurrent liabilities:Accounts payable and accrued liabilities

$
3,939


$
2,865Billings in excess of costs and estimated earnings on uncompleted contracts


3,474



4,984Deferred revenues


424



89Current portion of long-term debt


1,550



1,497Total current liabilities


9,387



9,435Long-term debt, net


5,176



5,379Total liabilities


14,563



14,814Commitments and contingencies (Note 13)Stockholders' equity:Common stock, $0.001 par value, 490,000 shares authorized, 180,451 shares issued   and outstanding


180



180Additional paid-in capital


61,387



61,161Accumulated deficit


(25,957)



(23,451)Total stockholders' equity


35,610



37,890Total liabilities and stockholders' equity

$
50,173


$
52,704






The accompanying notes are an integral part of the unaudited consolidated financial statements.
 1


DEEP DOWN, INC.


CONSOLIDATED STATEMENTS OF OPERATIONS


(Unaudited)





For the Three Months EndedMarch 31,(In thousands, except per share amounts)

2010


2009(As restated)Revenues

$
6,274


$
7,103Cost of sales


4,706



4,799Gross profit


1,568



2,304Operating expenses:Selling, general and administrative


3,483



2,844Depreciation and amortization


442



406Total operating expenses


3,925



3,250Operating loss


(2,357)



(946
)Other income (expense):Interest expense, net


(131
)


(46
)Other expense


(1
)


(3
)Total other expense


(132
)


(49
)Loss before income taxes


(2,489
)


(995
)Income tax (expense) benefit


(17
)


265Net loss

$
(2,506
)

$
(730
)Net loss per share, basic and diluted

$
(0.01
)

$
-Weighted-average common shares outstanding, basic and diluted


180,451



177,586







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


2




DEEP DOWN, INC.


CONSOLIDATED STATEMENTS OF CASH FLOWS


(Unaudited)






For the Three Months EndedMarch 31,(In thousands)

2010


2009Cash flows from operating activities:

(As restated)Net loss

$
(2, 506
)

$
(730
)Adjustments to reconcile net loss to net cash provided by (used in) operating activities:Share-based compensation expense


226



29Bad debt expense


21



60Depreciation and amortization


978



751Loss (gain) on disposal of equipment


2



(3
)Deferred taxes


-



(282
)Changes in assets and liabilities:Accounts receivable


2,674



4,290Inventory


(82
)


291Costs and estimated earnings in excess of billings on uncompleted contracts


(466
)


542Prepaid expenses and other current assets


(8
)


(30
)Other assets


(17
)


-Accounts payable and accrued liabilities


1,074



(795
)Billings in excess of costs and estimated earnings on uncompleted contracts


(1,511
)


(178
)Deferred revenues


335



(9)Net cash provided by operating activities


720



3,936Cash flows from investing activities:Purchases of property and equipment


(563
)


(1,428
)Purchase of investment


(25
)


-Cash paid for capitalized software


(91
)


-Deposits, related party


-



(470
)Note receivable


(100
)


-Net cash used in investing activities


(779
)


(1,898
)Cash flows from financing activities:Borrowings of long-term debt


-



1,840Repayments of long-term debt


(150
)


(112
)Net cash (used in) provided by financing activities


(150
)


1,728Change in cash and equivalents


(209
)


3,766Cash and cash equivalents, beginning of period


912



2,495Cash and cash equivalents, end of period

$
703


$
6,261


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


3


DEEP DOWN, INC.
 NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
 (Amounts in thousands except per share amounts)
  Note 1: Basis of Presentation





Basis of Presentation





The accompanying unaudited consolidated financial statements of Deep Down, Inc. and its wholly-owned subsidiaries (“Deep Down”, “we”, “us” or the “Company”) were prepared in accordance with the rules and regulations of the Securities and Exchange Commission (the “Commission”) pertaining to interim financial information and instructions to Form 10-Q.  As permitted under those rules, certain footnotes or other financial information that are normally required by United States generally accepted accounting principles (“US GAAP”) can be condensed or omitted.  Therefore, these statements should be read in conjunction with the audited consolidated financial statements and footnotes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2009, filed on April 15, 2010 with the Commission.





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





Management is also required to consider material events that occur after the date, prior to the issuance, of the financial statements and evaluate whether such events require modification to the reported results or footnote disclosures.  Our subsequent review was conducted through May 17, 2010, immediately prior to the filing of the financial statements with the Commission.





In the notes to the unaudited consolidated financial statements, all dollar and share amounts are in thousands unless otherwise indicated.




Prior period information presented in these consolidated financial statements includes reclassifications which were made to conform to the current period presentation. Specifically, depreciation expense included in cost of sales has been presented as a separate line on the face of the statements of operations.  Additionally, deferred revenues have been split out from billings in excess of costs and estimated earnings on uncompleted contracts on the face of the balance sheets.  These reclassifications had no effect on our previously reported gross profit, net loss or stockholders’ equity.




Principles of consolidation





The unaudited consolidated financial statements include the accounts of Deep Down, Inc. and its wholly-owned subsidiaries for the three months ended March 31, 2010 and 2009.  All intercompany transactions and balances have been eliminated.





Segments





During the three months ended March 31, 2010 and 2009, the operations of Deep Down’s operating segments, Deep Down Delaware, ElectroWave, Mako and Flotation, have been aggregated into a single reporting segment. Additionally, we have aggregated ElectroWave’s operations into Deep Down Delaware as a single operating segment due to similar production processes and cost savings related to office and administrative support. While the operating segments have different product lines; they are very similar. They are all service-based operations revolving around our personnel’s expertise in the deep water industry, and any equipment is produced to a customer specified design and engineered using Deep Down personnel’s expertise, with installation and project management as part of our service revenue to the customer. Additionally, the segments have similar customers and distribution methods, and their economic characteristics are similar with regard to their gross margin percentages. Our operations are located in the United States though we occasionally make sales to international customers.




4


DEEP DOWN, INC.
 NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
 (Amounts in thousands except per share amounts)
 
 Note 2: Restatement of Previously Reported Unaudited Consolidated Financial Statements
 
 As previously announced, in conjunction with an internal review meeting of Flotation Technologies, Inc., a Maine corporation (“Flotation”) and a wholly owned subsidiary of the Company, management of the Company (“Management”) reviewed the status of one of its long-term fixed price contracts (the “Contract”) that was entered into by the Company in November of 2008 and is scheduled to be completed in the third quarter of 2011. As a result of this review, Management identified errors in the labor and burden rates applied to the project costs used in the percentage of completion accounting model which is used to determine the amount of revenue to recognize in the Company’s consolidated financial statements. Additionally, Management determined that the cost estimate at completion for the Contract was not updated in a timely manner, and that the Contract was inappropriately bifurcated between two business units instead of treating it as a single contract. On January 14, 2011, the Audit Committee of the Company’s Board of Directors (the “Audit Committee”) concluded, based on recommendations from Management, that, as a result of these errors, the Company’s unaudited interim consolidated financial statements for the quarterly periods ended March 31, 2010, June 30, 2010 and September 30, 2010 should no longer be relied on and should be restated.  The error had no effect on the Company’s unaudited interim consolidated financial statements for the three months ended March 31, 2009.
 
 The following tables present the effects of the Restatement to the Company’s previously reported unaudited Consolidated Balance Sheet as of March 31, 2010. The Company considered the effect of the error to be immaterial to the consolidated financial statements as of and for the year ended December 31, 2009. Accordingly, the 2009 balances reflect the correction of an immaterial error that resulted in an increase of $639 to the amounts of billings in excess of costs and estimated earnings on uncompleted contracts and accumulated deficit as reported on our consolidated balance sheet in our December 31, 2009 Form 10-K.
 
 March 31, 2010ASSETS

As reported


Adjustments


As restatedCurrent assets:Cash and cash equivalents

$
703


$
-


$
703Accounts receivable, net of allowance of $314


4,967



-



4,967Inventory


978



-



978Costs and estimated earnings in excess of billings on uncompleted contracts


733



-



733Prepaid expenses and other current assets


233



-



233Total current assets


7,614



-



7,614Property, plant and equipment, net


19,843



-



19,843Intangibles, net


11,817



-



11,817Goodwill


9,429



-



9,429Other assets


1,470



-



1,470Total assets

$
50,173


$
-


$
50,173LIABILITIES AND STOCKHOLDERS' EQUITYCurrent liabilities:Accounts payable and accrued liabilities

$
3,939


$
-


$
3,939Billings in excess of costs and estimated earnings on uncompleted contracts


2,465



1,009



3,474Deferred revenues


424



-



424Current portion of long-term debt


1,550



-



1,550Total current liabilities


8,378



1,009



9,387Long-term debt, net


5,176



-



5,176Total liabilities


13,554



1,009



14,563-Stockholders' equity:Common stock, $0.001 par value, 490,000 shares authorized, 180,451 sharesissued and outstanding


180



-



180Additional paid-in capital


61,387



-



61,387Accumulated deficit


(24,948
)


(1,009
)


(25,957
)Total stockholders' equity


36,619



(1,009
)


35,610Total liabilities and stockholders' equity

$
50,173


$
-


$
50,173
 
 
 
 
 5
 
 DEEP DOWN, INC.
 NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
 (Amounts in thousands except per share amounts)
 
 The following table presents the effects of the Restatement to the Company’s previously reported unaudited Consolidated Statement of Operations for the three months ended March 31, 2010. The Restatement did not impact net loss per share for the three months ended March 31, 2010. There was no change to the Company’s previously reported unaudited Consolidated Statement of Operations data for the three months ended March 31, 2009.
 
 Three Months Ended March 31, 2010As reported


Adjustments


As restatedRevenues

$
6,644


$
(370
)

$
6,274Cost of sales:Cost of sales


4,170



-



4,170Depreciation expense


536



-



536Total cost of sales


4,706



-



4,706Gross profit


1,938



(370
)


1,568Operating expenses:Selling, general and administrative


3,483



-



3,483Depreciation and amortization


442



-



442Goodwill impairment


-



-



-Total operating expenses


3,925



-



3,925Operating loss


(1,987
)


(370
)


(2,357
)Other income (expense):Interest expense, net


(131
)


-



(131
)Other income, net


(1
)


-



(1
)Total other expense


(132
)


-



(132
)Loss before income taxes


(2,119
)


(370
)


(2,489
)Income tax expense


(17
)


-



(17
)Net loss

$
(2,136
)

$
(370
)

$
(2,506
)
 Note 3:   Liquidity and Financial Condition
 As a deep water service provider, our revenue, profitability, cash flows, and future rate of growth are substantially dependent on the condition of the oil and gas industry generally, and our customers’ ability to invest capital for offshore exploration, drilling and productions, 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 a continued delay in a payment by a significant customer 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 will need to raise additional debt or equity capital or renegotiate or refinance our existing debt to fund working capital requirements, to support SG&A and to pay all outstanding debt maturing on April 15, 2011 under the Whitney National Bank (“Whitney”) New Amended and Restated Credit Agreement (“New Agreement”). We cannot provide any assurance that any financing will be available to us in the future on acceptable terms or at all. Any such financing could be dilutive to our shareholders.  If we cannot raise required funds on acceptable terms, we may not be able to, among other things, (i) maintain SG&A; (ii) expand operations; (iii) hire and train new employees; (iv) respond to competitive pressures or unanticipated capital requirements; or (v) pay all outstanding debt maturing under the New Agreement. Per the terms of the New Agreement, we no longer have access to a line of credit and must rely solely on our cash position and operating cash flows for liquidity.
  While we believe that our results of operations, including gross profit and operating cash flow, will improve over the remainder of the year, additional debt or equity capital may be necessary to fund working capital requirements, to support SG&A and to pay all outstanding debt under the New Agreement if our planned results of operations are not achieved.  Further, failure to achieve our planned results could result in violation of certain of our loan covenants and require us to raise additional debt or equity capital. The foregoing and other matters raise substantial doubt about our ability to continue as a going concern.
 
 6
 DEEP DOWN, INC.
 NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
 (Amounts in thousands except per share amounts)
 
 We currently plan to use our available cash for our SG&A, debt service payments and working capital. The actual allocation of and the timing of the expenditures will be dependent on various factors, including changes in our strategic relationships, industry conditions, and other factors that we cannot currently predict.
 Our Credit Agreement imposes covenant restrictions on us that increase our vulnerability in the current adverse economic and industry climate, and limits our ability to obtain additional financing. We have recently amended and restated our credit facility, as discussed below and in Note 9 , Long-Term Debt, to waive our covenant noncompliance as of December 31, 2009 and to provide us more latitude in our covenants through the term of the agreement. Our ability to meet these covenants is primarily dependent on the adequacy of earnings before interest, taxes, depreciation and amortization. Our inability to satisfy the covenants contained in our Credit Agreement would constitute an event of default. An uncured default could result in our outstanding debt becoming immediately due and payable. If this were to occur, we may not be able to obtain waivers or secure alternative financing to satisfy our obligations, either of which would have a material adverse impact on our business or our ability to continue as a going concern.
 
 We believe that we will have adequate liquidity to meet our future operating requirements if we meet our goals for results of operations, including gross profit and operating cash flows, and we remain compliant with the covenants under our Credit Agreement, however, the factors described above create uncertainty.
  As discussed in Note 9 , Long-Term Debt, we entered into the New Agreement with Whitney, dated as of April 14, 2010, to address covenant violations we had under our Credit Agreement which we originally entered into on November 11, 2008.   Under the terms of the New Agreement, our noncompliance with the prior terms of the financial covenants and certain other covenants under the Credit Agreement have been waived (the effect of such noncompliance would have entitled the holders of all debt under the Credit Agreement and under a loan agreement between Flotation and TD Bank, N.A. (“TD Bank”) to call such debt immediately due and payable and would have required us to classify all debt outstanding under these facilities as current in our audited consolidated balance sheet at December 31, 2009).  We continue to remain current on payments of our principal, interest and fee obligations with Whitney and TD Bank.  However, under the terms of the New Agreement, all of the indebtedness outstanding under such agreement, which is an aggregate principal amount of $3,583 as of March 31, 2010, will all be due on April 15, 2011 and reclassified as current on our balance sheet on June 30, 2010, unless we are able to refinance all or a portion of such indebtedness, and we no longer have any further capacity to draw upon a revolving line of credit under the New Agreement.
 
 Note 4:   Recent Accounting Pronouncements
 
 In October 2009 the FASB issued Accounting Standards Update No. 2009-13, "Multiple-Deliverable Revenue Arrangements"   ("ASU No. 2009-13"). ASU No. 2009-13 provides principles for allocation of consideration among its multiple-elements, allowing more flexibility in identifying and accounting for separate deliverables under an arrangement.  The statement also introduces an estimated selling price method for valuing the elements of a bundled arrangement if vendor-specific objective evidence or third-party evidence of selling price is not available, and significantly expands related disclosure requirements.  ASU No. 2009-13 is effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010.  This guidance is effective for us for all new or materially modified arrangements entered into on or after January 1, 2011 with earlier application permitted as of the beginning of a fiscal year. Full retrospective application of the new guidance is optional. We are currently assessing implementation of this new guidance, but do not expect a material impact on our consolidated financial statements.
   7
  DEEP DOWN, INC.
 NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
 (Amounts in thousands except per share amounts)
  Note 5:   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, accounts receivable, and accounts payable approximate their fair values due to the short-term maturity of these instruments. Our long term debt was valued using techniques that require inputs that are both significant to the fair value measurement and unobservable (Level 3), specifically treasury rates adjusted for our credit risk premium.  At March 31, 2010, our debt, excluding capital leases, had a carrying value of $6,250 and a fair value of $5,849.
 
 Considerable judgment is required in interpreting data to develop the estimates of fair value. Accordingly, the estimates presented above are not necessarily indicative of the amounts we could realize in a current market exchange. As no active market exists for a significant portion of our financial instruments, fair value estimates were based on judgments regarding current economic conditions, future expected cash flows and loss experience, risk characteristics and other factors. These estimates are subjective in nature and involve uncertainties and therefore cannot be calculated with precision (Level 3). There may be inherent weaknesses in calculation techniques, and changes in the underlying assumptions used, including discount rates and estimates of future cash flows, which could significantly affect the results.
   8
 DEEP DOWN, INC.
 NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
 (Amounts in thousands except per share amounts)
 
 Note 6:   Inventory
 
 The components of inventory are summarized below (in thousands):
 
 March 31, 2010


December 31, 2009Raw materials

$
743


$
765Work in progress


167



84Finished goods


68



47Total Inventory

$
978


$
896
 
 Note 7: Costs and Estimated Earnings in Excess of Billings on Uncompleted Contracts
 
 The components of costs and estimated earnings in excess of billings on uncompleted contracts are summarized below (in thousands):
  March 31, 2010


December 31, 2009(As restated)Costs incurred on uncompleted contracts

$
5,009


$
3,319Estimated earnings


976



2,3045,985



5,623Less: Billings to date


(8,726
)


(10, 340
)$
(2,741
)

$
(4,717
)Included in the accompanying consolidatedbalance sheets under the following captions:Costs and estimated earnings in excess of billingson uncompleted contracts

$
733


$
267Billings in excess of costs and estimated earningson uncompleted contracts


(3,474
)


(4,984
)$
(2,741
)

$
(4,717
)
 At March 31, 2010 and December 31, 2009, the asset balances of $733 and $267, respectively, were related to several contracts that are projected to be completed during fiscal 2010. The balance in billings in excess of costs and estimated earnings on uncompleted contracts at March 31, 2010 and December 31, 2009, was $3,474 and $4,984 , respectively, and consisted of significant milestone billings, primarily related to a large fabrication project for which we have suspended work until we receive payment from the customer, plus several smaller contracts that are expected to be completed in fiscal 2010. We now anticipate recommencing work on the large fabrication project during the second quarter or early third quarter of 2010 and expect to complete this work early next year.
 
 The effects of the Restatement to the Company’s previously reported components of costs and estimated earnings in excess of billings on uncompleted contracts as of March 31, 2010 were as follows: a decrease in costs incurred on uncompleted contracts of $1,048, offset by an increase in estimated earnings on uncompleted contracts of $39, with the net impact of $1,009 increase to billings in excess of costs and estimated earnings on uncompleted contracts. The December 31, 2009 balances reflect the correction of an immaterial error that resulted in an increase of $639 to the amounts of billings in excess of costs and estimated earnings on uncompleted contracts, which is comprised of a decrease in costs incurred on uncompleted contracts of $731, offset by an increase in estimated earnings on uncompleted contracts of $92.
  9
 
  DEEP DOWN, INC. NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
 (Amounts in thousands except per share amounts)
 
 Note 8: Property, Plant and Equipment
 
 The components of net property, plant and equipment are summarized below (in thousands):
  March 31, 2010


December 31, 2009

Estimated

Useful LifeLand

$
1,954


$
1,954Buildings and improvements


5,458



5,458

7 – 36 yearsLeasehold improvements


278



313

2 – 5 yearsEquipment


13,808



13,772

2 – 10 yearsFurniture, computers and office equipment


1,120



1,154

2 – 7 yearsConstruction in progress


1,347



955Total property, plant and equipment


23,965



23,606Less: Accumulated depreciation


(4,122
)


(3,595
)Property, plant and equipment, net

$
19,843


$
20,011
 Depreciation expense, excluded from “Cost of sales” in the accompanying statements of operations, was $93 and $79 for the three months ended March 31, 2010 and 2009, respectively, and depreciation expense included in “Cost of sales” in the accompanying statements of operations, was $536 and $345 for same respective periods.
 
 On May 29, 2009, we consummated a purchase transaction with JUMA Properties, LLC (“JUMA”), a company owned by Ronald E. Smith, President, CEO and Director of Deep Down and wife Mary L. Budrunas, Vice President, Corporate Secretary and Director of Deep Down.  Pursuant to a Purchase and Sale Agreement dated May 22, 2009, we acquired certain property and improvements located in Channelview, Texas, where certain of our operations are currently located (the “Channelview Property”). The Channelview Property consists of 8.203 acres and was purchased for $2,600. The transaction was conducted on an arms-length basis and in accordance with normal terms and conditions. See additional discussion in Note 8, Long-Term Debt.  Prior to May 29, 2009, we leased the Channelview Property from JUMA at a base rate of $15 per month.  In connection with the purchase of the Channelview Property, the lease between us and JUMA was terminated.   We incurred no early termination penalties from JUMA in connection with this termination.
 
 Note 9: Long-Term Debt
 
 The components of long-term debt are summarized below (in thousands):
  March 31, 2010


December 31, 2009Secured credit agreement - Whitney Bank

$
3,583


$
3,694Secured credit agreement - TD Bank


2,110



2,125Other bank loans


57



63Total bank debt


5,750



5,8826% Subordinated Debenture


500



500Capital lease obligations


476



494Total debt


6,726



6,876Less: Current portion of long-term debt


(1,550
)


(1,497
)Long-term debt, net of current portion

$
5,176


$
5,379
 
 Overview
 
 We entered into the New Agreement with Whitney, dated as of April 14, 2010, to address covenant violations we had under our Credit Agreement which we originally entered into on November 11, 2008.  Under the terms of the New Agreement, our noncompliance with the prior terms of the financial covenants and certain other covenants under the Credit Agreement has been waived (the effect of such noncompliance would have entitled the holders of all debt under the Credit Agreement and under a loan agreement between Flotation and TD Bank, to call such debt immediately due and payable and would have required us to classify all debt outstanding under these facilities as current in our audited consolidated balance sheet at December 31, 2009).  We continue to remain current on payments of our principal, interest and fee obligations with Whitney and TD Bank.  However, under the terms of the New Agreement, all of the indebtedness outstanding under such agreement, which is an aggregate principal amount of $3,583 at March 31, 2010, will all be due on April 15, 2011, unless we are able to refinance all or a portion of such indebtedness and we no longer have access to a line of credit under the New Agreement.
  10
 DEEP DOWN, INC. NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
 (Amounts in thousands except per share amounts)
  Whitney Credit Agreement
 
 We originally entered into our Credit Agreement with Whitney in November 2008.  The Credit Agreement originally provided a commitment to lend to us the lesser of $2,000 or 80 percent of eligible receivables (generally defined as current due accounts receivable in which the lender has a first priority security interest).  All of this commitment was also available for Whitney to issue letters of credit (“L/C”) for our benefit.  In December 2008, we then entered into an amendment of the Credit Agreement that provided for us to receive a term loan in the principal amount of $1,150.  Then, in May 2009, we entered into another amendment to the Credit Agreement providing for us to receive another term loan in the principal amount of $2,100.  We used the proceeds from the December 2008 term loan to purchase a piece of equipment (a remotely operated vehicle) and we used the proceeds of the May 2009 term loan to purchase real property in Channelview, Texas.  There was $850 outstanding under the revolving credit line available under the Credit Agreement on March 31, 2010 and December 31, 2009, respectively. We have issued an irrevocable transferable standby L/C in the ordinary course of business, with an annual commission rate of 2.4 percent for $1,107 during the year ended December 31, 2009 related to a large contract that is expected to be completed during the first fiscal quarter of 2011. Under the New Agreement there is no further revolving line of credit available.
 
 We were originally obligated to repay the December 2008 term loan on the basis of monthly installments of $35, with the initial payment on February 1, 2009 and a final payment of all unpaid principal and accrued interest on January 2, 2012.  Outstanding amounts of principal of the December 2008 term loan accrue interest at a rate of 6.5 percent per annum.  Under the terms of the New Agreement, we are required to continue to make monthly installment payments for the December 2008 term loan in the amount of $35 and the outstanding principal amount of such loan continues to accrue interest at the rate of 6.5 percent per annum.  However, the final payment of all unpaid principal and accrued interest on the December 2008 term loan of $343 is now due on April 15, 2011. As of March 31, 2010, the outstanding principal amount of the December 2008 term loan was $730.
 
 We were originally obligated to repay the May 2009 term loan on the basis of monthly installments of $18, with the initial payment on June 1, 2009 and a final payment of all unpaid principal and accrued interest on May 1, 2024.  Outstanding amounts of principal of the May 2009 term loan accrue interest at a rate of 6.5 percent per annum.  Under the terms of the New Agreement, we are required to continue to make monthly installment payments for the May 2009 term loan in the amount of $18 and the outstanding principal amount of such loan continues to accrue interest at the rate of 6.5 percent per annum. However, the final payment of all unpaid principal and accrued interest on the May 2009 term loan of $1,928 is now due on April 15, 2011.  As of March 31, 2010, the outstanding principal amount of the May 2009 term loan is $2,003.
 
 Upon entry into the New Agreement, our indebtedness in the amount of $850 outstanding under the revolving credit line of the Credit Agreement was converted to a term loan. This April 2010 term loan requires us to make monthly installments in the amount of $40 plus the amount of accrued and unpaid interest beginning on May 1, 2010 and a final payment of all unpaid principal and accrued interest of $450 on April 15, 2011.  Outstanding amounts of principal of the April 2010 term loan accrue interest at a rate of 6.5 percent per annum.
 
 Fees on L/Cs issued under the New Agreement accrue at a rate of 3.5 percent to 2.5 percent (based on our leverage ratio) of the principal amount of the applicable L/C; and unused amounts under the L/C facility incur unused fees of 0.5 percent to 0.25 percent (also based on our leverage ratio).
 
 Each of our subsidiaries has guaranteed our obligations under the Credit Agreement, including as amended and restated under the New Agreement, and as such, our obligations in connection with the New Agreement are generally secured by a first priority lien on all of our subsidiaries’ non-real property assets.  With regard to the Channelview, Texas property purchased with the proceeds of the May 2009 term loan, we also entered into a Deed of Trust, Security Agreement and UCC Financing Statement for Fixture Filing (collectively, the “Deed of Trust”) creating a lien on such property.
  11
 DEEP DOWN, INC.
 NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
 (Amounts in thousands except per share amounts)
 Prior to entry into the New Agreement, we were not in compliance with the financial covenants of the original Credit Agreement as of December 31, 2009.  However, the New Agreement provides for the waiver of such noncompliance and establishes new financial covenants in this regard.  Beginning with the quarter ended June 30, 2010, and for each quarter thereafter, we will be obligated to comply with the following financial covenants: (i) total debt to consolidated earnings before interest, taxes, depreciation and amortization (“EBITDA”) of not greater than 3.0 to 1.0 (“Leverage Ratio”), consolidated EBITDA to consolidated net interest expense and principal payments on the total debt greater than 1.5 to 1.0 (“Fixed Charge Coverage Ratio”), and consolidated net worth after deducting other assets as are properly classified as “Intangible Assets” (“Tangible Net Worth”) in excess of $15,000.  The calculation of EBITDA, with regards to the Leverage Ratio and Fixed Charge Coverage Ratio, allows us to deduct certain non-cash items, specifically asset impairment charges as of December 31, 2009.  Under the New Agreement, we continue to have obligations for other covenants, including limitations on issuance of common stock, liens, transactions with affiliates, additional indebtedness and permitted investments, among others.
 
 The New Agreement also removed a provision that permitted us to obtain additional indebtedness from a third party in the event Whitney declined to increase its commitment of indebtedness to us.  As such, we expect to have to refinance the indebtedness outstanding under the New Agreement at any such time as we seek to obtain new financing from a third party.
 
 TD Bank Loan Agreement
 
 During fiscal 2009, Flotation, our wholly-owned subsidiary, obtained loan proceeds from TD Bank in the principal amount of $2,160.  Under the terms of the TD Bank loan agreement, we are obligated to make payments in monthly installments of $15, with an initial payment on March 13, 2009 and a final payment of the unpaid principal and accrued interest in February 2029.  The interest rate on the TD Bank Loan is 5.75 percent.
 
 The TD Bank loan is secured by Flotation’s operating premises in Biddeford, Maine under a mortgage and security agreement and a collateral assignment of leases and rents.  The TD Bank loan required us to enter into a debt subordination agreement that subordinated any debt Flotation owes to Deep Down, other than accounts payable between them arising in the ordinary course of business.  Additionally, the TD Bank Loan required a “negative pledge” that prohibits Flotation and Deep Down from granting security interests in Flotation’s personal property, other than such security interests granted in respect of our Revolver or New Agreement, as appropriate, with Whitney.
 
 Under the TD Bank loan, we are required to meet certain covenants and restrictions.  The financial covenants are reportable annually beginning with the year ended December 31, 2009, and are specific to the Flotation subsidiary financials.  The TD Bank Loan financial covenants include maintaining debt service coverage ratios, pre and post distributions, which are ratios of Flotation’s earnings after tax plus interest, depreciation, amortization and distributions to consolidated net interest expense and principal payments on the total debt, below 1.5 to 1.0 and including distributions of 2.0 to 1.0, and consolidated net worth after deducting other assets as are properly classified as “Intangible Assets” (“Tangible Net Worth”) in excess of $9,500.  Other covenants include limitations on issuance of liens, transactions with affiliates, and additional indebtedness among others.  At December 31, 2009, we were not in compliance with the financial covenants, and on April 15, 2010, we obtained a waiver for these covenants as of December 31, 2009.
 
 Other debt
 
 We have several vehicle loans outstanding with aggregated principal balances of $57 as of March 31, 2010. Interest rates on these loans are between 5.5 and 6.0 percent, and the maturities are on various dates between January 2011 and September 2012.  Additionally, we have a subordinated debenture with a principal amount of $500 which originated from the exchange of preferred stock in a previous year.  The debenture has a fixed interest rate of 6.0 percent per annum, which is required to be paid annually on March 31st through maturity on March 31, 2011, when the unpaid principal balance is due.
  12
 DEEP DOWN, INC.
 NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
 (Amounts in thousands except per share amounts)
 
 Note 10: Share -Based Compensation
 
 We have a stock-based compensation plan, the “2003 Directors, Officers and Consultants Stock Option, Stock Warrant and Stock Award Plan” (the “Plan”). Stock-based compensation is recognized as provided under the applicable authoritative guidance which requires all share-based payments to employees, including grants of employee stock options, to be recognized as compensation expense over the requisite service period (generally the vesting period) in the financial statements based on their fair values. The impact of forfeitures that may occur prior to vesting is also estimated and considered in the amount recognized. In addition, the realization of tax benefits in excess of amounts recognized for financial reporting purposes will be recognized as a financing activity. The options granted under the Plan have vesting periods that range from immediate vesting to vesting over five years, and the contract terms of the options granted are up to ten years. We expense all stock options on a straight-line basis, net of forfeitures, over the requisite expected service periods.  Under the Plan, the total number of options permitted is 15 percent of issued and outstanding common shares. Based on the shares of common stock outstanding at March 31, 2010, there were approximately 4,493 options available for grant under the Plan as of that date.
 
 Restricted Stock
 For the three months ended March 31, 2010 and 2009, we recognized a total of $64 and $66, respectively, in stock-based compensation related to all outstanding shares of restricted stock. The unamortized portion of the estimated fair value of restricted stock was $122 at March 31, 2010.
 
 Summary of Stock Options
 
 During the three months ended March 31, 2010, we granted 250 options. Additionally, a total of 2,000 option awards which were originally issued on February 14, 2008 to two executives were cancelled in March 2010 and not reissued; the related accelerated expense of $47 is included in the total stock-based option expense noted below for the three months ended March 31, 2010.  During the three months ended March 31, 2009, we revised the estimated rate of forfeitures to 30 percent from 0 percent based on the history of stock option cancellations and management’s estimates of expected future forfeiture rates, resulting in a reduction of stock-based compensation expense of $116 for the three months ended March 31, 2009. The total stock-based compensation expense recognized for stock options for the three months ended March 31, 2010 and 2009 was $162 and $(37), respectively, which for 2009 is net of the forfeiture adjustment of $116.  As of March 31, 2010, the unamortized portion of the estimated fair value of outstanding stock options was $1,046.
 
 Note 11: Income Taxes
 
 Income tax expense during interim periods is based on applying the estimated annual effective income tax rate on interim period operations, which may vary from the statutory rate due to the impact of permanent items relative to our net income as well as by any valuation allowance recorded.  We employ an asset and liability approach that results in the recognition of deferred tax liabilities and assets for the expected future tax consequences of temporary differences between the financial basis and the tax basis of those assets and liabilities.  A valuation allowance is established when it is more likely than not that some of the deferred tax assets will not be realized.  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.
 
 Note 12: Related Party 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% 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.
  13
 DEEP DOWN, INC.
 NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
 (Amounts in thousands except per share amounts)
 Ronald E. Smith, President, CEO and Director of Deep Down and Eugene Butler, Chairman of Deep Down, are partners in Ship and Sail, Inc. (“Ship and Sail”), a vendor of Deep Down. During the three months ended March 31, 2010, we made payments of $10 to Ship and Sail, and we expensed the prepaid balance of $38 as of December 31, 2009 during the first quarter of 2010. The payments and expense to Ship and Sail related to services provided by that entity for the support of the development of marine technology which is planned for production during fiscal 2010, including specialized services for provision of vessel access for design and testing, and office space and related utilities.
  Additionally, during the three months ended March 31, 2010, we recorded expenses to JUMA, a company owned by Ronald E. Smith, and his wife Mary L. Budrunas, Vice President, Corporate Secretary and Director of Deep Down, in the amount of $13, which amount is included in accounts payable as of March 31, 2010 and was paid in April 2010.  Payments relate to the monthly rental of a boat owned by JUMA, in connection with the development of marine technology as discussed above.
  In January 2010, we loaned South Texas Yacht Services, a vendor of Deep Down, $100.  The owner of South Texas Yacht Services is in a business alliance with Ship and Sail.  The final principal and interest payment is due March 24, 2015; the note bears interests of 5.5 percent and is payable monthly in the amount of $2 beginning in April 2010. As of May 17, 2010, the payments on the note were current.
 
 Note 13: Commitments and Contingencies
 
 Litigation
 
 Periodically, we are involved in legal proceedings arising from the normal course of business. As of the date of this Quarterly Report on Form 10-Q/A , we are currently not involved in any pending 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 2016.
 
 Letters of Credit
 
 Certain customers could require us to issue a standby letter of credit (“L/C”) in the ordinary course of business to ensure performance under terms of the contract and with associated vendors and subcontractors. In the event of default, the creditor could demand payment from the issuing bank for the amount of the L/C. Our revolving line of credit (“Revolver”) and subsequent New Agreement with Whitney, provides for L/Cs, as discussed in Note 9 above. During the year ended December 31, 2009, we issued a $1,107 irrevocable transferrable standby L/C in the normal course of business, with an annual commission rate of 2.4 percent. This L/C remains outstanding as of March 31, 2010.
 
 Note 14: Earnings per Common Share
 
 Basic earnings per share (“EPS”) is calculated by dividing net income (loss) by the weighted-average number of common shares outstanding for the period. Diluted EPS is calculated by dividing net income (loss) by the weighted-average number of common shares and dilutive common stock equivalents (warrants, stock awards and stock options) outstanding during the period. Dilutive EPS reflects the potential dilution that could occur if options to purchase common stock were exercised for shares of common stock. There were no potentially dilutive securities for the three months ended March 31, 2010 and 2009 that were excluded from the computation of diluted earnings per share because their effect would have been anti-dilutive or the exercise price for the outstanding warrants and options exceeded the average market price for our common stock.
  There was no impact to net loss per share from the effects of the Restatement for the three months ended March 31, 2010.
 14
 DEEP DOWN, INC.
 NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
 (Amounts in thousands except per share amounts)
 Note 15: Subsequent Events
 
 Business Combination
 
 On May 3, 2010, we announced the execution of a Stock Purchase Agreement, effective as of May 3, 2010 (the “Purchase Agreement”), by and among Deep Down, Cuming Corporation, a Massachusetts corporation (“Cuming”), and the stockholders of Cuming (the “Selling Stockholders”), pursuant to which we have agreed to purchase all of the issued and outstanding shares of Cuming’s common stock (the “Acquisition”) for a purchase price of  $47,000 (less an amount of certain liabilities to be assumed, estimated to be an approximate amount of $13,000 based upon Cuming’s balance sheet as of December 31, 2009 and further subject to a purchase price adjustment for working capital) (“Cash Price”), plus 25,000 shares of common stock of Deep Down to be delivered to the Selling Stockholders at the closing.  Upon the signing of the Purchase Agreement, Deep Down and the Selling Stockholders entered into an Escrow Agreement (the “Escrow Agreement”) pursuant to which Deep Down has deposited with an escrow agent 8,333 shares of its common stock (“Escrowed Stock”) to be (i) delivered to the Selling Stockholders if Deep Down does not meet certain conditions and the Purchase Agreement is terminated or (ii) applied against Deep Down’s obligation to deliver 25,000 shares of common stock at closing.
 
 Consummation of the Acquisition is subject to certain conditions, including the following (among other customary conditions for a transaction of this type):
 
 ·
Deep Down’s obtaining cash funds necessary to close the transaction;
 ·
certain employees of Cuming shall have entered into new employment agreements;
 ·
Cuming’s entering into a new lease agreement for its main manufacturing facility in Avon, Massachusetts;
 ·
an environmental assessment of Cuming’s main properties does not indicate circumstances or conditions which could result in (i) any criminal prosecution of Cuming, any of its subsidiaries or any director, officer or employee, or (ii) any suspension or closure of operations at Cuming’s main facilities;
 ·
the absence of any order or injunction prohibiting the consummation of the Acquisition; and
 ·
subject to certain exceptions, the accuracy of representations and warranties with respect to Deep Down’s or Cuming’s business, as applicable.
 
 The Purchase Agreement contains customary representations and warranties that the parties have made to each other.  The Purchase Agreement also contains standard indemnification provisions that require the indemnifying party to pay for any losses in excess of $500 that result from the failure of any representation or warranty to be true and correct.  The indemnification is subject to a cap of $25,000 other than for certain fundamental representations and warranties (for which case there is no capped limitation).  At closing a portion of the Cash Price will be deposited in an escrow account for purposes of the purchase price adjustment and for potential indemnity claims.
 
 Either of Deep Down or the Selling Stockholders may terminate the Purchase Agreement if the Acquisition is not completed by June 30, 2010, provided the party wishing to terminate is not in breach of the Purchase Agreement.  In the event of a termination of the Purchase Agreement as a result of a breach of our obligations under the Purchase Agreement or inability to obtain funds to pay the Cash Price, the escrow agent will release the Escrowed Stock to the Selling Stockholders.  If the Purchase Agreement is terminated by either Deep Down or Cuming under certain circumstances the parties will be obligated to reimburse the other’s expenses incurred in connection with the transactions contemplated by the Purchase Agreement in an aggregate amount not to exceed $275.
 
 On April 28, 2010, we obtained a waiver from Whitney from a covenant provision in the New Agreement that prohibits us from committing to make an investment in or purchase any equity interest in another entity.
 
 Private Placement
 
 Between April 25 and April 30, 2010, we sold 5,150 shares of our common stock in a private placement to accredited investors at a per-share price of $0.10 resulting in total proceeds of $515, which we will use for working capital purposes.
  15
 
 ITEM 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
 The following discussion and analysis provides information that management believes is relevant for an assessment and understanding of our results of operations and financial condition. This information should be read in conjunction with our audited historical consolidated financial statements which are included in our Form 10-K for the fiscal year ended December 31, 2009 filed with the Commission on April 15, 2010 and our unaudited consolidated financial statements and notes thereto included with this Quarterly Report on Form 10-Q/A in Part I. Item 1.
 
 Restatement
 In this Quarterly Report on Form 10-Q/A, we have restated the following previously filed unaudited consolidated financial statements and data (and related disclosures) (the “Restatement”):
  1.
Unaudited consolidated balance sheet as of March 31, 2010 and the related unaudited consolidated statements of operations and cash flows and any related notes to unaudited consolidated financial statements located in Part I, Item 1 of this Quarterly Report on Form 10-Q/A; and
 2.
Management’s discussion and analysis of financial condition and results of operations as of and for the three months ended March 31, 2010 contained herein.
  The Restatement resulted from an internal review which detected errors in our percentage of completion accounting model for revenue recognition pertaining to one of our key contracts. The following discussion and analysis of our financial condition and results of operation incorporates the restated amounts. See “Explanatory Note” immediately preceding Part I of this Quarterly Report on Form 10-Q/A, Item 1 and Note 2, “Restatement of Previously Reported Unaudited Consolidated Financial Statements,” Note 7, “Costs and Estimated Earnings in Excess of Billings on Uncompleted Contracts,” and Note 14, “Earnings per Common Share” of the notes to unaudited consolidated financial statements in Part I, Item 1 of this Quarterly Report on Form 10-Q/A for a detailed discussion of the review and effect of the Restatement. The Company considered the effect of the error to be immaterial to the consolidated financial statements as of and for the year ended December 31, 2009. Accordingly, the 2009 balances reflect the correction of an immaterial error that resulted in an increase of $639 to the amounts of billings in excess of costs and estimated earnings on uncompleted contracts and accumulated deficit as reported on our consolidated balance sheet in our December 31, 2009 Form 10-K
 
 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, flotation and drill riser buoyancy, remotely operated vehicles (“ROVs”) and toolings. 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
 
 Business conditions in our industry continued to impact our customers operations worldwide during the first three months of 2010. The financial markets, which are critical to the funding of the major offshore and deepwater projects, have not stabilized yet.  Although some new projects are being delayed and some existing projects slowed down generally, some of our customers began accelerating their projects in the fourth quarter of 2009 to meet their internal deadlines, which thereby reduced our revenue in the first quarter of fiscal 2010 compared to the first quarter of 2009.
 
 On April 20, 2010, a semi-submersible drilling rig operating in the deepwater Gulf of Mexico exploded, burned for two days and sank, resulting in an oil spill in the Gulf of Mexico.  In response to this accident, the U.S. Secretary of the Interior, on May 6, 2010, announced a moratorium on U.S. offshore drilling permits issued after April 20, 2010 until May 28, 2010, when a report on the accident is expected to be completed.  Such permits, among other required approval, are necessary prior to commencement of offshore drilling operation and could impact our customers’ deepwater operations in the Gulf of Mexico.  It remains to be seen how the industry and our company will be impacted by the oil spill in the Gulf of Mexico over the short and long term, with respect to clean up operations, potential delays on other projects in the Gulf of Mexico due to allocation of resources or access to the region, potential new U.S. government regulations and the increased focus on safety and maintenance. In response to the oil spill, we, like several others in the industry, have provided and will continue to provide our services and equipment to support the ongoing efforts related to this accident.  Additionally, we believe that the international markets will be more important to our operations going forward as we continue our focus on Brazil and West Africa deepwater projects.
  We believe that the economy is showing signs of stabiliziation and recovery. The price of oil has increased in the first three months of 2010; the financial markets show signs of improving, and our bidding activity is increasing. We believe the longer term outlook is still very positive for the offshore and deepwater drilling and we will continue to focus on this sector of the industry worldwide.
 
 16
 
 Segments
 
 During the three months ended March 31, 2010 and 2009, the operations of Deep Down’s operating segments, Deep Down Delaware, ElectroWave, Mako and Flotation, have been aggregated into a single reporting segment. Additionally, we have aggregated ElectroWave’s operations into Deep Down Delaware as a single operating segment due to similar production processes and cost savings related to office and administrative support. While the operating segments have different product lines; they are very similar. They are all service-based operations revolving around our personnel’s expertise in the deep water industry, and any equipment is produced to a customer specified design and engineered using Deep Down personnel’s expertise, with installation and project management as part of our service revenue to the customer. Additionally, the segments have similar customers and distribution methods, and their economic characteristics are similar with regard to their gross margin percentages. Our operations are located in the United States though we occasionally make sales to international customers.
 
 Recent Events
 
 On April 28, 2010, we obtained a waiver from Whitney National Bank relating to a covenant provision in the Amended and Restated Credit Agreement dated April 14, 2010 (the “Waiver Agreement”) that prohibits us from committing to make an investment or purchase any equity interest in another entity.
 
 On May 3, 2010, we announced the execution of a Stock Purchase Agreement, effective as of May 3, 2010 (the “Purchase Agreement”), by and among Deep Down, Cuming Corporation, a Massachusetts corporation (“Cuming”), and the stockholders of Cuming (the “Selling Stockholders”), pursuant to which we have agreed to purchase all of the issued and outstanding shares of Cuming’s common stock (the “Acquisition”) for a purchase price of approximately $47,000 (less an amount of certain liabilities to be assumed, estimated to be an approximate amount of $13,000 based upon Cuming’s balance sheet as of December 31, 2009 and further subject to a purchase price adjustment for working capital) (“Cash Price”), plus 25,000 shares of common stock of Deep Down to be delivered to the Selling Stockholders at the closing.  Upon the signing of the Purchase Agreement, Deep Down and the Selling Stockholders entered into an Escrow Agreement (the “Escrow Agreement”) pursuant to which Deep Down has deposited with an escrow agent 8,333 shares of its common stock (“Escrowed Stock”) to be (i) delivered to the Selling Stockholders if Deep Down does not meet certain conditions and the Purchase Agreement is terminated or (ii) applied against Deep Down’s obligation to deliver 25,000 shares of common stock at closing.
 
 Consummation of the Acquisition is subject to certain conditions, including the following (among other customary conditions for a transaction of this type):
 
 ·
Deep Down’s obtaining cash funds necessary to close the transaction;
 ·
certain employees of Cuming shall have entered into new employment agreements;
 ·
Cuming’s entering into a new lease agreement for its main manufacturing facility in Avon, Massachusetts;
 ·
an environmental assessment of Cuming’s main properties does not indicate circumstances or conditions which could result in (i) any criminal prosecution of Cuming, any of its subsidiaries or any director, officer or employee, or (ii) any suspension or closure of operations at Cuming’s main facilities;
 ·
the absence of any order or injunction prohibiting the consummation of the Acquisition; and
 ·
subject to certain exceptions, the accuracy of representations and warranties with respect to Deep Down’s or Cuming’s business, as applicable.
 
 The Purchase Agreement contains customary representations and warranties that the parties have made to each other.  The Purchase Agreement also contains standard indemnification provisions that require the indemnifying party to pay for any losses in excess of $500 that result from the failure of any representation or warranty to be true and correct.  The indemnification is subject to a cap of $25,000 other than for certain fundamental representations and warranties (for which case there is no capped limitation).  At closing a portion of the Cash Price will be deposited in an escrow account for purposes of the purchase price adjustment and for potential indemnity claims.
 
 Either of Deep Down or the Selling Stockholders may terminate the Purchase Agreement if the Acquisition is not completed by June 30, 2010, provided the party wishing to terminate is not in breach of the Purchase Agreement.  In the event of a termination of the Purchase Agreement as a result of a breach of our obligations under the Purchase Agreement or inability to obtain funds to pay the Cash Price, the escrow agent will release the Escrowed Stock to the Selling Stockholders.  If the Purchase Agreement is terminated by either Deep Down or Cuming under certain circumstances the parties will be obligated to reimburse the other’s expenses incurred in connection with the transactions contemplated by the Purchase Agreement in an aggregate amount not to exceed $275.
  17
  Results of Operations
 
 Three Months Ended March 31, 2010 Compared to Three Months Ended March 31, 2009
 
 Revenues.   Revenues decreased by $829, or 12 percent to $6,274 for the first quarter 2010 from $7,103 for the same quarter last year.  The decrease was primarily due to a delay in the need for our services related to new offshore developments during the first quarter of this year compared to the prior year and the continued delay of work due to non-payment by a customer for a large fabrication project, which we now anticipate recommencing during the second quarter or early third quarter 2010.  The decrease was partially offset by increased revenues from production buoyancy projects and ROV services in the Gulf of Mexico as compared to the same quarter last year.
 Gross Profit.  Gross profit decreased $736 to $1,568 for the first quarter 2010, a decrease of 32 percent over the same period of the prior year, reflecting an overall reduction in the gross profit margin from 32 percent to 25 percent.  The decrease in gross profit and gross profit percent was primarily a result of the decrease in total revenues as discussed above, since some of the delayed services were generally at higher gross margins. The decrease in the gross margin percent was also impacted by an increase in depreciation expense of $191 to $536 which was included in cost of sales. The increase in depreciation for 2010 resulted from depreciation associated with the purchase of ROVs and other capital expenditures during the latter half of 2009. Depreciation expense related to revenue-generating fixed assets is recorded as cost of sales.
 
 Selling, General and Administrative Expenses.Selling, general and administrative expenses (“SG&A”) include rent, utilities, general office expenses, insurance, personnel and other costs necessary to conduct business operations.  SG&A for the first quarter 2010 was $3,483 compared to $2,844 for the same quarter last year; an increase of $639, or 22 percent. Management began a company-wide cost reduction program during the second quarter of 2009 which is continuing during 2010. While we had reduction in certain SG&A of $278 during the first quarter 2010 compared to the first quarter of last year, this reduction was offset by an increase in non-cash stock-based compensation of $197 and expenses associated with the purchase of Cuming Corporation of $134. Additionally, during the first quarter of 2009, we reversed an accrual of $586 for registration penalty expense that was accrued during fiscal 2008. The reversal resulted from the Company receiving a different interpretation of the penalty clause in the 2008 private placement .
 
 Depreciation and amortization expense (excluded from Cost of sales). Depreciation and amortization expense excluded from “Cost of sales” in the accompanying statements of operations was $442 and $406 for the first quarter of 2010 and 2009, respectively.  Depreciation expense represented $93 and $79 of this total for the three months ended March 31, 2010 and 2009, respectively. The increase in depreciation expense resulted from the purchase of furniture and fixtures and office equipment during 2009.
 
 In addition, amortization of intangible assets for the first quarter 2010 was $349 compared to $327 for the first quarter 2009. The increase was due to a change during the fourth quarter of 2009, based upon current market trends and estimated future cash flows, in the estimated useful life of some technology intangible assets from twenty-five years to ten years and customer lists from a range of eight to twenty-five years to a range of six to fourteen years, which accelerated the amortization of the related assets.
 
 Net interest expense. Net interest expense for the first quarter 2010 was $131 compared to $46 for the same prior year period.  Net interest expense for each period was generated by our outstanding bank debt, capital leases and subordinated debenture, offset by interest income on cash balances.
 
 Income tax expense.  For the first quarter 2010, we have recorded a full valuation allowance of our deferred tax assets. For the previous year period we reserved only a portion of the deferred tax assets related to stock based compensation in the amount of $272.
  18
 
 EBITDA. EBITDA is a non-US GAAP financial measure. We use EBITDA as an unaudited supplemental financial measure to assess the financial performance of our assets without regard to financing methods, capital structures, taxes or historical cost basis; and to assess our liquidity and operating performance over time in relation to other companies that own similar assets and that we believe calculate EBITDA in a similar manner; and to assess the ability of our assets to generate cash sufficient for us to pay potential interest costs. We also understand that such data are used by investors to assess our performance. However, the term EBITDA is not defined under US GAAP and EBITDA is not a measure of operating income, operating performance or liquidity presented in accordance with US GAAP. When assessing our operating performance or liquidity, investors should not consider this data in isolation or as a substitute for net income, cash flow from operating activities, or other cash flow data calculated in accordance with US GAAP. EBITDA for the first quarter 2010 was negative $1,380 compared to negative $198 for the same period last year.  This reduction was primarily driven by the decrease in net income, offset by an increase in interest expense on outstanding debt, depreciation and amortization expense and reduction in income tax benefit due to the recording of a valuation allowance for the first quarter 2010.
  For the Three Months EndedMarch 31,2010


2009RestatedNet loss

$
(2,506
)

$
(730
)Add back interest expense, net of interest income


131



46Add back depreciation and amortization


978



751Add back (deduct) income tax expense (benefit)


17



(265
)EBITDA

$
(1,380
)

$
(198
)
 
 Capital Resources and Liquidity
 
 Overview
 
 As a deep water service provider, our revenue, profitability, cash flows, and future rate of growth are substantially dependent on the condition of the oil and gas industry generally, and our customers’ ability to invest capital for offshore exploration, drilling and productions 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 a continued delay in a payment by a significant customer 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 will need to raise additional debt or equity capital or renegotiate or refinance our existing debt to fund working capital requirements, to support SG&A and to pay all outstanding debt maturing on April 15, 2011 under the Whitney National Bank (“Whitney”) New Amended and Restated Credit Agreement (“New Agreement”). We cannot provide any assurance that any financing will be available to us in the future on acceptable terms or at all. Any such financing could be dilutive to our shareholders.  If we cannot raise required funds on acceptable terms, we may not be able to, among other things, (i) maintain SG&A; (ii) expand operations; (iii) hire and train new employees; (iv) respond to competitive pressures or unanticipated capital requirements; or (v) pay all outstanding debt maturing under the New Agreement. Per the terms of the New Agreement, we no longer have access to a line of credit and must rely solely on our cash position and operating cash flows for liquidity.
 
 While we believe that our results of operations, including gross profit and operating cash flow, will improve over the remainder of the year, additional debt or equity capital may be necessary to fund working capital requirements, to support SG&A and to pay all outstanding debt under the New Agreement if our planned results of operations are not achieved.  Further, failure to achieve our planned results could result in violation of certain of our loan covenants and require us to raise additional debt or equity capital.  The foregoing and other matters raise substantial doubt about our ability to continue as a going concern.
  We currently plan to use our available cash for our SG&A, debt service payments and working capital. The actual allocation of and the timing of the expenditures will be dependent on various factors, including changes in our strategic relationships, industry conditions, and other factors that we cannot currently predict.
 
 19
 
 Our Credit Agreement imposes covenant restrictions on us that increase our vulnerability in the current adverse economic and industry climate, and limits our ability to obtain additional financing. We have recently amended and restated our credit facility, as discussed below and in Note 9 , Long-Term Debt, to waive our covenant noncompliance as of December 31, 2009 and to provide us more latitude in our covenants through the term of the agreement. Our ability to meet these covenants is primarily dependent on the adequacy of earnings before interest, taxes, depreciation and amortization. Our inability to satisfy the covenants contained in our Credit Agreement would constitute an event of default. An uncured default could result in our outstanding debt becoming immediately due and payable. If this were to occur, we may not be able to obtain waivers or secure alternative financing to satisfy our obligations, either of which would have a material adverse impact on our business or our ability to continue as a going concern.
 
 Although we believe that we will have adequate liquidity to meet our future operating requirements if our planned results of operations, including gross profit and operating cash flows, are achieved and to remain compliant with the covenants under our Credit Agreement, the factors described above create uncertainty.
 
 As discussed in Note 9 , Long-Term Debt, we have entered into the New Agreement to address covenant violations we had under our Credit Agreement with Whitney that we originally entered into on November 11, 2008.  Under the terms of the New Agreement, our noncompliance with the prior terms of the financial covenants and certain other covenants under the Credit Agreement have been waived (the effect of such noncompliance would have entitled the holders of all debt under the Credit Agreement and under a loan agreement between Flotation and TD Bank, N.A. (“TD Bank”) to call such debt immediately due and payable and would have required us to classify all debt outstanding under these facilities as current in our audited consolidated balance sheet at December 31, 2009).  We continue to remain current on payments of our principal, interest and fee obligations with Whitney and TD Bank.  However, under the terms of the New Agreement, all of the indebtedness outstanding under such agreement, which is an aggregate principal amount of $3,583 as of March 31, 2010, will all be due on April 15, 2011 and reclassified as current on our balance sheet on June 30, 2010, unless we are able to refinance all or a portion of such indebtedness, and we no longer have any further capacity to draw upon a revolving line of credit under the New Agreement.
 
 Furthermore, as of December 31, 2009, Flotation was not in compliance with its covenant obligations under the TD Bank loan.  The noncompliance with such covenants under either of the Credit Agreement with Whitney and the loan agreement with TD Bank would constitute cross defaults for purposes of the other debt facility.  Flotation also obtained a waiver of its noncompliance so that such cross default has not occurred with respect to our fiscal quarter ended December 31, 2009. Compliance testing is required only at year end so no compliance test was performed at March 31, 2010. Indebtedness outstanding under the TD bank loan was $2,110 at March 31, 2010.
 
 Between April 25 and April 30, 2010, we sold 5,150 shares of our common stock in a private placement to accredited investors at a per-share price of $0.10 resulting in total proceeds of $515, which we will use for working capital purposes.
 Cash Flow from Operating Activities
 
 During the first quarter 2010, cash provided from operating activities was $720 as compared to $3,936 during the same prior year period.  Cash flow from operating activities declined due to an increase in our net loss and a decrease in cash provided by changes in working capital.  Working capital declined primarily in an effort to manage short term liquidity and as a result of the decline in net billings in excess of costs and estimated earnings on uncompleted contracts, which relates to several large projects that are expected to be completed in fiscal year 2010 and one that is expected to be completed during the first quarter of 2011.
 
 Cash Flow from Investing Activities
 
 During the first quarter 2010, cash used in investing activities was $779 compared to $1,898 during the same quarter last year. During the first quarter 2010, we used $563 to purchase property and equipment and $91 for capitalized software.  We also incurred a note of $100 related to a vendor receivable, which is a related party (see further discussion in Note 12 - Related Party Transactions in this Form 10-Q/A ).  For the first quarter 2009, we used $1,898 to purchase property and equipment, which included $470 in deposits for the purchase of land and buildings, which transaction was completed in May 2009.
 
 20
 
 Cash Flow from Financing Activities
 
 During the first quarter 2010, cash used in financing activities was $150 which represented principal payments on long term debt.  During the first quarter 2009, cash provided by financing activities was $1,728 which consisted of borrowings of $1,840 and principle payments of $112.
 
 Critical Accounting Policy Updates
 
 The discussion and analysis of our financial condition and results of operations is based on our unaudited consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements in accordance with US GAAP requires us to make estimates and judgments that may affect assets and liabilities. On an on-going basis, we evaluate our estimates, including those related to revenue recognition and related allowances, costs and estimated earnings incurred in excess of billings on uncompleted contracts, inventory, impairments of long-lived assets, including intangible assets, impairments of goodwill, income taxes including the valuation allowance for deferred tax assets, billings in excess of costs and estimated earnings on uncompleted contracts; contingencies and litigation, and share-based payments. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable, the results of which form the basis for making judgments about the carrying values of assets and liabilities. Actual results may differ from these estimates under different assumptions or conditions.
 
 See Note 4 , “Recent Accounting Pronouncements,” in the notes to unaudited consolidated financial statements for information regarding recently issued accounting standards.
 
 Refer to Part II. Item 2 “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” in our Annual Report on Form 10-K for the year ended December 31, 2009 for a discussion of our Critical Accounting Policies.
 
 Inflation and Seasonality
 
 We do not believe that our operations are significantly impacted by inflation.  Our business is not significantly seasonal in nature.
 
 Off-Balance Sheet Arrangements
 
 We have no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors.
 
 ITEM 4. CONTROLS AND PROCEDURES
 Evaluation of Disclosure Controls and Procedures.   We carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)). Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of the end of the period covered in this report, our disclosure controls and procedures were not effective due to the material weaknesses described below to ensure that information required to be disclosed in reports filed under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the required time periods and is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
 
 Internal Control Over Financial Reporting. In connection with the preparation of the Company’s Annual Report on Form 10-K for the year ended December 31, 2009, management conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control—Integrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission.  Based on this evaluation, our management concluded our internal control over financial reporting was not effective as of December 31, 2009 due to the following material weakness:
 21
  We did not maintain effective controls over the control environment.  Specifically, we had not formally adopted a written code of business conduct and ethics that governs our employees, officers and directors.  Further, the Board of Directors does not currently have any independent members and no director qualified as an audit committee financial expert as defined in Item 407(d)(5)(ii) of Regulation S-B.  We did not maintain the following controls: sufficient policies and procedures over the administration of our accounting and fraud risk policies, and a sufficient segregation of duties to decrease the risk of inappropriate accounting. Since these entity level programs have a pervasive effect across the organization, management has determined that these circumstances constitute a material weakness. Additionally, this control deficiency could result in another material weakness that could result in a material misstatement of the consolidated financial statements that would not be prevented or detected.
 
 This material weakness continues to exist as of March 31, 2010.  In addition, in connection with the restatement discussed in Note 2 of the Notes to Unaudited Consolidated Financial Statements, management identified the following additional material weaknesses as of March 31, 2010:
  We did not maintain effective monitoring controls.  Specifically, we did not have sufficient personnel with an appropriate level of technical accounting knowledge, experience, and training who could execute appropriate monitoring and review controls, particularly in situations where transactions were complex or non-routine.This material weakness contributed to the additional material weaknesses discussed below.
 We did not have adequate controls to provide reasonable assurance that revenue was recorded in accordance with GAAP.  Specifically, we did not have appropriately designed or effectively operating management review controls performed by individuals with appropriate technical expertise to ensure that the accounting for contracts under the percentage-of-completion method was appropriate.  This material weakness resulted in material errors that caused a restatement of our interim financial statements for the period ended March 31, 2010.
  We did not have an adequate internal control designed to prevent or detect and correct erroneous information in the project cost accounting application.  This material weakness resulted in material errors that caused a restatement of our interim financial statements for the period ended March 31, 2010.
  Changes in Internal Control Over Financial Reporting.    There have been no changes to our internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) that occurred during the fiscal quarter ended March 31, 2010 which have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
 
 Management’s remediation plans.In our efforts to continuously improve our internal controls, management has taken steps to enhance the following controls and procedures, subsequent to March 31, 2010 as part of our remediation efforts in addressing the material weaknesses above:
  ·
Management is in the process of increasing the Board of Directors with independent members, including a financial expert as defined in Item 407(d)(5)(ii) of Regulation S-B. An independent director was appointed by the Board effective April 12, 2010; Mark R. Hollinger has joined the Board as an independent director and was appointed Chairman of the Audit Committee of the Board of Directors.
  ·
Management has prepared a Code of Conduct for Management and Board of Directors and circulated these documents and obtained signed acknowledgements from management and the Board of Directors in April 2010.  See Corporate Governance under Item 10. Directors, Executive Officers and Corporate Governance included in our Annual Report on Form 10-K for the year ended December 31, 2009 for a description of the Codes.
  ·
Management implemented an anonymous “whistleblower” hotline effective April 2010.
  ·
During the fourth quarter of fiscal 2010 and into 2011, Management has increased review of the processes related tothe recognition of revenue accounted for under the percentage of completion methodology, including the timely review of cost estimates at completion for percentage of completion contracts. Effective with the Restatement and during the fourth quarter of fiscal 2010, Management corrected the errors identified in the labor and burden rates applied to the project costs used in the percentage of completion accounting model.
 22
 
 PART II – OTHER INFORMATION
 
 ITEM 1.  LEGAL PROCEEDINGS
  Periodically, we are involved in legal proceedings arising in the normal course of business. As of the date of this Quarterly Report on Form 10-Q/A , we are currently not involved in any pending, material legal proceedings.
 
 ITEM 2.  UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
  Between April 25 and April 30, 2010, we sold 5,150,000 shares of our common stock in a private placement to accredited investors, who purchased in reliance on the exemption from registration in Section 4(2) of the Securities Act of 1933, at a per-share price of $0.10 resulting in total proceeds of $515,000.  We did not use an underwriter for this private placement. The proceeds will be used for working capital purposes; the private placement is closed as of April 30, 2010. Investors in this private placement included certain related parties, however, no purchases by any individual investor equaled or exceeded $120,000 in this private placement.
 
 ITEM 5.  OTHER INFORMATION
  On May 3, 2010, Deep Down entered into a Stock Purchase Agreement (the “Purchase Agreement”), with Cuming Corporation, a Massachusetts corporation (“Cuming”), and the stockholders of Cuming (the “Selling Stockholders”), pursuant to which Deep Down has agreed to purchase all of the issued and outstanding shares of Cuming’s common stock (the “Cuming Acquisition”) for total consideration of approximately $50 million.  With the assumption of certain liabilities Deep Down will pay approximately $34 million in cash and deliver 25,000,000 shares of common stock of Deep Down to the Selling Stockholders at the closing.
 
 ITEM 6. EXHIBITS
 
 Exhibits required to be attached by Item 601 of Regulation S-K are listed in the Index of Exhibits of this Quarterly Report on Form 10-Q/A , which is incorporated herein by reference.
 
 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 ByLaws of Deep Down, Inc. (incorporated by reference from Exhibit B to our Schedule 14C filed on August 15, 2008).
  10.1 †
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).
  10.2 †
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).
  10.3 †
Employment Agreement, dated effective as of February 17, 2010, between Deep Down, Inc. and Michael J. Newbury (incorporated herein by reference from Exhibit 10.30 to our Form 10-K filed with the Commission on April 15, 2010).
  10.4
Amended and Restated Credit Agreement, entered into as of April 14, 2010, between Deep Down, Inc., as borrower, and Whitney National Bank, including the Guarantor’s Consent and Agreement as signed on behalf of ElectroWave USA, Inc., Flotation Technologies, Inc., Mako Technologies, LLC and Deep Down, Inc. (incorporated herein by reference from Exhibit 10.31 to our Form 10-K filed with the Commission on April 15, 2010).
  10.5
ROV Term Note, dated April 14, 2010, executed by Deep Down, Inc. and paid to the order of Whitney National Bank (incorporated herein by reference from Exhibit 10.32 to our Form 10-K filed with the Commission on April 15, 2010).
  10.6
RE Term Note, dated April 14, 2010, executed by Deep Down, Inc. and paid to the order of Whitney National Bank (incorporated herein by reference from Exhibit 10.33 to our Form 10-K filed with the Commission on April 15, 2010).
  23
  
 10.7
RLOC Term Note, dated April 14, 2010, executed by Deep Down, Inc. and paid to the order of Whitney National Bank (incorporated herein by reference from Exhibit 10.34 to our Form 10-K filed with the Commission on April 15, 2010).
  10.8
LC Note, dated April 14, 2010, executed by Deep Down, Inc. and paid to the order of Whitney National Bank (incorporated herein by reference from Exhibit 10.35 to our Form 10-K filed with the Commission on April 15, 2010).
  10.9
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 herein by reference from Exhibit 10.36 to our Form 10-K filed with the Commission on April 15, 2010).
  10.10
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 herein by reference from Exhibit 10.37 to our Form 10-K filed with the Commission on April 15, 2010).
  10.11
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 herein by reference from Exhibit 10.38 to our Form 10-K filed with the Commission on April 15, 2010).
  10.12 †
Employment Agreement, dated effective as of April 29, 2010, between Deep Down, Inc. and Gay Stanley Mayeux (incorporated by reference from Exhibit 10.1 to our Form 8-K filed on May 5, 2010).
  10.13
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 6, 2010).
  10.14
Waiver Agreement, dated April 28, 2010, by and between Whitney National Bank, as lender, and Deep Down, Inc., as borrower (incorporated by reference from Exhibit 10.2 to our Form 8-K filed on May 6, 2010).
  10.15
Escrow Agreement, dated May 3, 2010, among Deep Down, Inc., the Selling Stockholders, and Casner & Edwards, LLP (incorporated by reference from Exhibit 10.3 to our Form 8-K filed on May 6, 2010).
  31.1*
Certification of Chief Executive Officer Pursuant to Rules 13a-14(a) and 15d-14(a) of the Securities Exchange Act of 1934.
  31.2*
Certification of Chief Financial Officer Pursuant to Rules 13a-14 and 15d-14 of the Securities Exchange Act of 1934.
  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.
  ________________
 * Filed or furnished herewith.
 † Exhibit constitutes a management contract or compensatory plan or arrangement.
 
 24
 
 SIGNATURES
 
 Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
 
 
 DEEP DOWN, INC.(Registrant)
 
 Signature

Title

Date/s/ RONALD E. SMITH

President and CEO

March 8, 2011Ronald E. Smith

(Principal Executive Officer)/s/ EUGENE L. BUTLER

Chief Financial Officer

March 8, 2011Eugene L. Butler

(Principal Financial Officer)
  25
 
 INDEX TO EXHIBITS
 
 
 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 ByLaws of Deep Down, Inc. (incorporated by reference from Exhibit B to our Schedule 14C filed on August 15, 2008).
  10.1 †
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).
  10.2 †
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).
  10.3 †
Employment Agreement, dated effective as of February 17, 2010, between Deep Down, Inc. and Michael J. Newbury (incorporated herein by reference from Exhibit 10.30 to our Form 10-K filed with the Commission on April 15, 2010).
  10.4
Amended and Restated Credit Agreement, entered into as of April 14, 2010, between Deep Down, Inc., as borrower, and Whitney National Bank, including the Guarantor’s Consent and Agreement as signed on behalf of ElectroWave USA, Inc., Flotation Technologies, Inc., Mako Technologies, LLC and Deep Down, Inc. (incorporated herein by reference from Exhibit 10.31 to our Form 10-K filed with the Commission on April 15, 2010).
  10.5
ROV Term Note, dated April 14, 2010, executed by Deep Down, Inc. and paid to the order of Whitney National Bank (incorporated herein by reference from Exhibit 10.32 to our Form 10-K filed with the Commission on April 15, 2010).
  10.6
RE Term Note, dated April 14, 2010, executed by Deep Down, Inc. and paid to the order of Whitney National Bank (incorporated herein by reference from Exhibit 10.33 to our Form 10-K filed with the Commission on April 15, 2010).
  10.7
RLOC Term Note, dated April 14, 2010, executed by Deep Down, Inc. and paid to the order of Whitney National Bank (incorporated herein by reference from Exhibit 10.34 to our Form 10-K filed with the Commission on April 15, 2010).
  10.8
LC Note, dated April 14, 2010, executed by Deep Down, Inc. and paid to the order of Whitney National Bank (incorporated herein by reference from Exhibit 10.35 to our Form 10-K filed with the Commission on April 15, 2010).
  10.9
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 herein by reference from Exhibit 10.36 to our Form 10-K filed with the Commission on April 15, 2010).
  10.10
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 herein by reference from Exhibit 10.37 to our Form 10-K filed with the Commission on April 15, 2010).
  10.11
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 herein by reference from Exhibit 10.38 to our Form 10-K filed with the Commission on April 15, 2010).
  10.12 †
Employment Agreement, dated effective as of April 29, 2010, between Deep Down, Inc. and Gay Stanley Mayeux (incorporated by reference from Exhibit 10.1 to our Form 8-K filed on May 5, 2010).
  10.13
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 6, 2010).
   26
 
 10.14
Waiver Agreement, dated April 28, 2010, by and between Whitney National Bank, as lender, and Deep Down, Inc., as borrower (incorporated by reference from Exhibit 10.2 to our Form 8-K filed on May 6, 2010).
  10.15
Escrow Agreement, dated May 3, 2010, among Deep Down, Inc., the Selling Stockholders, and Casner & Edwards, LLP (incorporated by reference from Exhibit 10.3 to our Form 8-K filed on May 6, 2010).
  31.1*
Certification of Chief Executive Officer Pursuant to Rules 13a-14(a) and 15d-14(a) of the Securities Exchange Act of 1934.
  31.2*
Certification of Chief Financial Officer Pursuant to Rules 13a-14 and 15d-14 of the Securities Exchange Act of 1934.
  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.
  ________________
 * Filed or furnished herewith.
 † Exhibit constitutes a management contract or compensatory plan or arrangement.