Nevada
|
75-2263732
|
|
(State
of other jurisdiction of incorporation)
|
(I.R.S.
Employer Identification No.)
|
|
15473
East Freeway Channelview, Texas
|
77530
|
|
(Address
of Principal Executive Office)
|
(Zip
Code)
|
PART
I
|
||
Item
1
|
Description
of Business
|
4
|
Item
2
|
Description
of Property
|
13
|
Item
3
|
Legal
Proceedings
|
13
|
Item
4
|
Submission
of Matters to a Vote of Security Holders
|
13
|
|
|
|
PART
II
|
||
Item
5
|
Market
for Common Equity, Related Stockholder Matters and
Small Business
Issuer Purchases of Equity Securities
|
14
|
Item
6
|
Management’s
Discussion
and Analysis of Financial Condition and Results of
Operations
|
16
|
Item
7
|
Financial
Statements
|
26
|
Item
8
|
Changes
in and Disagreements with Accountants on Accounting and Financial
Disclosure
|
27
|
Item
8A
|
Controls
and Procedures
|
27
|
Item
8B
|
Other
Information
|
28
|
|
|
|
PART
III
|
||
|
||
Item
9
|
Directors,
Executive Officers, Promoters, Control Persons and Corporate
Governance
|
25
|
Item
10
|
Executive
Compensation
|
29
|
Item
11
|
Security
Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
|
30
|
Item
12
|
Certain
Relationships and Related Transactions, and Director
Independence
|
30
|
Item
13
|
Exhibits
|
30
|
Item
14
|
Principal
Accountant Fees and Services
|
30
|
High
|
Low
|
|||||||
Fiscal
2007:
|
||||||||
December
31, 2007
|
$ | 2.35 | $ | 0.76 | ||||
September
30, 2007
|
$ | 0.94 | $ | 0.51 | ||||
June
30, 2007
|
$ | 0.78 | $ | 0.27 | ||||
March
31, 2007
|
$ | 0.42 | $ | 0.16 | ||||
Fiscal
2006:
|
||||||||
December
31, 2006
|
$ | 0.85 | $ | 0.13 |
Dividend Policy |
|
Plan Category
|
Number
of securities
to
be issued upon
exercise
of
outstanding
options,
warrants and rights
|
Weighted-average
exercise
price of
outstanding
options,
warrants and rights
|
Number
of securities
remaining
available for
future
issuance under
equity
compensation
plans
(excluding
securities
reflected
in first column)
|
|||
Equity
compensation plans approved by securityholders
|
5,500,000
|
(1) |
$0.49
|
7,396,000
(1)
|
||
Equity
compensation plans not approved by securityholders
|
5,399,397
|
(2) |
$0.52
|
N/A
|
||
TOTAL
|
10,899,397
|
$0.56
|
6,410,000
|
(1)
|
Represents
5,500,000 shares of common stock that may be issued pursuant to options
granted and available for future grant under - the 2003 Directors,
Officers and Consultants Stock Option, Stock Warrant and Stock Award Plan
(the “Plan”). Under the Plan the total number of options permitted is 15%
of issued and outstanding shares of common
stock.
|
(2)
|
Represents
5,399,397 shares of common stock underlying warrants approved by the
Company’s board of directors, consisting of 4,960,585 warrants granted to
Prospect Capital Corporation and 320,000 warrants granted to a consultant
as part of the $6.5 million borrowing facility entered into on August 6,
2007, plus an additional 118,812 warrants granted to a consultant as part
of the additional $6.0 million advanced under the amendment to that same
borrowing facility effective December 31, 2007. See Note 6 to
our Consolidated Financial Statements for a detailed description of the
terms of these warrants.
|
Historical
Results
|
Unaudited
Pro forma
|
|||||||
Year
Ended
|
Year
Ended
|
|||||||
December
31, 2007
|
December
31, 2006
|
|||||||
Revenues
|
$ | 19,389,730 | $ | 8,821,149 | ||||
Cost
of sales
|
13,020,369 | 5,155,399 | ||||||
Gross
profit
|
6,369,361 | 3,665,750 | ||||||
Operating
expenses:
|
||||||||
Selling,
general & administrative (1)
|
4,284,553 | 5,710,324 | ||||||
Depreciation
|
426,964 | 166,468 | ||||||
Total
operating expenses
|
4,711,517 | 5,876,792 | ||||||
Operating
income
|
1,657,844 | (2,211,042 | ) | |||||
Other
income (expense):
|
||||||||
Gain
on disposal of assets
|
- | - | ||||||
Gain
on debt extinguishment
|
2,000,000 | - | ||||||
Interest
income
|
94,487 | - | ||||||
Interest
expense (2)
|
(2,430,149 | ) | (578,335 | ) | ||||
Total
other income
|
(335,662 | ) | (578,335 | ) | ||||
Income
from continuing operations
|
1,322,182 | (2,789,377 | ) | |||||
Income
tax expense
|
(369,673 | ) | (22,250 | ) | ||||
Net
income (loss)
|
$ | 952,509 | $ | (2,811,627 | ) | |||
Basic
earnings per share
|
$ | 0.01 | $ | (0.04 | ) | |||
Shares
used in computing basic per share amounts
|
73,917,190 | 75,862,484 | ||||||
Diluted
earnings per share
|
$ | 0.01 | $ | (0.04 | ) | |||
Shares
used in computing diluted per share amounts
|
104,349,455 | 75,862,484 | ||||||
(1)
Includes $3.3 million compensation expense from the issuance of Series F
and G preferred shares in 2006.
|
||||||||
(2)
Includes approximately $423,258 additional interest expense from the
accretion of
the
Series E preferred shares in 2006.
|
2007
|
Pro
Forma 2006
|
Change
|
%
|
|||||||||||||
Revenues
|
$ | 19,389,730 | $ | 8,821,149 | $ | 10,568,581 | 119.8% |
2007
|
Pro
Forma 2006
|
Change
|
%
|
|||||||||||||
Cost
of sales
|
$ | 13,020,369 | $ | 5,155,399 | $ | 7,864,970 | 152.6% |
2007
|
Pro
Forma 2006
|
Change
|
%
|
|||||||||||||
Selling,
general and administrative
|
$ | 4,284,553 | $ | 5,710,324 | $ | (1,425,771 | ) | -25.0% | ||||||||
Stock
based compensation expense
|
(187,394 | ) | (3,340,792 | ) | 3,153,398 | -94.4% | ||||||||||
Selling,
general and administrative
|
$ | 4,097,159 | $ | 2,369,532 | $ | 1,727,627 | 72.9% |
2007
|
Pro
Forma 2006
|
Change
|
%
|
|||||||||||||
Depreciation
|
$ | 398,610 | $ | 166,468 | $ | 232,142 | 139.5% | |||||||||
Amortization
|
28,354 | - | 28,354 |
NMF
|
||||||||||||
Depreciation
and amortization
|
$ | 426,964 | $ | 166,468 | $ | 260,496 | 156.5% |
2007
|
Pro
Forma 2006
|
Change
|
%
|
|||||||||||||
Cash
interest expense
|
$ | 594,667 | $ | 155,077 | $ | 439,590 | 283.5% | |||||||||
Amount
related to amortization of debt discounts and deferred financing
costs
|
190,491 | - | 190,491 |
NMF
|
||||||||||||
Amount
related to accretion
|
1,644,991 | 423,258 | 1,221,733 | 288.6% | ||||||||||||
Total
interest expense
|
$ | 2,430,149 | $ | 578,335 | $ | 1,851,814 | 320.2% |
2007
|
Pro
Forma 2006
|
Change
|
%
|
|||||||||||||
Net
income (loss)
|
$ | 952,509 | $ | (2,811,627 | ) | $ | 3,764,136 | -133.9% | ||||||||
Stock
based compensation expense
|
187,394 | 3,340,792 | (3,153,398 | ) | -94.4% | |||||||||||
Amount
related to debt discounts
|
190,491 | - | 190,491 |
NMF
|
||||||||||||
Amount
related to accretion
|
1,644,991 | 423,258 | 1,221,733 | 288.6% | ||||||||||||
Gain
on debt extinguishment
|
(2,000,000 | ) | - | (2,000,000 | ) |
NMF
|
||||||||||
Net
income
|
$ | 975,385 | $ | 952,423 | $ | 22,962 | 2.4% |
2007
|
Pro
Forma 2006
|
Change
|
%
|
|||||||||||||
Net
income (loss)
|
$ | 952,509 | $ | (2,811,627 | ) | $ | 3,764,136 | 395.2% | ||||||||
Tax
expense
|
369,673 | 22,250 | 347,423 | 94.0% | ||||||||||||
Gain
on debt extinguishment
|
(2,000,000 | ) | - | (2,000,000 | ) | 100.0% | ||||||||||
Interest
|
2,335,662 | 578,335 | 1,757,327 | 75.2% | ||||||||||||
Other
income (expense)
|
- | - | - |
NMF
|
||||||||||||
Depreciation
and amortization expense
|
426,964 | 166,468 | 260,496 | 61.0% | ||||||||||||
Stock
based compensation
expense
|
187,394 | 3,340,792 | (3,153,398 | ) |
NMF
|
|||||||||||
EBITDA
|
$ | 2,272,202 | $ | 1,296,218 | $ | 975,984 | 43.0% |
1.
|
As
of December 31, 2007, we did not maintain effective controls over the
control environment. Specifically, we have not formally adopted
a written code of business conduct and ethics that governs to the
Company’s employees, officers and directors. Additionally, we
have not developed and effectively communicated to our employees its
accounting policies and procedures. This has resulted in
inconsistent practices particularly at its ElectroWave
division. Further, the Board of Directors does not currently
have any independent members and no director qualifies as an audit
committee financial expert as defined in Item 407(d)(5)(ii) of Regulation
S-B. Since these entity level programs have a pervasive effect
across the organization, management has determined that these
circumstances constitute a material weakness.
|
|
|
2.
|
As
of December 31, 2007, at the ElectroWave subsidiary, we did not maintain
effective controls over revenue recognition. Specifically,
controls were not designed and in place to ensure that billing activities
were conducted in a timely manner resulting in contract services revenues
being recognized in an incorrect reporting
period. Additionally, the lack of consistency applied
procedures also resulted in the double billing of a
customer. This control deficiency resulted in an adjustment to
the consolidated financial statements. Accordingly, management
has determined that this control deficiency constitutes a material
weakness.
|
|
3.
|
As
of December 31, 2007, we did not maintain effective controls over payables
processing. Specifically, controls were not designed and in
place to ensure that vender-related and employee-related cash
disbursements were appropriately authorized and adequately supported by
receiving reports and other supporting documentation. A budget
process is not currently in place to monitor spending
levels. This material weakness could result in errors in the
accounting for accounts payable and expenses. Accordingly, management has
determined that this control deficiency constitutes a material
weakness.
|
·
|
The
ElectroWave division was re-structured and re-organized in the fourth
quarter of 2007. A majority of the accounting activities have
been transferred to Deep Down Delaware’s accounting department to
streamline and centralize
accounting.
|
·
|
In
response to the further growth of the business, management hired a
corporate controller in January 2008. He is responsible for the
coordination and integration of the accounting activities of each of our
current and future subsidiary operations. With his relevant experience
with the policies and procedures for compliance with regulations
promulgated by Sarbanes-Oxley, our goal is to reach full compliance during
2008.
|
·
|
Management
hired a corporate human resource and safety manager in March 2008 who will
be responsible for designing, planning and implementing human resource
programs and policies including benefits, staffing, compensation, employee
relations, training, and health and safety programs. She will
oversee the human resource functions for our current and future subsidiary
operations.
|
·
|
Management
has prepared an Employee Handbook and Code of Conduct and plans to
circulate these documents throughout the organization and obtain signed
acknowledgements from employees.
|
·
|
Management
plans to document its accounting policies and procedures to increase
consistency among divisions. This includes the creation or
expansion of checklists which serve to manage close
processes.
|
·
|
Management
has increased documentation around certain authorization and review
controls.
|
Signatures
|
Title
|
Date
|
/s/
RONALD E. SMITH
|
President,
Chief Executive Officer and Director
|
March
31, 2008
|
Ronald
E. Smith
|
(Principal
Executive Officer)
|
|
/s/
EUGENE L. BUTLER
|
Chief
Financial Officer and Director
|
March
31, 2008
|
Eugene
L. Butler
|
(Principal
Financial Officer)
|
|
/s/
ROBERT E. CHAMBERLAIN, JR.
|
Chairman,
Chief Acquisitions Officer and Director
|
March
31, 2008
|
Robert
E. Chamberlain, Jr.
|
||
/s/
MARY L. BUDRUNAS
|
Vice-President
and Director
|
March
31, 2008
|
Mary
L. Budrunas
|
2.1
|
Merger
agreement between
Deep Down,
Inc.
and Mako Technologies
, Inc., a Louisiana corporation
dated
December 17, 2007
|
3.1 | Certificate of Incorporation of Mediquip Holdings, Inc., a Nevada corporation |
3.2 | Mediquip Holdings, Inc. Article of Amendment Change of Name to Deep Down, Inc. |
4.1 | First Amendment to the Prospect Capital Credit Agreement dated December 21, 2007 |
4.2 | Common stock warrant issued to Dragonfly Capital Partners, LLC dated August 6, 2007 |
4.3 | Common stock warrant issued to Dragonfly Capital Partners, LLC dated January 4, 2008 |
10.1
†
|
Consulting
Agreement between Deep Down, Inc. and Robert Chamberlain of Strategic
Capital Services, Inc.
|
10.2
†
|
Consulting
Agreement between Deep Down, Inc. and Ronald E.
Smith
|
10.3
†
|
Consulting
Agreement between Deep Down, Inc. and Eugene L. Butler &
Associates
|
10.4
|
Lease
agreement between JUMA, L.L.C. as Landlord and Deep Down, Inc. as Tenant
dated September 1, 2006
|
21
|
Subsidiary
Listing
|
31.1
|
Rule
13a-14(a)/15d-14(a) Certification of the President and Chief Executive
Officer of Deep Down, Inc.
|
31.2
|
Rule
13a-14(a)/15d-14(a) Certification of the Chief Financial Officer of Deep
Down, Inc.
|
32.1
|
Section
1350 Certification of the President and Chief Executive Officer of Deep
Down, Inc.
|
32.2
|
Section
1350 Certification of the President and Chief Financial Officer of Deep
Down, Inc.
|
†
Exhibit
constitutes a management contract or compensatory plan or
arrangement.
|
Report
of Independent Registered Public Accounting Firm
|
F-2
|
Consolidated
Balance Sheets
|
F-3
|
Consolidated
Statements of Operations
|
F-4
|
Consolidated
Statements of Stockholders’ Equity (Deficit)
|
F-5
|
Consolidated
Statements of Cash Flows
|
F-6
|
Notes
to the Consolidated Financial Statements
|
F-8
|
Deep
Down, Inc.
|
||||||||
Consolidated
Balance Sheets
|
||||||||
December
31, 2007
|
December
31, 2006
|
|||||||
Assets
|
||||||||
Cash
and equivalents
|
$ | 2,206,220 | $ | 12,462 | ||||
Restricted
cash
|
375,000 | - | ||||||
Accounts
receivable, net of allowance of $139,787 and $81,809
|
7,190,466 | 1,264,228 | ||||||
Prepaid
expenses and other current assets
|
312,058 | 156,975 | ||||||
Inventory
|
502,253 | - | ||||||
Lease
receivable, short term
|
414,000 | - | ||||||
Work
in progress
|
945,612 | 916,485 | ||||||
Receivable
from Prospect, net
|
2,687,333 | - | ||||||
Total
current assets
|
14,632,942 | 2,350,150 | ||||||
Property
and equipment, net
|
5,172,804 | 845,200 | ||||||
Other
assets, net of accumulated amortization of $54,560 and $0
|
1,109,152 | - | ||||||
Lease
receivable, long term
|
173,000 | - | ||||||
Intangibles,
net
|
4,369,647 | - | ||||||
Goodwill
|
10,594,144 | 6,934,213 | ||||||
Total
assets
|
$ | 36,051,689 | $ | 10,129,563 | ||||
Liabilities
and Stockholders' Equity (Deficit)
|
||||||||
Accounts
payable and accrued liabilities
|
$ | 3,569,826 | $ | 816,490 | ||||
Deferred
revenue
|
188,030 | 190,000 | ||||||
Payable
to Mako Shareholders
|
3,205,667 | - | ||||||
Current
portion of long-term debt
|
995,177 | 410,731 | ||||||
Total
current liabilities
|
7,958,700 | 1,417,221 | ||||||
Long-term
debt, net of accumulated discount of $1,703,258 and $0
|
10,698,818 | 757,617 | ||||||
Series
E redeemable exchangeable preferred stock, face value and
|
||||||||
liquidation
preference of $1,000 per share, no dividend preference,
|
||||||||
authorized
10,000,000 aggregate shares of all series of Preferred
stock
|
||||||||
500
and 5,000 issued and outstanding, respectively
|
386,411 | 3,486,376 | ||||||
Series
G redeemable exchangeable preferred stock, face value and
|
||||||||
liquidation
preference of $1,000 per share, no dividend preference,
|
||||||||
authorized
10,000,000 aggregate shares of all series of Preferred
stock
|
||||||||
0
and 1,000 issued and outstanding, respectively
|
- | 697,275 | ||||||
Total
liabilities
|
19,043,929 | 6,358,489 | ||||||
Temporary
equity:
|
||||||||
Series
D redeemable convertible preferred stock, $0.01 par value, face value
and
|
||||||||
liquidation
preference of $1,000 per share, no dividend preference,
|
||||||||
authorized
10,000,000 aggregate shares of all series of Preferred
stock
|
||||||||
5,000
issued and outstanding
|
4,419,244 | 4,419,244 | ||||||
Series
F redeemable convertible preferred stock, $0.01 par value, face value
and
|
||||||||
liquidation
preference of $1,000 per share, no dividend preference,
|
||||||||
authorized
10,000,000 aggregate of all series of Preferred stock
|
||||||||
0
and 3,000 issued and outstanding, respectively
|
- | 2,651,547 | ||||||
Total
temporary equity
|
4,419,244 | 7,070,791 | ||||||
Stockholders'
equity (deficit):
|
||||||||
Series
C convertible preferred stock, $0.001 par value, 7% cumulative
dividend,
|
||||||||
authorized
10,000,000 aggregate shares of all series of Preferred
stock
|
||||||||
0
and 22,000 shares issued and outstanding, respectively
|
- | 22 | ||||||
Common
stock, $0.001 par value, 490,000,000 shares authorized,
85,976,526
|
||||||||
and
82,870,171 shares issued and outstanding, respectively
|
85,977 | 82,870 | ||||||
Paid
in capital
|
14,849,847 | (82,792 | ) | |||||
Accumulated
deficit
|
(2,347,308 | ) | (3,299,817 | ) | ||||
Total
stockholders' equity (deficit)
|
12,588,516 | (3,299,717 | ) | |||||
Total
liabilities and stockholders' equity
|
$ | 36,051,689 | $ | 10,129,563 |
Deep
Down, Inc.
|
||||||||
Consolidated
Statements of Operations
|
||||||||
For
the Year Ended December 31, 2007 and
|
||||||||
For
the Period Since Inception (June 29, 2006) to December 31,
2006
|
||||||||
From
Inception
|
||||||||
Year
Ended
|
June
29, 2006 to
|
|||||||
December
31, 2007
|
December
31, 2006
|
|||||||
Revenues
|
||||||||
Contract
revenue
|
$ | 15,652,848 | $ | 978,047 | ||||
Rental
revenue
|
3,736,882 | - | ||||||
Total
revenues
|
19,389,730 | 978,047 | ||||||
Cost
of sales
|
13,020,369 | 565,700 | ||||||
Gross
profit
|
6,369,361 | 412,347 | ||||||
Operating
expenses:
|
||||||||
Selling,
general & administrative
|
4,284,553 | 3,600,627 | ||||||
Depreciation
and amortization
|
426,964 | 27,161 | ||||||
Total
operating expenses
|
4,711,517 | 3,627,788 | ||||||
Operating
income (loss)
|
1,657,844 | (3,215,441 | ) | |||||
Other
income (expense):
|
||||||||
Gain
on debt extinguishment
|
2,000,000 | - | ||||||
Interest
income
|
94,487 | - | ||||||
Interest
expense
|
(2,430,149 | ) | (62,126 | ) | ||||
Total
other income
|
(335,662 | ) | (62,126 | ) | ||||
Income
(loss) from continuing operations
|
1,322,182 | (3,277,567 | ) | |||||
Income
tax expense
|
(369,673 | ) | (22,250 | ) | ||||
Net
income (loss)
|
$ | 952,509 | $ | (3,299,817 | ) | |||
Basic
earnings per share
|
$ | 0.01 | $ | (0.04 | ) | |||
Shares
used in computing basic per share amounts
|
73,917,190 | 76,701,569 | ||||||
Diluted
earnings per share
|
$ | 0.01 | $ | (0.04 | ) | |||
Shares
used in computing diluted per share amounts
|
104,349,455 | 76,701,569 |
Deep
Down, Inc.
|
||||||||||||||||||||||||||||
Statements
of Stockholders' Equity
|
||||||||||||||||||||||||||||
For
the Year Ended December 31, 2007 and
|
||||||||||||||||||||||||||||
For
the Period Since Inception (June 29, 2006) to December 31,
2006
|
||||||||||||||||||||||||||||
Common
Stock
|
Series
C Preferred Stock
|
Paid-in
|
Retained
|
|||||||||||||||||||||||||
Shares
|
Amount
|
Shares
|
Amount
|
Capital
|
Earnings
|
Total
|
||||||||||||||||||||||
Balance
at June 29, 2006 (inception) (a)
|
75,000,000 | $ | 75,000 | - | $ | - | $ | (74,900 | ) | $ | - | $ | 100 | |||||||||||||||
Net
income
|
- | - | - | - | - | (3,299,817 | ) | (3,299,817 | ) | |||||||||||||||||||
Reverse
merger with MediQuip (a)
|
7,870,171 | 7,870 | 22,000 | 22 | (7,892 | ) | - | - | ||||||||||||||||||||
Balance
at December 31, 2006
|
82,870,171 | 82,870 | 22,000 | 22 | (82,792 | ) | $ | (3,299,817 | ) | (3,299,717 | ) | |||||||||||||||||
Net
income
|
- | - | - | - | - | 952,509 | 952,509 | |||||||||||||||||||||
Shares
repurchased
|
(25,000,000 | ) | (25,000 | ) | - | - | (225,000 | ) | - | (250,000 | ) | |||||||||||||||||
Redemption
of Series E Preferred Stock
|
3,463,592 | 3,464 | - | - | 3,840,314 | - | 3,843,778 | |||||||||||||||||||||
Redemption
of Series C Preferred Stock
|
4,400,000 | 4,400 | (22,000 | ) | (22 | ) | (4,378 | ) | - | - | ||||||||||||||||||
Stock
issued for debt payment
|
543,689 | 544 | 559,456 | - | 560,000 | |||||||||||||||||||||||
Stock
issued for acquisition of a business
|
6,574,074 | 6,574 | - | - | 4,989,723 | - | 4,996,297 | |||||||||||||||||||||
Private
Placement offering
|
13,125,000 | 13,125 | - | - | 3,946,875 | - | 3,960,000 | |||||||||||||||||||||
Stock
based compensation
|
- | - | - | - | 187,394 | - | 187,394 | |||||||||||||||||||||
Warrants
issued to lender
|
- | - | - | - | 1,479,189 | - | 1,479,189 | |||||||||||||||||||||
Warrants
issued to third party for deferred financing costs
|
- | - | - | - | 159,066 | - | 159,066 | |||||||||||||||||||||
Balance
at December 31, 2007
|
85,976,526 | $ | 85,977 | - | $ | - | $ | 14,849,847 | $ | (2,347,308 | ) | $ | 12,588,516 | |||||||||||||||
Deep
Down, Inc.
|
||||||||
Consolidated
Statement of Cash Flows
|
||||||||
For
the Year Ended December 31, 2007 and
|
||||||||
For
the Period Since Inception (June 29, 2006) to December 31,
2006
|
||||||||
From
Inception
|
||||||||
For
the Year Ended
|
June
29, 2006 to
|
|||||||
December
31, 2007
|
December
31, 2006
|
|||||||
Cash
flows from operating activities:
|
||||||||
Net
income (loss)
|
$ | 952,509 | $ | (3,299,817 | ) | |||
Adjustments
to reconcile net income to net cash
|
||||||||
used
in operating activities:
|
||||||||
Gain
on extinguishment of debt
|
(2,000,000 | ) | - | |||||
Amortization
of debt discount
|
1,780,922 | 48,179 | ||||||
Amortization
of deferred financing costs
|
54,016 | - | ||||||
Share-based
compensation
|
187,394 | 3,340,792 | ||||||
Allowance
for doubtful accounts
|
108,398 | - | ||||||
Depreciation
and amortization
|
426,964 | 27,163 | ||||||
Gain
on disposal of equipment
|
24,336 | - | ||||||
Changes
in assets and liabilities:
|
||||||||
Lease
receivable
|
(863,000 | ) | - | |||||
Accounts
receivable
|
(4,388,146 | ) | (251,001 | ) | ||||
Prepaid
expenses and other current assets
|
(54,310 | ) | 23,335 | |||||
Inventory
|
(502,253 | ) | - | |||||
Work
in progress
|
246,278 | (90,326 | ) | |||||
Accounts
payable and accrued liabilities
|
1,022,726 | 145,433 | ||||||
Deferred
revenue
|
(1,970 | ) | - | |||||
Net
cash used in operating activities
|
(3,006,136 | ) | (56,242 | ) | ||||
Cash
flows from investing activities:
|
||||||||
Cash
acquired in acquisition of a business
|
261,867 | 101,497 | ||||||
Cash
paid for third party debt
|
(432,475 | ) | - | |||||
Cash
received from sale of ElectroWave receivables
|
261,068 | - | ||||||
Cash
paid for final acquisition costs
|
(242,924 | ) | - | |||||
Purchases
of equipment
|
(830,965 | ) | - | |||||
Restricted
cash
|
(375,000 | ) | - | |||||
Net
cash (used in) provided by investing activities
|
(1,358,429 | ) | 101,497 | |||||
Cash
flows from financing activities:
|
||||||||
Payment
for cancellation of common stock
|
(250,000 | ) | - | |||||
Redemption
of preferred stock
|
(250,000 | ) | - | |||||
Proceeds
from sale of common stock, net of expenses
|
3,960,000 | - |
Proceeds
from sales-type lease
|
276,000 | - | ||||||
Borrowings
on debt - related party
|
(150,000 | ) | - | |||||
Payments
on debt - related party
|
150,000 | - | ||||||
Borrowings
on long-term debt
|
6,204,779 | - | ||||||
Deferred
financing fees
|
(442,198 | ) | - | |||||
Prepaid
points
|
(180,000 | ) | - | |||||
Payments
of long-term debt
|
(2,760,258 | ) | (32,893 | ) | ||||
Net
cash provided by (used in) financing activities
|
6,558,323 | (32,893 | ) | |||||
Change
in cash and equivalents
|
2,193,758 | 12,362 | ||||||
Cash
and equivalents at beginning of year
|
12,462 | 100 | ||||||
Cash
and equivalents at end of period
|
$ | 2,206,220 | $ | 12,462 |
Deep
Down, Inc.
|
||||||||
Consolidated
Statements of Cash Flows
|
||||||||
For
the Year Ended December 31, 2007 and
|
||||||||
For
the Period Since Inception (June 29, 2006) to December 31,
2006
|
||||||||
From
Inception
|
||||||||
Year
Ended
|
June
29, 2006 to
|
|||||||
December
31, 2007
|
December
31, 2006
|
|||||||
Supplemental
schedule of noncash investing
|
||||||||
and
financing activities:
|
||||||||
Acquisition
of a business - Electrowave
|
$ | (190,381 | ) | $ | - | |||
Exchange
of receivables for acquisition of a business
|
$ | 171,407 | $ | - | ||||
Acquisition
of a business - Mako
|
$ | 280,680 | $ | - | ||||
Net receivable from lender-Prospect Capital | $ | 2,687,333 | $ | - | ||||
Transfer work in progress to fixed assets | $ | 110,181 | $ | - | ||||
Fixed
assets purchased with capital lease
|
$ | 525,000 | $ | - | ||||
Exchange
of preferred stock
|
$ | 3,366,778 | $ | - | ||||
Redemption
of preferred stock
|
$ | 4,935,463 | $ | - | ||||
Common stock issued for notes payable | $ | 560,000 | $ | - | ||||
Creation
of debt discount due to warrants issued to lender
|
$ | 1,479,189 | $ | - | ||||
Creation
of deferred financing cost due to warrants issued to third
party
|
$ | 159,066 | $ | - | ||||
Supplemental
Disclosures:
|
||||||||
Cash
paid for interest
|
$ | 594,667 | $ | - | ||||
Cash
paid for taxes
|
$ | 114,970 | $ | - |
·
|
Deep
Down Delaware provides installation management, engineering services,
support services and storage management services for the subsea controls,
umbilicals and pipeline industries offshore. Deep Down Delaware also
fabricates component parts for subsea distribution systems and
assemblies.
|
·
|
ElectroWave
offers products and services in the fields of electronic monitoring and
control systems for the energy, military, and commercial business
sectors.
|
·
|
Mako
serves the growing offshore petroleum and marine industries with technical
support services, and products vital to offshore petroleum production,
through rentals of its remotely operated vehicles (“ROV’s”) , topside and
subsea equipment, and diving support systems used in diving operations,
maintenance and repair operations, offshore construction, and
environmental/marine surveys.
|
●
|
Cash
and equivalents, accounts receivable and accounts payable - The carrying
amounts approximated fair value due to the short-term maturity of these
instruments.
|
●
|
Preferred
Stock - Series D, E, F and G - The carrying amounts approximate the fair
value
|
●
|
Long-term
debt - The fair value closely approximates the carrying value of Deep
Down’s debt instruments due to the short time the debt has been
outstanding and that similar debt was issued under an Amendment to the
Credit Agreement dated December 21, 2007. See discussion of the
terms at Note 6.
|
From
Inception
|
||||||||
Year
Ended
|
June
26, 2006 to
|
|||||||
December
31, 2007
|
December
31, 2006
|
|||||||
Numerator
for basic and diluted earnings per share:
|
||||||||
Net
income (loss)
|
$ | 952,509 | $ | (3,299,817 | ) | |||
Denominator
for basic earnings per share:
|
||||||||
Weighted
average shares outstanding (basic)
|
73,917,190 | 76,701,659 | ||||||
Denominator
for diluted earnings per share:
|
||||||||
Weighted
average shares outstanding (basic)
|
73,917,190 | 76,701,659 | ||||||
Effect
of dilutive securities
|
30,432,265 | - | ||||||
Weighted
average shares outstanding (diluted)
|
104,349,455 | 76,701,659 |
Principal
|
Unearned
income
|
|||||||||||
Minimum
lease payments receivable
|
$ | 828,000 | ||||||||||
Estimated
residual value of leased property
|
35,000 | |||||||||||
863,000 | 863,000 | (113,000 | ) | |||||||||
Less:
Unearned interest income
|
(113,000 | ) | ||||||||||
Net
investment in sales-type leases
|
750,000 | |||||||||||
Net
payments received
|
(217,975 | ) | (276,000 | ) | 58,025 | |||||||
Lease
balance December 31, 2007
|
$ | 532,025 | $ | 587,000 | $ | (54,975 | ) | |||||
Current
portion
|
$ | 414,000 | $ | (54,975 | ) | |||||||
Long-term
portion
|
$ | 173,000 |
1st Installment
|
2nd Installment
|
Total
|
||||||||||
Common
Stock Par
|
$ | 6,574 | $ | 2,803 | $ | 9,377 | ||||||
Common
Stock Paid in Capital
|
4,989,723 | 1,959,287 | 6,949,010 | |||||||||
Cash
|
2,916,667 | 1,243,577 | 4,160,244 | |||||||||
Amounts
for Mako Shareholders
|
$ | 7,912,964 | $ | 3,205,667 | $ | 11,118,631 |
Cash
and cash equivalents
|
$ | 280,841 | ||
Accounts
receivable
|
1,515,074 | |||
Construction
in progress
|
279,590 | |||
Prepaid
expenses
|
179,583 | |||
Property,
plant and equipment
|
3,235,456 | |||
Intangibles
|
4,398,000 | |||
Goodwill
|
3,066,153 | |||
Total
assets acquired
|
12,954,697 | |||
|
||||
Accounts
payable and accrued expenses
|
828,313 | |||
Long
term debt
|
819,384 | |||
Total
liabilities acquired
|
1,647,697 | |||
Net
assets acquired
|
$ | 11,307,000 |
Estimated
|
Remaining
|
|||||||
Fair
Value
|
Useful
Life
|
|||||||
Customer
List
|
$ | 1,071,000 |
8
|
|||||
Non-Compete
Covenant
|
458,000 |
5
|
|
|||||
Trademarks
|
2,869,000 |
25
|
||||||
$ | 4,398,000 |
Deep
Down, Inc.
|
|||||||||||||||||
Unaudited
Pro forma Statements of Operations
|
|||||||||||||||||
Historical
|
|||||||||||||||||
Historical
|
Mako
|
||||||||||||||||
Deep
Down
|
Eleven
Months
|
Pro
Forma
|
|||||||||||||||
Year
Ended
|
Ended
|
Year
Ended
|
|||||||||||||||
December
31,
|
November
30,
|
Pro
Forma
|
December
31,
|
||||||||||||||
2007
|
2007
|
Adjustments
|
2007
|
||||||||||||||
Revenues
|
$ | 19,389,730 | $ | 5,494,388 |
-
|
$ | 24,884,118 | ||||||||||
Cost
of sales
|
13,020,369 | 2,298,597 |
-
|
15,318,966 | |||||||||||||
Gross
profit
|
6,369,361 | 3,195,791 |
-
|
9,565,152 | |||||||||||||
Operating
expenses
|
4,711,517 | 2,455,728 | 311,882 |
(c)
|
7,479,127 | ||||||||||||
Total
other income
|
(335,662 | ) | (65,705 | ) | (1,059,573 | ) |
(d)
|
(1,460,940 | ) | ||||||||
Income
tax expense
|
(369,673 | ) | (319,432 | ) | - | (689,105 | ) | ||||||||||
Net
income (loss)
|
$ | 952,509 | $ | 354,926 | $ | (1,371,455 | ) | $ | (64,020 | ) | |||||||
Basic
earnings per share
|
$ | 0.01 | $ | - | |||||||||||||
Shares
used in computing basic per share amounts
|
73,917,190 |
(e)
|
83,276,238 | ||||||||||||||
Diluted
earnings per share
|
$ | 0.01 | $ | - | |||||||||||||
Shares
used in computing diluted per share amounts
|
104,349,455 |
(e)
|
113,708,503 |
(c)
|
Amortization
of the intangible assets at a rate of $28,353 per month for eleven months.
One month is included in the
historical
Deep Down total.
|
(d)
|
Represents
cash interest plus amortization of deferred financing costs and debt
discounts. Interest is payable at 15.5% on
the
outstanding principal, and the related fees are amortized using the
effective interest method over the four-year life of the
loan.
|
(e)
|
A
total of 9,377,059 shares were issued for the total transaction. These pro
forma amounts give effect as if shares were issued January 1,
2007.
|
Purchase
Price:
|
||||
Cash
paid for third party debt
|
$ | 432,475 | ||
Cash
received from sale of ElectroWave receivables
|
(261,068 | ) | ||
Cash
purchase price
|
$ | 171,407 | ||
Accounts
receivable
|
$ | 133,587 | ||
Construction
in progress
|
105,723 | |||
Property,
plant and equipment, net
|
45,502 | |||
Capitalized
R&D assets
|
270,094 | |||
Goodwill
|
350,854 | |||
Total
assets acquired
|
905,760 | |||
|
||||
Cash
deficit
|
$ | 18,974 | ||
Accrued
liabilities
|
715,379 | |||
Total
liabilities acquired
|
734,353 | |||
Net
assets acquired
|
$ | 171,407 |
Cash
and cash equivalents
|
$ | 101,497 | ||
Accounts
receivable
|
1,013,227 | |||
Inventory
|
168,672 | |||
Prepaid
expenses
|
11,638 | |||
Construction
in progress
|
826,159 | |||
Property,
plant and equipment, net
|
872,363 | |||
Goodwill
|
7,177,137 | |||
Total
assets acquired
|
10,170,693 | |||
|
||||
Accounts
payable
|
671,057 | |||
Accrued
liabilities
|
432,924 | |||
Current
portion of long term debt
|
403,057 | |||
Long
term debt
|
798,184 | |||
Total
liabilities acquired
|
2,305,222 | |||
Net
assets acquired
|
$ | 7,865,471 |
December
31, 2007
|
December
31, 2006
|
|||||||
Building
|
$ | 195,305 | $ | 46,474 | ||||
Furniture
and fixtures
|
63,777 | 11,806 | ||||||
Vehicles
and trailers
|
112,162 | 66,662 | ||||||
Leasehold
improvements
|
75,149 | - | ||||||
Rental
equipment
|
3,144,559 | - | ||||||
Equipment
|
2,004,166 | 747,419 | ||||||
Total
|
5,595,118 | 872,361 | ||||||
Less:
Accumulated depreciation
|
(422,314 | ) | (27,161 | ) | ||||
Property
and equipment, net
|
$ | 5,172,804 | $ | 845,200 |
December
31, 2007
|
December
31, 2006
|
|||||||
Secured
credit agreement with
|
||||||||
quarterly
principal payments of $250,000 beginning
|
||||||||
September
30, 2008; monthly interest payments,
|
||||||||
interest
fixed at 15.5%; balance due August 2011;
|
||||||||
secured
by all assets
|
$ | 12,000,000 | $ | - | ||||
Debt
discount, net of amortization of $135,931
|
(1,703,258 | ) | - | |||||
Note
payable to a bank, payable in monthly
|
||||||||
installments
bearing interest at 8.25% per annum,
|
||||||||
maturing
June 10, 2008, cross-collateralized
|
||||||||
by
Mako assets, paid January 2008.
|
289,665 | - | ||||||
Note
payable to a bank, payable in monthly
|
||||||||
installments
bearing interest at 7.85% per annum,
|
||||||||
maturing
September 28, 2010, collateralized by Mako
|
||||||||
life
insurance policy and equipment, paid January 2008.
|
320,027 | - | ||||||
Revolving
line-of-credit of $500,000 from a bank,
|
||||||||
matured
October 13, 2007 or on demand, interest rate is
|
||||||||
at
a variable rate resulting in a rate of 8.30% as of
|
||||||||
September
30, 2007, collateralized by Mako equipment,
|
||||||||
paid
January 2008.
|
151,705 | - | ||||||
Note
payable to a bank payable in monthly
|
||||||||
installments
bearing interest at 7.85% per annum,
|
||||||||
maturing
January 25, 2011, collateralized by Mako
|
||||||||
equipment
and life insurance policy, paid January 2008
|
154,647 | - | ||||||
Note
payable with a bank, monthly principal and
|
||||||||
interest
payments, interest fixed at 7.5%,
|
||||||||
paid
in full August 2007
|
- | 438,812 | ||||||
Note
payable with a bank, monthly principal and
|
||||||||
interest
payments, interest fixed at 7.5%,
|
||||||||
paid
in full August 2007
|
- | 729,536 | ||||||
Total
secured credit agreement and bank debt
|
11,212,786 | 1,168,348 | ||||||
Capital
lease of equipment, monthly lease payments,
|
||||||||
interest
imputed at 11.2%
|
481,209 | - | ||||||
Total
long-term debt
|
11,693,995 | 1,168,348 | ||||||
Current
portion of long-term debt
|
(995,177 | ) | (410,731 | ) | ||||
Long-term
debt, net of current portion
|
$ | 10,698,818 | $ | 757,617 |
Years
ended December 31,:
|
Principal
|
Unamortized
Debt Discount
|
Total
|
|||||||||
2008
|
$ | 1,416,044 | $ | (465,776 | ) | $ | 950,268 | |||||
2009
|
1,000,000 | (468,291 | ) | 531,709 | ||||||||
2010
|
1,000,000 | (461,413 | ) | 538,587 | ||||||||
2011
|
9,500,000 | (307,778 | ) | 9,192,222 | ||||||||
$ | 12,916,044 | $ | (1,703,258 | ) | $ | 11,212,786 |
Number
of Shares
|
Weighted-
Average
Exercise
Price
|
Weighted-
Average Remaining Contractual Term (in years)
|
Aggregate
Intrinsic Value (In-The-Money) Options)
|
|||||||||||||
Outstanding
at December 31, 2006
|
- | $ | - | |||||||||||||
Grants
|
5,500,000 | $ | 0.58 | |||||||||||||
Outstanding
at December 31, 2007
|
5,500,000 | $ | 0.58 | 3.2 | $ | 2,292,000 | ||||||||||
Exerciseable
at December 31, 2007
|
562,500 | $ | 0.76 | 4.3 | $ | 156,375 |
Exercise
Price
|
Number
of Shares
|
|||||
$ | 0.30 | 300,000 | ||||
$ | 0.50 - 0.52 | 4,300,000 | ||||
$ | 0.75 | 300,000 | ||||
$ | 1.00 | 300,000 | ||||
$ | 1.25 | 300,000 | ||||
5,500,000 |
Dividend
yield
|
0%
|
|||
Risk
free interest rate
|
5%
|
|||
Expected
life of options
|
3 -
4 years
|
|||
Expected
volatility
|
53%
- 55%
|
Number
of Shares
|
Weighted-
Average
Exercise
Price
|
Weighted-
Average Remaining Contractual Term (in years)
|
Aggregate
Intrinsic Value (In-The-Money) Options)
|
|||||||||||||
Outstanding
at December 31, 2006
|
- | $ | - | |||||||||||||
Grants
|
5,399,397 | $ | 0.53 | |||||||||||||
Outstanding
at December 31, 2007
|
5,399,397 | $ | 0.53 | 4.6 | $ | 2,405,075 | ||||||||||
Exerciseable
at December 31, 2007
|
- | $ | - |
Exercise
Price
|
Number
of Shares
|
|||||
$ | 0.51 | 4,960,585 | ||||
$ | 0.75 | 320,000 | ||||
$ | 1.01 | 118,812 | ||||
5,399,397 |
December
31, 2007
|
December
31, 2006
|
|||||||
Series
E preferred stock - face value at $1,000 per share
|
$ | 500,000 | $ | 5,000,000 | ||||
Less
unamortized discount
|
(113,589 | ) | (1,513,624 | ) | ||||
Balance
net of unamortized discount
|
386,411 | 3,486,376 | ||||||
Series
G preferred stock - face value at $1,000 per share
|
- | 1,000,000 | ||||||
Less
unamortized discount
|
- | (302,725 | ) | |||||
Balance
net of unamortized discount
|
- | 697,275 | ||||||
$ | 386,411 | $ | 4,183,651 |
Series
E
|
Series
G
|
|||||||
Outstanding
at December 31, 2006
|
5,000 | 1,000 | ||||||
Shares
issued
|
3,250 | - | ||||||
Shares
redeemed
|
(7,750 | ) | (1,000 | ) | ||||
Outstanding
at December 31, 2007
|
500 | - |
From
Inception
|
||||||||||||||||
Year
Ended
|
Tax
|
June
26, 2006 to
|
Tax
|
|||||||||||||
December
31, 2007
|
Rate
|
December
31, 2006
|
Rate
|
|||||||||||||
Federal
statutory rates
|
$ | 449,540 | 34% | $ | (1,121,938 | ) | 34% | |||||||||
Stock
based compensation
|
69,335 | 5% | 1,135,869 | -35% | ||||||||||||
Goodwill
|
(189,829 | ) | -14% | - | 0% | |||||||||||
Other
|
40,627 | 3% | 8,319 | 0% | ||||||||||||
Effective
rate
|
$ | 369,673 | 28% | $ | 22,250 | -1% |
Years
ended December 31,:
|
Capital
|
Operating
|
||||||
2008
|
$ | 96,428 | $ | 403,684 | ||||
2009
|
96,428 | 333,974 | ||||||
2010
|
96,428 | 234,915 | ||||||
2011
|
96,428 | 124,500 | ||||||
2012
|
96,428 | - | ||||||
Thereafter
|
112,501 | - | ||||||
Total
minimum lease payments
|
594,641 | $ | 1,097,073 | |||||
Residual
principal balance
|
105,000 | |||||||
Amount
representing interest
|
(218,432 | ) | ||||||
Present
value of minimum lease payments
|
481,209 | |||||||
Less
current maturities of capital lease obligations
|
44,909 | |||||||
Long-term
capital lease obligations
|
$ | 436,300 |
ARTICLE I THE MERGER |
3
|
SECTION 1.01.
The
Merger
|
3
|
SECTION 1.02.
Effective Time;
Closing
|
3
|
SECTION 1.03.
Effect of the
Merger
|
4
|
SECTION 1.04.
Articles of
Organization and Operating Arrangement
|
4
|
SECTION 1.05.
Directors and
Officers
|
4
|
ARTICLE II CONVERSION OF COMPANY SECURITIES ; EXCHANGE OF CERTIFICATES |
4
|
SECTION 2.01.
Conversion of
Securities
|
4
|
SECTION 2.01.
Merger
Consideration
|
5
|
SECTION 2.03.
Exchange of
Certificates
|
7
|
SECTION 2.04.
Stock
Transfer Books
|
8
|
|
|
ARTICLE II1 REPRESENTATIONS AND WARRANTIES OF THE COMPANY |
9
|
SECTION 3.1
Organization; Authority; Due
Authorization
|
9
|
SECTION 3.2
No
Violation
|
10
|
SECTION 3.3
Regulatory Approvals and Other
Consents
|
10
|
SECTION 3.4
Title to
Assets
|
10
|
SECTION 3.5
Financial
Condition
|
10
|
SECTION 3.6
Tax
Matters
|
15
|
SECTION 3.7
Compliance with Laws; Governmental
Matters
|
16
|
SECTION 3.8
Litigation
|
17
|
SECTION 3.9
Property of the
Company
|
18
|
SECTION 3.11.
Labor and Employment
Matters
|
23
|
SECTION 3.12.
Pension and Benefit
Plans
|
25
|
SECTION 3.13.
Insurance
|
27
|
SECTION 3.30.
Representations and Warranties on
Closing
|
32
|
|
|
ARTICLE
IV
REPRESENTATIONS AND
WARRANTIES OF PARENT AND MERGER SUB
|
32
|
ARTICLE V CONDUCT OF BUSINESSES PENDING THE MERGER |
34
|
SECTION 5.01.
Conduct of Business by
the Company Pending the Merger
|
34
|
SECTION 5.02.
Conduct of Business by
Parent Pending the Merger
|
35
|
ARTICLE VI ADDITIONAL AGREEMENTS |
37
|
SECTION
6.01.
Access to
Information; Confidentiality
|
37
|
SECTION 6.02.
Obligations of Merger
Sub
|
37
|
SECTION 6.03.
Further Action;
Consents; Filings
|
37
|
SECTION 6.04.
Plan of
Reorganization
|
38
|
|
|
ARTICLE VII CONDITIONS TO THE MERGER |
38
|
SECTION 7.01.
Conditions to the
Obligations of Each Party
|
38
|
SECTION 7.02.
Conditions to the
Obligations of Parent and Merger Sub
|
38
|
SECTION 7.03.
Conditions to the
Obligations of the Company
|
41
|
ARTICLE VIII TERMINATION, AMENDMENT AND WAIVER |
42
|
SECTION 8.01.
Termination
|
42
|
SECTION 8.02.
Effect of
Termination
|
42
|
SECTION 8.03.
Amendment
|
42
|
SECTION 8.04.
Waiver
|
43
|
SECTION 8.05.
Expenses
|
43
|
|
|
ARTICLE
IX
INDEMNIFICATION
|
43
|
SECTION 9.01.
Indemnification by the Company
|
43
|
ARTICLE X GENERAL PROVISIONS |
45
|
SECTION 10.01.
Survival
of Representations, Warranties and Covenants
|
45
|
SECTION
10.02.
Notices
|
45
|
SECTION 10.03.
Certain
Definitions
|
46
|
SECTION I0.04.
Severability
|
50
|
SECTION 10.05.
Assignment;
Binding Effect; Benefit
|
50
|
SECTION
10.06.
Incorporation
of Exhibits
|
50
|
SECTION 10.07.
Specific Performance
|
50
|
SECTION 10.08.
Governing Law;
Forum
|
51
|
SECTION 10.09.
Headings
|
51
|
SECTION
10.10.
Counterparts
|
51
|
SECTION 10.11.
Entire
Agreement
|
51
|
A. |
Shares
Owned by Shareholders and Cash, Notes and Common Stock to be received in
Merger
|
B. |
Add-Backs
—
Special
Payments for the Benefit of Shareholders
|
C. |
Form
of Investment Letter from Parent
|
D. | Form of Investment Letter from Shareholders |
E.
|
Form of Certificates of Common Stock of Parent |
F.
|
Form of Opinion of Parent's Counsel |
G. |
Form
of Opinion of the Company's Counsel
|
H.
|
Form
of Agreement not to Compete
|
I.
|
Form
of Mutual Confidentiality Agreement
|
J. | Form of Officers' Certificate of the Company |
K. | Form of Officers' Certificate of Parent |
L. |
Form
of Employment Agreement of Jacob J. Marcell
|
M. | Contracts Requiring Consent after Closing |
N. | Company Financing Guaranteed by Jacob J. Marcell |
0. | Post-Closing Holdback Escrow Agreement |
(i)
|
statement
of income related to
the
business of the
Company's
operations
for the period covered thereby;
|
(ii)
|
payments
of interest related to debt of the
Company;
|
(iii)
|
federal
or state taxes based on income attributable to the Company's
operations;
|
(iv)
|
depreciation
related to the Company's
assets;
|
(v)
|
amortization
related to the Company's
assets;
|
(vi)
|
special
payments through the Effective Time for the benefit of the Shareholders
listed on Exhibit "B"
("Add-hacks");
|
(vii)
|
any
charges or expenses solely attributable to the Company being a subsidiary
of Parent, or the Parent's arbitrary decision to defer income or prepay
expenses;and
|
(viii)
|
and
charges or expenses solely attributable to closing and consummating the
transaction contemplated by this
Agreement.
|
(i)
|
cash
in an amount equal to $2.083333 for each $1.00 of Deferred Merger
Consideration Basis, up to, but not to exceed,
$2,083,333;
|
(ii)
|
1.388889
shares of Parent Common Stock for each $1.00 of Deferred Merger
Consideration Basis, up to, but not to exceed, a total of 1,388,889
shares; and
|
(iii)
|
the
number of shares of Common Stock equal to 3.306878 shares for each $1.00
of Deferred Merger Consideration Basis, up to, but not to exceed 3,306,878
shares.
|
DEEP DOWN, INC. | ||
/s/
Robert E. Chamberlain, Jr.
Robert
E. Chamberlain, Jr.
Chairman
of the Board
|
||
MAKO TECHNOLOGIES, INC. | OCEAN SPECIALISTS INC. | |
/s/
Jacob J. Marcell
Jacob
J. Marcell
President
& CEO
|
/s/
Kevin Peterson
Kevin
Peterson, CEO
Corporate
Shareholder of Mako Technologies, Inc.
|
|
MAKO TECHNOLOGIES, LLC | ||
By:
Deep Down, Inc.
Managing Member
|
||
/s/
Robert E. Chamberlain, Jr
Robert
E. Chamberlain, Jr
Chairman
of the Board
|
/s/
Jacob J. Marcell
Jacob
J. Marcell
Individual
Shareholder of Mako Technologies, Inc.
|
|
/s/
Barry J. Dufrene
Barry J.
Dufrene
|
/s/
Robert J. Marcell
Robert J.
Marcell
|
[SEAL
HERE]
|
/s/
Dean Heller
|
|
DEAN
HELLER
|
||
Secretary
of State
|
||
By:
/s/ signature
|
||
Certification
Clerk
|
DEAN
HELLER
|
Entity
#
|
|
Secretary
of State
|
E0251052006-8
|
|
204
North Carson Street, Suite 1
|
Document
Number:
|
|
Carson
City, Nevada 89701-4299
|
20060778378-68
|
|
(775)
634-5708
|
||
Website:
secretaryofstate.biz
|
||
Date
Filed:
|
||
12/4/2006
12:00:59 PM
|
||
In
the office of
|
||
Dean
Heller
|
||
Secretary
of State
|
||
Each
fiscal quarter ending:
|
Ratio
|
|
12/31/07
until 6/30/08
|
3.50
: 1.00
|
|
09/30/08
to 6/30/09
|
3.00
: 1.00
|
|
09/30/09
and thereafter
|
2.50
: 1.00
|
BORROWOR: | DEEP DOWN, INC. , a Nevada corporation |
By: /s/ Ronald E. Smith | |
Name:
Ronald
E. Smith
|
|
Title: President | |
LENDER: | PROSPECT CAPITAL CORPORATION |
By: | |
Name:
|
|
Title: | |
a.
|
Cash
Exercise.
The purchase rights represented by this Warrant may be
exercised by the Holder, in whole or in part, by the surrender of this
Warrant (with the notice of exercise form attached hereto as Exhibit A
duly executed) at the principal office of the Company. and by the payment
to the Company, by certified, cashier's or other check acceptable to the
Company or by wire transfer to an account designated by the Company, of an
amount equal to the aggregate Exercise Price of the Shares being
purchased.
|
b.
|
Relinquishment
of Options.
(i) The Holder
in lieu of purchasing the entire number of
shares subject to purchase hereunder, shall have the right to relinquish
all or any part of the then unexercised portion of this Warrant (to the
extent then
exercisable)
for a number of shares
of
Common Stock to be
determined in accordance with the following provisions of this clause
(b):
|
c.
|
Stock
Certificates.
In the event of any exercise of the rights
represented by this Warrant, certificates for the Shares so purchased
shall be delivered to the Holder within a reasonable time and, unless this
Warrant has been fully exercised or has expired, a new Warrant
representing the shares with respect to which this Warrant shall not have
been exercised shall also be issued to the Holder within such
time.
|
2.
|
Stock
Fully Paid; Reservation of Shares.
All of the Shares issuable upon
the exercise of the rights represented by this Warrant will, upon issuance
and receipt of the Exercise Price therefor, be fully paid and
nonassessable, and free from all taxes, liens and charges with respect to
the issue thereof. During the period
within
which the rights represented by this Warrant may be exercised, the
Company shall at all times have authorized and reserved for issuance
sufficient shares of its Common Stock to provide for the exercise of the
rights represented by this Warrant.
|
3.
|
Adjustments.
The number and kind of securities purchasable upon the exercise of this
Warrant and the Exercise Price therefor shall be subject to adjustment
from time to time upon the occurrence of certain
events,
as follows:
|
a.
|
Reclassification.
In the case of any reclassification or change of securities of the class
issuable upon exercise of this Warrant (other than a change in par value,
or from par value to no par value, or from no par value to par value, or
as a result of a subdivision or combination), or in case of any merger of
the Company with or into another corporation (other than a merger with
another corporation in which the Company is the acquiring and the
surviving corporation and which does not result in any reclassification or
change of outstanding securities issuable upon exercise of this Warrant),
or in case of any sale of all or substantially all of the assets of the
Company, the Company, or such successor or purchasing corporation, as the
case may be, shall duly execute and
deliver to the holder of this
Warrant a new Warrant (in
form and substance reasonably
satisfactory
to the holder of this Warrant), or the Company shall
make appropriate provision without the issuance of a new Warrant, so that
the holder of this Warrant shall have the right to receive, at a total
purchase price not to exceed that payable upon the exercise of the
unexercised portion of this Warrant, and in lieu of the shares of Common
Stock theretofore issuable upon exercise of this Warrant, (i) the kind and
amount of shares of stock, other securities, money and property receivable
upon such reclassification, change, merger or sale by a holder of the
number of shares of Common Stock then purchasable under this Warrant,
or (ii)
in the case
of such a merger or sale in which the consideration paid consists all or
in part of assets other than securities of the successor or purchasing
corporation, at the option of the Holder of this Warrant, the securities
of the successor or purchasing corporation having a value at the time of
the transaction equivalent to the fair market value of the Common Stock at
the time of the transaction. The provisions of this subparagraph (a) shall
similarly apply to successive reclassifications, changes, mergers and
transfers.
|
b.
|
Stock
Splits, Dividends and Combinations.
In the event that the Company
shall at any time subdivide the outstanding shares of Common Stock or
shall issue a stock dividend on its outstanding shares of Common Stock the
number of Shares issuable upon exercise of this Warrant immediately prior
to such subdivision or to the issuance of such stock dividend shall be
proportionately increased, and the Exercise Price shall be proportionately
decreased, and in the event that the Company shall at any time combine the
outstanding shares of Common Stock the number of Shares issuable upon
exercise of this Warrant immediately prior to such combination shall be
proportionately decreased, and the Exercise Price shall be proportionately
increased, effective at the close of business on the date of such
subdivision, stock dividend or combination, as the case may
be.
|
4.
|
Notice
of Adjustments.
Whenever the number of Shares purchasable hereunder
or
the Exercise Price thereof shall be adjusted pursuant to Section 3
hereof, the Company shall provide notice to the Holder setting forth, in
reasonable detail, the event requiring the adjustment, the amount of the
adjustment, the method by which such adjustment was calculated, and the
number and class of shares which may be purchased thereafter and the
Exercise Price therefor after giving effect to such
adjustment.
|
5.
|
Fractional
Shares.
Whether or not the number of shares purchasable upon the
exercise of a Warrant is adjusted pursuant to Section 3 of this Agreement,
this Warrant may not be exercised for fractional shares and the Company
shall not be required to issue fractions of Shares upon exercise of the
Warrants or to distribute Shares certificates that evidence fractional
Shares. In lieu of fractional Shares, there shall be returned to
exercising Registered Holders of the Warrants upon such exercise an amount
in cash, in United States dollars, equal to the amount in excess of that
required to purchase the largest number of full
Shares.
|
6.
|
Representations
of
the
Company.
The Company represents that all corporate actions on the
part of the Company, its officers, directors and shareholders necessary
for the sale and issuance of the Shares pursuant hereto and the
performance of the Company's obligations hereunder were taken prior to and
are effective as of the effective date of this
Warrant.
|
7.
|
Representations
and Warranties by the Holder.
The Holder represents and warrants to
the Company as follows:
|
a.
|
This
Warrant and the Shares issuable upon exercise thereof are being acquired
for its own account, for investment and not with a view to. or for resale
in connection with, any distribution or public offering thereof within the
meaning of the Securities Act of 1933, as amended (the "Act"). Upon
exercise of this Warrant, the Holder shall, if so requested by the
Company, confirm in writing, in a form satisfactory to the Company, that
the securities issuable upon exercise of this Warrant are being acquired
for investment and not with a view toward distribution or
resale.
|
b. |
The
Holder understands that the Warrant and the Shares have not been
registered under the Act by reason of their issuance in a transaction
exempt from the registration and prospectus delivery requirements of the
Act pursuant to Section 4(2) thereof, and that they must be held by the
Holder indefinitely, and that the Holder must therefore hear the economic
risk of such investment indefinitely, unless a subsequent disposition
thereof is registered tinder the Act or is exempted from such
registration.
|
c. |
The
Holder has such knowledge and experience in financial and business matters
that it is capable of evaluating the merits and risks of the purchase of
this Warrant and the Shares purchasable pursuant to the terms of this
Warrant and of protecting its interests in connection
therewith.
|
d. |
The
Holder is able to bear the economic risk of the purchase of the Shares
pursuant to the terms of this
Warrant.
|
8.
|
Restrictive
Legend.
The Shares (unless registered under the Act) shall be
stamped or imprinted with a legend in substantially the following form:
THE SHARES REPRESENTED BY THIS CERT
IFICATE
HAVE BEEN ACQUIRED FOR INVESTMENT AND NOT WITH A VIEW TO, OR IN
CONNECTION WITH, THE SALE OR DISTRIBUTION THEREOF, AND HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED. SUCH SHARES MAY
NOT BE SOLD OR TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION OR UNLESS
THE COMPANY RECEIVES AN OPINION OF COUNSEL REASONABLY ACCEPTABLE TO IT
STATING THAT SUCH SALE OR TRANSFER IS EXEMPT FROM THE REGISTRATION AND
PROSPECTUS DELIVERY REQUIREMENTS OF THE ACT. UPON THE FULFILLMENT OF
CERTAIN OF SUCH CONDITIONS DEEP DOWN, INC. HAS AGREED TO DELIVER TO THE
HOLDER HEREOF A NEW CERTIFICATE NOT BEARING THIS LEGEND FOR THE SECURITIES
REPRESENTED HEREBY REGISTERED IN THE NAME OF THE HOLDER HEREOF. A COPY OF
THE AGREEMENT MAY BE OBTAINED AT NO COST BY WRITTEN REQUEST MADE BY THE
HOLDER OF RECORD OF THIS CERTIFICATE TO THE SECRETARY OF DEEP DOWN,
INC.
|
a.
|
The
Company need not register a
transfer of this Warrant
or Shares bearing the restrictive legend set forth in Section 8
hereof, unless the conditions specified in such legend are satisfied. The
Company may also instruct its transfer agent not to register the transfer
of the Shares, unless one of the conditions specified in the legend
referred to in Section 8 hereof is
satisfied.
|
b. |
Notwithstanding
the provisions of paragraph (a) above, no opinion of counsel shall be
necessary for a transfer without consideration by any holder (i) if such
holder is a partnership, to a partner or retired partner of such
partnership who retires after the date hereof or to
the
estate of any such
partner or retired partner, or (ii) if such holder is a corporation, to a
shareholder of such corporation, or to any other corporation under common
control, direct or indirect, with such
holder.
|
10.
|
Rights
of Shareholders.
No holder of this Warrant shall be entitled, as a
Warrant holder, to vote or receive dividends or be deemed the holder of
any Shares or any other securities of the Company which may at any time be
issuable on the exercise hereof for any purpose, nor shall anything
contained herein be construed to confer upon the holder of this Warrant,
as such, any of the rights of a stockholder of the Company or any right to
vote for the election of directors or upon any matter submitted to
shareholders at any meeting thereof. or to give or withhold consent to any
corporate action (whether upon any recapitalization, issuance of stock,
reclassification of stock, change of par value. consolidation, merger,
conveyance,
or otherwise) or to receive notice of meetings, or to receive
dividends or subscription rights or otherwise until the Warrant shall have
been exercised and the Shares purchasable upon the exercise hereof shall
have become deliverable. as provided
herein.
|
11.
|
Registration
Rights.
|
a.
|
Definitions.
As used
herein:
|
i.
|
The
terms "register," "registered" and "registration" refer to a registration
effected by
preparing
and filing with the Securities and Exchange Commission
(the
"SEC")
a registration statement pursuant to the Securities Act of
1933, as amended (the "Act"). and the declaration or order of
effectiveness of such registration
statement.
|
ii.
|
For
the purposes hereof the term "Registerable Securities" means shares of (i)
common
stock,
preferred stock or debt securities of the Company (the "Securities"), (ii)
stock or debt securities issued in lieu of the Securities in any
reorganization which have not been sold to the public and (iii) stock
issued in respect of the stock referred in (i) and (ii) as a result of a
stock split, stock dividend, recapitalization or combination, which have
not been sold to the public.
|
b.
|
Incidental
Registration.
|
i.
|
If
the Company at any
time
proposes to register any of its securities under the Act,
whether
of its own accord or at the demand of any holder of such securities
pursuant to an agreement with respect to the registration thereof
(provided such agreement does not prohibit third parties from including
additional securities in such registration), and if the form of
registration statement proposed to be used may be used for the
registration of Registerable Securities, the Company will give notice to I
folder not less than 10 days nor more than 30 days prior to the filing of
such registration statement of its intention to proceed with the proposed
registration (the "Incidental Registration"), and, upon written request of
the Holder made within ten (10) days after the receipt of any such notice
(which request will specify the Registerable Securities intended to be
disposed of by the Holder and state the intended method of disposition
thereof), the Company will use its best efforts to cause all Registerable
Securities of Holder as to which registration has been requested
to
be registered under the Act, provided that if such registration is
in connection with an underwritten public offering, Holder's Registerable
Securities to be included in such registration shall be offered upon the
same terms and conditions as apply to any other securities included in
such registration. Notwithstanding anything contained in this Section
1.2
to the contrary, the
Company shall have no obligation to cause
Registerable Securities to be registered with respect to any
Registerable
Securities which
shall
be
eligible for resale under Rule 144(k) of the Securities
Act.
|
ii.
|
If
an Incidental Registration is a primary registration on behalf of the
Company and is in
connection
with an underwritten public offering, and if the managing underwriters
advise the Company in writing that in their opinion the amount of
securities requested to be included in such registration (whether by the
Company, the Holder, or other holders of the Company's securities pursuant
to any other rights granted by the Company to demand inclusion of any such
securities in such registration) exceeds the amount of such securities
which can be successfully sold in such offering, the Company will include
in such registration the amount of securities requested to be included
which in the opinion of such underwriters can be sold, in the following
order
(A)
first, all
of the securities the Company proposes to sell, and
(B)
second, any other
securities requested to be included in such registration. pro rata among
the holders thereof on the basis of the amount of such securities then
owned by such holders.
|
iii.
|
If
an Incidental Registration is a secondary registration on behalf of
holders of securities
of
the Company and is in connection with an underwritten public offering, and
if the managing underwriters advise the Company in writing that in their
opinion the amount of securities requested to be included in such
registration (whether by such holders, by the Holder, or by holders of the
Company's securities pursuant to any other rights granted by the Company
to demand inclusion of securities in such registration) exceeds the amount
of such securities which can be sold in such offering, the Company will
include in, such registration the amount of securities requested to be
included which in the opinion of such underwriters can be sold, in the
following order (A) first, all of the securities requested to be included
by holders demanding or requesting such registration, and (B) second, any
other securities requested to be included in such registration, pro rata
among the holders thereof on the basis of the amount of such securities
then owned by such holders.
|
c.
|
Registration
Procedures.
The Company will advise the Holder in writing as to the
effective date of the registration and as to the completion thereof. At
its expense the Company
will:
|
i.
|
keep
the registration effective for a period of days or until the Holder has
completed the
distribution
described in the registration statement relating thereto, whichever first
occurs; and
|
ii.
|
furnish such number
of prospectuses and any other documents incident thereto as the Holder
from time to time may reasonably
request.
|
12.
|
Notices.
All notices and other communications required or permitted hereunder shall
be in writing, shall be effective when given, and shall in any event be
deemed to be given upon receipt or, if earlier, (a) five (5) days after
deposit with the U.S. Postal Service or other applicable postal service,
if delivered by first class mail, postage prepaid, (b) upon delivery, if
delivered by hand, (c) one business day after the business day of deposit
with Federal Express or similar overnight courier, freight prepaid or (d)
one business day after the business day of facsimile transmission, if
delivered by facsimile transmission with copy by first class mail, postage
prepaid, and shall be addressed
(i)
if to the Holder, at
the Holder's address as set forth on the books of the Company, and (ii) if
to the Company, at the address of its principal corporate offices
(attention: President) or at such other address as a party may designate
by ten days advance written notice to the other party pursuant to the
provisions above.
|
13.
|
Governing
Law.
This Warrant and all actions arising out of or in
connection with this Agreement shall he governed by and construed in
accordance with the laws of the State of Nevada, without regard to the
conflicts of law provisions of the State of Nevada or of any other
state.
|
14.
|
Entire
Agreement;
Modification; Waivers.
This Agreement contains the entire
agreement of the parties, and supersedes any prior agreements with respect
to its subject matter. Except for the provisions of subsection 4.2. the
Warrant Agent and the Company, by supplemental agreement, may make any
changes in this Agreement (i) that they shall deem appropriate to cure any
ambiguity or to correct any defective or inconsistent provision or
manifest mistake or error herein contained; or (ii) that they may deem
necessary or desirable and that shall not adversely affect the interests
of the Registered Holders of Warrant Certificates (this provision, for
instance, shall permit the Exercise Price to be decreased at the Company's
option)
.
|
15.
|
Assignment.
This Warrant may be assigned or transferred, in whole or in part, by due
execution of the assignment form attached hereto as Exhibit B and the
delivery of a true and correct copy thereof to the principal office of the
Company along with a certification by the Holder that the assignee is, or
was at the time this Warrant was issued. a registered representative with
Dragonfly Capital Partners, LLC. Any assignment shall he null, void and of
no force or effect unless the assignee is, or was at the time this Warrant
was issued, a registered representative with Dragonfly Capital Partners,
LLC and the assignment is accompanied by a certification to such
effect.
|
16.
|
Jurisdiction
and Venue.
The courts
of the
State
of Texas. sitting in
the City of Houston.
(the
"Texas Courts") shall have exclusive jurisdiction to hear,
adjudicate, decide, determine and enter final judgment in any action,
suit, proceeding, case, controversy or dispute, whether at law or in
equity or both, and whether in contract or tort or both, arising out of or
related to this
Agreement,
or the construction
or enforcement hereof or thereof (any such action, suit, proceeding, case,
controversy or dispute, a "Related Action"). The Company and the
Registered Holder hereby irrevocably consent and submit to the exclusive
personal jurisdiction of the Texas Courts to hear, adjudicate, decide.
determine and enter Final judgment in any Related Action. The Company and
the Registered Holder hereby irrevocably waive and agree not to assert any
right or claim that it is not personally subject to the jurisdiction of
the Texas Courts in any Related Action, including any claim
of
forum nun conveniens
or that the Texas. Courts are not the proper
venue or form to adjudicate any Related Action. It' any Related Action is
brought or maintained in any court other than the Texas Courts, then that
court shall, at the request of the Company or the Registered Holder,
dismiss that action.
|
17.
|
Specific
Performance.
The Company hereby acknowledges and agrees that it is
difficult, if not impossible to measure in money the damages that will
accrue to the Registered Holder by reason of a failure to issue the Shares
under this Agreement, and that the Registered Holder may seek to
specifically enforce the Company's obligation to issue the Shares.
Therefore, if the Registered Holder shall institute any action or
proceeding to enforce the provisions hereof, the Company hereby waives all
claims or defenses therein that the Registered I !older has an adequate
remedy at law, and hereby agrees not to assert or otherwise raise any such
claim or defense.
|
18.
|
Waiver
of Jury Trial.
The
Company and the
Registered Holder hereby waive trial by jury in any Related
Action.
|
19.
|
Attorney's
Fees.
The prevailing party in any Related Action shall be entitled
to recover that party's costs of suit, including reasonable attorney's
fees.
|
20.
|
Binding
Effect.
This Agreement shall be binding on, and shall
inure to the benefit of the parties
and
their respective
successors in interest.
|
21.
|
Construction,
Counterparts.
This Agreement shall be construed as a
whole and
in favor of the validity and enforceability of
each of its provisions, so as to carry out the intent of the parties as
expressed herein. Heading are for the convenience of reference. and the
meaning and interpretation of the text of any provision shall take
precedence over its heading. This Agreement may be signed in one or more
counterparts, each of which shall constitute an original, but all of
which, taken together shall constitute one agreement. A faxed copy or
photocopy of a party's signature shall he deemed an original for all
purposes.
|
DEEP DOWN, INC. | |||
|
By:
|
/s/ Ronald E. Smith | |
Name: Ronald E. Smith | |||
Title: President & CEO | |||
1.
|
The
undersigned hereby elects to purchase _______ Shares of DEEP DOWN, INC.
pursuant to the terms of the attached
Warrant.
|
2.
|
Method
of Exercise (Please initial the applicable blank);
|
3.
|
Please
issue a certificate or certificates representing said Shares in the name
of the undersigned or in such other name as is specified
below;
|
______________________________________ | |
(Name) | |
______________________________________ | |
______________________________________ | |
(Address) |
4.
|
The
undersigned hereby represents and warrants that the aforesaid Shares are
being acquired for the account of the undersigned for investment and not
with a view to. or for resale, in connection with the distribution
thereof, and that the undersigned has no present intention of distributing
or reselling such shares and all representations and warranties of the
undersigned set forth in Section 7 of the attached Warrant are true and
correct as of the date
hereof.
|
_______________________________ | |
(Signature) | |
Title:___________________________ |
___________________________________________________ | |
Signature
Guaranteed:
|
|
___________________________________________________ |
No. 3 |
Void after January
4, 2013
|
a.
|
Cash
Exercise.
The purchase rights represented by this Warrant may be
exercised by the Holder, in whole or in part, by the surrender of this
Warrant (with the notice of exercise form attached hereto as Exhibit A
duly executed) at the principal office of the Company. and by the payment
to the Company, by certified, cashier's or other check acceptable to the
Company or by wire transfer to an account designated by the Company. of an
amount equal to the aggregate Exercise Price of the Shares being
purchased.
|
b.
|
Relinquishment
of Options.
(i) The Holder in lieu of purchasing the entire number
of shares subject to purchase hereunder,
shall
have the right to
relinquish all or any part of the then unexercised portion of this Warrant
(to the extent then exercisable) for a number of shares of Common Stock to
be determined in accordance with the following provisions of this clause
(b):
|
c.
|
Stock
Certificates.
In the event of any exercise of the rights
represented by this Warrant, certificates for the Shares so purchased
shall be delivered to the Holder within a reasonable time and, unless this
Warrant has been fully exercised or has expired, a new Warrant
representing the shares with respect to which this Warrant shall not have
been exercised shall also be issued to the Holder within such
time.
|
2.
|
Stock
Fully Paid; Reservation of Shares.
All
of
the
Shares
issuable upon the exercise of the rights represented by this
Warrant will, upon issuance and receipt of the Exercise Price therefor, be
fully paid and nonassessable, and free from all taxes, liens and charges
with respect to the issue thereof. During the period within which the
rights represented by this Warrant may be exercised, the Company shall at
all times have authorized and reserved for issuance sufficient shares of
its Common Stock to provide for the exercise of the rights represented by
this Warrant.
|
3.
|
Adjustments.
The
number and kind of
securities purchasable upon the exercise of this Warrant and the Exercise
Price therefor shall be subject to adjustment from time to time upon the
occurrence of certain events, as
follows:
|
a.
|
Reclassification.
In the case of any reclassification or change of securities of the class
issuable upon exercise of this Warrant (other than a change in par value,
or from par value to no par value, or from no par value to par value, or
as a result of a subdivision or combination), or in case of any merger of
the Company with or into another corporation (other than a merger with
another corporation in which the Company is the acquiring and the
surviving corporation and which does not result in any reclassification or
change of outstanding securities issuable upon exercise of this Warrant),
or in case of any sale of all or substantially all of the assets of the
Company, the Company, or such successor or purchasing corporation, as the
case may be, shall duly execute and deliver to the holder of this Warrant
a new Warrant (in form and substance reasonably satisfactory to the holder
of this Warrant), or the Company shall make appropriate provision without
the issuance of a new Warrant, so that the holder of this Warrant shall
have the right to receive, at a total purchase price not to exceed that
payable upon the exercise of the unexercised portion of this Warrant, and
in lieu of the shares of Common Stock theretofore issuable upon exercise
of this Warrant, (i) the kind and amount of shares of stock, other
securities, money and property receivable upon such reclassification,
change, merger or sale by a holder of the number of shares of Common Stock
then purchasable under this Warrant, or (ii) in the case of such a merger
or sale in which the consideration paid consists all or in part of assets
other than securities of the successor or purchasing corporation, at the
option of the Holder of this Warrant, the securities of the successor or
purchasing corporation having a value at the time of the transaction
equivalent to the fair market value of the Common Stock at the time of the
transaction. The provisions of this subparagraph (a) shall similarly apply
to successive reclassifications, changes, mergers and
transfers.
|
b.
|
Stock
Splits, Dividends and Combinations.
In the event that the Company
shall at any time subdivide the outstanding shares of Common Stock or
shall issue a stock dividend on its outstanding shares of Common Stock the
number of Shares issuable upon exercise of this Warrant immediately prior
to such subdivision or to the issuance of such stock dividend shall be
proportionately increased, and the Exercise Price shall be proportionately
decreased, and in the event that the Company shall at any time combine the
outstanding shares of Common Stock the number of Shares issuable upon
exercise of this Wan•ant immediately prior to such combination shall be
proportionately decreased, and the Exercise Price shall be proportionately
increased, effective at the close of business on the date of such
subdivision, stock dividend or combination, as the case may
be.
|
4.
|
Notice
of Adjustments.
Whenever the
number of
Shares purchasable hereunder or the Exercise Price thereof shall be
adjusted pursuant to Section 3 hereof, the Company shall provide notice to
the Holder setting forth, in reasonable detail, the event requiring the
adjustment. the amount of the adjustment. the method by which such
adjustment was calculated, and the number and class of shares which may be
purchased thereafter and the Exercise Price therefor after giving effect
to such adjustment.
|
5.
|
Fractional
Shares.
Whether or not the number of shares purchasable upon the
exercise of a Warrant is adjusted pursuant to Section 3 of this Agreement,
this Warrant may not he exercised for fractional shares and the Company
shall not be required to issue fractions of Shares upon exercise of the
Warrants or to distribute Shares certificates that evidence fractional
Shares, In lieu of fractional Shares, there shall be returned to
exercising Registered Holders of the Warrants upon such exercise an amount
in cash, in United States dollars. equal to the amount in excess of that
required to purchase the largest number of full
Shares.
|
6.
|
Representations
of the Company.
The Company represents that all corporate actions
on the part of the Company, its officers, directors and shareholders
necessary for the sale and issuance of the Shares pursuant hereto and the
performance of the Company's obligations hereunder were taken prior to and
are effective as of the effective date of this
Warrant.
|
7.
|
Representations
and Warranties by the Holder.
The Holder represents and
warrants to the Company
as
follows:
|
a.
|
This
Warrant and the Shares issuable upon exercise thereof are being acquired
for its own account. for investment and not with a view to. or for
resale
in
connection with, any distribution or public offering thereof within the
meaning of the Securities Act of 1933, as amended (the "Act"). Upon
exercise of this Warrant, the Holder shall. if so requested by the
Company, confirm in writing, in a form
satisfactory
to the
Company, that the
securities issuable upon exercise of this Warrant are
being acquired for
investment and not with a view toward distribution or
resale.
|
b.
|
The Holder
understands that the Warrant and the Shares have not been registered under
the Act by reason of their issuance in a transaction exempt from
the registration and prospectus delivery requirements of the Act pursuant
to Section 4(2) thereof, and that they must be held by the Holder
indefinitely, and that the Holder must therefore bear the economic risk of
such investment indefinitely, unless a subsequent disposition thereof is
registered under the Act or is exempted from such
registration.
|
c.
|
The
Holder has such knowledge and experience in financial and business matters
that it is capable of evaluating the merits and risks of the purchase of
this Warrant and the Shares purchasable pursuant to the terms of this
Warrant and of protecting its interests in connection
therewith.
|
d.
|
The
Holder is able to bear the economic risk of the purchase of the Shares
pursuant to the terms of this
Warrant.
|
8.
|
Restrictive
Legend.
The Shares (unless registered under the Act) shall
be stamped or imprinted with a legend in substantially the following form:
THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE BEEN ACQUIRED FOR
INVESTMENT AND NOT WITH A VIEW TO, OR IN CONNECTION WITH, THE SALE OR
DISTRIBUTION THEREOF, AND HAVE NOT BEEN REGISTERED UNDER THE SECURITIES
ACT OF 1933, AS AMENDED. SUCH SHARES MAY NOT BE SOLD OR TRANSFERRED IN THE
ABSENCE OF SUCH REGISTRATION OR UNLESS THE COMPANY RECEIVES AN OPINION OF
COUNSEL REASONABLY ACCEPTABLE TO IT STATING THAT SUCH SALE OR TRANSFER IS
EXEMPT FROM THE REGISTRATION AND PROSPECTUS DELIVERY REQUIREMENTS OF THE
ACT. UPON THE FULFILLMENT OF CERTAIN OF SUCH CONDITIONS DEEP DOWN, INC.
HAS AGREED TO DELIVER TO THE HOLDER HEREOF A NEW CERTIFICATE NOT BEARING
THIS LEGEND FOR THE SECURITIES REPRESENTED HEREBY REGISTERED IN THE NAME
OF THE HOLDER HEREOF. A COPY OF THE AGREEMENT MAY BE OBTAINED AT NO COST
BY WRITTEN REQUEST MADE BY THE HOLDER OF RECORD OF THIS CERTIFICATE TO THE
SECRETARY OF DEEP DOWN, INC.
|
9.
|
Restrictions
Upon Transfer and Removal of
Legend.
|
a.
|
The
Company need not register a transfer of this Warrant or Shares bearing the
restrictive legend set forth in Section 8 hereof, unless the conditions
specified in such legend are satisfied. The Company may also instruct its
transfer agent not to register the transfer of the Shares, unless one of
the conditions specified in the legend referred to in Section 8 hereof is
satisfied.
|
b.
|
Notwithstanding
the provisions of paragraph (a) above, no opinion of counsel shall be
necessary for a transfer without consideration by any holder (i) if such
holder is a partnership, to a partner or retired partner of such
partnership who retires after the date hereof or to the estate of any such
partner or retired partner, or (ii) if such holder is a corporation, to a
shareholder of such corporation, or to any other corporation under common
control, direct or indirect, with such
holder.
|
10.
|
Rights
of Shareholders.
No holder of this Warrant shall be entitled, as a
Warrant holder, to vote or receive dividends or be deemed the holder of
any Shares or any other securities of the Company which may at any time be
issuable on the exercise hereof for any purpose, nor shall anything
contained herein be construed to confer upon the holder of this Warrant,
as such, any of the rights of a stockholder of the Company or any right to
vote for the election of directors or upon any matter submitted to
shareholders at any meeting thereof, or to give or withhold consent to any
corporate action (whether upon any recapitalization, issuance of stock,
reclassification of stock, change of par value, consolidation, merger,
conveyance, or otherwise) or to receive notice of meetings, or to receive
dividends or subscription rights or otherwise until the Warrant shall have
been exercised and the Shares purchasable upon the exercise hereof shall
have become deliverable, as provided
herein.
|
11.
|
Registration
Rights.
|
a.
|
Definitions.
As used herein:
|
i.
|
The
terms "register," "registered" and "registration" refer to a registration
effected by preparing and filing with the Securities and Exchange
Commission (the "SEC") a registration statement pursuant
to
the Securities Act of 1933, as amended (the "Act"), and the
declaration or order of effectiveness of such registration
statement.
|
ii.
|
For
the purposes hereof the term "Registerable Securities" means shares of (i)
common
stock,
preferred stock or debt securities of the Company (the "Securities"), (ii)
stock or debt securities issued in lieu of the Securities in any
reorganization which have not been sold to the public and (iii) stock
issued in respect of the stock referred in (i) and (ii) as a result of a
stock split, stock dividend. recapitalization or combination, which have
not been sold to the public.
|
b.
|
Incidental
Registration.
|
i.
|
If
the Company at any time proposes to register any of its securities under
the Act,
whether
of its own accord or at the demand of any holder of such securities
pursuant to an agreement with respect to the registration thereof
(provided such agreement does not prohibit third parties from including
additional securities in such registration), and if the form of
registration statement proposed to be used may be used for the
registration of Registerable Securities, the Company will give notice to
Holder not less than 10 days nor more than 30 days prior to the filing of
such registration statement of its intention to proceed with the proposed
registration (the "Incidental Registration"), and, upon written request of
the Holder made within ten (10) days after the receipt of any such notice
(which request will specify the Registerable Securities intended to be
disposed of by the Holder and state the intended method of disposition
thereof'), the Company will use its best efforts to cause all Registerable
Securities of Holder as to which registration has been requested to be
registered under the Act, provided that if such registration is in
connection with an underwritten public offering, Holder's Registerable
Securities to be included in such registration shall be offered upon the
same terms and conditions as apply to any other securities included in
such registration. Notwithstanding anything contained in this Section 1.2
to the contrary, the Company shall have no obligation to cause
Registerable Securities to be registered with respect to any Registerable
Securities which shall be eligible for resale under Rule 144(k) of the
Securities Act.
|
ii.
|
If an Incidental Registration is
a primary registration on behalf of the Company and
is in
connection
with an underwritten public offering, and if the managing underwriters
advise the Company in writing that in their opinion the amount of
securities requested to be included in such registration (whether by the
Company.
the
Holder, or other holders of the Company's securities pursuant to
any other rights granted by the Company to demand inclusion of any such
securities in such registration) exceeds the amount of
such securities which can be successfully sold in such offering, the
Company will include in such registration the amount of securities
requested to be included which in the opinion of such underwriters can be
sold, in the following order (A) first, all of the securities the Company
proposes to sell, and (B) second, any other securities requested to he
included in such registration, pro rata among the holders thereof on the
basis of the amount of such securities then owned by such
holders.
|
iii.
|
If
an Incidental Registration is a secondary registration on behalf of
holders of securities
of the Company and is in
connection with an underwritten public offering, and if the
managing underwriters advise the Company in writing that in their
opinion the amount of securities requested to be included in such
registration (whether by such holders, by the Holder, or by holders of the
Company's securities pursuant to any other rights granted by the Company
to demand inclusion of securities in such registration) exceeds the amount
of such securities which can be sold in such offering, the Company will
include in, such registration the amount of securities requested to be
included which in the opinion of such underwriters can be sold, in the
following order (A) first, all of the securities requested to be included
by holders demanding or requesting such registration, and (B) second, any
other securities requested to be included in such registration, pro rata
among the holders thereof on the basis of the amount of such securities
then owned by such holders.
|
c.
|
Registration
Procedures.
The Company will advise the Holder in writing as
to the effective date of the registration and as to the completion
thereof. At its expense the Company
will:
|
i.
|
keep
the registration effective for a period of days or until the Holder has
completed the
distribution
described in the registration statement relating thereto, whichever first
occurs; and
|
ii.
|
furnish
such number of prospectuses and any other documents incident thereto as
the
Holder
from time to time may reasonably
request.
|
12.
|
Notices.
All notices and other communications required or permitted hereunder shall
be in writing, shall be effective when given, and shall in any event be
deemed to be given upon receipt or, if earlier, (a) five (5) days after
deposit with the U.S. Postal Service or other applicable postal service,
if delivered by first class mail, postage prepaid, (b) upon delivery, if
delivered by hand. (c) one business day after the business day of deposit
with Federal Express or similar overnight courier, freight prepaid or (d)
one business day after the business day of facsimile transmission, if
delivered by facsimile transmission with copy by first class mail, postage
prepaid. and shall be addressed (i) if to the Holder, at the Holder's
address as set forth on the books of the Company, and (ii) if to the
Company, at the address of its principal corporate offices (attention:
President) or at such other address as a party may designate by ten days
advance written notice to the other party pursuant to the provisions
above.
|
13.
|
Governing
Law.
This Warrant and all actions arising out of or in connection
with this Agreement shall be governed by and construed in accordance with
the laws of the State of Nevada, without regard to the conflicts of law
provisions of the State of Nevada or of any other
state.
|
14.
|
Entire
Agreement; Modification; Waivers.
This Agreement contains the
entire agreement of the parties, and supersedes any prior agreements with
respect to its subject matter. Except for the provisions of subsection
4.2, the Warrant Agent and the Company, by supplemental agreement, may
make any changes in this Agreement (i) that they shall deem appropriate to
cure any ambiguity or to correct any defective or inconsistent provision
or manifest mistake or error herein contained; or (ii) that they may deem
necessary or desirable and that shall not adversely affect the interests
of the Registered Holders of Warrant Certificates (this provision,
for
instance, shall permit
the Exercise Price to be decreased at the Company's
option).
|
15.
|
Assignment.
This Warrant may be assigned or transferred, in whole or in part, by due
execution of the assignment form attached hereto as Exhibit B and the
delivery of a true and correct copy thereof to the principal office of the
Company along with a certification by the Holder that the assignee is, or
was at the time this Warrant was issued, a registered representative with
Dragonfly Capital Partners, LLC. Any assignment shall be null, void and of
no force or effect unless the assignee is. or was at the time this Warrant
was issued, a registered representative with Dragonfly Capital Partners.
LLC and the assignment is accompanied by a certification to such
effect.
|
16.
|
Jurisdiction
and Venue.
The courts of the State of Texas, sitting in the City of
Houston. (the "Texas Courts') shall have exclusive jurisdiction to hear,
adjudicate, decide, determine and enter final judgment in any action,
suit, proceeding, case. controversy or dispute. whether at law or in
equity or both, and whether in contract or tort or both, arising out of or
related to this Agreement, or the construction or enforcement hereof or
thereof (any such action, suit. proceeding. case, controversy or dispute,
a "Related Action"). The Company and the Registered Holder hereby
irrevocably consent and submit to the exclusive personal jurisdiction of
the Texas Courts to hear, adjudicate, decide, determine and enter final
judgment in any Related Action. The Company and the Registered Holder
hereby irrevocably waive and agree not to assert any right or claim that
it is not personally subject to the jurisdiction of the Texas Courts in
any Related Action, including any claim
of
forum non conveniens
or that the Texas Courts are not the proper
venue or form to adjudicate any Related Action. If any Related Action is
brought or maintained in any court other than the Texas Courts, then that
court shall, at the request of the Company or the Registered Holder.
dismiss that action.
|
17.
|
Specific
Performance.
The Company hereby acknowledges and agrees that it is
difficult, if not impossible to measure in money the damages that will
accrue to the Registered Holder by reason of a failure to issue the Shares
under this Agreement, and that the Registered Holder may seek to
specifically enforce the Company's obligation to issue the Shares.
Therefore, if the Registered Holder shall institute any action or
proceeding to enforce the provisions hereof, the Company hereby waives all
claims or defenses therein that the Registered Holder has an adequate
remedy at law, and hereby agrees not to assert or otherwise raise any such
claim or defense.
|
18.
|
Waiver
of Jury Trial.
The Company and the Registered Holder hereby waive
trial by jury in any Related
Action.
|
19.
|
Attorney's
Fees
.The prevailing party in any Related Action shall be entitled
to recover that party's costs of suit, including reasonable attorney's
fees.
|
20.
|
Binding
Effect.
This Agreement shall be binding on, and shall inure to the
benefit of the parties and their respective successors in
interest.
|
2l.
|
Construction,
Counterparts.
This Agreement shall be construed as a whole and in
favor of the validity and enforceability of each of its provisions, so as
to carry out the intent of the parties as expressed herein. Heading are
for the convenience of reference, and the meaning and interpretation of
the text of any provision shall take precedence over its heading. This
Agreement may be signed in one or more counterparts, each of which shall
constitute an original, but all of which, taken together shall constitute
one agreement. A faxed copy or photocopy of a party's signature shall be
deemed an original for all
purposes.
|
DEEP DOWN, INC. | |||
|
By:
|
/s/ Ronald E. Smith | |
Name: Ronald E. Smith | |||
Title: President & CEO | |||
1.
|
The
undersigned hereby elects to purchase _______ Shares of DEEP DOWN, INC.
pursuant to the terms of the attached
Warrant.
|
2.
|
Method
of Exercise (Please initial the applicable blank);
|
3.
|
Please
issue a certificate or certificates representing said Shares in the name
of the undersigned or in such other name as is specified
below;
|
______________________________________ | |
(Name) | |
______________________________________ | |
______________________________________ | |
(Address) |
4.
|
The
undersigned hereby represents and warrants that the aforesaid Shares are
being acquired for the account of the undersigned for investment and not
with a view to. or for resale, in connection with the distribution
thereof, and that the undersigned has no present intention of distributing
or reselling such shares and all representations and warranties of the
undersigned set forth in Section 7 of the attached Warrant are true and
correct as of the date
hereof.
|
_______________________________ | |
(Signature) | |
Title:___________________________ |
___________________________________________________ | |
Signature
Guaranteed:
|
|
___________________________________________________ |
1.1
|
The
Consultant is hereby engaged for a three-year period commencing August 6,
2007 (the "Initial Term"), and the Consultant hereby accepts the
engagement by providing the services of Robert E. Chamberlain, Jr.
("Chamberlain") as Chairman and Chief Acquisitions Officer. The Initial
Term shall be automatically renewed for up to two successive consecutive
one (1) year periods (each, a "Renewal Term" and the Initial Term and
Renewal Term are collectively referred to as the "consulting period")
thereafter unless either party sends notice to the other party, not more
than 270 days and not less than 90 days before the end of the
then-existing consulting period, of such party's desire to terminate the
Agreement at the end of the then-existing term, in which case this
Agreement will terminate at the end of the then- existing term. Consulting
services will be provided at the Company address or at such other places
as may be directed by the Company. The Consultant agrees that time is to
be scheduled by the Company and to devote reasonable productive time,
ability and attention to the business of the Company during the term of
this Agreement, subject to the direction and supervision of the
Company.
|
2.1
|
As
compensation for services rendered under this Agreement, the Consultant
shall be entitled to receive a base consulting fee of One Hundred Eighty
Thousand and NO/100 DOLLARS ($180,000.00) per annum payable twice monthly
plus an amount equal to Federal and State payroll withholdings customarily
withheld for an employee earning this compensation, including but not
limited to FICA and Medicare. The consulting fee may be increased annually
at the discretion of the Board of Directors. The Consultant is also
entitled to annual bonuses as determined by the Board of Directors. The
Consultant shall provide such reasonable business hours as the Company
shall dictate, but at least forty hours per
week.
|
2.2
|
Chamberlain
shall be eligible to participate in any and all benefits as are available
from time
to
time to
key executive office
rs, directors and employees (and
their families) of the
Company, including all health,
medical, dental, and life insurance benefits. The Company
shall pay 100
%
of all premiums with respect to
such plans for Chamberlain. Chamberlain
may, at his option, e
lect to be reimbursed for medical
insurance premiums incurred for
medical insurance not provided
through the Company. Chamberlain will be entitled to four
weeks paid vacation. Chamberlain
will also be entitled to $1,000 per month as an expense
allowance to pay for the cost of a
vehicle, insurance, gasoline, maintenance, repairs and
other unanticipated
costs.
|
3.1
|
If the Consultant willfully
breaches or habitually neglects the duties which he is required
to
perform under the terms of the
Agreement, the Company may at its option terminate this Agreement by
giving written notice of termination to the
Consultant.
|
3.2
|
Willfully breaches is defined as
misappropriation of Company' s assets, being intoxicated or
un
der the influence of drugs or
alcohol while on the job, being convicted of a felony, or not
willingly corning to
work.
|
4.1
|
Consultant agrees that this
covenant is a separate contract in and of itself. In the event
that
any of the prior clauses of this
contract should fail, this separate contract shall be binding
upon the parties. Consultant
covenants and agrees that during his consultancy with
Company and upon termination of
their engagement, whether by termination
of this
Agreement, by wrongful discharge,
or otherwise, Consultant shall not directly or indirectly,
within Texas, enter into or engage
generally in direct competition with the Company's
business, as a Consultant in any
business providing identical services as Company or own
a business which provides
identical services as Company either individually or as a
Consultant, officer, director,
independent contractor, or shareholder or otherwise,
during the
term of this Agreement or for
three (3) months after termination. This covenant on the part
of Consultant shall be construed
as an agreement independent of any other provision of this
Agreement; and the existence of
any claim or cause of action
of Consultant against
Company, whether
predicated on this Agreement or otherwise, shall not constitute a
defense to the
enforcement by Company of this section. Company shall be entitled to such
extra remedies as injunctions, stays or restraining orders to
enforce its rights
hereunder.
|
4.2
|
The Consultant will not solicit or
divert or attempt to solicit or divert, any business,
patronage, or clients of the
Company from the Company to himself or a competitor or rival of
Company for three (3)
months from the date of Consultant's withdrawal or termination from
the
Company,
|
4.3
|
During the term of this Agreement,
the Consultant will not communicate or divulge to or for
the benefit of any competitor or
rival of the Company, a
ny of the trade secrets or
processes
of the
Company including client list or pricing information, and used by the
Company.
Notwithstanding the foregoing,
upon termination of this Agreement and the Non-Compete
period, Consultant shall not be
prohibited from contacting any prospective client or
determine appropriate pricing for
any products and/or services on behalf of any new
Company.
|
4.4
|
The Consultant states that he has
read this Agreement in full and underst
ands the terms
and language in Article IV. The
Consultant has had outside counsel of his choosing review
the Covenant of Noncompete and
counsel has explained all terms and conditions to him.
The Consultant swears that he is
not under any duress or coercion
to enter this Covenant of
Noncompete, but is
doing it of his own free will in order to gain the experience, specialized
training and
especially the extra compensation offered by
Company.
|
4.5
|
Confidentiality of this business
is very important as the natur
e of the business is
securing
the customers confidence.
Therefore, Consultant may not directly or indirectly make known
to any person, firm
or corporation the names, addresses or any information pertaining to or
regarding any
customer of the Company during
or after termination of
employment through the end of the Non-Compete
period.
|
5.1
|
Any notices to be given hereunder
by either party to the other may be effected either by
personal delivery in writing or by
mail, registered or
certified, postage prepaid with return
receipt requested. Mailed notices
shall be addressed to the parties at the address
appearing in the introductory
paragraph of this Agreement, but each party may change her
address by written notice in
accordance with
the
paragraph. Notices delivered personally
shall be deemed communicated as of
actual receipt; mailed notices shall be deemed
communicated as of three (3) days
after mailing.
|
5.2
|
This Agreement supersedes any and
all other agreements, either oral or writ
ten, between
the parties hereto with respect to
the employment of the Consultant by the Company and
contains all of the covenants and
agreements between the parties with respect to such
employment in any
manne
r whatsoever.
Any changes or amendments must be in writing,
signed by all the parties, or they
are null and void.
|
5.3
|
This Agreement shall be governed
by and construed in accordance with the laws of the
State of Texas and enforceable in
Houston, Texas
|
5.4
|
Where context and circumstances
require, the gender of all words used in this contract shall
include the masculine, feminine
and neuter.
|
COMPANY:
DEEP DOWN,
INC.
By:
/s/
Ronald
E.
Smith
Name:
Ronald E. Smith
Title:
President &
CEO
CONSULTANT:
STRATEGIC
CAPITAL SERVICES, INC.
/s/
Robert E. Chamberlain, Jr.
Name:
Robert E. Chamberlain, Jr.
Title:
President
|
1.1
|
The
Employee is hereby engaged for a three-year period commencing August 6,
2007 (the "Initial Term"), and the Employee hereby accepts the employment
as President and Chief Executive Officer. The Initial Term shall be
automatically renewed for up to two successive consecutive one (1) year
periods (each, a "Renewal Term" and the Initial Term and Renewal Term are
collectively referred to as the "consulting period") thereafter unless
either party sends notice to the other party, not more than 270 days and
not less than 90 days before the end of the then-existing consulting
period, of such party's desire to terminate the Agreement at the end of
the then-existing term, in which case this Agreement will terminate at the
end of the then-existing term. Employment services will be provided at the
Company address or at such other places as may be directed by the Company.
The Employee agrees that time is to be scheduled by the Company and to
devote reasonable productive time, ability and attention to the business
of the Company during the term of this Agreement, subject to the direction
and supervision of the Company.
|
2.1
|
As
compensation for services rendered under this Agreement, the Employee
shall be entitled to receive a base salary of Two Hundred and Fifty
Thousand and NO/100 DOLLARS ($250,000.00) per annum payable twice monthly
less all Federal, State and required payroll withholdings. The salary may
be increased annually at the discretion of the Board of Directors. The
Employee is also entitled to annual bonuses as determined by the Board of
Directors and offshore bonuses as dictated by Company policy. The Employee
shall provide such reasonable business hours as the Company shall dictate,
but at least forty hours per week.
|
2.2
|
Employee
shall be eligible to participate in any and all benefits as are available
from time to time to key executive officers, directors and employees (and
their families) of the Company, including all health, medical, dental, and
life insurance benefits. The Company shall pay 100 % of all premiums with
respect to such plans for Employee. Employee will be entitled to four
weeks paid vacation. Employee will also be entitled to $1,000 per month as
an expense allowance to pay for the cost of a vehicle, insurance,
gasoline, maintenance, repairs and other unanticipated
costs.
|
3.1
|
If
the Employee willfully breaches or habitually neglects the duties which he
is required to perform under the terms of the Agreement, the Company may
at its option terminate this Agreement by giving written notice of
termination to the Employee.
|
3.2
|
Willfully
breaches is defined as misappropriation of Company' s assets, being
intoxicated or under the influence of drugs or alcohol while on the job,
being convicted of a felony, or not willingly coming to
work.
|
4.1
|
Employee
agrees that this covenant is a separate contract in and of itself. In the
event that any of the prior clauses of this contract should fail, this
separate contract shall be binding upon the parties. Employee covenants
and agrees that during his consultancy with Company and upon termination
of their engagement, whether by termination of this Agreement, by wrongful
discharge, or otherwise, Employee shall not directly or indirectly, within
Texas, enter into or engage generally in direct competition with the
Company's business, as a Employee in any business providing identical
services as Company or own a business which provides identical services as
Company either individually or as a Employee, officer, director,
independent contractor, or shareholder or otherwise, during the term of
this Agreement or for three (3) months after termination. This covenant on
the part of Employee shall be construed as an agreement independent of any
other provision of this Agreement; and the existence of any claim or cause
of action of Employee against Company, whether predicated on this
Agreement or otherwise, shall not constitute a defense to the enforcement
by Company of this section. Company shall be entitled to such extra
remedies as injunctions, stays or restraining orders to enforce its rights
hereunder.
|
4.2
|
The
Employee will not solicit or divert or attempt to solicit or divert, any
business, patronage, or clients of the Company from the Company to himself
or a competitor or rival of Company for three (3) months from the date of
Employee's withdrawal or termination from the
Company.
|
4.3
|
During
the term of this Agreement, the Employee will not communicate or divulge
to or for the benefit of any competitor or rival of the Company, any of
the trade secrets or processes
of
the Company including
client list or pricing information, and used by the Company.
Notwithstanding the foregoing, upon termination of this Agreement and the
Non-Compete period, Employee shall not be prohibited from contacting any
prospective client or determine appropriate pricing for any products
and/or services on behalf of any new
Company.
|
4.4
|
The
Employee states that he has read this Agreement in full and understands
the terms and language in Article IV. The Employee has had outside counsel
of
his choosing
review the Covenant of Noncompete and counsel has explained
all
terms and conditions
to him. The Employee swears that he is not under any duress or coercion to
enter this Covenant of Noncompete, but is doing it of his own free will in
order to gain the experience, specialized training
and
especially the extra
compensation offered by Company.
|
4.5
|
Confidentiality
of this business is very
important as the nature
of the business is securing the customers
confidence. Therefore, Employee may not directly or indirectly make known
to any person, firm or corporation the names, addresses or any information
pertaining to or regarding any customer of the Company during or after
termination of employment through the end of the Non-Compete
period.
|
5.1
|
Any
notices to be given hereunder by either party to the other may be effected
either by personal delivery in writing or by mail, registered or
certified, postage prepaid with return receipt requested. Mailed notices
shall be addressed to the parties at the address appearing in the
introductory paragraph of this Agreement, but each party may change her
address by written notice in accordance with the paragraph. Notices
delivered personally shall be deemed communicated as of actual receipt;
mailed notices shall be deemed communicated as of three (3) days after
mailing.
|
5.2
|
This
Agreement supersedes any and all other agreements, either oral or written,
between the parties hereto with respect to the employment of the Employee
by the Company and contains all of the covenants and agreements between
the parties with respect to such employment in any manner whatsoever. Any
changes or amendments must be in writing, signed by all the parties, or
they are null and void.
|
5.3
|
This Agreement shall be governed
by and construed in accordance with the laws of the
State of Texas and
enforceable in Houston,
Texas.
|
5.4
|
Where
context and circumstances require, the gender of all words used in this
contract shall include the masculine, feminine and
neuter.
|
COMPANY:
DEEPDOWN,
INC.
By:
/s/ Robert E. Chamberlain,
Jr.
Name:
Robert E. Chamberlain, Jr.
Title:
Chairman & CAO
EMPLOYEE:
RONALD
E. SMITH
/s/
Ronald E.
Smith
Name:
Ronald E.
Smith
Title:
President & CEO
|
1.1
|
The
Consultant is hereby engaged for a period commencing on August 6, 2007 and
ending May 31, 2010 (the "Initial Term"), and the Consultant hereby
accepts the engagement by providing the services of Eugene
L.
Butler
("Butler") as Chief Financial Officer. The Initial Term shall be
automatically renewed for up to two successive consecutive one (1) year
periods (each, a ''Renewal Term" and the Initial Term and Renewal Term are
collectively referred to as the "consulting period") thereafter unless
either party sends notice to the other party, not more than 270 days and
not less than 90 days before the end of the then-existing consulting
period, of such party's desire to terminate the Agreement at the end of
the then- existing term, in which case this Agreement will terminate at
the end of the then-existing term. Consulting services will be provided at
the Company address or at such other places as may be directed by the
Company. The Consultant agrees that time is to be scheduled by the Company
and to devote reasonable productive time, ability and attention to the
business of the Company during the term of this Agreement, subject to the
direction and supervision of the
Company.
|
2.1
|
As
compensation for services rendered under this Agreement, the Consultant
shall be entitled to receive a base consulting fee of One Hundred Eighty
Thousand and NO/100 DOLLARS ($180,000.00) per annum payable twice monthly
plus an amount equal to Federal and State payroll withholdings customarily
withheld for an employee earning this compensation, including but not
limited to FICA and Medicare. The consulting fee may be increased annually
at the discretion of the Board of Directors. The Consultant is also
entitled to annual bonuses as determined by the Board of Directors. The
Consultant shall provide such reasonable business hours as the Company
shall dictate, but at least forty hours per
week.
|
2.2
|
Butler
shall be eligible to participate in any and all benefits as are available
from time to time to key executive officers, directors and employees (and
their families) of the Company, including all health, medical, dental, and
life insurance benefits. The Company shall pay 100 % of all premiums with
respect to such plans for Butler. Butler may, at his option, elect to be
reimbursed for medical insurance premiums incurred for medical insurance
not provided through the Company. Butler will be entitled to four weeks
paid vacation. Butler will also be entitled to $1,000 per month as an
expense allowance to pay for the cost of a vehicle, insurance, gasoline,
maintenance, repairs and other unanticipated
costs.
|
2.3
|
The
Employment Agreement dated May 31, 2007 is hereby terminated and replaced
by this Consulting Agreement. Notwithstanding the foregoing, the 3,000,000
options granted pursuant to the Employment Agreement remain as validly
existing options.
|
3.1
|
If
the Consultant willfully breaches or habitually neglects the duties which
he is required to perform under the terms of the Agreement, the Company
may at its option terminate this Agreement by giving written notice of
termination to the Consultant.
|
3.2
|
Willfully
breaches is defined as misappropriation of Company' s assets, being
intoxicated or under the influence of drugs or alcohol while on the job.
being convicted of a felony, or not willingly coming to
work.
|
4.1
|
Consultant agrees that this
covenant is a separate contract in and of itself. In the event that
any of the prior
clauses of this contract should fail, this separate contract shall be
binding
upon the
parties. Consultant covenants and agrees that during his consultancy with
Company and upon
termination of their engagement, whether by termination of this
Agreement, by
wrongful discharge. or otherwise, Consultant shall not directly or
indirectly,
within
Texas, enter into or engage generally in direct competition with the
Company's
business,
as a Consultant in any business providing identical services as Company or
own
a business which
provides identical services as Company either individually or as a
Consultant, officer,
director, independent contractor, or shareholder or otherwise, during the
term of this
Agreement or for three (3) months after termination. This covenant on the
part
of Consultant
shall be construed as an agreement independent of any other provision of
this
Agreement; and
the existence of any claim or cause of action of Consultant against
Company. whether
predicated on this Agreement or otherwise, shall not constitute a
defense to the
enforcement by Company of this section. Company shall be entitled to such
extra remedies as
injunctions, stays or restraining orders to enforce its rights
hereunder.
|
4.2
|
The Consultant will not solicit or
divert or attempt to solicit or divert, any business,
patronage, or clients of the
Company from the Company to himself or a competitor or rival of
Company for three
(3)
months from the date
of Consultant's withdrawal or t
ermination from
the
Company.
|
4.3
|
During the term of this Agreement,
the Consultant will not communicate or divulge to or for
the benefit of any competitor or
rival of the Company, any of the trade secrets or processes
of the Company including client
list
or pricing
information, and used by the Company.
Notwithstanding the foregoing,
upon termination of this Agreement and the Non-Compete
period, Consultant shall not be
prohibited from contacting any prospective client or
determine appropriate pricing for
an
y products and/or
services on behalf of any new
Company.
|
4.4
|
The Consultant states that he has
read this Agreement in
full
and understands the
terms
and language in Article IV. The
Consultant has had outside counsel of his choosing review
the Covenant of
Noncompete and counsel has
explained all terms and conditions to him.
The Consultant swears that he is
not under any duress or coercion to enter this Covenant of
Noncompete, but is doing it of his
own free will in order to gain the experience, specialized
training and especially the extra
compensation offered by
Company.
|
4.5
|
Confidentiality of this business
is very important as the nature of the business is securing
the customers confidence.
Therefore, Consultant may not directly or indirectly make known
t
o any person, firm or corporation
the names, addresses or any information pertaining to or
regarding any customer of the
Company during or after termination of employment through the end of the
Non-Compete period.
|
5.1
|
Any notices to be given hereunder
by either party to the other may be effected either by
personal delivery in writing or by
mail, registered or certified, postage prepaid with return
receipt requested. Mailed notices
shall be addressed to the parties at th
e address
appearing in the introductory
paragraph of this Agreement, but each party may change her
address by written notice in
accordance with the paragraph. Notices delivered personally
shall be deemed communicated as of
actual receipt; mailed notices sh
all be deemed
communicated as of three
(3)
days after
mailing.
|
5.2
|
This
Agreement supersedes any and all other agreements, either oral or written,
between the parties hereto with respect to the employment of the
Consultant by the Company and contains all of the covenants and agreements
between the parties with respect to such employment in any manner
whatsoever. Any changes or amendments must be in writing, signed by all
the parties, or they are null and
void.
|
5.3
|
This
Agreement shall be governed by and construed in accordance with the laws
of the State of Texas and enforceable in Houston.
Texas.
|
5.4
|
Where
context and circumstances require, the gender of all words used in this
contract shall include the masculine, feminine and
neuter.
|
COMPANY:
DEEP
DOWN, INC.
By:
/s/
Ronald E.
Smith
Name:
Ronald E. Smith
Title:
President & CEO
CONSULTANT:
EUGENE
L. BUTLER & ASSOCIATES
/s/
Eugene L.
Butler
Name: Eugene L. Butler
Title:
President
|
Landlord's
|
Tenant's
|
Address
:
|
Address
:
|
15473
East Freeway
|
15473
East Freeway
|
Channelview
Texas
|
Channelview
Texas
|
LANDLORD:
JUMA,
L.L.C.
By:
/s/
Ronald E.
Smith
Ronald E. Smith, President
|
TENANT:
Deep
Down, Inc.
By:
/s/
Ronald E.
Smith
Ronald E. Smith, President
|
Company | State of Incorporation | |
Deep Down, Inc. | Nevada | |
Deep Down,
Inc.
|
Delaware | |
ElectroWave,
Inc.
|
Texas | |
Mako Technologies,
LLC
|
Louisiana |