Table
of Contents



UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549



FORM 10-Q



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



For the quarterly period ended June 30,
2020



OR



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



Commission File No. 000-30351



DEEP DOWN, INC.

(Exact name of registrant as specified
in its charter)



|Nevada                                         |  | 75-2263732                          
|---------------------------------------------- |  | ------------------------------------
|(State or other jurisdiction of incorporation) |  | (I.R.S. Employer Identification No.)
|                                               |  |                                     
|18511 Beaumont Highway,
        Houston, Texas |  | 77049                               
|(Address of Principal Executive Offices)       |  | (Zip Code)                          



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



Not applicable

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



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



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



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



Indicate
by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant
to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that
the registrant was required to submit such files). Yesþ No ̈



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



|Large accelerated filer ̈ | Accelerated filer ̈        
|------------------------ | --------------------------
|                         |                           
|Non-accelerated filerþ   | Smaller reporting companyþ
|                         |                           
|                         | Emerging growth company ̈  



If
an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for
complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ̈



Indicate
by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ̈
Noþ



At August 10, 2020, there were 12,391,365
shares outstanding of Common Stock, par value $0.001 per share.













IMPORTANT INFORMATION REGARDING THIS FORM 10-Q



Unless otherwise indicated, references
to “we,” “us,” and “our” in this Quarterly Report on Form 10-Q (“Report”) refer
collectively to Deep Down, Inc., a Nevada corporation (“Deep Down”), and its wholly-owned subsidiary Deep Down, Inc.,
a Delaware corporation (“Deep Down Delaware”). Our current operations are primarily conducted under Deep Down
Delaware.



Readers should consider the following information
as they review this Report:



Forward-Looking Statements



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



Given the risks and uncertainties relating
to forward-looking statements, investors should not place undue reliance on such statements. Forward-looking statements included
in this Report speak only as of the date of this Report and are not guarantees of future performance. Although we believe that
the expectations reflected in the forward-looking statements are reasonable, such expectations may prove to be incorrect. All subsequent
written and oral forward-looking statements attributable to us, or persons acting on our behalf, are expressly qualified in their
entirety by these cautionary statements. The risks and uncertainties mentioned previously relate to, among other matters, the following:



| | • | Economic uncertainty and financial market conditions may impact our customer base, suppliers and backlog;                                                                                  
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                                                                                            
| | • | Our backlog is subject to unexpected adjustments and cancellations and, therefore, may not be a reliable indicator of our future earnings;                                                 
| |   |                                                                                                                                                                                            
| | • | The volatility of oil and natural gas prices;                                                                                                                                              
| |   |                                                                                                                                                                                            
| | • | Our use of percentage-of-completion accounting could result in volatility in our results of operations;                                                                                    
| |   |                                                                                                                                                                                            
| | • | A portion of our contracts may contain terms with penalty provisions;                                                                                                                      
| |   |                                                                                                                                                                                            
| | • | Fluctuations in the price and supply of raw materials used to manufacture our products may reduce our profits and could materially impact our ability to meet commitments to our customers;
| |   |                                                                                                                                                                                            
| | • | Our operations could be adversely impacted by the continuing effects of government regulations;                                                                                            
| |   |                                                                                                                                                                                            
| | • | International and political events may adversely affect our operations;                                                                                                                    









i







| | • | Our operating results may vary significantly from quarter to quarter;                               
| | - | ----------------------------------------------------------------------------------------------------
| |   |                                                                                                     
| | • | We may be unsuccessful at generating profitable internal growth;                                    
| |   |                                                                                                     
| | • | The departure of key personnel could disrupt our business;                                          
| |   |                                                                                                     
| | • | Our business requires skilled labor, and we may be unable to attract and retain qualified employees;
| |   |                                                                                                     
| | • | Unfavorable legal outcomes could have a negative impact on our business; and                        
| |   |                                                                                                     
| | • | The impact of global health crises, including epidemics and pandemics.                              



Document Summaries



Descriptions of documents and agreements
contained in this Report are provided in summary form only, and such summaries are qualified in their entirety by reference to
the actual documents and agreements filed as exhibits to our Annual Report on Form 10-K for the year ended December 31, 2019, other
periodic and current reports we have filed with the SEC, or this Report.



Access to Filings



Access to our Annual Reports on Form 10-K,
Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments thereto, filed with or furnished to the SEC pursuant
to Section 13(a) of the Exchange Act, as well as reports filed by our executive officers and directors pursuant to Section 16(a)
of the Exchange Act, may be obtained through our website (www.deepdowninc.com) as soon as reasonably practicable after we,
or our executive officers and directors, have filed or furnished such material with the SEC. The contents of our website are
not, and shall not be deemed to be, incorporated into this Report.





























ii









TABLE OF CONTENTS



|                              |                                                                                                                                          | Page No.
|----------------------------- | ---------------------------------------------------------------------------------------------------------------------------------------- | --------
|                              |                                                                                                                                          |         
|PART I. FINANCIAL INFORMATION
|                             
|Item 1.                       | Financial Statements                                                                                                                     | 1       
|                              | Unaudited Condensed Consolidated Balance Sheets at June 30, 2020 and December 31, 2019                                                   | 1       
|                              | Unaudited Condensed Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2020 and 2019                      | 2       
|                              | Unaudited Condensed Consolidated Statements of Changes in Stockholders’ Equity for the Three and Six Months Ended June 30, 2020 and 2019 | 3       
|                              | Unaudited Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2020 and 2019                                | 4       
|                              | Notes to Unaudited Condensed Consolidated Financial Statements                                                                           | 5       
|Item 2.                       | Management’s Discussion and Analysis of Financial Condition and Results of Operations                                                    | 14      
|Item 3.                       | Quantitative and Qualitative Disclosures About Market Risk                                                                               | 18      
|Item 4.                       | Controls and Procedures                                                                                                                  | 18      
|                              |                                                                                                                                         
|PART II. OTHER INFORMATION   
|                              |                                                                                                                                         
|Item 1.                       | Legal Proceedings                                                                                                                        | 19      
|Item 2.                       | Unregistered Sales of Equity Securities and Use of Proceeds                                                                              | 19      
|Item 6.                       | Exhibits                                                                                                                                 | 19      
|                              |                                                                                                                                          |         
|Signatures                    | 20                                                                                                                                      
|Exhibit Index                 | 21                                                                                                                                      





















iii











PART I – FINANCIAL INFORMATION



ITEM 1.  FINANCIAL STATEMENTS



DEEP DOWN, INC.

CONDENSED CONSOLIDATED
BALANCE SHEETS

(UNAUDITED)



|                                                                                                                        |  | June 30, 2020                         |         |   | December 31, 2019 |  
|----------------------------------------------------------------------------------------------------------------------- |  | ------------------------------------- | ------- | - | ----------------- | -
|                                                                                                                        |  | (In thousands, except per share data) |        
|ASSETS                                                                                                                  |  |                                       |         |   |                   |  
|Current assets:                                                                                                         |  |                                       |         |   |                   |  
|Cash                                                                                                                    |  | $                                     | 3,664   |   |                   | $
|Accounts receivable, net of allowance of $498 and $50, respectively                                                     |  |                                       | 4,354   |   |                   |  
|Contract assets                                                                                                         |  |                                       | 585     |   |                   |  
|Prepaid expenses and other current assets                                                                               |  |                                       | 98      |   |                   |  
|Total current assets                                                                                                    |  |                                       | 8,701   |   |                   |  
|Property, plant and equipment, net                                                                                      |  |                                       | 2,992   |   |                   |  
|Intangibles, net                                                                                                        |  |                                       | 47      |   |                   |  
|Right-of-use operating lease assets                                                                                     |  |                                       | 3,742   |   |                   |  
|Other assets                                                                                                            |  |                                       | 439     |   |                   |  
|Total assets                                                                                                            |  | $                                     | 15,921  |   |                   | $
|                                                                                                                        |  |                                       |         |   |                   |  
|LIABILITIES AND STOCKHOLDERS' EQUITY                                                                                    |  |                                       |         |   |                   |  
|Current liabilities:                                                                                                    |  |                                       |         |   |                   |  
|Accounts payable and accrued liabilities                                                                                |  | $                                     | 2,094   |   |                   | $
|Contract liabilities                                                                                                    |  |                                       | 956     |   |                   |  
|Current portion of PPP loan payable                                                                                     |  |                                       | 553     |   |                   |  
|Current lease liabilities                                                                                               |  |                                       | 1,213   |   |                   |  
|Total current liabilities                                                                                               |  |                                       | 4,816   |   |                   |  
|                                                                                                                        |  |                                       |         |   |                   |  
|PPP loan payable                                                                                                        |  |                                       | 558     |   |                   |  
|Operating lease liability, long-term                                                                                    |  |                                       | 2,561   |   |                   |  
|Total liabilities                                                                                                       |  |                                       | 7,935   |   |                   |  
|                                                                                                                        |  |                                       |         |   |                   |  
|Commitments and contingencies (Note 8)                                                                                  |  |                                       |         |   |                   |  
|                                                                                                                        |  |                                       |         |   |                   |  
|Stockholders' equity:                                                                                                   |  |                                       |         |   |                   |  
|Common stock, $0.001 par value, 24,500,000 shares authorized, 15,756,010 and
    15,906,010 shares issued, respectively |  |                                       | 16      |   |                   |  
|Additional paid-in capital                                                                                              |  |                                       | 73,595  |   |                   |  
|Treasury stock, 3,364,645 and 2,620,830 shares, respectively, at cost                                                   |  |                                       | (2,808  | ) |                   |  
|Accumulated deficit                                                                                                     |  |                                       | (62,817 | ) |                   |  
|Total stockholders' equity                                                                                              |  |                                       | 7,986   |   |                   |  
|Total liabilities and stockholders' equity                                                                              |  | $                                     | 15,921  |   |                   | $



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









1









DEEP DOWN, INC.

CONDENSED CONSOLIDATED
STATEMENTS OF OPERATIONS

(UNAUDITED)



|                                                  |  | Three Months
    Ended                |        |   | Six Months Ended |  
|------------------------------------------------- |  | ------------------------------------- | ------ | - | ---------------- | -
|                                                  |  | June
    30,                          |        |   | June 30,         |  
|                                                  |  | 2020                                  |        |   | 2019             |  
|                                                  |  | (In thousands, except per share data) |       
|Revenues                                          |  | $                                     | 2,725  |   |                  | $
|Cost of sales:                                    |  |                                       |        |   |                  |  
|Cost of sales                                     |  |                                       | 1,216  |   |                  |  
|Depreciation
    expense                          |  |                                       | 242    |   |                  |  
|Total
    cost of sales                           |  |                                       | 1,458  |   |                  |  
|Gross profit                                      |  |                                       | 1,267  |   |                  |  
|Operating expenses:                               |  |                                       |        |   |                  |  
|Selling, general and administrative               |  |                                       | 2,005  |   |                  |  
|Depreciation and amortization                     |  |                                       | 61     |   |                  |  
|Asset
    impairment                              |  |                                       | 4,490  |   |                  |  
|Total
    operating expenses                      |  |                                       | 6,556  |   |                  |  
|Operating income (loss)                           |  |                                       | (5,289 | ) |                  |  
|Other income:                                     |  |                                       |        |   |                  |  
|Interest (expense) income,
    net                |  |                                       | (1     | ) |                  |  
|Gain
    on sale of property, plant and equipment |  |                                       | –      |   |                  |  
|Total
    other income (expense)                  |  |                                       | (1     | ) |                  |  
|Income (loss) before income taxes                 |  |                                       | (5,290 | ) |                  |  
|Income tax expense                                |  |                                       | –      |   |                  |  
|Net income (loss)                                 |  | $                                     | (5,290 | ) |                  | $
|Net income (loss) per share:                      |  |                                       |        |   |                  |  
|Basic                                             |  | $                                     | (0.42  | ) |                  | $
|Fully diluted                                     |  | $                                     | (0.42  | ) |                  | $
|Weighted-average shares outstanding:              |  |                                       |        |   |                  |  
|Basic                                             |  |                                       | 12,492 |   |                  |  
|Fully diluted                                     |  |                                       | 12,492 |   |                  |  



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









2







DEEP DOWN, INC.

CONDENSED CONSOLIDATED
STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

(UNAUDITED)



|                             |  |                  |        |  |                |   |    | Additional |  |   |             |  |  |         |        |   |       |  
|---------------------------- |  | ---------------- | ------ |  | -------------- | - | -- | ---------- |  | - | ----------- |  |  | ------- | ------ | - | ----- | -
|                             |  | Common
    Stock |        |  | Paid-in        |   |    | Treasury   |  |   | Accumulated |  |  |         |       
|(In thousands)               |  | Shares
    (#)   |        |  | Amount
    ($) |   |    | Capital    |  |   | Stock       |  |  | Deficit |        |   | Total |  
|Balance at December 31, 2018 |  |                  | 15,706 |  |                | $ | 16 |            |  | $ | 73,271      |  |  | $       | (2,062 | ) |       | $
|Net income                   |  |                  | –      |  |                |   | –  |            |  |   | –           |  |  |         | –      |   |       |  
|Treasury shares purchased    |  |                  | –      |  |                |   | –  |            |  |   | –           |  |  |         | (170   | ) |       |  
|Share-based compensation     |  |                  | –      |  |                |   | –  |            |  |   | 104         |  |  |         | –      |   |       |  
|Balance at March 31, 2019    |  | $                | 15,706 |  |                | $ | 16 |            |  | $ | 73,375      |  |  | $       | (2,232 | ) |       | $
|                             |  |                  |        |  |                |   |    |            |  |   |             |  |  |         |        |   |       |  
|Net loss                     |  |                  | –      |  |                |   | –  |            |  |   | –           |  |  |         | –      |   |       |  
|Treasury shares purchased    |  |                  | –      |  |                |   | –  |            |  |   | –           |  |  |         | (48    | ) |       |  
|Share-based compensation     |  |                  | –      |  |                |   | –  |            |  |   | 24          |  |  |         | –      |   |       |  
|Balance at June 30, 2019     |  | $                | 15,706 |  |                | $ | 16 |            |  | $ | 73,399      |  |  | $       | (2,280 | ) |       | $
|                             |  |                  |        |  |                |   |    |            |  |   |             |  |  |         |        |   |       |  
|Balance at December 31, 2019 |  |                  | 15,906 |  |                | $ | 16 |            |  | $ | 73,521      |  |  | $       | (2,284 | ) |       | $
|Net loss                     |  |                  | –      |  |                |   | –  |            |  |   | –           |  |  |         | –      |   |       |  
|Treasury shares purchased    |  |                  | –      |  |                |   | –  |            |  |   | –           |  |  |         | (524   | ) |       |  
|Share-based compensation     |  |                  | –      |  |                |   | –  |            |  |   | 50          |  |  |         | –      |   |       |  
|Balance at March 31, 2020    |  |                  | 15,906 |  |                | $ | 16 |            |  | $ | 73,571      |  |  | $       | (2,808 | ) |       | $
|                             |  |                  |        |  |                |   |    |            |  |   |             |  |  |         |        |   |       |  
|Net loss                     |  |                  | –      |  |                |   | –  |            |  |   | –           |  |  |         | –      |   |       |  
|Treasury shares purchased    |  |                  | –      |  |                |   | –  |            |  |   | –           |  |  |         | –      |   |       |  
|Share-based compensation     |  |                  | –      |  |                |   | –  |            |  |   | 24          |  |  |         | –      |   |       |  
|Balance at June 30, 2020     |  |                  | 15,906 |  |                | $ | 16 |            |  | $ | 73,595      |  |  | $       | (2,808 | ) |       | $



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









3







DEEP DOWN, INC.

CONDENSED CONSOLIDATED
STATEMENTS OF CASH FLOWS

(UNAUDITED)



|                                                                                                   |  | Six Months Ended |       
|-------------------------------------------------------------------------------------------------- |  | ---------------- | ------
|                                                                                                   |  | June 30,         |       
|                                                                                                   |  | 2020             |       
|                                                                                                   |  | (In thousands)   |       
|Cash flows from operating activities:                                                              |  |                  |       
|Net income (loss)                                                                                  |  | $                | (5,927
|Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: |  |                  |       
|Share-based compensation                                                                           |  |                  | 74    
|Depreciation and amortization                                                                      |  |                  | 604   
|Gain on sale of property, plant and equipment                                                      |  |                  | –     
|Bad debt expense                                                                                   |  |                  | 448   
|Non-cash lease expense                                                                             |  |                  | 5     
|Loss on asset impairment                                                                           |  |                  | 4,490 
|Changes in operating assets and liabilities:                                                       |  |                  |       
|Accounts receivable                                                                                |  |                  | (348  
|Contract assets                                                                                    |  |                  | 229   
|Prepaid expenses and other current assets                                                          |  |                  | 51    
|Other assets                                                                                       |  |                  | (200  
|Accounts payable and accrued liabilities                                                           |  |                  | (110  
|Contract liabilities                                                                               |  |                  | 333   
|Net cash used in operating activities                                                              |  |                  | (351  
|                                                                                                   |  |                  |       
|Cash flows from investing activities:                                                              |  |                  |       
|Proceeds from sale of property, plant and equipment                                                |  |                  | –     
|Purchases of property, plant and equipment                                                         |  |                  | (102  
|Payments received on note receivable (included in Prepaid expenses and other current assets)       |  |                  | 7     
|Short term investment - (certificate of deposit)                                                   |  |                  | –     
|Net cash provided by (used in) investing activities                                                |  |                  | (95   
|                                                                                                   |  |                  |       
|Cash flows from financing activities:                                                              |  |                  |       
|Principal payment on long-term debt                                                                |  |                  | –     
|Repurchase of common shares                                                                        |  |                  | (524  
|Proceeds from PPP loan                                                                             |  |                  | 1,111 
|Net cash provided by (used in) financing activities                                                |  |                  | 587   
|Change in cash                                                                                     |  |                  | 141   
|Cash, beginning of period                                                                          |  |                  | 3,523 
|Cash, end of period                                                                                |  | $                | 3,664 
|                                                                                                   |  |                  |       



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









4







NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS

(Amounts in thousands except per share
amounts)



|NOTE 1: | BASIS OF PRESENTATION
|------- | ---------------------



Basis of Presentation



The accompanying unaudited condensed consolidated
financial statements of Deep Down, Inc. and its wholly-owned subsidiary (“Deep Down”, “we”, “us”
or the “Company”) were prepared in accordance with the rules and regulations of the Securities and Exchange Commission
(“SEC” or the “Commission”) pertaining to interim financial information and instructions to Form 10-Q.
As permitted under those rules, certain notes or other financial information that are normally required by United States generally
accepted accounting principles (“US GAAP”) can be condensed or omitted. Therefore, these statements should be read
in conjunction with the audited consolidated financial statements, and notes thereto, included in our Annual Report on Form 10-K
for the year ended December 31, 2019.



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, then the actual amounts may differ
from those included in the accompanying unaudited condensed consolidated financial statements. In the opinion of management, all
adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included.



Liquidity



The Company’s cash on hand was $3,664
and working capital was $3,885 as of June 30, 2020. As of December 31, 2019, cash on hand and working capital was $3,523 and $4,939,
respectively. The Company does not have a credit facility in place and generally depends on cash on hand, cash flows from operations,
and the potential opportunistic sales of property, plant and equipment (“PP&E”) to meet its liquidity needs.



The Company cannot predict with certainty
the overall impact of the abrupt decline in oil prices and global economic disruption caused by COVID-19 on the Company’s
operations and cash flows. The Company has taken steps to mitigate the challenges presented by the current macro environment, including
workforce reductions, wage reductions, rent abatement, and limiting capital expenditures and research and development efforts to
only critical items. The Company continues to seek further cost reduction opportunities to preserve liquidity.



The change in operating assets and liabilities
for the six months ended June 30, 2020 resulted in a $45 decrease in cash. The decrease in cash was primarily a result of slower
collections of accounts receivable. Despite actively engaging our customers, collections were impacted by customers focusing on
cash conservation and remote working arrangements impacting our ability to collect. As a result of prolonged customer payment terms
and uncertainty around certain customers’ liquidity, the Company recorded a $448 reserve for doubtful accounts receivable
for the quarter ended June 30, 2020.



The Company applied for a loan under the
Small Business Administration’s Paycheck Protection Program. On April 29, 2020, the Company received a loan in the amount
of $1,111, which was used to finance payroll, rent, and utilities over the balance of the second quarter of 2020. The loan principal
and related interest accrued may be forgivable, partially or in full, if certain conditions are met.



The Company believes it will have adequate
liquidity to meet its future operating requirements arising in the normal course of business for the next twelve months through
a combination of current cash on hand, cash expected to be generated from operations, current working capital, and potential opportunistic
sales of PP&E in addition to pursuing a disciplined approach to making capital investments.



Principles of Consolidation



The unaudited condensed consolidated financial
statements presented herein include the accounts of Deep Down, Inc. and its wholly owned subsidiary. All intercompany transactions
and balances have been eliminated.









5







Segments



For the three and six months ended June
30, 2020 and 2019, the Company had one operating and reporting segment, Deep Down Delaware.



|NOTE 2: | LEASES
|------- | ------



In February 2016, the Financial Accounting
Standards Board (“FASB”) issued ASU 2016-02, Leases (“ASC Topic 842”). Under this guidance, lessees are
required to recognize on the balance sheet a lease liability and a right-of-use (“ROU”) asset for all leases, except
for short-term leases with terms of twelve months or less. The lease liability represents the lessee’s obligation to make
lease payments arising from a lease and will be measured as the present value of the lease payments. The ROU asset represents the
lessee’s right to use a specified asset for the lease term, and will be measured at the lease liability amount, adjusted
for lease prepayment, lease incentives received and the lessee’s initial direct costs.



ASC Topic 842 provides for certain practical
expedients when adopting the guidance. The Company elected the package of practical expedients allowing the Company, for all leases
that commenced prior to the adoption date, to not reassess whether any expired or existing contracts are, or contain, leases, the
lease classification for any expired or existing leases, or initial direct costs for any expired or existing leases.



The Company utilizes the land easements
practical expedient allowing the Company to not assess whether any expired or existing land easements are, or contain, leases if
they were not previously accounted for as leases under the existing leasing guidance. Instead, the Company will continue to apply
its existing accounting policies to historical land easements. The Company elects to apply the short-term lease exception; therefore,
the Company will not record an ROU asset or corresponding lease liability for leases with an initial term of twelve months or less
that are not reasonably certain of being renewed and instead will recognize a single lease cost allocated over the lease term,
generally on a straight-line basis. The Company elects to apply the practical expedient to not separate lease components from non-lease
components and instead account for both as a single lease component for all asset classes.



The Company elects to not capitalize any
lease in which the estimated value of the underlying asset at the commencement date is less than the Company’s capitalization
threshold. A lease would need to qualify for the low value exception based on various criteria.



ROU assets and lease liabilities are recognized
at the commencement date based on the present value of lease payments over the lease term and include options to extend or terminate
the lease when they are reasonably certain to be exercised. The present value of lease payments is determined primarily using the
incremental borrowing rate based on the information available at the lease commencement date. Lease agreements with lease and non-lease
components are generally accounted for as a single lease component. The Company’s operating lease expense is recognized on
a straight-line basis over the lease term and a portion is recorded in cost of sales, and the remainder is recorded in selling,
general and administrative expenses. The accounting for some leases may require significant judgment, which includes determining
whether a contract contains a lease, determining the incremental borrowing rate to utilize in our net present value calculation
of lease payments for lease agreements which do not provide an implicit rate, and assessing the likelihood of renewal or termination
options.



As of June 30, 2020, the Company does not
have any finance lease assets or liabilities, nor does the Company have any subleases.



The following tables present information
about our operating leases:



|                              |  | June 30, 2020 |       |  | December 31, 2019 |  
|----------------------------- |  | ------------- | ----- |  | ----------------- | -
|Assets:                       |  |               |       |  |                   |  
|Right-of-use assets           |  | $             | 3,742 |  |                   | $
|                              |  |               |       |  |                   |  
|Liabilities:                  |  |               |       |  |                   |  
|Current lease liabilities     |  |               | 1,213 |  |                   |  
|Non-current lease liabilities |  |               | 2,561 |  |                   |  
|Total lease liabilities       |  | $             | 3,774 |  |                   | $









6







The components of the Company’s lease expense are as follows:





|                                                  |  | Three Months Ended |     |  | Six Months Ended |  
|------------------------------------------------- |  | ------------------ | --- |  | ---------------- | -
|                                                  |  | June 30,           |     |  | June 30,         |  
|                                                  |  | 2020               |     |  | 2019             |  
|Operating lease expense included in Cost of sales |  | $                  | 80  |  |                  | $
|Operating lease expense included in SG&A          |  |                    | 14  |  |                  |  
|Short term lease expense                          |  |                    | 53  |  |                  |  
|Total lease expense                               |  | $                  | 147 |  |                  | $



Lease term and discount rate:



|                                                                  |  | June 30, 2020 |  | December 31, 2019
|----------------------------------------------------------------- |  | ------------- |  | -----------------
|Weighted-average remaining lease terms on operating leases (yrs.) |  |               |  | 2.90             
|Weighted-average discount rates on operating leases               |  |               |  | 5.374%           



During the quarter ended June 30, 2020, the Company did not
have any sale/leaseback transactions.



Present value of lease liabilities:



|Twelve months ending June 30,      |  | Operating Leases |      
|---------------------------------- |  | ---------------- | -----
|2021                               |  | $                | 1,383
|2022                               |  |                  | 1,399
|2023                               |  |                  | 1,296
|Thereafter                         |  |                  | –    
|Total lease payments               |  | $                | 4,078
|Less: Interest                     |  |                  | (304 
|Present value of lease liabilities |  | $                | 3,774



NOTE 3: REVENUE FROM CONTRACTS WITH
CUSTOMERS



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



For most of our fixed price contracts,
the customer contracts with us to provide a significant service of integrating a complex set of tasks and components into a single
project or capability even if that single project results in the delivery of multiple units. Hence, the entire contract is accounted
for as one performance obligation. We account for a contract when it has approval and commitment from both parties, the rights
of the parties are identified, payment terms are identified, the contract has commercial substance and collectability of consideration
is probable.









7







Disaggregation of Revenue



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



|                      |  | Three Months Ended |      
|--------------------- |  | ------------------ | -----
|                      |  | June 30,           |      
|                      |  | 2020               |      
|Fixed Price Contracts |  | $                  | 2,073
|Service Contracts     |  |                    | 652  
|Total                 |  | $                  | 2,725



|                      |  | Six Months Ended |      
|--------------------- |  | ---------------- | -----
|                      |  | June 30,         |      
|                      |  | 2020             |      
|Fixed Price Contracts |  | $                | 3,817
|Service Contracts     |  |                  | 2,513
|Total                 |  | $                | 6,330



Fixed price contracts



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



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



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



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









8







Service Contracts



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



Contract balances



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



Assets related to costs and estimated earnings
in excess of billings on uncompleted contracts, as well as liabilities related to billings in excess of costs and estimated earnings
on uncompleted contracts, have been classified as current. The contract cycle for certain long-term contracts may extend beyond
one year; thus, complete collection of amounts related to these contracts may extend beyond one year though such long-term contracts
include contractual milestone billings as discussed above. At June 30, 2020 and December 31, 2019, there were no contracts with
terms that extended beyond one year.



The following table summarizes the Company’s
contract assets, which are “Costs and estimated earnings in excess of billings on uncompleted contracts” and our contract
liabilities, which are “Billings in excess of costs and estimated earnings on uncompleted contracts”.



|                                                                                                               |  | June
    30, 2020 |        |   | December
    31, 2019 |  
|-------------------------------------------------------------------------------------------------------------- |  | ----------------- | ------ | - | --------------------- | -
|Costs incurred on uncompleted contracts                                                                        |  | $                 | 1,907  |   |                       | $
|Estimated earnings on uncompleted
    contracts                                                                |  |                   | 3,355  |   |                       |  
|                                                                                                               |  |                   | 5,262  |   |                       |  
|Less: Billings to date on
    uncompleted contracts                                                            |  |                   | (5,633 | ) |                       |  
|                                                                                                               |  | $                 | (371   | ) |                       | $
|                                                                                                               |  |                   |        |   |                       |  
|Included
    in the accompanying unaudited condensed consolidated balance sheets under the following captions: |  |                   |        |   |                       |  
|Contract assets                                                                                                |  | $                 | 585    |   |                       | $
|Contract
    liabilities                                                                                       |  |                   | (956   | ) |                       |  
|                                                                                                               |  | $                 | (371   | ) |                       | $



The contract asset and liability balances
at June 30, 2020 and December 31, 2019 are primarily associated with revenue related to fixed-price projects.



Remaining Performance Obligations



Remaining performance obligations represent
the transaction price of firm orders for which work has not been performed and excludes unexercised contract options, potential
orders, and any remaining performance obligations for any sales arrangements that had not fully satisfied the criteria to be considered
a contract with a customer pursuant to the requirements of ASC 606.









9







Practical Expedients and Exemptions



We generally expense sales commissions
when incurred because the amortization period would have been one year or less. These costs are recorded within selling, general
and administrative expenses.



Many of our services contracts are short-term
in nature with a contract term of one year or less. For those contracts, we have utilized the practical expedient in ASC 606-10-50-14
exempting the Company from disclosure of the transaction price allocated to remaining performance obligations if the performance
obligation is part of a contract that has an original expected duration of one year or less.



Additionally, our payment terms are short-term
in nature with settlements of one year or less. We have, therefore, utilized the practical expedient in ASC 606-10-32-18 exempting
the Company from adjusting the promised amount of consideration for the effects of a significant financing component given that
the period between when the entity transfers a promised good or service to a customer and when the customer pays for that good
or service will be one year or less.



Further, in many of our service contracts,
we have a right to consideration from a customer in an amount that corresponds directly with the value to the customer of our performance
completed to date (for example, a service contract in which we bill a fixed amount for each hour of service provided). For those
contracts, we have utilized the practical expedient in ASC 606-10-55-18, which allows us to recognize revenue in the amount for
which we have the right to invoice.



Accordingly, we do not disclose the value
of unsatisfied performance obligations for (i) contracts with an original expected length of one year or less and (ii) contracts
for which we recognize revenue at the amount to which we have the right to invoice for services performed.



|NOTE 4: | PROPERTY, PLANT AND EQUIPMENT
|------- | -----------------------------



Property, plant and equipment consisted
of the following:



|                                                |  |               |         |   |                   |   |         | Range of   
|----------------------------------------------- |  | ------------- | ------- | - | ----------------- | - | ------- | -----------
|                                                |  | June 30, 2020 |         |   | December 31, 2019 |   |         | Asset Lives
|Buildings and improvements                      |  | $             | 285     |   |                   | $ | 285     |            
|Leasehold improvements                          |  |               | 906     |   |                   |   | 896     |            
|Equipment                                       |  |               | 12,327  |   |                   |   | 17,887  |            
|Furniture, computers and office equipment       |  |               | 907     |   |                   |   | 901     |            
|Construction in progress                        |  |               | 31      |   |                   |   | 64      |            
|                                                |  |               |         |   |                   |   |         |            
|Total property, plant and equipment             |  |               | 14,456  |   |                   |   | 20,033  |            
|Less: Accumulated depreciation and amortization |  |               | (11,464 | ) |                   |   | (12,069 | )          
|Property, plant and equipment, net              |  | $             | 2,992   |   |                   | $ | 7,964   |            



Impairment of Long-lived Assets



As a result of unfavorable market conditions
primarily due to the COVID-19 pandemic and developments in global oil markets, which triggered historically low crude oil prices
and decreases in our customers’ capital budgets, the Company determined the carrying amount of certain idle long-lived assets
exceeded their respective values and therefore recorded an impairment charge of $4,490 related to idle fixed assets during the
three months ended June 30, 2020.









10







The Company owns, and routinely invests
in, a portfolio of long-lived assets which are used both internally for product manufacturing and externally to perform services
in the field. We evaluate for impairment our property and equipment that is held and used whenever changes in circumstances indicate
that the carrying amount of an asset group may not be recoverable. Recoverability is assessed based on estimated undiscounted future
net cash flows. Estimating future net cash flows requires us to make assumptions and estimates including, but not limited to, cash
flows associated with future use and eventual disposal of the asset group and determination of the primary asset of the group.
Should the review indicate that the carrying value is not fully recoverable, the amount of the impairment loss is determined by
comparing the carrying value to the estimated fair value. No impairment was recorded related to the long-lived assets held and
used during the three and six months ended June 30, 2020.



|NOTE 5: | SHARE-BASED COMPENSATION
|------- | ------------------------



Share-based compensation is included in
selling, general and administrative expenses in the accompanying unaudited condensed consolidated statements of operations and
additional paid in capital in the accompanying unaudited consolidated balance sheets. During the three and six months ended June
30, 2020, the Company recognized a total of $24 and $50, respectively, of share-based compensation expense, which includes $23
of credits to compensation expense related to the forfeiture of restricted stock awards of our former Chief Operating Officer
in the second quarter of 2020. During the three and six months ended June 30, 2019, the Company recognized a total of $24 and
$128, respectively, of share-based compensation expense. The unamortized estimated fair value of nonvested shares of restricted
stock and stock options was $133 and $134 at June 30, 2020 and December 31, 2019, respectively. These costs are expected to be
recognized as expense over a weighted-average period of 1.17 years.



|NOTE 6: | TREASURY STOCK
|------- | --------------



On December 23, 2019, the Board authorized
the repurchase of up to 500 shares of the Company’s outstanding common stock (the “Repurchase Program”). The
Repurchase Program was funded from cash on hand and cash provided by operating activities. The Board separately authorized the
repurchase of additional shares during the quarter ended March 31, 2020, in a privately negotiated transaction. As of March 31,
2020, the repurchase program has been exhausted.



For the three months ended June 30, 2020,
no shares of common stock were purchased by the Company. For the six months ended June 30, 2020, the Company purchased 744 shares
of common stock at an average price of approximately $0.70 per share totaling $524 in a privately negotiated transaction.



For the three months ended June 30, 2019,
the Company purchased 60 shares of common stock at an average price of approximately $0.80 per share totaling $48. For the six
months ended June 30, 2019, the Company purchased 288 shares of common stock at an average price of approximately $0.76 per share
totaling $218.



Treasury shares are accounted for using
the cost method.



|NOTE 7: | INCOME TAXES
|------- | ------------



Income tax expense during interim periods
is based on applying the estimated annual effective income tax rate to interim period operations. The estimated annual effective
income tax rate may vary from the statutory rate due to the impact of permanent items relative to our pre-tax income, as well as
by any valuation allowance recorded. We employ an asset and liability approach that results in the recognition of deferred tax
assets and liabilities for the expected future tax consequences of temporary differences between the financial basis and the tax
basis of those assets and liabilities. A valuation allowance is established when it is more likely than not that some of the deferred
tax assets will not be realized. At June 30, 2020 and December 31, 2019, management has recorded a full deferred tax asset valuation
allowance.



|NOTE 8: | COMMITMENTS AND CONTINGENCIES
|------- | -----------------------------



Employment Agreements



The Company entered into employment agreements
with the Chief Executive Officer and former Chief Operating Officer (the “Executives”) containing severance provisions.
In the event of termination of the Executives’ employment for any reason, the Executives would be entitled to receive all
accrued, unpaid salary and vacation time through the date of termination and all benefits to which the Executives are entitled
or vested under the terms of all employee benefit and compensation plans, agreements and arrangements in which the Executives
are participants as of the date of termination.









11







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



On April 1, 2020, the Company eliminated
the position of Chief Operating Officer (“COO”) and relieved the COO of his duties pursuant to the terms of his employment
agreement. In addition to payment of accrued and unpaid salary, vacation time, and other benefits referred to above, the Company
is required to pay the former COO one time his contractual annual base salary of $245, payable over 12 months. This amount is
included in selling, general and administrative expenses in the accompanying unaudited condensed consolidated statements of operations
for the three and six months ended June 30, 2020.



Litigation



From time to time, the Company is party
to various legal proceedings arising in the ordinary course of business. The Company expenses or accrues legal costs as incurred.
The Company resolved a material legal proceeding during the quarter ended June 30, 2020 and is involved in only one material legal
proceeding as of the date of this Report.



In November 2011, the Company delivered
equipment to Aker Solutions, Inc. (“Aker”), but Aker declined to pay the final invoice in the aggregate amount of $270
alleging some warranty items needed to be repaired. The Company made repairs, but Aker continued to claim further work was required.
The Company repeatedly attempted to collect on the receivable and ultimately filed suit on November 16, 2012, in the Harris County
District Court. Aker subsequently filed a counterclaim on March 20, 2013 in the aggregate amount of $1,000 for reimbursement of
insurance payments allegedly made for repairs. The parties have not reached a resolution on this matter. At this point, it is not
clear as to whether an unfavorable outcome is either probable or remote, and the Company is unable to determine the likelihood
of an unfavorable outcome or the amount or range of potential loss if the outcome should be unfavorable.



On August 6, 2018, GE Oil and Gas UK Ltd.
(“GE”) requested that the Company mediate a dispute between the parties in the ICC International Centre for ADR (“ICC”).
The dispute involved alleged delays and defects in products manufactured by the Company for GE dating back to 2013. During the
second quarter of 2020, the parties finalized the terms of a definitive settlement agreement which is now final and binding. Per
the terms of the settlement, the Company shall pay GE the total amount of $750 on a monthly basis through February 2022. The Company
accrued a liability related to this matter in the amount of $750 for the year ended December 31, 2019.



|NOTE 9: | EARNINGS PER COMMON SHARE
|------- | -------------------------



Basic earnings per share (“EPS”)
is calculated by dividing net income (loss) by the weighted-average number of common shares outstanding for the period. Diluted
EPS is calculated by dividing net income (loss) by the weighted-average number of common shares and dilutive common stock equivalents
(warrants, nonvested stock awards and stock options) outstanding during the period. Diluted EPS reflects the potential dilution
that could occur if options to purchase common stock were exercised for shares of common stock and all nonvested stock awards vest.



At June 30, 2020 and 2019, all such securities
were anti-dilutive.



|NOTE 10: | RELATED PARTY TRANSACTIONS
|-------- | --------------------------



On August 15, 2019, Mr. Ronald E. Smith,
the Company's Founder, resigned as Chief Executive Officer and as a member of the Board, effective as of August 31, 2019. In connection
with Mr. Smith's resignation, the Company and Mr. Smith entered into a Transition Agreement, effective as of September 1, 2019
(the “Transition Agreement”). The Transition Agreement provides for Mr. Smith to serve as an independent consultant
to the Company from September 1, 2019 through December 31, 2021. The Company agreed to pay Mr. Smith $15 per month, from January
1, 2020 through December 31, 2021, in exchange for his future services. The Company therefore recorded consulting expenses related
to the Transition Agreement totaling $45 and $90 for the three and six months ended June 30, 2020, respectively.









12







In addition to the other payments provided
for under the Transition Agreement, the Company also agreed to pay Mr. Smith 1.5% of the net sale or lease value of two carousels
owned by Company, if such sale or lease occurs prior to December 31, 2021, unless those assets are sold or leased in conjunction
with a sale of all or substantially all of the assets or stock of Deep Down, in which case no commission is due.



As part of the Transition Agreement, Mr.
Smith is bound by certain non-disclosure and confidentiality provisions, and a non-compete and non-hire agreement.



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



As a result of the abrupt decline in oil
prices and global economic activity caused by COVID-19, the Company applied for a loan under the Small Business Administration’s
Paycheck Protection Program, and on April 29, 2020, the Company received a loan (“PPP loan”) in the amount of $1,111,
which was used to finance payroll, rent, and utilities through the second quarter of 2020. The PPP loan is evidenced by a promissory
note, dated to be effective as of April 27, 2020, between the Company and the lender. The PPP loan matures on April 27, 2022 and
bears interest at a fixed rate of 1.00 percent per annum, payable in 18 monthly payments commencing on November 27, 2020. The loan
principal and related interest accrued may be forgivable, partially or in full, if certain conditions are met.













13







ITEM 2. MANAGEMENT’S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

(Amounts in thousands except per share
amounts)



The following discussion and analysis provide
information that management believes is relevant for an assessment and understanding of the Deep Down’s results of operations
and financial condition. This information should be read in conjunction with the Company’s audited historical consolidated
financial statements, which are included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31,
2019, and the Company’s unaudited condensed consolidated financial statements, and notes thereto, included with this Quarterly
Report on Form 10-Q (“Report”) in Part I. Item 1. “Financial Statements,” and is available on the SEC’s
website.



General



Deep Down is an oilfield product and services
company specializing in complex deepwater and ultra-deepwater support services and subsea distribution products used between the
production facility and the wellhead. Our core services and technological solutions include distribution system installation support
and engineering services, umbilical terminations, loose-tube steel flying leads, and related services. Additionally, our
highly experienced, specialized service teams can support subsea engineering, installation, commissioning, and maintenance projects
located anywhere in the world.



Industry and Executive Outlook



The dual challenges of the global COVID-19
pandemic and the sharp decline in oil prices continue to impact our business and that of our customers. Our service business is
particularly dependent on our personnel being able to travel domestically and internationally, and travel restrictions imposed
by various governments partially contributed to reduced revenues during the second quarter of 2020.



We experienced additional headwinds as
our customers scaled back their operations based on the current oil price environment. This includes customers delaying new purchase
orders, extending timelines for existing purchase orders, and delaying the payment of outstanding invoices. We expect that customer
spending will increase if oil prices stabilize and there is an overall improvement in global economic activity.



In response to these new challenges, we
successfully adjusted our strategy to operate in this cycle of lower oil prices. During the second quarter of 2020, we implemented
workforce reductions, wage reductions, rent abatement, and limited capital expenditures and R&D efforts to only critical items.
We were not able to accomplish this without our team of highly capable individuals who were able to respond quickly to the global
pandemic pressures; however, there is much more work to do. Despite the reduction in our second quarter revenues, as compared to
the same period in 2019, we are encouraged by the improvement in our margins, which is a direct result of the cost mitigation efforts
we have implemented and continue to pursue. We will continue to seek further cost reduction opportunities to streamline our cost
structure to preserve our liquidity.



The Company also applied for and received
a loan in the amount of $1,111 under the Small Business Administration’s Paycheck Protection Program. The loan proceeds were
used to finance payroll, rent, and utilities through the second quarter of 2020. The loan principal and related interest accrued
may be forgivable, partially or in full, if certain conditions are met.



During the second quarter of 2020, we analyzed
the carrying value of our long-lived assets and recorded an impairment charge for certain idle fixed assets given our inability
to objectively project cash flows related to those assets. We are still in discussions with various potential customers for the
sale or rental of these assets and do not expect the results of this impairment to have an impact on the discussions.



While increasing revenue remains our top
priority, generating free cash flow and preservation of liquidity remains a high priority in the current environment. We are keenly
focused on the levers within our control, and we are seeing an increase in requests for short-cycle service work, an area where
we have a proven track record. We, therefore, see this as an area of further growth for the Company. We also believe customers
on the other side of the downturn will be heavily focused on efficiency and shorter lead times, without sacrificing quality and
safety, and are confident our streamlined operations and renewed focus on our cost drivers will enable us to be a solid choice
for our customers.









14







We continue to be encouraged by the future
of the Company and look forward to continuing to be a service provider of choice for our customers, an employer of choice for our
current and future employees, and a good value for shareholders.



Results of Operations



Three Months Ended June 30, 2020 Compared
to Three Months Ended June 30, 2019



Revenues. Revenues for the three
months ended June 30, 2020 were $2,725 compared to revenues of $5,269 for the three months ended June 30, 2019. The $2,544, or
48 percent, decrease from the same period in 2019 was primarily the result of fewer projects in process, COVID-19 related travel
restrictions, and the recent developments in the global oil markets.



Gross profit. Gross profit for the
three months ended June 30, 2020 was $1,267, or 46 percent of revenues, compared to $1,965, or 37 percent of revenues, for the
three months ended June 30, 2019. The 9 percent increase in gross profit percentage was primarily due to a higher proportion of
rental revenue and receiving rent abatements during the three months ended June 30, 2020, compared to the three months ended June
30, 2019. Despite the increase in gross profit percentage, the $698 decrease in gross profit was driven by lower revenues in the
2020 period, compared to the 2019 period.





Selling, general and administrative
expenses.Selling, general and administrative (“SG&A”) expenses were $2,005, or 74 percent of revenues, for
the three months ended June 30, 2020 compared to $2,007, or 38 percent of revenues, for the three months ended June 30, 2019.
The increase in SG&A expenses as a percent of revenues was due to lower revenues, a $245 severance charge related to the elimination
of the Company’s COO position, and a $448 reserve for doubtful accounts receivable related to prolonged customer payment
terms and uncertainty around certain customers’ liquidity affected by the COVID-19 pandemic. Excluding these charges, SG&A
expenses for the three months ended June 30, 2020 were $1,312, or 48 percent of revenues, which represents a $695, or 35 percent,
reduction from the same period in 2019 and a $381, or 23 percent, reduction from the first quarter of 2020.



Asset Impairment. During the three
months ended June 30, 2020, we recorded charges of $4,490 for the impairment of certain idle long-lived assets. The impairment
was the result of an analysis of the carrying value of the assets and our inability to objectively project future cash flows from
the sale or lease of these assets, particularly in light of the impact of the COVID-19 pandemic and resulting global economic disruption.
No impairment of long-lived assets was recorded during the three months ended June 30, 2019.



Modified EBITDA. Our management
evaluates our performance based on a non-US GAAP measure which consists of earnings (net income or loss) available to common shareholders
before net interest income, income taxes, depreciation and amortization, non-cash share-based compensation expense, non-cash impairments,
non-cash gains or losses on the sale of PP&E, other non-cash items and one-time charges (“Modified EBITDA”). This
measure may not be comparable to similarly titled measures employed by other companies and is not a measure of performance calculated
in accordance with US GAAP. The measure should not be considered in isolation or as a substitute for operating income or loss,
net income or loss, cash flows provided by operating, investing or financing activities, or other cash flow data prepared in accordance
with US GAAP. The amounts included in the Modified EBITDA calculation, however, are derived from amounts included in the accompanying
unaudited condensed consolidated statements of operations.



We believe Modified EBITDA is a useful
measure of a company’s operating performance, which can vary substantially from company to company depending upon accounting
methods and book value of assets, financing methods, capital structure and the method by which assets were acquired. It helps investors
more meaningfully evaluate and compare the results of our operations from period to period by removing the impact of our capital
structure (primarily interest), asset base (primarily depreciation and amortization), and actions that do not affect liquidity
(share-based compensation expense) from our operating results. Additionally, it helps investors identify items that are within
our operational control. Depreciation and amortization charges, while a component of operating income, are fixed at the time of
the asset purchase or acquisition in accordance with the depreciable lives of the related asset and as such are not a directly
controllable period operating charge.









15







The following is a reconciliation of net
income (loss) to Modified EBITDA (loss) for the three months ended June 30, 2020 and 2019:



|                                                             |  | Three Months Ended |       
|------------------------------------------------------------ |  | ------------------ | ------
|                                                             |  | June 30,           |       
|                                                             |  | 2020               |       
|Net income (loss)                                            |  | $                  | (5,290
|                                                             |  |                    |       
|Add: Interest expense (income), net                          |  |                    | 1     
|Add: Income tax expense                                      |  |                    | –     
|Add: Depreciation and amortization                           |  |                    | 303   
|Add: Share-based compensation                                |  |                    | 24    
|Add: Asset Impairment                                        |  |                    | 4,490 
|Add: One-time charges related to elimination of COO position |  |                    | 245   
|Modified EBITDA (loss)                                       |  | $                  | (227  



The $491 decrease in Modified EBITDA was
primarily due to decreased revenues as a result of the decline in offshore activity triggered by the COVID-19 pandemic coupled
with a $448 reserve for doubtful accounts receivable due to prolonged customer payment terms and uncertainty around certain customers’
liquidity affected by the COVID-19 pandemic for the three months ended June 30, 2020 as compared to the three months ended June
30, 2019.



Six Months Ended June 30, 2020 Compared
to Six Months Ended June 30, 2019



Revenues. Revenues for the six months
ended June 30, 2020 were $6,330 compared to revenues of $11,568 for the six months ended June 30, 2019. The $5,238, or 45 percent,
decrease was the result of fewer projects in process, COVID-19 related travel restrictions, and the recent developments in the
global oil markets.



Gross profit. Gross profit for the
six months ended June 30, 2020 was $2,390, or 38 percent of revenues, compared to $4,222, or 36 percent of revenues, for the six
months ended June 30, 2019. The $1,832, or 43 percent, decrease in gross profit was primarily due to decreased revenues due to
fewer projects during the six months ended June 30, 2020 as compared to the six months ended June 30, 2019.





Selling, general and administrative
expenses.SG&A expenses were $3,698, or 58 percent of revenues, for the six months ended June 30, 2020 compared to $4,001,
or 35 percent of revenues, for the six months ended June 30, 2019. The increase in SG&A expenses as a percent of revenues
was due to lower revenues, a $245 severance charge related to the elimination of the Company’s COO position, and a $448
reserve for doubtful accounts receivable due to prolonged customer payment terms and uncertainty around certain customers’
liquidity affected by the COVID-19 pandemic. Excluding these charges, SG&A expenses for the six months ended June 30, 2020
was $3,005, or 47 percent of revenues, which represents a $996, or 25 percent, reduction from the same period in 2019.



Asset Impairment. During the six
months ended June 30, 2020, we recorded charges of $4,490 for the impairment of certain idle long-lived assets. The impairment
was the result of an analysis of the carrying value of the assets and our inability to objectively project future cash flows from
the sale or lease of these assets, particularly in light of the impact of the COVID-19 pandemic and resulting global economic disruption.



Modified EBITDA. The following is
a reconciliation of net income (loss) to Modified EBITDA (loss) for the six months ended June 30, 2020 and 2019:



|                                                             |  | Six Months Ended |       
|------------------------------------------------------------ |  | ---------------- | ------
|                                                             |  | June 30,         |       
|                                                             |  | 2020             |       
|Net income (loss)                                            |  | $                | (5,927
|                                                             |  |                  |       
|Add: Interest expense (income), net                          |  |                  | 2     
|Add: Income tax expense                                      |  |                  | 5     
|Add: Depreciation and amortization                           |  |                  | 604   
|Add: Share-based compensation                                |  |                  | 74    
|Deduct: Gain on sale of asset                                |  |                  | –     
|Add: Asset Impairment                                        |  |                  | 4,490 
|Add: One-time charges related to elimination of COO position |  |                  | 245   
|Modified EBITDA (loss)                                       |  | $                | (507  







16







The $1,415 decrease in Modified EBITDA
was due to decreased revenues as a result of the decline in offshore activity triggered by the COVID-19 pandemic coupled with a
$448 reserve for doubtful accounts receivable due to prolonged customer payment terms and uncertainty around certain customers’
liquidity affected by the pandemic for the six months ended June 30, 2020 as compared to the six months ended June 30, 2019.



Liquidity and Capital Resources



The Company believes it will have adequate
liquidity to meet its future operating requirements through a combination of cash on hand, cash expected to be generated from
operations, working capital of $3,885 as of June 30, 2020, and potential opportunistic sales of PP&E in addition to pursuing
a disciplined approach to making capital investments.



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



The Company applied for a loan under the
Small Business Administration’s Paycheck Protection Program, and on April 29, 2020, the Company received a loan in the amount
of $1,111, which was used to finance payroll, rent, and utilities through the second quarter of 2020. The loan principal and related
interest accrued may be forgivable, partially or in full, if certain conditions are met. The Company also continues to engage in
discussions with several financial institutions if a credit facility is needed to further support operations. There can be no assurance
that the Company could obtain a credit facility, if needed.



During the six months ended June 30, 2020,
the Company used $351 of net cash in operating activities, which was primarily due to lower revenues partially offset by reductions
in accounts receivable and other assets. The Company also used $95 in net cash for investing activities, primarily for purchases
of property, plant and equipment. The Company generated $587 from financing activities, primarily through the $1,111 PPP loan proceeds,
which was partially offset by $524 of share repurchases.



During the six months ended June 30, 2019,
the Company used $397 of net cash in operating activities, primarily due to a $495 decrease in account payable and a $760 increase
of in accounts receivable offset by net income. The Company generated $1,580 from investing activities, primarily due to receiving
$510 in repayments on a note receivable and $1,035 from the maturity of a certificate of deposit. The Company also used $224 in
financing activities primarily related to share repurchases.



Inflation and Seasonality



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



Off-Balance Sheet Arrangements



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



Critical Accounting Estimates



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









17







Refer to Part II. Item 7. “Management’s
Discussion and Analysis of Financial Condition and Results of Operations,” in our Annual Report on Form 10-K for the year
ended December 31, 2019 for a discussion of our critical accounting policies and estimates.



Recently Issued Accounting Standards



Refer to Note 1 in Part II. Item 8. “Financial Statements
and Supplemental Data,” in our Annual Report on Form 10-K for the year ended December 31, 2019 for a discussion of recently
issued accounting standards.



Share Repurchase Program



On December 23, 2019, the Board authorized
the repurchase of up to 500 shares of the Company’s outstanding common stock (the “Repurchase Program”). The
Repurchase Program was funded from cash on hand and cash provided by operating activities. The Board separately authorized the
repurchase of additional shares during the quarter ended March 31, 2020, in a privately negotiated transaction. As of March 31,
2020, the repurchase program has been exhausted.



For the three months ended June 30, 2020,
no shares of common stock were purchased by the Company. For the six months ended June 30, 2020, the Company purchased 744 shares
of common stock at an average price of approximately $0.70 per share, totaling $524, in a privately negotiated transaction.



For the three months ended June 30, 2019,
the Company purchased 60 shares of common stock at an average price of approximately $0.80 per share totaling $48. For the six
months ended June 30, 2019, the Company purchased 288 shares of common stock at an average price of approximately $0.76 per share,
totaling $218.



ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK.



Not Applicable



ITEM 4. CONTROLS AND PROCEDURES



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



The Company’s management, with the
participation of the principal executive and principal financial officer, evaluated the effectiveness of the design and operation
of the Company’s disclosure controls and procedures as of June 30, 2020, as required by Rule 13a-15(e) of the Exchange
Act. Based upon that evaluation, the principal executive and the principal financial officer concluded that the Company’s
disclosure controls and procedures were effective as of June 30, 2020.



Management’s Report on Internal
Control Over Financial Reporting.The Company’s management is responsible for establishing and maintaining
adequate internal controls over financial reporting, as defined in Rule 13a-15(f) of the Exchange Act. Although the internal
controls over financial reporting were not audited, the Company’s management, including the principal executive and principal
financial officer, assessed the effectiveness of internal controls over financial reporting as of June 30, 2020, based on
criteria issued in 2013 by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) entitled “Internal
Control-Integrated Framework.” Upon evaluation, the Company’s management has concluded that the Company’s
internal controls over financial reporting were effective as of June 30, 2020.



Changes in Internal Control Over Financial
Reporting.The Company’s management, with the participation of the principal executive and principal
financial officer, have concluded there were no changes in internal control over financial reporting during the fiscal quarter
ended June 30, 2020.









18







PART
II. – OTHER INFORMATION

(Amounts in thousands except per
share amounts)



ITEM 1. LEGAL
PROCEEDINGS



From time to time, the Company is party
to various legal proceedings arising in the ordinary course of business. The Company expenses or accrues legal costs as incurred.
The Company resolved a material legal proceeding during the quarter ended June 30, 2020 and is involved in only one material legal
proceeding as of the date of this Report.



In November 2011, the Company delivered
equipment to Aker Solutions, Inc. (“Aker”), but Aker declined to pay the final invoice in the aggregate amount of $270
alleging some warranty items needed to be repaired. The Company made repairs, but Aker continued to claim further work was required.
The Company repeatedly attempted to collect on the receivable and ultimately filed suit on November 16, 2012, in the Harris County
District Court. Aker subsequently filed a counterclaim on March 20, 2013 in the aggregate amount of $1,000 for reimbursement of
insurance payments allegedly made for repairs. The parties have not reached a resolution on this matter. At this point, it is not
clear as to whether an unfavorable outcome is either probable or remote, and the Company is unable to determine the likelihood
of an unfavorable outcome or the amount or range of potential loss if the outcome should be unfavorable.



On August 6, 2018, GE Oil and Gas UK Ltd.
(“GE”) requested that the Company mediate a dispute between the parties in the ICC International Centre for ADR (“ICC”).
The dispute involved alleged delays and defects in products manufactured by the Company for GE dating back to 2013. During the
second quarter of 2020, the parties finalized the terms of a definitive settlement agreement which is now final and binding. Per
the terms of the settlement, the Company shall pay GE the total amount of $750 on a monthly basis through February 2022. The Company
accrued a liability related to this matter in the amount of $750 for the year ended December 31, 2019.



ITEM
1A. RISK FACTORS



Not applicable



ITEM 2. UNREGISTERED
SALES OF EQUITY SECURITIES AND USE OF PROCEEDS



During the quarter ended June 30, 2020,
the Company did not repurchase any outstanding common stock.



During the quarter ended June 30, 2019,
the Company repurchased 60 shares of our common stock from Mr. Randy Warner, who resigned as a member of the Board. The shares
were repurchased at the price of $0.80 per share, which was the average closing price for the ten trading days prior to the date
of repurchase.



ITEM 6. EXHIBITS



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











19









SIGNATURES



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



|                      | DEEP DOWN, INC.
|--------------------- | ---------------
|                      | (Registrant)   
|                      |                
|Date: August 10, 2020 |                
|                      | By:            
|                      |                
|                      |                
|                      |                
|                      |                
|                      | By:            
|                      |                
|                      |                
|                      |                
|                      |                
|                      |                
|                      |                























20









INDEX TO EXHIBITS



|31.1*     | Certification of Charles K. Njuguna, President, Chief Executive Officer and Chief Financial Officer, furnished pursuant to Rules 13a-14(a) and 15d-14(a) of the Securities Exchange Act of 1934, as amended.        
|--------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|          |                                                                                                                                                                                                                     
|31.2*     | Certification of Trevor L. Ashurst, Vice President of Finance, furnished pursuant to Rules 13a-14 and 15d-14(a) of the Securities Exchange Act of 1934, as amended.                                                 
|          |                                                                                                                                                                                                                     
|32.1*     | Statement of Charles K. Njuguna, President, Chief Executive Officer and Chief Financial Officer, furnished pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
|          |                                                                                                                                                                                                                     
|32.2*     | Statement of Trevor L. Ashurst, Vice President of Finance, furnished pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                      
|          |                                                                                                                                                                                                                     
|101.INS** | XBRL Instance Document                                                                                                                                                                                              
|          |                                                                                                                                                                                                                     
|101.SCH** | XBRL Schema Document                                                                                                                                                                                                
|          |                                                                                                                                                                                                                     
|101.CAL** | XBRL Calculation Linkbase Document                                                                                                                                                                                  
|          |                                                                                                                                                                                                                     
|101.DEF** | XBRL Definition Linkbase Document                                                                                                                                                                                   
|          |                                                                                                                                                                                                                     
|101.LAB** | XBRL Label Linkbase Document                                                                                                                                                                                        
|          |                                                                                                                                                                                                                     
|101.PRE** | XBRL Presentation Linkbase Document                                                                                                                                                                                 
|          |                                                                                                                                                                                                                     





______________________________

* Filed or furnished herewith.

** To be filed by amendment











21