As filed
with the Securities and Exchange Commission on July __, 2008
Registration
No. 333-__________
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
____________________
FORM
S-1
REGISTRATION
STATEMENT UNDER THE SECURITIES ACT OF 1933
____________________
DEEP
DOWN, INC.
(Exact
name of registrant as specified in its charter)
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Nevada
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3533
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75-2263732
|
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(State
or other jurisdiction of
incorporation
or organization)
|
(Primary
Standard Industrial
Classification
Number
|
(I.R.S.
Employer
Identification
No.)
|
15473
East Freeway
Channelview,
Texas 77530
(Address
of principal executive offices)
Ronald
E. Smith, President
Deep
Down, Inc.
15473
East Freeway
Channelview,
Texas 77530
(Name
and address of agent for service)
(281)
862-2201
(Telephone
number, including area code of agent for service)
Copy
to:
|
Robert
L. Sonfield, Jr., Esq.
|
|
Sonfield
& Sonfield
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770
South Post Oak Lane
|
|
Houston,
Texas 77056
|
|
Telephone:
(713) 877-8333
|
|
Facsimile:
(713) 877-1547
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|
Email:
Robert@sonfield.com
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Approximate
date of commencement of proposed sale to the public:
From time
to time after this Registration Statement becomes effective.
If any of
the securities being registered on this Form are to be offered on a delayed or
continuous basis pursuant to Rule 415 under the Securities Act of 1933, check
the following box.
x
If this
Form is filed to register additional securities for an offering pursuant to Rule
462(b) under the Securities Act, please check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering.
o
If this
Form is a post-effective amendment filed pursuant to Rule 462(c) under the
Securities Act, check the following box and list the Securities Act registration
statement number of the earlier effective registration statement for the same
offering.
o
If this
Form is a post-effective amendment filed pursuant to Rule 462(d) under the
Securities Act, check the following box and list the Securities Act registration
statement number of the earlier effective registration statement for the same
offering.
o
|
Large
accelerated filer
o
|
Accelerated
filer
o
|
Non-accelerated
filer
o
(Do
not check if a smaller reporting company)
|
Smaller
reporting company
þ
|
CALCULATION
OF REGISTRATION FEE
|
Title of each class
of
securities to be registered
|
Amount to
be registered
(1)
|
Proposed
maximum
offering
price per
share (2)
|
Proposed
maximum
aggregate
offering
price (2)
|
Amount of
registration fee
|
|||||||
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Common
Stock, $0.001 par value
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57,142,857 Shares
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$ 0.78
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$
44,571,428
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$
1,752
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||||||
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(1)
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Pursuant
to Pursuant to Rule 415 of the Securities Act of 1933, as amended, or
the Securities Act, this registration statement also registers
such additional shares of common stock of the Registrant as may
hereafter be offered or issued to prevent dilution resulting from stock
splits, stock dividends, recapitalizations or other capital
adjustments.
|
|
(2)
|
Estimated
solely for the purpose of calculating the registration fee pursuant to
Rule 457(c) of the Securities Act based upon the average of the high and
low sale prices of the Company’s common stock as reported on the OTC
Electronic Bulletin Board on July 16,
2008.
|
The registrant hereby amends this
registration statement on such date or dates as may be necessary to delay its
effective date until the registrant shall file a further amendment which
specifically states that this registration statement shall thereafter become
effective in accordance
with Section 8(a) of the Securities
Act of 1933 or until the registration statement shall become effective on such
date as the Commission, acting pursuant to said Section 8(a), may
determine.
The
information in this Prospectus is not complete and may be
changed. The Selling Shareholders may not sell these securities until
the registration statement filed with the Securities and Exchange Commission
relating to these securities is effective. This Prospectus is not an offer to
sell these securities and is not soliciting an offer to buy these securities in
any state where the offer or sale is not permitted.
SUBJECT
TO COMPLETION, DATED JULY __, 2008
PRELIMINARY
PROSPECTUS
57,142,857 Shares
Common
Stock
The
Selling Shareholders identified in this Prospectus from time to time are
offering for sale 57,142,857 shares of our outstanding common
stock. These shares were issued to the Selling Shareholders pursuant
to a private placement on June 5, 2008, and issued pursuant to an exemption
provided by Rule 506 of the Securities Act of 1933, as amended. The term
“Selling Shareholders” also covers persons to whom the original Selling
Shareholders transfer their shares, including transferees, donees, pledgees, or
other successors.
The
methods of sale of the common stock offered by this Prospectus are described
under the heading “Plan of Distribution” on page 70. We will receive none of the
proceeds from the sale of any of the common stock to which this Prospectus
relates. See “Use of Proceeds from the Offering” on page 19.
The
prices at which the Selling Shareholders may sell the shares of common stock
that are part of this offering will be determined by the prevailing market price
for the shares at the time the shares are sold, a price related to the
prevailing market price, at negotiated prices, or prices determined from time to
time by the Selling Shareholders. See “Plan of Distribution” on page
70.
Sales of
our common stock are reported on the Over-The-Counter Bulletin Board under the
symbol “DPDW.” On July 16, 2008, the last reported sale price of our common
stock was $0.77 per share.
A current
Prospectus must be in effect at the time of the sale of the shares of common
stock discussed above. The Selling Shareholders will be responsible for any
commissions or discounts due to brokers or dealers. We will pay all of the other
offering expenses.
Each
Selling Shareholder or dealer selling the common stock is required to deliver a
current Prospectus upon the sale. In addition, for the purposes of the
Securities Act of 1933, as amended, Selling Shareholders may be deemed
underwriters.
The
information in this Prospectus is not complete and may be changed. We may not
sell these securities until the Registration Statement filed with the Securities
and Exchange Commission is effective. This Prospectus is not an offer to sell
these securities and it is not soliciting an offer to buy these securities in
any state where the offer or sale is not permitted.
Investing
in our common stock involves a high degree of risk. You should
carefully read and consider the “Risk Factors” beginning on
page 9.
Neither the Securities and Exchange
Commission nor any state securities commission has approved or disapproved of
these securities or passed upon the accuracy or adequacy of this Prospectus. Any
representation to the contrary is a criminal offense.
Prospectus
dated July __, 2008.
This
Prospectus is part of a registration statement on Form S-1 that we filed with
the Securities and Exchange Commission, or the “SEC,” using a “shelf”
registration or continuous offering process. Under this shelf process, certain
Selling Shareholders may from time to time sell the shares of common stock
described in this Prospectus in one or more offerings.
You
should rely only on the information contained or incorporated by reference in
this Prospectus. Neither we nor the Selling Shareholders have authorized anyone
to provide you with different information. If anyone provides you with different
or inconsistent information, you should not rely on it. The Selling Shareholders
are not making an offer to sell these securities in any jurisdiction where the
offer or sale of these securities is not permitted. You should assume that the
information appearing in this Prospectus is accurate only as of the date on the
front cover of this Prospectus and that any information we have incorporated by
reference is accurate only as of the date of the document incorporated by
reference. Our business, financial condition, results of operation and prospects
may have changed since these dates.
PRELIMINARY
PROSPECTUS SUMMARY
This
summary highlights key aspects of our business that are described in more detail
in our reports filed with the Securities and Exchange
Commission. This summary does not contain all of the information that
you should consider before making a future investment decision with respect to
our securities. You should read this entire Prospectus carefully,
including the “Risk Factors,” the combined audited financial statements and the
notes thereto, and the documents incorporated by reference.
Unless
the context indicates otherwise, all references in this registration statement
to “Deep Down,” “the Company,” “we,” “us” and “our” refer to Deep Down, Inc. and
its subsidiaries.
Our goal
is to provide superior products and services designed to provide safer, more
cost-effective solutions in a more expeditious manner to our
clients. We believe there is significant demand for, and brand name
recognition of, our established products due to the technological capabilities,
reliability, cost-effectiveness, timely delivery and operational time-saving
features of these products. Since our formation, we have introduced
many new products that continue to broaden the market currently served by
us.
We market
our products and services primarily through our corporate offices in
Channelview, Texas. Our sales representatives travel worldwide to the
major international energy and maritime markets. We generally
manufacture and fabricate our products at our facilities, although we also work
with third parties who provide manufacturing and fabrication support through
their own facilities in the Houston, Texas, metropolitan area.
All
57,142,857 shares of common stock offered herein were sold pursuant to a private
offering of our common stock in June 2008 to thirty-five (35) accredited
investors pursuant to an exemption from registration provided by Rule 506 of the
Securities Act of 1933, as amended (the “Act”).
Company
Information:
Our
executive offices are located at 15473 East Freeway, Channelview, Texas
77530-4107 and our telephone number is (281) 862-2201. Our website
address is located at http://www.deepdowninc.com. The information on
our website is not incorporated by reference and does not form any part of this
Prospectus or the registration statement of which this Prospectus is a
part.
Risks
Affecting Us
We are
subject to a number of risks that you should consider before you decide to
purchase our common stock. Those risks are discussed more fully under the
heading “Risk Factors” on page 9.
The table
below summarizes our shares of common stock outstanding connected with and after
this offering.
(1)
All
57,142,857 shares of common stock offered herein were sold pursuant to a private
offering of our common stock in June 2008 to thirty-five (35) accredited
investors pursuant to an exemption from registration provided by Rule 506 of the
Act.
(2)
The
number of shares of our common stock outstanding after this offering is based on
the number of shares outstanding as of July 16, 2008 and excludes:
·
200,000
shares of our common stock issuable upon exercise of a warrant issued in
connection with our acquisition of Flotation Technologies, Inc.
(“Flotation”)
·
Shares
of our common stock issuable upon the exercise of 438,812 other outstanding
warrants; and
·
Common
shares in an amount equal to 15% of the total number of shares outstanding
reserved for issuance under our stock purchase plan
SUMMARY
HISTORICAL AND UNAUDITED PRO FORMA FINANCIAL INFORMATION
The
following tables present summary historical and unaudited pro forma financial
information for Deep Down and its subsidiaries as of the dates and for the
periods indicated. The historical consolidated financial data for the year ended
December 31, 2007, and the period from inception, June 29, 2006 to December
31, 2006 are derived from our audited consolidated financial statements
appearing elsewhere in this Prospectus. The following summary historical
consolidated financial data as of March 31, 2008 and for the three-month periods
ended March 31, 2008 and 2007 are derived from our unaudited interim condensed
consolidated financial statements appearing elsewhere in this Prospectus. In the
opinion of our management, the unaudited consolidated financial statements have
been prepared on the same basis as the audited consolidated financial statements
and include all adjustments necessary for a fair presentation of the information
set forth therein. Interim results are not necessarily indicative of full year
results.
The
following summary unaudited pro forma financial data for the twelve months ended
December 31, 2007 and 2006, respectively, and for and as of the three
months ended March 31, 2008 give effect to (1) our acquisition of
Flotation, (2) the issuance of common stock to the sellers of Flotation in
connection with such acquisition, (3) the issuance of 600,000 incentive common
stock purchase options to employees of Flotation, (4) the application of
$22.1 million of the net proceeds of the private placement completed
on June 5, 2008 (the
“
Private
Placement
”
) to finance
the cash portion of the purchase price of Flotation and (5) the receipt of
the remaining net proceeds of the Private Placement. The following summary
unaudited pro forma financial data does not give effect to usage of $12.5
million of the net proceeds of the Private Placement to repay debt
owing to Prospect and related early termination fees which was paid in June
2008. Additionally, the summary unaudited pro forma financial data for the
twelve months ended December 31, 2007 and 2006, respectively, give effect
to (1) the acquisition of Mako, and (2) the interest expense generated by the
debt issued to Prospect in order to finance the acquisition. For
further information on the pro forma assumptions and data refer to pages 25-32
of this document.
The
summary unaudited pro forma financial information is based on our historical
consolidated financial statements and the historical combined financial
statements of Flotation and Mako as indicated. The pro forma adjustments are
based on information and assumptions we believe are reasonable. The unaudited
pro forma financial information is presented for informational purposes only and
does not purport to represent what our results of operations or financial
position would have been had the transactions reflected occurred on the dates
indicated or to project our financial position as of any future date or our
results of operations for any future period.
You
should read the summary financial information presented below for the year ended
December 31, 2007 and the period from June 29, 2006 (inception) through December
31, 2006, and for the unaudited period ended March 31, 2008 and 2007 which is
presented elsewhere in this Prospectus. This information is only a summary and
should be read together with “Unaudited pro forma condensed combined financial
statements”, “Management’s discussion and analysis of financial condition and
results of operations,” our historical consolidated financial statements and the
related notes contained elsewhere in this prospectus supplement and the other
information contained in this prospectus supplement. For more details on how you
can obtain our SEC reports incorporated by reference in this prospectus
supplement, see “Where You Can Find More Information” in the accompanying
prospectus.
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(1)
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Historical results of operations
as reported from inception, June 29, 2006 to December 31 2006 of the
operations of Deep Down,
Inc.
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(2)
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Historical
results of operations for the year ended December 31, 2007 including the
historical results of ElectroWave and Mako from the dates of their
acquisitions in April 2007 and December 2007,
respectively.
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(3)
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Historical
unaudited results of operations for the three months ended March 31, 2008
which include the results of ElectoWave, and Mako, which were both
acquired after the first quarter of 2007; therefore our results of
operations for the comparable period in 2007 did not include these
acquisitions.
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(4)
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EBITDA
is a non-GAAP financial measure. Deep Down defines EBITDA as net income
plus interest expense, income taxes, depreciation, amortization and other
non-cash, non-operating expenses. Deep Down uses EBITDA as an
unaudited supplemental financial measure to assess the financial
performance of its assets without regard to financing methods, capital
structures, taxes or historical cost basis; its liquidity and operating
performance over time in relation to other companies that own similar
assets. The Company also calculates EBITDA to measure the ability of Deep
Down assets to generate cash sufficient for Deep Down to pay potential
interest costs. Deep Down also understands that such data is used by
investors to assess the Company's performance. However, the term EBITDA is
not defined under generally accepted accounting principles and EBITDA is
not a measure of operating income, operating performance or liquidity
presented in accordance with generally accepted accounting principles.
When assessing Deep Down’s operating performance or liquidity, investors
and others should not consider this data in isolation or as a substitute
for net income, cash flow from operating activities, or other cash flow
data calculated in accordance with generally accepted accounting
principles.
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The
following is a reconciliation of net income (loss) to EBITDA:
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Historical
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Pro
forma (5)
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|||||||||||||||||||||||
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Three
Months
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Three
Months
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|||||||||||||||||||||||
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Inception
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Ended
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Ended
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Year
Ended
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Year
Ended
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||||||||||||||||||||
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June
29, 2006 -
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Year
Ended
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March
31,
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March
31,
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December
31,
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December
31,
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|||||||||||||||||||
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December
31,
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December
31,
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2007
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2008
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2006
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2007
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|||||||||||||||||||
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2006
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2007
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(unaudited)
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(unaudited)
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(unaudited)
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(unaudited)
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|||||||||||||||||||
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EBITDA Reconciliation:
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||||||||||||||||||||||||
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Net
income (loss)
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$ | (3,299,817 | ) | $ | 952,509 | $ | (109,258 | ) | $ | (89,447 | ) | $ | (3,877,833 | ) | $ | 1,585,170 | ||||||||
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Tax
expense (benefit)
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22,250 | 369,673 | - | (269,366 | ) | 1,078,030 | 2,190,503 | |||||||||||||||||
|
Interest
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62,126 | 2,335,662 | 231,887 | 729,866 | 1,121,699 | 3,395,235 | ||||||||||||||||||
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Other
income (a)
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- | (2,000,000 | ) | - | (28,355 | ) | - | (2,000,000 | ) | |||||||||||||||
|
Depreciation
and amortization expense
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27,161 | 426,964 | 64,025 | 298,149 | 1,601,876 | 2,314,872 | ||||||||||||||||||
|
Stock
based compensation expense
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3,340,792 | 187,394 | - | 105,162 | 3,428,904 | 275,506 | ||||||||||||||||||
|
EBITDA
|
$ | 152,512 | $ | 2,272,202 | $ | 186,654 | $ | 746,009 | $ | 3,352,676 | $ | 7,761,286 | ||||||||||||
Note (a):
Both Historical and Pro forma “Other income” for the year ended December 31,
2007 include a $2.0 million gain on extinguishment of debt.
During
the second quarter of 2007, Deep Down executed a Securities Redemption Agreement
with the former Deep Down Chief Financial Officer to redeem 4,000 shares of
Series E exchangeable preferred stock at a discounted price of $500 per share
for a total of $2.0 million. The discount of $500 per share from the
face value of $1,000 was accounted for as a substantial modification of debt,
thereby generating a gain on extinguishment of debt which is reflected as other
income on the statement of operations.
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(5)
|
Pro
forma results reflect the combined condensed results of Mako and Flotation
assuming the respective purchases took place on January 1, 2006 and
2007. Additionally, please see the detailed pro forma
statements included in this document under “Unaudited Pro Forma Financial
Information.”
|
If you purchase our common stock,
you will be taking on a high degree of financial risk. In deciding
whether or not to purchase our common stock, you should carefully consider the
following discussion of risks, together with the other information contained in
this Prospectus. The occurrence of any of the following risks could
materially harm our business and financial condition and our ability to raise
additional capital in the future. In that event, the market price of
our common stock could decline and you could lose part or all of your
investment.
Risks
Related to Our Business
We
derive most of our revenues from companies in the offshore oil and gas industry,
a historically cyclical industry with levels of activity that are significantly
affected by the levels and volatility of oil and gas prices.
We derive
most of our revenues from customers in the offshore oil and gas exploration,
development and production industry. The offshore oil and gas
industry is a historically cyclical industry characterized by significant
changes in the levels of exploration and development activities. Oil and gas
prices, and market expectations of potential changes in those prices,
significantly affect the levels of those activities. Worldwide
political, economic and military events have contributed to oil and gas price
volatility and are likely to continue to do so in the future. Any prolonged
reduction in the overall level of offshore oil and gas exploration and
development activities, whether resulting from changes in oil and gas prices or
otherwise, could materially and adversely affect our financial condition and
results of operations in our segments within our offshore oil and gas
business.
Some
factors that have affected and are likely to continue affecting oil and gas
prices and the level of demand for our services and products include the
following:
|
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·
|
worldwide
demand for oil and gas;
|
|
|
·
|
the
ability of the Organization of Petroleum Exporting Countries, or OPEC, to
set and maintain production levels and
pricing;
|
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·
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the
level of production by non-OPEC
countries;
|
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|
·
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domestic
and foreign tax policy;
|
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|
·
|
laws
and governmental regulations that restrict exploration and development of
oil and gas in various offshore
jurisdictions;
|
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|
·
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advances
in exploration and development
technology;
|
|
|
·
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the
political environment of oil-producing
regions;
|
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|
·
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the
price and availability of alternative fuels;
and
|
·
overall economic conditions.
Our
business involves numerous operating hazards that may not be covered by
insurance. The occurrence of an event not fully covered by insurance could have
a material adverse effect on our financial condition and results of
operations.
Our
products are used in potentially hazardous drilling, completion and production
applications that can cause personal injury, product liability and environmental
claims. A catastrophic occurrence at a location where our equipment and/or
services are used may expose us to substantial liability for personal injury,
wrongful death, product liability or commercial claims. To the extent available,
we maintain insurance coverage that we believe is customary in the industry.
Such insurance does not, however, provide coverage for all liabilities, and we
cannot assure you that our insurance coverage will be adequate to cover claims
that may arise or that we will be able to maintain adequate insurance at rates
we consider reasonable. The occurrence of an event not fully covered by
insurance could have a material adverse effect on our financial condition and
results of operations.
We
may lose money on fixed-price contracts.
A portion
of our business consists of designing, manufacturing, selling and installing
equipment for major projects pursuant to competitive bids, and is performed on a
fixed-price basis. Under these contracts, we are typically responsible for all
cost overruns, other than the amount of any cost overruns resulting from
requested changes in order specifications. Our actual costs and any gross profit
realized on these fixed-price contracts will often vary from the estimated
amounts on which these contracts were originally based. This may
occur for various reasons, including:
|
|
·
|
errors
in estimates or bidding;
|
|
|
·
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changes
in availability and cost of labor and materials;
or
|
|
|
·
|
variations
in productivity from our original
estimates.
|
These
variations and the risks inherent in our projects may result in reduced
profitability or losses on projects. Depending on the size of a project,
variations from estimated contract performance could have a significant impact
on our operating results.
Our
business could be adversely affected if we do not develop new
products.
Technology
is an important component of our business and growth strategy, and our success
as a company depends to a significant extent on the development and
implementation of new product designs and improvements. Whether we can continue
to develop systems and services and related technologies to meet evolving
industry requirements and, if so, at prices acceptable to our customers will be
significant factors in determining our ability to compete in the industry in
which we operate. Many of our competitors are large multinational companies that
may have significantly greater financial resources than we have, and they may be
able to devote greater resources to research and development of new systems,
services and technologies than we are able to do.
Loss
of our key management or other personnel could adversely impact our
business.
We depend
on the services of our executive management team, including Ronald E. Smith,
Robert E. Chamberlain, Jr. and Eugene L. Butler. The loss of any of these
officers could have a material adverse effect on our operations and financial
condition. In addition, competition for skilled machinists, fabricators and
technical personnel among companies that rely heavily on engineering and
technology is intense, and the loss of qualified employees or an inability to
attract, retain and motivate additional highly skilled employees required for
the operation and expansion of our business could hinder our ability to conduct
research activities successfully and develop and produce marketable products and
services. While we believe that our wage rates are competitive and that our
relationship with our skilled labor force is good, a significant increase in the
wages paid by competing employers could result in a reduction of our skilled
labor force, increases in the wage rates paid by us, or both. If either of these
events were to occur, in the near-term, the profits realized by us from work in
progress would be reduced and, in the long-term, our production capacity and
profitability could be diminished, and our growth potential could be
impaired. Additionally, if we were to lose the services of our
officers for any reason, we could face substantial costs and expenses to locate
individuals with similar capabilities and/or may not be able to find suitable
candidates to fill the vacancies left by such individuals, either of which could
have a material adverse effect on our results of operations.
We
may not be successful in integrating business that we acquire.
The
successful integration of acquired businesses is important to our future
financial performance. We may not achieve the anticipated benefits
from any acquisition unless the operations of the acquired business are
successfully combined with ours in a timely manner. The integration of our
acquisitions will require substantial attention from our
management. The diversion of the attention of our management, and any
difficulties encountered in the transition process, could have a material
adverse effect on our operations and financial results. The
difficulties of integration may be increased by the necessity of coordinating
geographically separated organizations, integrating personnel with disparate
business backgrounds and combining different corporate
cultures. There can be no assurance that there will not be
substantial costs associated with such activities or that there will not be
other material adverse effects of these integration efforts. In addition, the
process of integrating the various businesses could also cause the interruption
of, or a loss of momentum in, the activities of some or all of these businesses,
which could have a material adverse effect on our operations and financial
results. There can be no assurance that we will realize any of the anticipated
benefits from our acquisitions. The acquisition of oil service
companies that are not profitable, or the acquisition of new facilities that
result in significant integration costs and inefficiencies, could also adversely
affect our profitability.
Our
current and anticipated future growth has placed, and will continue to place,
significant demands on our management, operational and financial
resources. Our ability to manage our growth effectively will require
us to continue to improve our operational, financial and management information
systems and to continue to attract, train, motivate, manage and retain key
employees. We may not be able to manage our expanded operations
effectively.
We may
not be successful in implementing our strategy or in responding to ongoing
changes in the oil service industry which may require adjustments to our
strategy. If we are unable to implement our strategy successfully or
do not respond timely and adequately to ongoing changes in the healthcare
industry, our business, financial condition and results of operations will be
materially adversely affected.
If
we undertake international operations, it will involve additional risks not
associated with our domestic operations.
If we
become involved in international operations, the effect on our business from the
risks we described will not be the same in all countries and
jurisdictions. By way of example, recently there has been political
instability and civil unrest in Indonesia and West Africa and general economic
downturns in Asia and Brazil. However, the specific risks associated
with our operations in foreign areas will include risks of:
|
|
·
|
multiple,
conflicting, and changing laws and regulations, export and import
restrictions, and employment laws;
|
|
|
·
|
regulatory
requirements, and other government approvals, permits, and
licenses;
|
|
|
·
|
potentially
adverse tax consequences;
|
|
|
·
|
political
and economic instability, including wars and acts of terrorism; political
unrest, boycotts, curtailments of trade, and other business
restrictions;
|
|
|
·
|
expropriation,
confiscation or nationalization of
assets;
|
|
|
·
|
renegotiation
or nullification of existing
contracts;
|
|
|
·
|
difficulties
and costs in recruiting and retaining individuals skilled in international
business operations;
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foreign
exchange restrictions;
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foreign
currency fluctuations;
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foreign
taxation;
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the
inability to repatriate earnings or
capital;
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changing
political conditions;
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changing
foreign and domestic monetary
policies;
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regional
economic downturns; and
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foreign
governmental regulations favoring or requiring the awarding of contracts
to local contractors or requiring foreign contractors to employ citizens
of, or purchase supplies from, a particular jurisdiction that may harm our
ability to compete.
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Our
offshore oilfield operations involve a variety of operating hazards and risks
that could cause losses.
Our
operations are subject to the hazards inherent in the offshore oilfield
business. These include blowouts, explosions, fires, collisions,
capsizing and severe weather conditions. These hazards could result
in personal injury and loss of life, severe damage to or destruction of property
and equipment, pollution or environmental damage and suspension of operations.
We may incur substantial liabilities or losses as a result of these
hazards. While we maintain insurance protection against some of these
risks, and seek to obtain indemnity agreements from our customers requiring the
customers to hold us harmless from some of these risks, our insurance and
contractual indemnity protection may not be sufficient or effective to protect
us under all circumstances or against all risks. The occurrence of a
significant event not fully insured or indemnified against or the failure of a
customer to meet its indemnification obligations to us could materially and
adversely affect our results of operations and financial condition.
Laws
and government regulations may add to our costs or adversely affect our
operations.
Our
business is affected by changes in public policy and by federal, state, local
and foreign laws and regulations relating to the energy industry. Oil
and gas exploration and production operations are affected by tax, environmental
and other laws relating to the petroleum industry, by changes in those laws and
changes in related administrative regulations. It is also possible that these
laws and regulations may in the future add significantly to our operating costs
or those of our customers or otherwise directly or indirectly affect our
operations.
Environmental
laws and regulations can increase our costs, and our failure to comply with
those laws and regulations can expose us to significant
liabilities.
Risks of
substantial costs and liabilities related to environmental compliance issues are
inherent in our operations. Our operations are subject to extensive federal,
state, local and foreign laws and regulations relating to the generation,
storage, handling, emission, transportation and discharge of materials into the
environment. Permits are required for the operation of various
facilities, and those permits are subject to revocation, modification and
renewal. Governmental authorities have the power to enforce compliance with
their regulations, and violations are subject to fines, injunctions or both. In
some cases, those governmental requirements can impose liability for the entire
cost of cleanup on any responsible party without regard to negligence or fault
and impose liability on us for the conduct of or conditions others have caused,
or for our acts that complied with all applicable requirements when we performed
them. It is possible that other developments, such as stricter
environmental laws and regulations, and claims for damages to property or
persons resulting from our operations, would result in substantial costs and
liabilities. Our insurance policies and the contractual indemnity
protection we seek to obtain from our customers may not be sufficient or
effective to protect us under all circumstances or against all risks involving
compliance with environmental laws and regulations.
Provisions
recently added to our corporate documents and Nevada law could delay or prevent
a change in control of our Company, even if that change would be beneficial to
our shareholders.
The Board
of Directors and a majority of the shareholders recently approved amendments to
our articles of incorporation and bylaws that, along with Nevada law could delay
or prevent a change in control of our company, even if that change would be
beneficial to our shareholders. The provisions are designed to
discourage any tender offer or other attempt to gain control of the Company in a
transaction that is not approved by our Board of Directors, by making it more
difficult for a person or group to obtain control of the Company in a short time
and then impose its will on the remaining stockholders, including:
Classified Board of Directors and
Removal of Directors
. Our Board of Directors is divided into
three classes which shall be as nearly equal in number as
possible. The directors in each class serve for terms of three years,
with the terms of one class expiring each year. Each class currently
consists of approximately one-third of the number of directors. Each
director will serve until his successor is elected and qualified. A
director may not be removed except for cause by the affirmative vote of the
holders of 75% of the outstanding shares of capital stock entitled to vote at an
election of directors.
Advance Notice Requirements for
Nomination of Directors and Proposal of New Business at Annual Stockholder
Meetings
. Any stockholder desiring to make a nomination for
the election of directors or a proposal for new business at a stockholder
meeting must submit written notice not less than 30 or more than 60 days in
advance of the meeting.
Supermajority Voting Requirement for
Amendment of Certain Provisions of the Articles of
Incorporation
. Specified provisions contained in the articles
of incorporation and bylaws may not be repealed or amended except upon the
affirmative vote of the holders of not less than seventy-five percent of the
outstanding stock entitled to vote. This requirement exceeds the
majority vote that would otherwise be required by Nevada law for the repeal or
amendment of the articles or bylaws.
We
may be unable to successfully compete with other manufacturers of drilling and
production equipment.
Several
of our primary competitors are diversified multinational companies with
substantially larger operating staffs and greater capital resources than ours
and which have been engaged in the manufacturing business for a much longer time
than us. If these competitors substantially increase the resources they devote
to developing and marketing competitive products and services, we may not be
able to compete effectively. Similarly, consolidation among our competitors
could enhance their product and service offerings and financial resources,
further intensifying competition.
The
loss of a significant customer could have an adverse impact on our financial
results.
Our
principal customers are major integrated oil and gas companies, large
independent oil and gas companies and foreign national oil and gas companies.
Offshore drilling contractors and engineering and construction companies also
represent a portion of our customer base. During the last 12 months, our top 5
customers represented approximately 50% of total revenues, with our largest
customer accounting for more than 16% of our total revenues. While we are not
dependent on any one customer or group of customers, the loss of one or more of
our significant customers could, at least on a short-term basis, have an adverse
effect on our results of operations.
Our
customers’ industries are undergoing continuing consolidation that may impact
our results of operations.
The oil
and gas industry is rapidly consolidating and, as a result, some of our largest
customers have consolidated and are using their size and purchasing power to
seek economies of scale and pricing concessions. This consolidation may result
in reduced capital spending by some of our customers or the acquisition of one
or more of our primary customers, which may lead to decreased demand for our
products and services. We cannot assure you that we will be able to maintain our
level of sales to a customer that has consolidated or replace that revenue with
increased business activity with other customers. As a result, the acquisition
of one or more of our primary customers may have a significant negative impact
on our results of operations or our financial condition. We are unable to
predict what effect consolidations in the industry may have on price, capital
spending by our customers, our selling strategies, our competitive position, our
ability to retain customers or our ability to negotiate favorable agreements
with our customers.
Increases
in the cost of raw materials and energy used in our manufacturing processes
could negatively impact our profitability.
During
2006 and 2007, commodity prices for items such as nickel, molybdenum and heavy
metal scrap that are used to make the steel alloys required for our products
increased significantly, resulting in an increase in our raw material costs.
Similarly, energy costs to produce our products have increased significantly. If
we are not successful in raising our prices on products, our margins will be
negatively impacted.
Future
capital needs.
Our
growth and continued operations could be impaired by limitations on our access
to the capital markets. There can be no assurance that capital from outside
sources will be available, or if such financing is available, it may involve
issuing securities senior to the common stock or equity financings which are
dilutive to holders of the common stock.
We
depend on third party suppliers for timely deliveries of raw materials, and our
results of operations could be adversely affected if we are unable to obtain
adequate supplies in a timely manner.
Our
manufacturing operations depend upon obtaining adequate supplies of raw
materials from third parties. The ability of these third parties to deliver raw
materials may be affected by events beyond our control. Any interruption in the
supply of raw materials needed to manufacture our products could adversely
affect our business, results of operations and reputation with our
customers.
If
we are not able to adequately protect our intellectual property, we may not be
able to compete effectively.
Our
success depends, to a significant degree, upon the protection of our proprietary
technologies. While we currently own one U.S. patent and there are no foreign
counterparts relating to our products and techniques and have applied for five
U.S. patents and there are no foreign counterparts related to our products and
techniques, we will need to pursue additional protections for our intellectual
property as we develop new products or techniques and enhance existing products
or techniques. We may not be able to obtain appropriate protections for our
intellectual property in a timely manner, or at all. Our inability to obtain
appropriate protections for our intellectual property may allow competitors to
enter our markets and produce or sell the same or similar products.
If we are
forced to resort to legal proceedings to enforce our intellectual property
rights, the proceedings could be burdensome and expensive. In addition, our
proprietary rights could be at risk if we are unsuccessful in, or cannot afford
to pursue, those proceedings.
We also
rely on trade secrets and contract law to protect some of our proprietary
technology. Nevertheless, our unpatented trade secrets and know-how may not be
effectively protected.
Moreover,
others may independently develop substantially equivalent proprietary
information and techniques or otherwise gain access to our trade secrets and
know-how.
Drilsys
TM
,
Electrowave
TM
, Mudsys
TM
,
Aquasox
TM
, Moray
TM
,
Seastax
TM
,
Quick-Loc
®
,
Flotec
®
,
Proteus™ and Flotect
TM
are our
registered trademarks.
In 1995,
the U.S. Patent and Trademark Office adopted changes to the U.S. patent law that
made the term of issued patents 20 years from the date of filing rather than 17
years from the date of issuance, subject to specified transition periods.
Beginning in June 1995, the patent term became 20 years from the earliest
effective filing date of the underlying patent application. These changes may
reduce the effective term of protection for patents that are pending for more
than three years. In addition, as of January 1996, all inventors who work
outside of the United States are able to establish a date of invention on the
same basis as those working in the United States. This change could adversely
affect our ability to prevail in a priority of invention dispute with a third
party located or doing work outside of the United States. While we cannot
predict the effect that these changes will have on our business, they could have
a material adverse effect on our ability to protect our proprietary information.
Furthermore, the possibility of extensive delays in the patent issuance process
could effectively reduce the term during which a marketed product is protected
by patents.
We may
need to obtain licenses to patents or other proprietary rights from third
parties. We may not be able to obtain the licenses required under any patents or
proprietary rights, or they may not be available on acceptable terms. If we do
not obtain required licenses, we may encounter delays in product development or
find that the development, manufacture or sale of products requiring licenses
could be foreclosed. We may, from time to time, support and collaborate in
research conducted by universities and governmental research organizations. We
may not be able to acquire exclusive rights to the inventions or technical
information derived from these collaborations, and disputes may arise over
rights in derivative or related research programs conducted by us or our
collaborators.
If
we infringe on the rights of third parties, we may not be able to sell our
products, and we may have to defend against litigation and pay
damages.
If a
competitor were to assert that our products infringe on its patent or other
intellectual property rights, we could incur substantial litigation costs and be
forced to pay substantial damages. Third-party infringement claims, regardless
of their outcome, would not only consume significant financial resources, but
would also divert our management’s time and attention. Such claims could also
cause our customers or potential customers to purchase competitors’ products or
defer or limit their purchase or use of our affected products until resolution
of the claim. If any of our products are found to violate third-party
intellectual property rights, we may have to re-engineer one or more of our
products, or we may have to obtain licenses from third parties to continue
offering our products without substantial re-engineering. Our efforts to
re-engineer or obtain licenses could require significant expenditures and may
not be successful.
Limitation
on remedies, indemnification
The
Company’s Bylaws provide that the officers and directors will only be liable to
the Company for acts or omissions that constitute actual fraud, gross negligence
or willful and wanton misconduct. Thus, the Company may be prevented from
recovering damages for certain alleged errors or omissions by the officers and
directors for liabilities incurred in connection with their good faith acts for
the Company. Such an indemnification payment might deplete the Company’s assets.
Stockholders who have questions regarding the fiduciary obligations of the
officers and directors of the Company should consult with independent legal
counsel. It is the position of the Securities and Exchange Commission that
exculpation from and indemnification for liabilities arising under the 1933 Act
and the rules and regulations hereunder is against public policy and therefore
unenforceable.
Our
internal controls may be inadequate, which could cause our financial reporting
to be unreliable and lead to misinformation being disseminated to the
public.
Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting. As defined in Exchange Act Rule 13a-15(f),
internal control over financial reporting is a process designed by, or under the
supervision of, the principal executive and principal financial officer and
effected by the board of directors, management and other personnel, to provide
reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with
generally accepted accounting principles and includes those policies and
procedures that: (i) pertain to the maintenance of records that in reasonable
detail accurately and fairly reflect the transactions and dispositions of the
assets of Deep Down; (ii) provide reasonable assurance that transactions are
recorded as necessary to permit preparation of financial statements in
accordance with generally accepted accounting principles, and that receipts and
expenditures of Deep Down are being made only in accordance with authorizations
of management and directors of Deep Down, and (iii) provide reasonable assurance
regarding prevention or timely detection of unauthorized acquisition, use or
disposition of Deep Down’s assets that could have a material effect on the
financial statements.
Our
management assessed the effectiveness of our internal control over financial
reporting as of December 31, 2007 and identified material weaknesses. We have
not formally adopted a written code of business conduct and ethics that governs
our employees, officer sand directors. We have not effectively
communicated our accounting policies and procedures to our
employees. We do not have any independent director nor any director
that qualifies as an audit committee financial expert. Our
ElectroWave subsidiary does not maintain effective controls over revenue
recognition and has following accounting policies and procedures. We
have not maintained effective controls over payables
processing. Although we have taken steps to address a number of
these weaknesses since this assessment (See “Management’s Discussion and
Analysis of Financial Condition and Results of Operations — Controls and
Procedures — Changes in Internal Control Over Financial Reporting” on
page 37), our internal controls may be inadequate or ineffective, which could
cause our financial reporting to be unreliable and lead to misinformation being
disseminated to the public. Investors relying upon this misinformation may make
an uninformed investment decision.
Risks
Related to this Offering
We
and certain of our majority shareholders, officers and directors are subject to
certain requirements and prohibitions regarding the sale of our common stock
pursuant to the terms and conditions of the Purchase Agreement.
Until
September 4 , 2008, we have agreed not to directly or indirectly, (1) offer for
sale, sell, pledge or otherwise dispose of (or enter into any transaction or
device which is designed to, or could be expected to, result in the disposition
by the Company at any time in the future of) any shares of common stock, or
securities convertible into or exchangeable for common stock, or sell or grant
options, rights or warrants with respect to any shares of common stock or
securities convertible into or exchangeable for common stock (other than option
grants to employees pursuant to existing plans in the ordinary course of
business), or (2) enter into any swap or other derivatives transaction that
transfers to another, in whole or in part, any of the economic benefits or risks
of ownership of such shares of common stock, whether any such transaction
described in clause (1) or (2) above is to be settled by delivery of common
stock or other securities, in cash or otherwise, without the prior written
consent of the Selling Shareholders or Dahlman Rose & Company,
LLC.
As a
result of the above prohibitions, we could be prohibited from raising capital
and/or entering into agreements with consultants in the future, which could have
a material adverse effect on our results of operations.
We
may face penalties if we fail to timely obtain effectiveness of this
Registration Statement.
If this
Registration Statement is not declared effective by September 4, 2008 (the
“Required Effective Date”), then for each day following the Required Effective
Date, until but excluding the date the Commission declares the Registration
Statement effective, the Company shall, for each such day, pay each Purchaser
with respect to any such failure, as damages, an amount equal to 0.0333% of the
purchase price paid by such Purchaser for the shares purchased pursuant to the
Purchase Agreement. Furthermore, if a Purchaser is prohibited from
selling shares under the Registration Statement as a result of a suspension of
more than thirty (30) days or suspensions on more than two (2) occasions of not
more than thirty (30) days each in any 12-month period, then for each day on
which a suspension is in effect that exceeds the maximum allowed period for
suspensions, but not including any day on which a suspension is lifted, the
Company shall pay such Purchaser, as damages an amount equal to 0.0333% of the
purchase price paid by such Purchaser for its shares pursuant to the Purchase
Agreement for each such day. Assuming that this Registration
Statement is not declared effective by the Required Effective Date and/or all
Purchasers are prohibited from selling their shares under this Registration
Statement, we will be required to pay daily damages of $1,332 per day to the
Purchasers. As a result, our failure to obtain timely effectiveness
of this Registration Statement could cause a material adverse effect on our
results of operations and/or force us to pay penalties to the
Purchasers.
Risks
Related to the Securities Market and Ownership of our Common Stock
Our
stock price has been and will likely continue to be volatile and you may be
unable to resell your shares at or above the price you paid.
The
market price of our common stock could be subject to significant
fluctuations. Among the factors that could affect our stock price
are:
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quarterly
variations in our operating
results;
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changes
in revenue or earnings estimates or publication of research reports by
analysts;
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failure
to meet analysts’ revenue or earnings
estimates;
|
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·
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speculation
in the press or investment
community;
|
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·
|
strategic
actions by us or our competitors, such as acquisitions or
restructurings;
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·
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actions
by institutional stockholders;
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general
market conditions; and
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domestic
and international economic factors unrelated to our
performance.
|
The stock
markets in general and the markets for energy stocks in particular, have
experienced extreme volatility that has often been unrelated to the operating
performance of particular companies. These broad market fluctuations may
adversely affect the trading price of our common stock. In particular, we cannot
assure you that you will be able to resell your shares at any particular price,
or at all.
Shares
eligible for sale in the future could negatively affect our stock
price.
The
market price of our common stock could decline as a result of sales of a large
number of shares of our common stock or the perception that these sales could
occur. This might also make it more difficult for us to raise funds
through the issuance of securities. As of July 16, 2008, we had
outstanding 177,350,630 shares of common stock, of which 29,002,052 shares are
freely tradable or covered by a current registration statement, and 57,142,857
shares will be freely tradable under this Prospectus. The remaining
91,205,721 shares of common stock outstanding are “restricted securities” as
defined in Rule 144 and are held by our “affiliates” (as that term is defined in
Rule 144 under the Securities Act). These restricted securities may
be sold in the future pursuant to registration statements filed with the SEC or
without registration under the Securities Act to the extent permitted by Rule
144 or other exemptions under the Securities Act.
As of
July 16, 2008, there were an aggregate of 8,775,000 shares of common stock
issuable upon exercise of outstanding stock options and an aggregate of 638,812
shares of stock issuable upon exercise of outstanding warrants. On
July 3, 2008, the holder of 4,960,585 warrants exercised the warrants in a
cashless exercise for a total of 2,618,129 shares of common stock.
Until
September 4 , 2008, we have agreed not to directly or indirectly, (1) offer for
sale, sell, pledge or otherwise dispose of (or enter into any transaction or
device which is designed to, or could be expected to, result in the disposition
by the Company at any time in the future of) any shares of common stock, or
securities convertible into or exchangeable for common stock, or sell or grant
options, rights or warrants with respect to any shares of common stock or
securities convertible into or exchangeable for common stock (other than option
grants to employees pursuant to existing plans in the ordinary course of
business), or (2) enter into any swap or other derivatives transaction that
transfers to another, in whole or in part, any of the economic benefits or risks
of ownership of such shares of common stock, whether any such transaction
described in clause (1) or (2) above is to be settled by delivery of common
stock or other securities, in cash or otherwise, without the prior written
consent of the Selling Shareholders or Dahlman Rose & Company,
LLC.
We may
register additional shares in the future in connection with acquisitions,
compensation or otherwise. We have not entered into any agreements or
understanding regarding any future acquisitions and cannot ensure that we will
be able to identify or complete any acquisition in the future. Sales
of shares of common stock in the public markets or through Rule 144 may have an
adverse effect on prevailing market prices for our common
stock.
We
may issue preferred stock whose terms could adversely affect the voting power or
value of our common stock.
Our
certificate of incorporation authorizes us to issue, without the approval of our
shareholders, one or more classes or series of preferred stock having such
preferences, powers and relative, participating, optional and other rights,
including preferences over our common stock respecting dividends and
distributions, as our Board of Directors may determine. The terms of
one or more classes or series of preferred stock could adversely impact the
voting power or value of our common stock. For example, we might grant holders
of preferred stock the right to elect some number of our directors in all events
or on the happening of specified events or the right to veto specified
transactions. Similarly, the repurchase or redemption rights or liquidation
preferences we might assign to holders of preferred stock could affect the
residual value of the common stock.
If
we are late in filing our quarterly or annual reports with the SEC, we may be
de-listed from the OTC Electronic Bulletin Board.
We are
not registered on any public stock exchange. Sales of our shares are quoted by
market on the OTC Electronic Bulletin Board (“OTCBB”). The OTCBB is a regulated
quotation service that displays real-time quotes, last sale prices and volume
information in over-the-counter (OTC) securities. The OTCBB is not an issuer
listing service, market or exchange. Although the OTCBB does not have any
listing requirements per se, to be eligible for quotation on the OTCBB, issuers
must remain current in their periodic filings (Current Reports on Form 8-K,
Quarterly Reports on Form 10-Q and Annual Reports on Form 10-K) with the SEC.
Broker-dealers are not permitted to begin quotation of a security whose issuer
does not meet this filing requirement. Securities already quoted on the OTCBB
that become delinquent in their required filings will be removed following a 30
or 60 day grace period if they do not make their required filing of periodic
reports during that time. Pursuant to the OTCBB rules relating to the
timely filing of periodic reports with the SEC, the securities of any OTCBB
issuer which fails to file a quarterly or annual report on a timely basis three
times during any twenty-four (24) month period are not eligible for quotation on
the OTCBB. Such removed issuer would not be re-eligible for quotation
by broker-dealers for a period of one-year, during which time any subsequent
late filing would reset the one-year period of removal from OTCBB
quotation. If we are late in our filings three times in any
twenty-four (24) month period and our common stock is no longer eligible for
quotation on the OTCBB, our securities may become worthless and we may be forced
to curtail or abandon our business plan. It will be difficult for you
to sell any shares you purchase in this offering. In such a case, you may find
that you are unable to achieve any benefit from your investment or liquidate
your shares without considerable delay, if at all. In addition, if we fail to
have our common stock quoted on a public trading market, your common stock will
not have a quantifiable value and it may be difficult, if not impossible, to
ever resell your shares, resulting in an inability to realize any value from
your investment.
We
will incur significant increased costs as a result of Section 404 of the
Sarbanes Oxley Act, and our management will be required to devote substantial
time to new compliance initiatives.
Moving
forward, we anticipate incurring significant legal, accounting and other
expenses in connection with our status as a fully reporting public company. The
Sarbanes-Oxley Act of 2002 (the "Sarbanes-Oxley Act") and new rules subsequently
implemented by the SEC have imposed various new requirements on public
companies, including requiring changes in corporate governance practices. As
such, our management and other personnel will need to devote a substantial
amount of time to these new compliance initiatives. Moreover, these rules and
regulations will increase our legal and financial compliance costs and will make
some activities more time-consuming and costly. In addition, the Sarbanes-Oxley
Act requires, among other things, that we maintain effective internal controls
for financial reporting and disclosure of controls and procedures. In
particular, we are required to perform system and process evaluation and testing
of our internal controls over financial reporting to allow management to report
on the effectiveness of our internal controls over financial reporting, as
required by Section 404 of the Sarbanes-Oxley Act at the end of each fiscal
year. For fiscal year 2009, Section 404 will require us to obtain a report
from our independent registered public accounting firm attesting to the
assessment made by management. Our testing, or the subsequent testing
by our independent registered public accounting firm, may reveal deficiencies in
our internal controls over financial reporting that are deemed to be material
weaknesses. Our compliance with Section 404 will require that we incur
substantial accounting expense and expend significant management efforts. We
currently do not have an internal audit group, and we may need to hire
additional accounting and financial staff with appropriate public company
experience and technical accounting knowledge. Moreover, if we are not able to
comply with the requirements of Section 404 in a timely manner, or if we or our
independent registered public accounting firm identifies deficiencies in our
internal controls over financial reporting that are deemed to be material
weaknesses, the market price of our stock could decline, and we could be subject
to sanctions or investigations by the SEC or other regulatory authorities, which
would require additional financial and management resources.
Investors
may face significant restrictions on the resale of our common stock due to
federal regulations of penny stocks.
Our
common stock is subject to the requirements of Rule 15(g)9, promulgated under
the Securities Exchange Act as long as the price of our common stock is below
$5.00 per share. Under such rule, broker-dealers who recommend low-priced
securities to persons other than established customers and accredited investors
must satisfy special sales practice requirements, including a requirement that
they make an individualized written suitability determination for the purchaser
and receive the purchaser's consent prior to the transaction. The Securities
Enforcement Remedies and Penny Stock Reform Act of 1990 also requires additional
disclosure in connection with any trades involving a stock defined as a penny
stock. Generally, the Commission defines a penny stock as any equity security
not traded on an exchange or quoted on NASDAQ that has a market price of less
than $5.00 per share. The penny stock disclosures require a broker-dealer to
deliver, prior to any transaction, a disclosure schedule explaining the penny
stock market and the risks associated with it; disclosure of commissions payable
to the broker-dealer and our registered representatives and current bid and
offer quotations for our common stock; and sending monthly statements disclosing
recent price information pertaining to the penny stock held in a customer’s
account, the account’s value and information regarding the limited market in
penny stocks. Such requirements could severely limit the market liquidity of the
securities, the pricing of our common stock, and the ability of purchasers to
sell their securities in the secondary market.
SPECIAL
NOTE ABOUT FORWARD-LOOKING STATEMENTS
This
Prospectus, contains forward-looking statements. Any statements about our
expectations, beliefs, plans, objectives, assumptions or future events or
performance are not historical facts and may be forward-looking. These
statements are often, but not always, made through the use of words or phrases
such as “anticipate,” “estimate,” “plans,” “projects,” “continuing,” “ongoing,”
“expects,” “management believes,” “we believe,” “we intend” and similar words or
phrases. These statements involve estimates, assumptions and uncertainties which
could cause actual results to differ materially from those projected. Any
forward-looking statements are qualified in their entirety by reference to the
factors discussed in this Prospectus or incorporated by reference.
Forward-looking
statements are subject to known and unknown risks and uncertainties that could
cause actual results to differ materially from those expected or implied by the
forward-looking statements. Our actual results could differ materially from
those anticipated in the forward-looking statements for many reasons; including
the factors described under the heading “Risk Factors” beginning on page
10.
You
should not unduly rely on these forward-looking statements, which speak only as
of the date on which it is made. We undertake no obligation to publicly revise
any forward-looking statement to reflect circumstances or events after the date
of this Prospectus or to reflect the occurrence of unanticipated events. You
should review the factors and risks we describe in the reports we file from time
to time with the SEC after the date of this Prospectus. The reports we file from
time to time with the SEC are available to the public over the Internet at the
SEC’s website
http://www.sec.gov
.
USE
OF PROCEEDS
We will
not receive any proceeds from the sale of the selling shareholders’ shares of
common stock registered herein.
MARKET
FOR COMMON EQUITY
AND
RELATED STOCKHOLDER MATTERS
Our
common stock trades publicly on the OTC Bulletin Board under the symbol “DPDW.”
The OTCBB is a regulated quotation service that displays real-time quotes,
last-sale prices and volume information in over-the-counter equity securities.
The OTCBB securities are traded by a community of market makers that enter
quotes and trade reports. This market is extremely limited and any prices quoted
may not be a reliable indication of the value of our common stock.
Prior to
the reverse merger with MediQuip on December 14, 2006, no public market in our
common stock existed. See the discussion of the reverse merger under Corporate
History under “Description of Business.” Beginning December 14, 2006, our common
stock was quoted on the OTC Bulletin Board. These quotes represent inter-dealer
quotations, without adjustment for retail mark-up, markdown or commission and
may not represent actual transactions. The following table sets, for
the periods indicated, the high and low sales prices for our common stock as
reported by the OTC Bulletin Board.
|
High
|
Low
|
|||||||
|
Fiscal
2008:
|
||||||||
|
July
1 to 16, 2008
|
$
0.95
|
$
0.76
|
||||||
|
June
30, 2008
|
$
1.27
|
$
0.68
|
||||||
|
March
31, 2008
|
$
1.24
|
$
0.35
|
||||||
|
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
|
||||||
Holders
As of
July 16, 2008, there were approximately 1,097 holders of record of our common
stock.
Dividend
Policy
To date,
we have not paid any cash dividends and our present policy is to retain earnings
for use in our business. Under the terms of a $13.0 million borrowing
facility from Prospect Capital Corporation, we were restricted from paying any
dividends on our common stock until such time as the borrowing facility is
repaid in full. This facility was paid in full in June
2008.
Equity
Compensation Plan Information
The
following table sets forth the outstanding equity instruments as of July 16,
2008:
|
Number
of securities to be issued upon exercise of outstanding
options,
|
Weighted-average
exercise price
of
outstanding options,
|
Number
of securities remaining
available
for future issuance under
equity
compensation plans
(excluding
securities reflected
|
||||
|
Plan Category
|
warrants and rights
|
warrants and rights
|
in first column)
|
|||
|
Equity
compensation
|
8,775,000 (1)
|
$0.93
|
17,827,595
(1)
|
|||
|
plans
approved by securityholders
|
||||||
|
Equity
compensation
|
||||||
|
plans
not approved by securityholders
|
638,812
(2)
|
$0.78
|
N/A
|
|||
|
TOTAL
|
9,413,812
|
$0.92
|
17,827,595
|
____________
|
(1)
|
Represents
8,775,000 shares of common stock that may be issued pursuant to options
granted as of July 16, 2008 and 17,827,595 additional 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
638,812 shares of common stock underlying warrants approved by the
Company’s board of directors, including 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
included herein for a detailed description of the terms of these warrants.
Also includes 200,000 shares issued as part of the Flotation acquisition
detailed in the Recent Events section of this
document.
|
DESCRIPTION
OF CAPITAL STOCK
We have
authorized capital stock consisting of 490,000,000 common shares, $0.001 par
value, and 10,000,000 of all series of preferred shares, $0.001 par
value.
Common
Stock
The
holders of outstanding shares of common stock are entitled to receive dividends
out of assets or funds legally available for the payment of dividends of such
times and in such amounts as the board from time to time may determine. Holders
of common stock are entitled to one vote for each share held on all matters
submitted to a vote of shareholders. There is no cumulative voting of the
election of directors then standing for election. The common stock is not
entitled to pre-emptive rights and is not subject to conversion or redemption.
Upon liquidation, dissolution or winding up of our company, the assets legally
available for distribution to stockholders are distributable ratably among the
holders of the common stock after payment of liquidation preferences, if any, on
any outstanding payment of other claims of creditors.
The Board
of Directors recently approved amendments to our Bylaws and Articles of
Incorporation, subject to shareholder approval, which will affect the following
changes, among other things, once they are approved by the shareholders and
become effective:
Classified Board of Directors and
Removal of Directors
. Our board of directors is divided into
three classes which shall be as nearly equal in number as
possible. The directors in each class serve for terms of three years,
with the terms of one class expiring each year. Each class currently
consists of approximately one-third of the number of directors. Each
director will serve until his successor is elected and qualified. A
director may not be removed except for cause by the affirmative vote of the
holders of 75% of the outstanding shares of capital stock entitled to vote at an
election of directors.
Advance Notice Requirements for
Nomination of Directors and Proposal of New Business at Annual Stockholder
Meetings
. Any stockholder desiring to make a nomination for
the election of directors or a proposal for new business at a stockholder
meeting must submit written notice not less than 30 or more than 60 days in
advance of the meeting.
Supermajority Voting Requirement for
Amendment of Certain Provisions of the Certificate of
Incorporation
. Specified provisions contained in the articles
of incorporation and bylaws may not be repealed or amended except upon the
affirmative vote of the holders of not less than seventy-five percent of the
outstanding stock entitled to vote. This requirement exceeds the
majority vote that would otherwise be required by Nevada law for the repeal or
amendment of the articles or bylaws.
Preferred
Stock
Series
E and G Classified as Liabilities
The
Series E and G redeemable exchangeable preferred stock have a face value and
liquidation preference of $1,000 per share, no dividend preference, and are
exchangeable at the holder’s option into 6% Subordinated Notes due three years
from the date of the exchange. These shares carry voting rights equal to 690
votes per share. The Series E and G preferred stock were valued based on the
discounted value of their expected future cash flows (using a discount rate of
20%). Deep Down evaluated the Series E and G preferred stock and has
classified them as debt instruments from the date of issuance due to the fact
that they are exchangeable at the option of the holder thereof into
Notes.
In
February 2007, Deep Down redeemed 250 shares of Series E redeemable,
exchangeable preferred stock held by its CEO at the face value of $1,000 per
share for a total of $250,000. Deep Down accreted the remaining
discount of $72,799 attributable to such shares on the date of redemption as
interest expense.
In May
2007, Deep Down executed a Securities Redemption Agreement (the “Agreement”)
with a stockholder (the former CFO of Deep Down) to redeem 4,000 shares of
Series E redeemable, exchangeable preferred stock at a discounted price of $500
per share for a total of $2,000,000. The discount of $500 per share
from the face value of $1,000 was accounted for as a substantial modification of
debt, thereby generating a gain on extinguishment of debt which is reflected in
other income. Deep Down accreted the remaining discount of $1,017,707
attributable to such shares on the date of redemption as interest
expense. The shareholder placed all 4,000 shares into an escrow
account as of the execution of this agreement. Terms of the payment to the
shareholder are: 2,800 shares at $500 for a total of $1,400,000 paid in August
2007, with the remaining shares to being redeemed monthly beginning August 31,
2007 at a rate of 40 shares at $500 per share, or $20,000 per
month. The final balance outstanding of $560,000 was paid with
543,689 shares of common stock in October 2007.
On
September 13, 2007, Deep Down redeemed 2,250 shares owned by the CEO and
director, and his wife, a Vice-President and director of Deep
Down. The Series E preferred shares were redeemed for 2,250,000
shares of common stock at the closing price of $0.66 totaling
$1,473,750. Since the shareholders are related parties, no accretion
interest was recorded related to the redemption. The difference
between the carrying value of the Series E shares of $1,685,463 and the common
stock market value was recorded to Paid in Capital.
Additionally,
in October 2007, Deep Down redeemed 1,250 shares of Series E redeemable,
exchangeable preferred stock at the face value of $1,000 per share for a total
of $1,250,000. The Series E preferred shares were redeemed for 1,213,592 shares
of common stock at the closing price of $1.03. Deep Down accreted the
remaining discount of $260,520 attributable to such shares on the date of
redemption and recorded it as interest expense.
All
Series G preferred shares were cancelled and exchanged during the first quarter
of 2007. Accordingly, there is no future discount accretion relating to the
Series G preferred shares. See “Series F and G Cancellation and
Issuance of Additional Series E” below.
A summary
of Series E and Series G preferred stock transactions follows:
|
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
|
-
|
||||||
|
Shares
redeemed
|
(500
|
)
|
||||||
|
Outstanding
at March 31, 2008
|
-
|
-
|
||||||
The
remaining and outstanding 500 shares of the Series E preferred stock were
acquired by an unrelated third party in February 2008 from a former
director of Deep Down. The Series E shares were exchanged into a
Debenture as described in Note 6 of the audited financial statements attached
hereto.
As a
result of the above transactions as of the date of this Registration Statement,
the Company does not have outstanding shares of Series E or Series G Preferred
Stock.
Series
F and G Cancellation and Issuance of Additional Series E
On March
20, 2007, Deep Down finalized the terms of an agreement with a former
non-employee director who surrendered 25,000,000 shares of common stock for
$250,000 in cash. The market value of those shares was $7,250,000. Additionally,
he surrendered 1,500 shares of Series F convertible preferred stock with a value
of $1,325,773 and 500 shares of Series G exchangeable preferred stock with a
value of $357,615 to Deep Down for cancellation in exchange for 1,250 shares of
Series E exchangeable preferred stock valued at $945,563. The Series E Preferred
Stock was valued based on the discounted value of its expected future cash flows
(using a discount rate of 20%). In addition, he also kept 500 shares
of Series E exchangeable preferred stock he previously owned and agreed to
tender his resignation from the Board.
On March
20, 2007, Deep Down issued 2,000 shares of Series E exchangeable preferred stock
to John C. Siedhoff, then Chief Financial Officer, and director, valued at
$1,512,901 for the surrender of his ownership of 1,500 shares of Series F
convertible preferred stock valued at $1,325,773 and 500 shares of Series G
exchangeable preferred stock valued at $357,616, which were returned to the
transfer agent for cancellation. The Series E Preferred Stock was
valued based on the discounted value of its expected future cash flows (using a
discount rate of 20%).
Series
D and F Classified as Temporary Equity
The
Series D redeemable convertible preferred stock have a face value and
liquidation preference of $1,000 per share, no dividend preference, and are
convertible into shares of common stock determined by dividing the face amount
by a conversion price of $0.1933. These shares carry voting rights
equal to one vote for every share of common stock into which the preferred stock
is convertible. These shares are redeemable at their face value on an
annual basis within 120 days after each calendar year-end beginning with the
year ending December 31, 2007 based on an amount equal to 15.625% of annual net
income. In the event that a holder declines redemption, such amounts
are reallocated to the other preferred stockholders that have elected to
redeem.
The
Series F preferred stock has the same terms as described above, with the
exception of the amount of redemption is equal to 9.375% of annual net
income.
Deep Down
evaluated the Series D and F preferred stock for liability or equity
presentation and determined that the instruments were more appropriately
classified as temporary equity due to the conditional redemption
feature.
On March
28, 2008, holders of the Series D preferred stock converted 5,000 of the
outstanding shares into 25,866,518 shares of common stock.
As of the
filing of this Registration Statement, there are no outstanding shares of Series
D Preferred Stock or Series F Preferred Stock.
Series
C Preferred Stock
On April
22, 2005, MediQuip issued 22,000 Series C convertible preferred shares which
remained after the reverse merger. The Series C shares had a face value and a
liquidation preference of $12.50 per share, a cumulative dividend of 7% payable
at the conversion date, and were convertible into shares of common stock
determined by dividing the face amount by a conversion price of $0.0625. These
shares carried no voting rights. All of the Series C shares were
converted in the fourth quarter of fiscal year 2007 to 4,400,000 shares of Deep
Down’s common stock.
As a
result of the above transactions, as of the filing of this Registration
Statement, there are no outstanding shares of Series C Preferred
Stock.
UNAUDITED
PRO FORMA FINANCIAL INFORMATION
The
following unaudited pro forma combined condensed financial statements are based
on the historical financial statements of Deep Down Inc., Mako Technologies,
Inc. and Flotation Technologies, Inc. after giving effect to the acquisitions of
Mako Technologies, Inc. and Flotation Technologies, Inc.,
respectively.
The
unaudited pro forma combined condensed balance sheets as of March 31, 2008 are
presented to give effect to the acquisition of Flotation Technologies, Inc. as
if it occurred on March 31, 2008; Mako is included in the historical financial
statements of Deep Down, Inc as of that date. The unaudited pro forma combined
condensed statements of operations for the three months ended March 31, 2008 are
presented as if the acquisition of Flotation Technologies, Inc. had taken place
on January 1, 2008 by combining the historical results of Flotation
Technologies, Inc. and Deep Down, Inc. The unaudited pro forma
combined condensed statements of operations for the twelve months ended December
31, 2007 and December 31, 2006, respectively, are presented as if the
acquisition of Mako Technologies, Inc. and Flotation Technologies, Inc. had each
taken place on January 1, 2006.
Purchase of Mako
Technologies, Inc.
Effective
December 1, 2007, Deep Down purchased 100% of the common stock of Mako
Technologies, Inc. Pursuant to the agreement and plan of merger, two
installments were paid to the Mako shareholders. The first installment of $2.9
million in cash and 6,574,074 restricted shares of common stock of Deep Down,
valued at $0.76 per share, were paid on January 4, 2008. The second installment
of 2,802,969 restricted shares of common stock of Deep Down, valued at $0.70 per
share, was issued on March 28, 2008. The final cash payment of $1.2 million
which was paid on April 11, 2008, is reflected as “Payable to Mako shareholders”
on the accompanying balance sheets.
The
purchase price of $11.3 million included approximately $188,369 of transaction
expenses, plus the assumption of leases of real and personal property and
ongoing accounts payable and bank loans in exchange for substantially all of the
assets, including construction in progress, fixed assets and accounts receivable
and the transfer of all employees. The acquisition price was allocated to the
assets acquired and liabilities assumed based upon their estimated fair values
with the excess being recorded in goodwill. The following table
summarizes the estimated fair values of the assets acquired and liabilities
assumed at the date of acquisition:
|
Cash
and cash equivalents
|
$ | 280,841 | ||
|
Accounts
receivable
|
1,515,074 | |||
|
Construction
in progress
|
279,590 | |||
|
Prepaid
expenses
|
179,583 | |||
|
Property,
plant and equipment, net
|
3,235,456 | |||
|
Intangibles
|
4,398,000 | |||
|
Goodwill
|
3,132,678 | |||
|
Total
assets acquired
|
$ | 13,021,222 | ||
|
|
||||
|
Accounts
payable and accrued liabilities
|
894,838 | |||
|
Long
term debt
|
819,384 | |||
|
Total
liabilities acquired
|
$ | 1,714,222 | ||
|
Net
assets acquired
|
$ | 11,307,000 |
The
allocation of the purchase price was based on preliminary unaudited
estimates. Estimates and assumptions are subject to change upon the
receipt of management’s review of audited final amounts and final tax
returns. This final evaluation of net assets acquired will be offset
by a corresponding change in goodwill
Purchase of Flotation
Technologies, Inc.
On June
5, 2008, Deep Down completed the acquisition of 100% of the equity securities of
Flotation Technologies, Inc. (“Flotation”), a Maine corporation, pursuant to the
Stock Purchase Agreement entered into on April 17, 2008. The equity interest was
acquired from the three individual shareholder members of the same family and
related technology was acquired from an entity affiliated with the selling
stockholders. No prior material relationship existed between the selling
shareholders and Deep Down, any of our affiliates, or any of our directors or
officers, or any associate of any of our officers or directors. Deep
Down executed the definitive agreement to purchase Flotation on April 17, 2008
and effectively dated the acquisition for accounting purposes as of May 1, 2008.
Deep Down announced the closing on June 6, 2008.
The
acquisition of Flotation has been accounted for using the purchase method of
accounting in accordance with Statement of Financial Accounting Standards (FASB)
No. 141, Business Combinations (FASB 141) since Deep Down acquired substantially
all of the assets, certain liabilities, employees, and business of
Flotation.
The
purchase price of Flotation was $23.8 million and consisted of $22.1 million
cash, and 1,714,286 shares of common stock valued at $0.83 per common share plus
transaction costs of $181,227. In addition, warrants to purchase 200,000 common
shares at $0.70 per share were issued to an affiliated entity for acquisition of
the related technology. The warrants are exercisable at any time from June 3,
2009 through September 3, 2011 and include piggyback registration rights with
respect to the underlying shares of common stock. Deep Down valued the warrants
at $121,793 based on the Black Scholes option pricing model. Flotation’s
shareholders used $1.8 million of the $22.1 million cash received to pay
outstanding bank and shareholder debt of Flotation. The purchase price may be
adjusted upward or downward, dependant on certain working capital
targets.
Deep Down
sold 57,142,857 shares to accredited investors on June 5, 2008, for
approximately $37.1 million in net proceeds, at a price of $0.70 per share.
Completion of the private placement was subject to completion of the acquisition
of Flotation Technologies as described above. Dahlman Rose & Company, LLC
acted as exclusive placement agent for the financing. Deep Down used $22.1
million in proceeds from this private placement to fund the cash requirement of
the Flotation acquisition as discussed above.
Deep Down
also issued 600,000 incentive common stock purchase options to employees of
Flotation with an exercise price of $1.15 per share. The employee options vest
one-third of the original amount each year and may be exercised in whole or in
part after vesting. Deep Down valued the options at $264,335 based on the Black
Scholes option pricing model, and will recognize the related compensation cost
ratably over the requisite service period.
The table
below reflects the breakdown of the purchase price as noted above:
|
Cash
|
$ | 22,100,000 | ||
|
Certain
transaction costs
|
181,227 | |||
|
Fair
market value of common stock
|
1,422,857 | |||
|
Fair
market value of warrants issued
|
121,793 | |||
|
Total
purchase price
|
$ | 23,825,877 |
The
purchase price of $23.8 million was in exchange for substantially all of the
assets, including construction in progress, fixed assets and accounts receivable
and the transfer of all employees and assumption of accounts payable and other
accrued liabilities. The acquisition price was allocated to the
assets acquired and liabilities assumed based upon their estimated fair values
with the excess being recorded in goodwill. The following table
summarizes the estimated fair values of the assets acquired and liabilities
assumed at the date of acquisition:
|
Summary of net assets
acquired:
|
||||
|
Cash
and cash equivalents
|
$ | 235,040 | ||
|
Accounts
receivable
|
2,105,519 | |||
|
Construction
in progress
|
871,183 | |||
|
Prepaid
expenses
|
15,903 | |||
|
Property,
plant and equipment, net
|
4,671,190 | |||
|
Intangibles
|
14,797,000 | |||
|
Goodwill
|
1,977,389 | |||
|
Total
assets acquired
|
$ | 24,673,224 | ||
|
|
||||
|
Accounts
payable and accrued liabilities
|
847,347 | |||
|
Total
liabilities acquired
|
$ | 847,347 | ||
|
Net
assets acquired
|
$ | 23,825,877 | ||
Deep Down
obtained an independent valuation of the assets and liabilities as of the
purchase date of May 1, 2008. Based on the independent valuation, the fair value
of the property, plant and equipment was increased by approximately $986,000 and
will be depreciated over estimated useful lives of 3 to 39 years using the
straight-line method. Deep Down has estimated the fair value of Flotation’s
identifiable intangible assets as follows:
|
Estimated
|
Average
Remaining
|
|||||||
|
Fair
Value
|
Useful
Life
|
|||||||
|
Trademarks
|
$ | 2,039,000 |
40
|
|||||
|
Technology
|
11,209,000 |
25
|
||||||
|
Non-compete
covenant
|
879,000 |
3
|
||||||
|
Customer
relationship
|
670,000 |
25
|
||||||
| $ | 14,797,000 | |||||||
The
allocation of the purchase price was based on preliminary unaudited
estimates. Estimates and assumptions are subject to change upon the
receipt of management’s review of audited final amounts and final tax
returns. This final evaluation of net assets acquired will be offset
by a corresponding change in goodwill.
Unaudited pro forma
condensed combined financial statements
The pro
forma combined condensed financial statements are presented for informational
purposes only and are not necessarily indicative of the results of operations
that actually would have been achieved had each acquisition been consummated as
of that time, or is it intended to be a projection of future results. The
unaudited pro forma results were as follows:
The
Unaudited Pro Forma Combined Condensed Statements include the following pro
forma assumptions and entries for Flotation:
|
(a)
|
Purchase
accounting related to assets acquired and liabilities assumed as part of
the transaction:
|
Deep Down
obtained an independent valuation of the assets and liabilities as of the
purchase date of May 1, 2008. The fair value of the property, plant
and equipment will be depreciated over estimated useful lives of 3 to 39 years
using the straight-line method. Deep Down has estimated the fair
value of Flotation’s identifiable intangible assets as follows:
|
Estimated
|
Average
Remaining
|
|||||||
|
Fair
Value
|
Useful
Life
|
|||||||
|
Trademarks
|
$ | 2,039,000 |
40
|
|||||
|
Technology
|
11,209,000 |
25
|
||||||
|
Non-compete
covenant
|
879,000 |
3
|
||||||
|
Customer
relationship
|
670,000 |
25
|
||||||
| $ | 14,797,000 | |||||||
|
(b)
|
Amounts
reflect the total purchase price of $23.8 million including approximately
$181,227 of transaction expenses and $121,793 Black Scholes fair market
valuation of the warrants issued:
|
|
Cash
|
$ | 22,100,000 | ||
|
Certain
transaction costs
|
181,227 | |||
|
Fair
market value of common stock
|
1,422,857 | |||
|
Fair
market value of warrants issued
|
121,793 | |||
|
Total
purchase price
|
$ | 23,825,877 |
|
(c)
|
Represents
par value and additional paid-in capital related to shares of common stock
issued in the private placement to outside third party
investors. Deep Down sold 57,142,857 shares to institutional
investors on June 5, 2008, for approximately $37.1 million in net
proceeds, at a price of $0.70 per share. Deep Down used $22.1 million for
the purchase of Flotation. The remaining $15.0 million in proceeds were
used to pay off debt and for working capital purposes, and are not
reflected in these pro forma
amounts.
|
|
(d)
|
Represents
estimated income tax accruals for the respective periods at Deep Down’s
estimated combined effective rate of 37%. Flotation was an S-Corp, and as
such did not accrue income taxes in its historical financial
statements.
|
|
(e)
|
Amortization
of the intangible assets at a rate of $68,261 per month based on the lives
in the table above.
|
|
(f)
|
Recognition
of stock based compensation from employee stock options issued in
connection with the acquisition of Flotation. Deep Down is recognizing
$7,343 per month for the respective time
periods.
|
The table
below reflects the assumptions used for warrant and option grants in the three
months ended March 31, 2008:
|
Expected
life (in years)
|
2-3
years
|
|
Risk-free
interest rate
|
2.52
% - 2.84%
|
|
Volatility
|
51.7%
- 53.3%
|
|
Dividend
yield
|
0%
|
The
Unaudited Pro Forma Combined Condensed Statements include the following pro
forma assumptions and entries for Mako:
|
(g)
|
For
the year ended December 31, 2007, 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. For the year ended December 31,
2006, amortization at a rate of $28,353 for twelve
months.
|
|
(h)
|
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.
|
A total
of 9,377,043 shares were issued for the total transaction. These pro forma
amounts give effect as if shares were issued January 1, 2006.
SELECTED
HISTORICAL FINANCIAL INFORMATION
The
following tables present summary historical and unaudited financial information
for Deep Down and its subsidiaries as of the dates and for the periods
indicated. The historical consolidated financial data for the year ended
December 31, 2007, and the period from inception, June 29, 2006 to December
31, 2006 are derived from our audited consolidated financial statements
appearing elsewhere in this Prospectus. The following summary historical
consolidated financial data as of March 31, 2008 and for the three-month periods
ended March 31, 2008 and 2007 are derived from our unaudited interim condensed
consolidated financial statements appearing elsewhere in this Prospectus. In the
opinion of our management, the unaudited consolidated financial statements have
been prepared on the same basis as the audited consolidated financial statements
and include all adjustments necessary for a fair presentation of the information
set forth therein. Interim results are not necessarily indicative of full year
results.
|
Selected
historical consolidated financials data
|
||||||||||||||||
|
Historical
|
||||||||||||||||
|
Three
Months
|
Three
Months
|
|||||||||||||||
|
Inception
|
Ended
|
Ended
|
||||||||||||||
|
June
29, 2006 -
|
Year
Ended
|
March
31,
|
March
31,
|
|||||||||||||
|
December
31,
|
December
31,
|
2007
|
2008
(3)
|
|||||||||||||
|
2006
(1)
|
2007
(2)
|
(unaudited)
|
(unaudited)
|
|||||||||||||
|
Results
of operations data:
|
||||||||||||||||
|
Revenues
|
$ | 978,047 | $ | 19,389,730 | $ | 2,098,394 | $ | 6,279,465 | ||||||||
|
Cost
of sales
|
565,700 | 13,020,369 | 1,252,089 | 3,876,371 | ||||||||||||
|
Gross
profit
|
412,347 | 6,369,361 | 846,305 | 2,403,094 | ||||||||||||
|
Operating
expenses:
|
||||||||||||||||
|
Selling,
general & administrative
|
3,600,627 | 4,284,553 | 659,651 | 1,762,247 | ||||||||||||
|
Depreciation
and amortization
|
27,161 | 426,964 | 64,025 | 298,149 | ||||||||||||
|
Total
operating expenses
|
3,627,788 | 4,711,517 | 723,676 | 2,060,396 | ||||||||||||
|
Operating
income (loss)
|
(3,215,441 | ) | 1,657,844 | 122,629 | 342,698 | |||||||||||
|
Total
other expense
|
(62,126 | ) | (335,662 | ) | (231,887 | ) | (701,511 | ) | ||||||||
|
Income
(loss) from continuing operations
|
(3,277,567 | ) | 1,322,182 | (109,258 | ) | (358,813 | ) | |||||||||
|
Income
tax benefit (expense)
|
(22,250 | ) | (369,673 | ) | - | 269,366 | ||||||||||
|
Net
income (loss)
|
$ | (3,299,817 | ) | $ | 952,509 | $ | (109,258 | ) | $ | (89,447 | ) | |||||
|
Basic
earnings (loss) per share
|
$ | (0.04 | ) | $ | 0.01 | $ | (0.00 | ) | $ | (0.00 | ) | |||||
|
Shares
used in computing
|
||||||||||||||||
|
basic
per share amounts
|
76,701,569 | 73,917,190 | 81,036,838 | 87,185,242 | ||||||||||||
|
Diluted
earnings (loss) per share
|
$ | (0.04 | ) | $ | 0.01 | $ | (0.00 | ) | $ | (0.00 | ) | |||||
|
Shares
used in computing
|
||||||||||||||||
|
diluted
per share amounts
|
76,701,569 | 104,349,455 | 81,036,838 | 87,185,242 | ||||||||||||
|
EBITDA
(4)
|
$ | 152,512 | $ | 2,272,202 | $ | 186,654 | $ | 746,009 | ||||||||
|
Cash
flow data:
|
||||||||||||||||
|
Cash
provided by (used in):
|
||||||||||||||||
|
Operating
activities
|
$ | (56,242 | ) | $ | (3,006,136 | ) | $ | 144,083 | $ | (543,444 | ) | |||||
|
Investing
activities
|
101,497 | (1,358,429 | ) | (395,439 | ) | (410,983 | ) | |||||||||
|
Financing
activities
|
(32,893 | ) | 6,558,323 | 336,871 | 1,864,025 | |||||||||||
|
Balance
sheet data (at period end):
|
||||||||||||||||
|
Cash
and cash equivalents
|
$ | 12,462 | $ | 2,581,220 | $ | 97,977 | $ | 3,678,318 | ||||||||
|
Working
capital
|
932,929 | 6,674,242 | 698,700 | 8,914,647 | ||||||||||||
|
Total
assets
|
10,129,563 | 36,051,689 | 11,790,067 | 34,715,696 | ||||||||||||
|
Total
liabilities
|
6,358,489 | 19,043,929 | 9,171,483 | 15,730,144 | ||||||||||||
|
Total
debt
|
1,168,348 | 11,693,995 | 1,580,219 | 11,385,358 | ||||||||||||
|
Total
temporary equity
|
7,070,791 | 4,419,244 | 4,419,244 | - | ||||||||||||
|
Stockholders'
equity (deficit)
|
(3,299,717 | ) | 12,588,516 | (1,800,660 | ) | 18,985,552 | ||||||||||
|
(1)
|
Results of operations from
inception, June 29, 2006 to December 31, 2006 include the operations of
Deep Down, Inc.
|
|
(2)
|
Results
of operations for the year ended December 31, 2007 include the results of
ElectroWave and Mako from the dates of their acquisitions in April 2007
and December 2007, respectively
|
|
(3)
|
Results
of operations for the three months ended March 31, 2008 include the
results of ElectoWave and Mako, which were both acquired after the first
quarter of 2007; therefore our results of operations for the comparable
period in 2007 did not include these
acquisitions.
|
|
(4)
|
EBITDA
is a non-GAAP financial measure. Deep Down defines EBITDA as net income
plus interest expense, income taxes, depreciation, amortization and other
non-cash, non-operating expenses. Deep Down uses EBITDA as an
unaudited supplemental financial measure to assess the financial
performance of its assets without regard to financing methods, capital
structures, taxes or historical cost basis; its liquidity and operating
performance over time in relation to other companies that own similar
assets and that the Company believes calculate EBITDA in a similar manner;
and the ability of Deep Down assets to generate cash sufficient for Deep
Down to pay potential interest costs. Deep Down also understands that such
data are used by investors to assess the Company's performance. However,
the term EBITDA is not defined under generally accepted accounting
principles and EBITDA is not a measure of operating income, operating
performance or liquidity presented in accordance with generally accepted
accounting principles. When assessing Deep Down’s operating performance or
liquidity, investors and others should not consider this data in isolation
or as a substitute for net income, cash flow from operating activities, or
other cash flow data calculated in accordance with generally accepted
accounting principles.
|
The
following is a reconciliation of net income (loss) to EBITDA:
|
Historical
|
||||||||||||||||
|
Three
Months
|
Three
Months
|
|||||||||||||||
|
Inception
|
Ended
|
Ended
|
||||||||||||||
|
June
29, 2006 -
|
Year
Ended
|
March
31,
|
March
31,
|
|||||||||||||
|
December
31,
|
December
31,
|
2007
|
2008
|
|||||||||||||
|
2006
|
2007
|
(unaudited)
|
(unaudited)
|
|||||||||||||
|
EBITDA
Reconciliation:
|
||||||||||||||||
|
Net
income (loss)
|
$ | (3,299,817 | ) | $ | 952,509 | $ | (109,258 | ) | $ | (89,447 | ) | |||||
|
Tax
expense
|
22,250 | 369,673 | - | (269,366 | ) | |||||||||||
|
Interest
|
62,126 | 2,335,662 | 231,887 | 729,866 | ||||||||||||
|
Other
income (a)
|
- | (2,000,000 | ) | - | (28,355 | ) | ||||||||||
|
Depreciation
and amortization expense
|
27,161 | 426,964 | 64,025 | 298,149 | ||||||||||||
|
Stock
based compensation expense
|
3,340,792 | 187,394 | - | 105,162 | ||||||||||||
|
EBITDA
|
$ | 152,512 | $ | 2,272,202 | $ | 186,654 | $ | 746,009 | ||||||||
Note (a):
Other income for the year ended December 31, 2007 includes a $2.0 million
gain on extinguishment of debt.
During
the second quarter of 2007, Deep Down executed a Securities Redemption Agreement
with the former Chief Financial Officer of Deep Down, to redeem 4,000 shares of
Series E exchangeable preferred stock at a discounted price of $500 per share
for a total of $2.0 million. The discount of $500 per share from the
face value of $1,000 was accounted for as a substantial modification of debt,
thereby generating a gain on extinguishment of debt which is reflected as other
income on the statement of operations.
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF
FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The
following discussion of our financial condition and results of operations should
be read in conjunction with our consolidated financial statements and the notes
to those financial statements appearing elsewhere in this prospectus supplement.
This discussion contains forward-looking statements that involve significant
risks and uncertainties. As a result of many factors, such as those set forth
under “Risk Factors” and elsewhere in this prospectus supplement, our actual
results may differ materially from those anticipated in our forward-looking
statements.
During
2006, MediQuip Holdings, Inc. (“MediQuip”), a publicly traded Nevada
corporation, divested Westmeria Healthcare Limited, its wholly-owned operating
subsidiary, and subsequently acquired Deep Down, Inc., a Delaware corporation,
in a transaction that was accounted for as a reverse merger, with Deep Down
being the surviving entity for accounting purposes. The following discussion
describes the history of Deep Down.
On June
29, 2006, Subsea Acquisition Corporation (“Subsea”), a Texas corporation, was
formed with the intent to acquire offshore energy service providers, and
designers and manufacturers of subsea equipment, surface equipment and offshore
rig equipment that are used by major integrated, large independent and foreign
national oil and gas companies in offshore areas throughout the
world.
On
November 21, 2006, Subsea acquired all the common stock of Strategic Offshore
Services Corporation (“SOS”), a Texas corporation, for 3,000 shares of Subsea’s
Series F Preferred Stock and 1,000 shares of Subsea’s Series G Preferred Stock
from two common shareholders of Subsea. Since the entities were under
common control and the acquired entity did not constitute a business, the
Company was charged compensation expense to shareholders for the fair value of
both series totaling $3,340,792.
On
November 21, 2006, Subsea also acquired Deep Down, Inc., a Delaware corporation
which was founded in 1997. Under the terms of this transaction, Subsea acquired
all of Deep Down’s common stock in exchange for 5,000 shares of Subsea’s Series
D Preferred Stock and 5,000 shares of Subsea’s Series E Preferred Stock
resulting in Deep Down becoming a wholly-owned subsidiary of
Subsea. The transaction was accounted for under SFAS 141, “Business
Combinations,” as a purchase as there was a change of control. The
purchase price, based on the fair value of the Series D and E Preferred stock,
was $7,865,471.
Immediately
after acquiring Deep Down and SOS on November 21, 2006, Subsea merged with SOS,
with Subsea as the surviving company. Immediately thereafter, Subsea
merged with Deep Down, with Deep Down as the surviving company.
On
December 14, 2006, after divesting its Westmeria Healthcare Limited subsidiary,
MediQuip acquired all 9,999,999 shares of Deep Down common stock and all 14,000
shares of Deep Down preferred stock for 75,000,000 shares of common stock and
14,000 shares of preferred stock of MediQuip. The preferred shares of MediQuip
were issued with the same designations as Deep Down’s preferred
stock. As a result of the acquisition, the shareholders of Deep Down
owned a majority of the voting stock of MediQuip, which changed its name to Deep
Down, Inc.
On April
2, 2007, Deep Down acquired substantially all of the assets of ElectroWave USA,
Inc., a Texas corporation for a total purchase price of $171,407. Deep Down
formed a wholly-owned subsidiary, ElectroWave USA, Inc. (“ElectroWave”), a
Nevada corporation, to complete the acquisition. Headquartered in
Channelview, Texas, ElectroWave offers products and services involving
electronic monitoring and control systems for the energy, military, and
commercial business markets. This was not a "significant" acquisition,
therefore, no pro forma results are included for this acquisition in this
registration statement.
Effective
December 1, 2007, Deep Down acquired all of the common stock of Mako
Technologies, Inc. (“Mako”) for a total purchase price of $11.3 million
including transaction fees. Deep Down formed a wholly-owned
subsidiary, Mako Technologies, LLC to complete the
acquisition. Headquartered in Morgan City, Louisiana, 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”), topside and subsea equipment, and
diving support systems used in diving operations, maintenance and repair
operations, offshore construction, and environmental/marine
surveys.
The
Company’s historical financial statements reflect those of Deep Down, Inc. and
its subsidiaries, and do not include the results of MediQuip or Westmeria
Healthcare Limited for periods prior to the reverse merger date of December 14,
2006.
On June
5, 2008, Deep Down entered into a Purchase Agreement (the “Purchase Agreement”)
with institutional accredited investors (the “Purchasers”) to sell and issue to
the Purchasers in reliance on the exemption from registration in Section 4(2) of
the Securities Act of 1933, as amended (the “Securities Act”), an aggregate of
57,142,857 shares, or $40.0 million of shares, of the Company’s Common Stock
(the “Shares”) at a price of $0.70 per share, for net proceeds of approximately
$37.1 million. Completion of the private placement was subject to
completion of the acquisition of Flotation as described
below. Dahlman Rose & Company, LLC acted as exclusive placement
agent for the financing.
Deep Down
used $22.1 million of the net proceeds to fund the cash portion of the Flotation
purchase, and used approximately $12.5 million to repay outstanding debt to
Prospect Capital Corporation on June 12, 2008, with the remainder being retained
for working capital purposes.
On June
5, 2008, we completed the acquisition of 100% of the equity securities of
Flotation, pursuant to a Stock Purchase Agreement entered into April 17,
2008. The preliminary purchase price of Flotation is $23.8 million
and consists of $22.1 million cash, and 1,714,286 shares of common stock valued
at $0.83 per common share plus transaction costs of $181,227. In addition,
warrants to purchase 200,000 common shares at $0.70 per share were issued to an
affiliated entity for acquisition of the related technology. The warrants are
exercisable at any time from June 3, 2009 through September 3, 2011 and include
piggyback registration rights with respect to the underlying shares of common
stock. Deep Down valued the warrants at $121,793 based on the Black Scholes
option pricing model. Flotation’s shareholders used $1.8 million of the $22.1
million cash received to pay outstanding bank and shareholder debt of Flotation.
The purchase price may be adjusted upward or downward, dependant on certain
working capital targets.
The
Company’s financial statements as included herein do not include the operations
of Flotation, as the Stock Purchase Agreement closed after the end of our March
31, 2008 fiscal quarter.
Critical
Accounting Policies
The
accompanying discussion and analysis of our financial condition and results of
operations is based upon our audited consolidated financial statements, which
have been prepared in accordance with accounting principles generally accepted
in the United States of America. Note 1 “Nature of Business and Summary of
Significant Accounting Policies” of the notes to our audited consolidated
financial statements included elsewhere in this Prospectus contains a detailed
summary of our significant accounting policies. We utilize the following
critical accounting policies in the preparation of our financial
statements.
Accounts
Receivable
We provide an allowance for doubtful accounts on
trade receivables based on historical collection experience and a specific
review of each customer’s trade receivable balance.
Consolidation
The accompanying
financial statements include the accounts of Deep Down and all of its
wholly-owned subsidiaries, including Deep Down Delaware since its inception on
June 29, 2006, ElectroWave since its acquisition on April 2, 2007 and Mako since
its acquisition on December 1, 2007. All intercompany accounts and
transactions have been eliminated.
Long-Lived
Assets
We
evaluate long-lived assets for impairment whenever changes in circumstances
indicate that the carrying amount of the asset may not be
recoverable. Recoverability of assets to be held and used is measured
by a comparison of the carrying amount of an asset to future undiscounted cash
flows expected to be generated by the asset. If assets are considered
to be impaired, the impairment to be recognized is measured by the amount by
which the carrying amounts exceed the fair values of the
assets. Assets to be disposed are reported at the lower of carrying
values or fair values, less costs of disposal.
Stock-Based
Compensation
We account for stock-based compensation issued to
employees and non-employees as required by SFAS No. 123(R) “Accounting for Stock
Based Compensation.” Under these provisions, we record expense ratably over the
requisite service period based on the fair value of the awards determined at the
grant date (net of estimated forfeitures) utilizing the Black-Scholes-Merton
pricing model for options and warrants. Key assumptions include
(1) expected volatility (2) expected term (3) discount rate and (4)
expected dividend yield.
Revenue
Recognition
We recognize fabrication and sale of equipment
revenue upon transfer of title to the customer which is upon shipment or when
customer-specific acceptance requirements are met. Service revenue is recognized
as the service is provided. All intercompany revenues are eliminated in
consolidation for those periods for which consolidated results are
applicable.
Goodwill and
Intangible Assets
Goodwill represents the cost in excess of the fair
value of net assets acquired in business combinations. Statement of Financial
Accounting Standards (SFAS) No. 142, “Goodwill and Other Intangible Assets”
(SFAS 142), prescribes the process for impairment testing of goodwill on an
annual basis or more often if a triggering event occurs. Goodwill is not
amortized, and there were no indicators of impairment at December 31,
2007.
We
evaluate the carrying value of goodwill during the fourth quarter of each year
and between annual evaluations if events occur or circumstances change that
would more likely than not reduce the fair value of the reporting unit below its
carrying amount. Such circumstances could include a significant adverse change
in legal factors or in business or the business climate or unanticipated
competition. When evaluating whether goodwill is impaired, we compare the fair
value of the business to its carrying amount, including goodwill. The fair value
of the reporting unit is estimated using the income or discounted cash flows. If
the carrying amount of the business exceeds its fair value, then the amount of
the impairment loss must be measured. The impairment loss would be calculated by
comparing the implied fair value of reporting unit goodwill to its carrying
amount.
Our
intangible assets consist of assets acquired in the purchase of the Mako
subsidiary and comprised of customer lists, non-compete covenants with key
employees and trademarks related to Mako’s ROVs. We amortize the
intangible assets over their useful lives ranging from 5 to 25 years on a
straight line basis.
Income Taxes
We have adopted the provisions of SFAS No. 109, “Accounting for Income
Taxes" which requires recognition of deferred tax liabilities and assets for the
expected future tax consequences of events that have been included in the
consolidated financial statements or tax returns. Under this method, deferred
tax liabilities and assets are determined based on the difference between the
financial statement and tax basis of assets and liabilities using enacted tax
rates in effect for the year in which the differences are expected to
reverse.
In June
2006, the FASB issued Interpretation No. 48, “Accounting for Uncertainty in
Income Taxes - an interpretation of FASB Statement No. 109”. FIN 48 clarifies
the accounting for uncertainty in income taxes recognized in an enterprise’s
financial statements in accordance with FASB Statement No. 109, “Accounting for
Income Taxes,” by prescribing a recognition threshold and measurement attribute
for the financial statement recognition and measurement of a tax position taken
or expected to be taken in a tax return. If a tax position is more likely than
not to be sustained upon examination, then an enterprise would be required to
recognize in its financial statements the largest amount of benefit that is
greater than 50% likely of being realized upon ultimate
settlement.
Results
of Operations
Three
months Ended March 31, 2008 Compared to Three Months Ended March 31,
2007
Revenue.
Revenue
generated in the three months ended March 31, 2008 was $6,279,465 compared to
$2,098,394 for the three months ended March 31, 2007, an increase of $4,181,071
or 199%. Increased activity from Deep Down's offshore
subsea business, including service activity related to installation of
recoveries of subsea equipment, the delivery of launch and recovery systems,
loose tube steel flying leads, winch system refurbishments, and an active heave
compensated in-line winch system accounted for $4,293,820 of this revenue, an
increase of $2,195,426, or 105% over the same prior year period. The
Mako and ElectroWave acquisitions accounted for $1,985,645 of this revenue, an
increase of 94% over the same prior year period.
Gross Profit.
Gross margin
for the three months ended March 31, 2008 was $2,403,094 compared to $846,305 in
the same prior year period, an increase of $1,556,789 or 184%. Gross margin as a
percentage of revenue was 38% in the current period as compared to 40% in the
prior period.
Selling, General and Administrative
Expenses.
Selling,
general and administrative expenses (“SG&A”) for the three months ended
March 31, 2008 was $1,762,247 compared to $659,651 for the same prior year
period. The increase was primarily due to costs related to our
acquisitions of Mako and Electrowave. However, SG&A as a percent
of net revenue was lower for the three months ended March 31, 2008 at
approximately 28% compared to 31% for the same prior period.
Interest Expense.
Interest
expense for the three months ended March 31, 2008 was $769,030 compared to
$231,887 for the same prior year period. This increase is the result
of the interest of debt related to the Credit Agreement in the three months
ended March 31, 2008 which did not exist for the same prior
period (See below “Capital Resources and Liquidity”).
Net loss
. Net loss for the
three months ended March 31, 2008 was $89,447, compared to a net loss of
$109,258 for the same prior year period.
EBITDA.
EBITDA is
a non-GAAP financial measure. Deep Down defines EBITDA as net income plus
interest expense, income taxes, depreciation, amortization and other non-cash,
non-operating expense. Deep Down uses EBITDA as an unaudited supplemental
financial measure to assess (1) the financial performance of its assets without
regard to financing methods, capital structures, taxes or historical cost basis;
(2) its liquidity and operating performance over time in relation to other
companies that own similar assets and that the Company believes calculate EBITDA
in a similar manner; and (3) the ability of Deep Down assets to generate cash
sufficient for Deep Down to pay potential interest costs. Deep Down also
understands that such data are used by investors to assess the Company's
performance. However, the term EBITDA is not defined under generally accepted
accounting principles, and EBITDA is not a measure of operating income,
operating performance or liquidity presented in accordance with generally
accepted accounting principles. When assessing Deep Down’s operating performance
or liquidity, investors and others should not consider this data in isolation or
as a substitute for net income, cash flow from operating activities, or other
cash flow data calculated in accordance with generally accepted accounting
principles. Excluding the one-time gain and non-cash interest and stock based
compensation charges, earnings before depreciation, interest, amortization,
taxes and other non-cash charges (“EBITDA”) for the three months ended March 31,
2008 was $746,009 compared to $186,654, an increase of $559,355, or 300% over
the same prior year period.
Pro
Forma Results of Operations for the Year Ended December 31, 2007 Compared to the
Period from Inception, June 29, 2006 to December 31, 2006
On
November 21, 2006, Subsea, a company formed on June 29, 2006, acquired Deep
Down, Inc., which was founded in 1997. The transaction was accounted for as a
purchase according to SFAS 141, “Business Combinations”, as there was a change
of control.
As a
result, the audited financial results disclosed herein present operating results
for the period beginning November 21, 2006 and ending December 31, 2006, the
period after which Deep Down was acquired. Management believes this stub period
does not give a full view of the operations of Deep Down and, therefore, present
pro forma results of operations. The following presentation and discussion of
the unaudited pro forma consolidated results of operations has been prepared as
if the acquisition of Deep Down had occurred at January 1, 2006. The pro forma
information is presented for informational purposes only and is not necessarily
indicative of the results of operations that actually would have been achieved
had the acquisition been consummated as of that time, nor is it intended to be a
projection of future results.
Deep
Down, Inc.
Pro
forma Statements of Operations
|
For
the Year Ended December 31, 2007 and
|
|
|
For
the Period Since Inception (June 29, 2006) to December 31,
2006
|
|
|
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 (loss)
|
1,657,844
|
(2,211,042
|
)
|
|||||
|
Other
income (expense):
|
||||||||
|
Gain
on debt extinguishment
|
2,000,000
|
-
|
||||||
|
Interest
income
|
94,487
|
-
|
||||||
|
Interest
expense (2)
|
(2,430,149
|
)
|
(578,335
|
)
|
||||
|
Total
other income (loss)
|
(335,662
|
)
|
(578,335
|
)
|
||||
|
Income
(loss) before income taxes
|
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
|
)
|
|||
|
Weighted-average
shares outstanding
|
73,917,190
|
75,862,484
|
||||||
|
Diluted
earnings per share
|
$
|
0.01
|
$
|
(0.04
|
)
|
|||
|
Weighted-average
shares outstanding
|
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.
|
||||||||
The
following discussion of the unaudited pro forma consolidated results of
operations has been prepared as if the acquisition of Deep Down had occurred at
January 1, 2006. The pro forma information is presented for informational
purposes only and is not necessarily indicative of the results of operations
that actually would have been achieved had the acquisition been consummated as
of that time, nor is it intended to be a projection of future
results. The pro forma amounts included below do not include the
acquisitions of Mako or Flotation as if they were acquired January 1,
2006.
Revenues
|
2007
|
Pro
forma 2006
|
Change
|
%
|
||||||||||
|
Revenues
|
$
|
19,389,730
|
$
|
8,821,149
|
$
|
10,568,581
|
119.8%
|
||||||
Revenues
increased by approximately $10.6 million, or 119.8% to $19.4 million for the
twelve months ended December 31, 2007 from approximately $8.8 million for the
comparable period in 2006. This increase was due primarily to a significant
increase in the Company’s core operations at its Deep Down Delaware subsidiary,
including increased revenue from the delivery of loose tube steel flying leads;
new products such as launch and retrieval systems and an active heave
compensated in-line winch system, winch system refurbishments, and increased
acceptance of newly developed installation procedures utilizing our rapid
deployment cartridges and subsea deployment baskets. In addition, we
experienced increased levels of service activity related to installations and
recoveries of various subsea equipment. These results were further
augmented by ElectroWave revenue of approximately $3.2 million for the nine
months since acquisition and Mako revenue of $0.8 million for the one month
since acquisition.
Cost of
sales
|
2007
|
Pro
Forma 2006
|
Change
|
%
|
|||||||||||||
|
Cost
of sales
|
$ | 13,020,369 | $ | 5,155,399 | $ | 7,864,970 | 152.6% | |||||||||
As a
percentage of revenues, cost of sales increased to approximately 67.1% in 2007
from approximately 58.4% in 2006. Gross margins were impacted by increased
engineering and other costs associated with new product development, including
our new line of Proteus™ custom-engineered active heave compensated in-line
winches, deep water rated (4000 meter) launch and retrieval systems, and other
products in development. Management expects gross margins on these products to
increase on future orders. Management also expects overall margins to
increase as a result of its recent acquisition of Mako’s rental and service
operations.
Selling, general and
administrative expenses
|
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%
|
||||||
Selling,
general and administrative expenses include rent, utilities, general office
expenses, insurance, personnel and other costs necessary to conduct business
operations. Stock-based compensation expense of approximately $0.2
million in fiscal year 2007 relates to stock option grants during fiscal year
2007 to various consultants and employees, and the $3.3 million stock-based
compensation expense for fiscal 2006 related to the Series F and G Preferred
Stock which was issued in exchange for the acquisition of 100% of the common
stock of Strategic Offshore Services Corporation. See further
discussion of the fiscal 2006 transaction in Corporate History appearing
elsewhere in this Prospectus.
After
adjusting for the stock based compensation expense, selling, general and
administrative expenses for the year ended December 31, 2007 was approximately
$4.0 million, up approximately $1.7 million from $2.4 million for the comparable
period in 2006. The increase is primarily the result of an increased
engineering staff to focus on the development of new products and quality
control, increased administrative personnel, increased sales staff, and
increased costs of functioning as a public company and pursuing acquisitions. As
a percentage of revenues, selling, general and administrative expenses decreased
to approximately 22% in 2007 from approximately 26.9% in 2006.
For
fiscal year 2007, the consolidated selling, general and administrative
expenses were as follows: $1.7 million administrative payroll and benefits, $0.2
million insurance cost, $0.8 million in accounting, legal and expenses related
to public company reporting requirements, $0.1 million in advertising and sales
related expenses, $0.9 million in rental, utility and general office expenses
and $0.1 million in property and sales taxes.
Depreciation and
amortization expense
|
2007
|
Pro
Forma 2006
|
Change
|
%
|
|||||||||||||
|
Depreciation
|
$
|
398,610
|
$
|
166,468
|
$
|
232,142
|
139.5%
|
|||||||||
|
Amortization
|
28,354
|
-
|
28,354
|
-
|
||||||||||||
|
Depreciation
and amortization
|
$
|
426,964
|
$
|
166,468
|
$
|
260,496
|
156.5%
|
|||||||||
Depreciation
increased by approximately $0.3 million, or 162% to $0.4 million for the
twelve months ended December 31, 2007 from approximately $0.2 million for the
comparable period in 2006. During fiscal year 2007, we acquired
approximately $3.2 million in fixed assets through the acquisition of the Mako
subsidiary in December 2007 and approximately $45,500 in fixed assets in the
acquisition of ElectroWave in April 2007. Additionally, we
purchased approximately $0.8 million in fixed assets during fiscal year
2007, including a 100-ton mobile gantry crane valued at $0.5 million, under a
capital lease.
We
depreciate our assets using the straight-line method over the estimated useful
lives of the respective assets. Buildings are amortized over 36 years, and
leasehold improvements are amortized over the shorter of the assets' useful
lives or lease terms. Equipment lives range from two to seven years, computers
and electronic lives are from two to three years, and furniture and fixtures are
two to seven years. Deep Down’s intangible assets consist of $4.4
million in specifically identified intangible assets acquired in the purchase of
the Mako subsidiary on December 1, 2007, specifically Mako’s customer list, a
non-compete covenant and trademarks related to Mako’s ROVs. We are
amortizing the intangible assets over their estimated useful lives on the
straight line basis between five and twenty five years.
Interest
expense
|
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
|
-
|
||||||||||||
|
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%
|
|||||||||
Interest
expense increased by approximately $1.9 million to $2.4 million for
the twelve months ended December 31, 2007 from approximately $0.5 million for
the comparable period in 2006.
During
fiscal year 2006, in conjunction with the reverse merger with Subsea, Deep Down
determined that the Series E and Series G Preferred Stock was more like debt
than equity due to their “redeemable exchangeable” nature into
notes. The fair value calculated for the Series E and G Preferred
Stock issued in exchange for 100% of the Deep Down Delaware common stock and
Strategic Offshore Services Corporation using a 20% discount rate was
significantly greater than the 6% interest on the three-year term note into
which those preferred shares were exchangeable. Deep Down has been accreting the
difference between the determined value and the face value of $1,000 per share
for which we are obligated as interest expense. During fiscal year 2007, we
redeemed all of the Series G Preferred Stock in exchange for 3,250 shares of
Series E Preferred Stock. Additionally, a total of 7,750 shares of Series E
Preferred Shares were redeemed, which generated non-cash interest expense of
$1.6 million, plus approximately $42,000 of non-cash interest expense on the 500
shares of Series E Preferred Stock which remain outstanding at December 31,
2007. The amount of discount associated with the Series E Preferred
stock outstanding at December 31, 2007 is $0.1 million.
On August
6, 2007, Deep Down entered into a $6.5 million secured Credit Agreement with
Prospect and received an advance of $6.0 million on that date. The
Credit Agreement provides for a 4-year term, an annual interest rate of 15.5%,
with the ability to defer up to 3.0% of interest through a PIK (paid-in-kind)
feature and principal payments of $250,000 per quarter beginning September 30,
2008, with the remaining balance outstanding due August 6, 2011. Interest
payments are payable monthly, in arrears, on each month end commencing on August
31, 2007. Interest paid through December 31, 2007 was
$377,167. Deep Down paid the full 15.5% and did not exercise the PIK
feature for the monthly periods through December
2007.
On
December 21, 2007, Deep Down entered into an amendment to the Credit Agreement
(the “Amendment”) to provide the funding for the cash portion of the purchase of
Mako. The total commitment available under the Amendment was increased to $13.0
million, and the quarterly principal payments increased to $250,000, with the
payment dates remaining the same. The interest terms and loan covenants also
remained substantially the same under the Amendment. Deep Down was advanced an
additional $6.0 million on January 4, 2008 under terms of the
Amendment.
Terms of
the Credit Agreement also include a detachable warrant to purchase up to
4,960,585 shares of common stock at an exercise price of $0.507 per
share. The warrant has a five-year term and becomes exercisable on
the two-year anniversary of the original financing, August 6,
2009. The proceeds of the debt were allocated to the warrants based
on its estimated relative fair value at the measurement date of when the final
agreement was signed and announced and reflected as a discount to the debt. The
relative fair market value of these warrants was $1.5 million and is being
amortized as interest expense. Interest expense associated with the fair market
value of the warrant was $135,931 during 2007.
Additionally,
in connection with the initial advance in August 2007, Deep Down pre-paid
$180,000 in points to the lender which was treated as a discount to the
note. The discount associated with the value of the warrants and the
pre-paid points are being amortized into interest expense over the life of the
note agreement using the effective interest method. A total of
$135,931 has been amortized into interest expense through December 31,
2007.
In
connection with the second advance in January 4, 2008, Deep Down pre-paid
$180,000 in points to the lender which was treated as a discount to the
note.
Deep Down
capitalized a total of $555,314 in deferred financing costs related to the
original amounts borrowed under the Credit Agreement. Of this amount,
$442,194 was paid in cash to various third parties related to the financing, and
the remainder of $113,120 represents the Black Scholes valuation of warrants
issued to one of these third party vendors. The warrant is a
detachable warrant to purchase up to 320,000 shares of common stock at an
exercise price of $0.75 per share (calculated as the volume weighted average
closing price of the common stock for the ten days immediately preceding the
closing of the Credit Agreement which took place on August 6,
2007). The warrant has a five-year term and becomes exercisable on
the two-year anniversary of the original financing, August 6,
2009. The assumptions used in the Black Scholes model included (1)
expected volatility of 52.7%, (2) expected term of 3.5 years, (3) discount rate
of 5% and (4) zero expected dividends. The deferred financing
cost is being amortized using the effective interest method over the term of the
note. A total of $54,560 of deferred financing cost was amortized
into interest expense through December 31, 2007.
In
connection with the second advance under the Credit Agreement on January 4,
2008, Deep Down capitalized an additional $261,941 in deferred financing
costs. Of this amount, $216,000 was paid in cash to various third
parties related to the financing, and the remainder of $45,946 represents the
Black Scholes valuation of warrants issued to one of these third party
vendors. The detachable warrant was granted to purchase up to 118,812
shares of common stock at an exercise price of $1.01 per share. The
warrant has a five-year term and is immediately exercisable. The fair
value of the warrant was estimated to be $45,946 based on the Black Scholes
pricing model. The assumptions used in the model included (1)
expected volatility of 61.3%, (2) expected term of 2.5 years, (3) discount rate
of 3.2% and (4) zero expected dividends. Provisions in the
warrant agreement allow for a cashless exercise provision, not to exceed 2% of
outstanding common stock at the time of exercise.
Net Income
(loss)
|
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
|
-
|
||||||||||||
|
Amount
related to accretion
|
1,644,991
|
423,258
|
1,221,733
|
288.6%
|
||||||||||||
|
Gain
on debt extinguishment
|
(2,000,000
|
)
|
-
|
(2,000,000
|
)
|
-
|
||||||||||
|
Net
income
|
$
|
975,385
|
$
|
952,423
|
$
|
22,962
|
2.4%
|
|||||||||
Net
income increased by approximately $3.7 million to nearly $1.0 million for the
twelve months ended December 31, 2007 as compared to a loss of approximately
$2.8 million for the comparable period in 2006.
The
increase in net loss from operations includes the pro forma and non-recurring,
non-cash, non-operating expense items noted above arising out of the accounting
treatment of the Series E and G Preferred Stock. After adjusting for these
non-cash, non-operating expenses, the Company has net income of approximately
$1.0 million, up approximately $0.1 million, or 8%, from $0.9 million for the
comparable period in 2006.
During
the second quarter of 2007, Deep Down executed a Securities Redemption Agreement
(the “Agreement”) with the former Deep Down CFO to redeem 4,000 shares of Series
E exchangeable preferred stock at a discounted price of $500 per share for a
total of $2.0 million. The discount of $500 per share from the face
value of $1,000 was accounted for as a substantial modification of debt, thereby
generating a gain on extinguishment of debt which is reflected as other income
on the statement of operations. Deep Down accreted the remaining
discount of $1.1 million attributable to such shares on the date of
redemption. On August 16, 2007, Deep Down made the initial payment of
$1.4 million under the terms of the securities redemption agreement, and 2
payments of $20,000 each were made during August and September
2007. The final balance due of $0.5 million was paid with 543,789
shares of common stock on October 2, 2007.
EBITDA
|
2007
|
Pro
Forma 2006
|
Change
|
%
|
|||||||||||||
|
Net
income (loss)
|
$
|
952,509
|
$
|
(2,811,627
|
)
|
$
|
3,764,136
|
133.9%
|
||||||||
|
Tax
expense
|
369,673
|
22,250
|
347,423
|
-
|
||||||||||||
|
Gain
on debt extinguishment
|
(2,000,000
|
)
|
-
|
(2,000,000
|
)
|
-
|
||||||||||
|
Interest
|
2,335,662
|
578,335
|
1,757,327
|
303.9%
|
||||||||||||
|
Depreciation
and amortization expense
|
426,964
|
166,468
|
260,496
|
156.5%
|
||||||||||||
|
Stock
based compensation expense
|
187,394
|
3,340,792
|
(3,153,398
|
)
|
(94.4)%
|
|||||||||||
|
EBITDA
|
$
|
2,272,202
|
$
|
1,296,218
|
$
|
975,984
|
75.3%
|
|||||||||
EBITDA
increased by approximately $0.9 million to $2.2 million for the twelve months
ended December 31, 2007 from approximately $1.3 million for the comparable
period in 2006. Excluding the one-time gain on debt extinguishment
discussed above and non-cash interest and stock based compensation charges,
earnings before depreciation, interest, amortization, taxes and other non-cash
charges (
“EBITDA”
) for
the twelve months ended December 31, 2007 was $2.2 million, an increase of $0.9
million from $1.3 million for the comparable period in
2006.
EBITDA is
a non-GAAP financial measure. Deep Down defines EBITDA as net income plus
interest expense, income taxes, depreciation, amortization and other non-cash,
non-operating expenses. Deep Down uses EBITDA as an unaudited supplemental
financial measure to assess the financial performance of its assets without
regard to financing methods, capital structures, taxes or historical cost basis;
its liquidity and operating performance over time in relation to other companies
that own similar assets and that the Company believes calculate EBITDA in a
similar manner; and the ability of Deep Down assets to generate cash sufficient
for Deep Down to pay potential interest costs. Deep Down also understands that
such data are used by investors to assess the Company's performance. However,
the term EBITDA is not defined under generally accepted accounting principles
and EBITDA is not a measure of operating income, operating performance or
liquidity presented in accordance with generally accepted accounting principles.
When assessing Deep Down’s operating performance or liquidity, investors and
others should not consider this data in isolation or as a substitute for net
income, cash flow from operating activities, or other cash flow data calculated
in accordance with generally accepted accounting principles.
Capital
Resources and Liquidity
Financing
for our operations consists primarily of cash flows attributable to our
operations. We believe that the liquidity we derive from our leasing
arrangements, our Credit Agreement and cash flows attributable to our operations
is more than sufficient to fund our capital expenditures, debt maturities and
other business needs. We continue to evaluate acquisitions and joint ventures in
the ordinary course of business. When opportunities for business acquisitions
meet our standards, we believe we will have access to capital sources necessary
to take advantage of those opportunities.
Cash
Flow from Operations
As of
March 31, 2008, our cash and cash equivalents were $3,115,818 plus restricted
cash of $562,500. Cash and cash equivalents were $2,206,220 plus
restricted cash of $375,000 as of December 31, 2007. Management
believes that the Company has adequate capital resources when combined with its
cash position and cash flow from operations to meet current operating
requirements.
On April
11, 2008, the shareholders of Mako received the final cash installment of
$1,243,571 under the terms of the securities redemption and shareholder payable
agreement.
For the
three months ended March 31, 2008, cash used in operating activities was
$543,444 as compared to cash provided by operating activities for the same prior
year period of 2007 of $144,083. Our working capital balances vary due to
delivery terms and payments on key contracts, work in progress, and outstanding
receivables and payables.
For the
three months ended March 31, 2008, cash used in investing activities was
$410,983 as compared to $395,439 for the same prior year
period. Investing outflows were due to equipment purchases of
$156,958, acquisition costs of $66,525 and restricted cash of
$187,500.
For the
three months ended March 31, 2008, cash provided by financing
activities was $1,864,025 compared to cash provided by financing activities for
the same prior year period of $336,871. Increased financing outflows
were primarily due to long-term debt payments of $926,808 related to the Mako
acquisition.
On June
5, 2008, Deep Down received the net proceeds from the private placement of $37.1
million after offering costs. Deep Down used $22.1 million of the net proceeds
to fund the cash portion of the Flotation purchase, and used approximately $12.5
million to repay outstanding debt to Prospect Capital Corporation on June 12,
2008, with the remainder being retained for working capital
purposes.
Capital
Resources and Requirements
We
generate our liquidity and capital resources primarily through operations and,
when needed, through available capital markets. At March 31, 2008, long-term
debt was $11,385,358, of which $330,399 was the current portion. Long-term debt,
net of current portion, included bank loans of $10,834,513 (includes $750,000
restricted cash), capital leases of $470,446 and the Debenture of $500,000 (See
Note 6 “Preferred Stock”).
Quantitative
and Qualitative Disclosures About Market Risk
Financial
market risks relating to our operations result primarily from changes in
interest rates. We hold no securities for purposes of trading. Our cash and cash
equivalents representing bank deposits at July 16, 2008 are not restricted as to
withdrawal. Interest earned on our cash equivalents is sensitive to changes in
interest rates. We have no variable rate debt.
Controls
and Procedures
Evaluation
of Disclosure Controls and Procedures
We
carried out an evaluation, under the supervision and with the participation of
our management, including our principal executive officer and principal
financial officer, of the effectiveness of our disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and
15d-15(e)). Based upon that evaluation, our principal executive
officer and principal financial officer concluded that, as of the end of the
period covered in this report, our disclosure controls and procedures were
effective to ensure that information required to be disclosed in reports filed
under the Securities Exchange Act of 1934 is recorded, processed, summarized and
reported within the required time periods and is accumulated and communicated to
our management, including our principal executive officer and principal
financial officer, as appropriate to allow timely decisions regarding required
disclosure.
Our
management, including our principal executive officer and principal financial
officer, does not expect that our disclosure controls and procedures or our
internal controls will prevent all error or fraud. A control system,
no matter how well conceived and operated, can provide only reasonable, not
absolute, assurance that the objectives of the control system are
met. Further, the design of a control system must reflect the fact
that there are resource constraints and the benefits of controls must be
considered relative to their costs. Due to the inherent limitations
in all control systems, no evaluation of controls can provide absolute assurance
that all control issues and instances of fraud, if any, have been
detected.
Management’s
Report on Internal Control Over Financial Reporting.
Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting as defined in Rule 13a-15(f) under the
Securities Exchange Act, as amended. Our management assessed the
effectiveness of our internal control over financial reporting as of December
31, 2007. In making this assessment, our management used the criteria set forth
by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”)
in Internal Control-Integrated Framework. A material weakness is a
deficiency, or a combination of deficiencies, in internal control over financial
reporting, such that there is a reasonable possibility that a material
misstatement of the company's annual or interim financial statements will not be
prevented or detected on a timely basis. We have identified the
following material weaknesses.
|
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 the Company’s
employees, officers and directors. Additionally, we have not
developed and effectively communicated to our employees our accounting
policies and procedures. This has resulted in inconsistent
practices particularly at our 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.
|
Because
of these material weaknesses, management has concluded that the Company did not
maintain effective internal control over financial reporting as of December 31,
2007, based on the criteria established in "Internal Control-Integrated
Framework" issued by the COSO.
Changes in Internal Control Over
Financial Reporting.
In our
efforts to continuously improve our internal controls, management has taken
steps to enhance the following controls and procedures subsequent to the end of
fiscal year 2007 as part of our remediation efforts:
|
·
|
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’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.
|
DESCRIPTION
OF BUSINESS
Corporate
History
In
December 2006, MediQuip Holdings, Inc. (“MediQuip”), a publicly traded Nevada
corporation, divested Westmeria Healthcare Limited, its wholly-owned subsidiary
representing substantially all of its preceding operations, and subsequently
acquired Deep Down, Inc. ("Deep Down"), a Delaware corporation, in a reverse
merger transaction so that Deep Down was the surviving entity for accounting
purposes. Due to the structure of such December 2006 transactions,
the following discussion and disclosure in this Prospectus relates to Deep Down
and its operations unless otherwise specified.
In June
2006, the former parent entity of Deep Down, Subsea Acquisition Corporation
(“Subsea”), a Texas corporation, was formed for the purpose of acquiring service
providers to the offshore energy industry and designers and manufacturers of
subsea equipment, surface equipment and offshore rig equipment that are used by
major integrated, large independent and foreign national oil and gas companies
in offshore areas throughout the world.
On
November 21, 2006, Subsea acquired all the outstanding capital stock of
Strategic Offshore Services Corporation (“SOS”), a Texas corporation, for 3,000
shares of Subsea’s Series F Preferred Stock and 1,000 shares of Subsea’s Series
G Preferred Stock from two of the three principal shareholders of
Subsea. Since both Subsea and SOS were then under common control and
the operations of SOS did not constitute a business, the Company recognized
compensation expense to such principal shareholders for the fair value of both
series of preferred stock totaling $3,340,792.
On the
same day as its acquisition of SOS, Subsea also acquired Deep Down, Inc., a
Delaware corporation founded in 1997. Under the terms of this
transaction, Subsea acquired all of Deep Down’s outstanding capital stock in
exchange for 5,000 shares of Subsea’s Series D Preferred Stock and 5,000 shares
of Subsea’s Series E Preferred Stock. The purchase price, based on
the fair value of the Series D and E Preferred stock, was
$7,865,471.
Immediately
after the completion of the acquisitions of Deep Down and SOS on November 21,
2006, Subsea merged with and into its wholly-owned subsidiary SOS, with Subsea
continuing as the surviving company. Immediately thereafter, Subsea
merged with and into its wholly-owned subsidiary Deep Down, with Deep Down
continuing as the surviving company.
On
December 14, 2006, after divesting its Westmeria Healthcare Limited subsidiary,
MediQuip acquired all 9,999,999 outstanding shares of Deep Down common stock and
all 14,000 outstanding shares of Deep Down preferred stock in exchange for
75,000,000 shares of common stock and 14,000 shares of preferred stock of
MediQuip. The shares of preferred stock of MediQuip were issued with
the same designations, rights and privileges as the Deep Down preferred stock
existing immediately prior to such transaction. As a result of the
acquisition, the shareholders of Deep Down obtained ownership of a majority of
the outstanding voting stock of MediQuip. MediQuip changed its name
to Deep Down, Inc. as part of the transaction, and Deep Down, Inc. continued as
a Nevada corporation following consummation of the acquisition.
The
financial information and the financial statements of the Company presented in
this Prospectus reflect those of Deep Down, Inc. and its subsidiaries, and do
not include the financial condition and results of operations of MediQuip or
Westmeria Healthcare Limited for periods prior to the December 2006 merger
date.
Since
December 2006, Deep Down has consummated three strategic
acquisitions. On April 2, 2007, Deep Down acquired substantially all
of the assets of ElectroWave USA, Inc., a Texas corporation. For
purposes of completing the acquisition, Deep Down formed a wholly-owned
subsidiary, ElectroWave USA, Inc. (“ElectroWave”), a Nevada
corporation. Effective December 1, 2007, Deep Down acquired all of
the outstanding common stock of Mako Technologies, Inc., a Louisiana
corporation. For purposes of completing the acquisition, Deep Down
formed a wholly-owned subsidiary, Mako Technologies, LLC (“Mako”), a Nevada
limited liability company, which merged with and into Mako Technologies, Inc.,
with Mako as the surviving entity. Effective May 1, 2008, Deep Down acquired all
of the outstanding common stock of Flotation Technologies, Inc., a Maine
corporation.
Our
current operations are the result of the recent acquisitions of Deep Down,
ElectroWave, Mako and Flotation (described elsewhere in this
Prospectus). In addition to our strategy of continuing to grow and
strengthen our operations, including by expanding our services and products in
accordance with our customers’ demands, we intend to continue to seek strategic
acquisitions of complementary service providers, product manufacturers and
technologies that are focused primarily on supporting offshore deepwater
exploration, development and production of oil and gas reserves and other
maritime operations.
Recent
Events
Amendments
to Bylaws and Articles of Incorporation
In May
2008, the Board of Directors amended the Bylaws and approved amendments to our
Articles of Incorporation subject to shareholder approval. The amendments
are designed to discourage any tender offer or other attempt to gain control of
the Company in a transaction that is not approved by our Board of Directors, by
making it more difficult for a person or group to obtain control of the Company
in a short time and then impose its will on the remaining stockholders,
including:
Classified Board of Directors and
Removal of Directors
. Our Board of Directors is divided into
three classes which shall be as nearly equal in number as
possible. The directors in each class serve for terms of three years,
with the terms of one class expiring each year. Each class currently
consists of approximately one-third of the number of directors. Each
director will serve until his successor is elected and qualified. A
director may not be removed except for cause by the affirmative vote of the
holders of 75% of the outstanding shares of capital stock entitled to vote at an
election of directors.
Advance Notice Requirements for
Nomination of Directors and Proposal of New Business at Annual Stockholder
Meetings
. Any stockholder desiring to make a nomination for
the election of directors or a proposal for new business at a stockholder
meeting must submit written notice not less than 30 or more than 60 days in
advance of the meeting.
Supermajority Voting Requirement for
Amendment of Certain Provisions of the Certificate of
Incorporation
. Specified provisions contained in the articles
of incorporation and bylaws may not be repealed or amended except upon the
affirmative vote of the holders of not less than seventy-five percent of the
outstanding stock entitled to vote. This requirement exceeds the
majority vote that would otherwise be required by Nevada law for the repeal or
amendment of the articles or bylaws.
Private
Placement
On June
5, 2008, Deep Down entered into a Purchase Agreement (the “Purchase Agreement”)
with accredited investors (the “Purchasers”) to sell and issue to the Purchasers
in reliance on the exemption from registration in Section 4(2) of the Securities
Act of 1933, as amended (the “Securities Act”), an aggregate of 57,142,857
shares, or $40.0 million of shares, of the Company’s Common Stock (the “Shares”)
at a price of $0.70 per share, for net proceeds of approximately $37.1
million. Completion of the private placement was subject to
completion of the acquisition of Flotation, as described
below. Dahlman Rose & Company, LLC acted as exclusive placement
agent for the financing.
Deep Down
used $22.1 million of the net proceeds to fund the cash portion of the Flotation
purchase, and used approximately $12.5 million to repay outstanding debt to
Prospect Capital Corporation on June 12, 2008, with the remainder being retained
for working capital purposes.
Purchase
of Flotation.
On June
5, 2008, Deep Down completed the acquisition on 100% of the equity securities of
Flotation, a Maine corporation, pursuant to the Stock Purchase Agreement entered
into on April 17, 2008. The equity interest was acquired from the three
individual shareholder members of the same family and related technology was
acquired from an entity affiliated with the selling stockholders. No prior
material relationship existed between the selling shareholders and Deep Down,
any of our affiliates, or any of our directors or officers, or any associate of
any of our officers or directors. Deep Down executed the definitive
agreement to purchase Flotation on April 17, 2008 and effectively dated the
acquisition for accounting purposes as of May 1, 2008. Deep Down announced the
closing on June 6, 2008.
Flotation
engineers, designs and manufactures deepwater buoyancy systems using
high-strength Flotec
TM
syntactic foam and polyurethane elastomers. Flotation’s product offerings
include distributed buoyancy for flexible pipes and umbilicals, Core Tec™
drilling riser buoyancy modules, ROVits
TM
buoyancy, Hydro-Float mooring buoys, Stablemoor
TM
low-drag
ADCP deployment solution, Quick-Loc
TM
and cable floats, HardBall
TM
umbilical floats , Flotect
TM
cable and pipeline protection, InFlex
TM
polymer
static bend restrictors, and installation buoyancy of any size and depth
rating.
The
acquisition of Flotation has been accounted for using the purchase method of
accounting in accordance with Statement of Financial Accounting Standards (FASB)
No. 141, Business Combinations (FASB 141) since Deep Down
acquired substantially all of the assets, certain liabilities, employees, and
business of Flotation.
The
preliminary purchase price of Flotation is $23.8 million and consists of $22.1
million cash, and 1,714,286 shares of common stock valued at $0.83 per common
share plus transaction costs of $181,227. In addition, warrants to purchase
200,000 common shares at $0.70 per share were issued to an affiliated entity for
acquisition of the related technology. The warrants are exercisable at any time
from June 3, 2009 through September 3, 2011 and include piggyback registration
rights with respect to the underlying shares of common stock. Deep Down valued
the warrants at $121,793 based on the Black Scholes option pricing model.
Flotation’s shareholders used $1.8 million of the $22.1 million cash received to
pay outstanding bank and shareholder debt of Flotation. The purchase price may
be adjusted upward or downward, dependant on certain working capital targets.
Deep Down used $22.1 million in proceeds from the private placement completed on
June 5, 2008 to fund the cash requirement of the Flotation
acquisition.
Deep Down
also issued 600,000 incentive common stock purchase options to employees of
Flotation for future services with an exercise price of $1.15 per share. The
employee options vest one-third of the original amount each year and may be
exercised in whole or in part after vesting. Deep Down valued the options at
$264,335 based on the Black Scholes option pricing model, and will recognize the
related compensation cost ratably over the requisite service
period.
Payment
of long term debt and exercise of Prospect warrants:
On June
12, 2008, the Company paid approximately $12.5 million to Prospect Capital
Corporation to pay the balance due under its Credit Agreement and related
interest and early termination fees. Since the warrants issued in
connection with the original Credit Agreement and the Amendment dated January 4,
2008 were detachable, there was no change to these equity
instruments. On July 3, 2008, Prospect exercised their outstanding
4,960,585 warrants in a cashless exercise for a total of 2,618,129 restricted
shares of Deep Down common stock.
Our
Services and Products
Services.
We provide a wide
variety of project engineering and management services, including the design,
installation and retrieval of subsea equipment and systems, connection and
termination operations and well commissioning. We pride ourselves on
the ability to collaborate with the engineering departments of oil and gas
operators, installation contractors and subsea equipment manufacturers to find
the quickest, safest, and most cost-effective solutions to address all manner of
issues in the subsea world. We also provide installation, retrieval,
storage and management services in connection with the use of our
products.
Project
Management
. Our installation management team specializes in
deepwater subsea developments. We are often contracted by our customers to
assist with the preparation and evaluation of subsea development bids and
requests for quotes. Our experience comes from working with
installation contractors, oil and gas operators, controls suppliers, umbilical
manufacturers and other subsea equipment manufacturers, who often hire us to
help ensure that a project progresses smoothly, on time and on
budget.
Project
Engineering
. Our engineers have experience ranging from the
initial conceptual design phases through manufacturing and installation, and
concluding with topside connections and commissioning. Our experience
provides us with a level of “hands on” and practical understanding that has
proven to be indispensable in enabling us to offer customer solutions to the
many problems encountered both subsea and topside. Because of our
wide knowledge base, our engineering team is often hired by oil and gas
operators, installation contractors and subsea equipment manufacturers to
provide installation management and engineering support services. Our
engineering team has been involved in most of the innovative solutions used
today in deepwater subsea systems. We specialize in offshore
installation engineering and the writing of practical installation
procedures. We deal with issues involving flying leads, compliant
umbilical splices, bend stiffener latchers, umbilical hardware, hold-back
clamps, and the development of distribution system components. We are
heavily involved in the fabrication of installation aids to simplify offshore
executions, and offer hydraulic, fiber optic, and electrical testing services
and various contingency testing tools.
Installation Support and
Management
. Our installation management services are centered
around the utilization of standardized hardware, proven, well-tested
installation techniques, and an experienced, consistent team that has proven to
be safe and skilled in all aspects of the installation process. We
pride ourselves on supporting installation contractors through our installation
management and engineering services, installation aids and equipment, and our
offshore installation support services, including spooling operations, offshore
testing, and flying lead installation support. Many installation contractors
find it beneficial to utilize our services to help reduce on-board personnel
since our specialized technicians can perform multiple tasks. We have
designed and fabricated many different installation tools and equipment over the
years. We have been involved in the design of the following equipment
to help make installations run as smoothly as possible: steel flying
leads, steel flying lead deployment systems, umbilical hardware and termination
systems, umbilical bell mouths, lay chutes, rapid deployment cartridges,
horizontal drive units, mud mats, flying lead installation and parking frames,
umbilical termination assembly stab & hinge over systems, and numerous other
pieces of offshore equipment. Our team has vast experience with the
installation of flexible and rigid risers and flowlines, umbilicals, flexible
and rigid jumpers, steel tube and thermoplastic hose flying leads, pipeline end
terminations (“PLETs”) and manifolds.
Spooling
. Our
experienced personnel are involved in the operation of spooling equipment on
many projects, including operations for other companies to run their spooling
equipment. We have developed a very efficient (in both time and cost)
system for spooling, utilizing our horizontal drive units, under-rollers,
tensioners, carousels and rapid deployment cartridges.
Pull-In
Operations
. We are involved in the pull-in operations for most
of the major umbilical projects in the Gulf of Mexico. Our
familiarity with offshore systems is important, and our pull-ins run smoothly
because the same engineers who plan the pull-in operations are also involved in
supervising the offshore operations. Our offshore servicemen comprise
the topside umbilical support team and are familiar with the umbilical
termination hardware. These same servicemen are often involved in
terminating the umbilicals at the manufacturers’ yard several weeks prior to the
installation. Everything is thoroughly tested prior to installation,
including winches at the rental contractor’s yard and after set-up on the
platform. Load cells are tested onshore, and the same load cells are used to
test the system offshore. This eliminates variables and validates the condition
of the pull-in system. We then perform pull-ins under more controlled
conditions with increased confidence, resulting in safer
operations.
Terminations
. Deep
Down and members of its team have been involved in umbilical terminations since
1988. The Company’s team was involved with the designs for the
armored thermo plastic umbilicals at Multiflex, the first steel tube umbilical
in the Gulf of Mexico for the Shell Popeye
®
umbilical, and the standardization of many steel tube umbilical
terminations. We have also pioneered the concept of the compliant
Moray
®
section
that enables a traditional helically wound umbilical to be used for direct well
step outs, or long field flying leads. Our management believes we are
the only company that can terminate umbilicals provided by any manufacturer with
the same termination system.
Testing
Services
. Umbilical manufacturers, control suppliers,
installation contractors, and oil and gas operators utilize our services to
perform all aspects of testing, including initial Factory Acceptance Testing
(“FAT”), Extended Factory Acceptance Testing (“EFAT”) and System Integration
Testing (“SIT”), relating to the connecting of the umbilical termination
assemblies, the performing of installations, and the completion of the
commissioning of the system thereafter. To execute these services, we
have assembled a variety of personnel and equipment to ensure that all testing
operations are done in the safest and time-efficient manner, ensuring a reduced
overall project cost. We also work hard to utilize the most detailed
digital testing and monitoring equipment to ensure that the most accurate data
is provided to our clients. We have been hired to perform coiled
tubing flushing, cleaning, and hydro testing, umbilical filling, flushing,
pressure, flow rate, and cleanliness testing, load out monitoring and testing,
installation monitoring, post installation testing, system commissioning,
umbilical intermediate testing, and umbilical termination assembly cleanliness,
flow, and leak testing. We believe we have one of the best filling,
flushing and testing teams in the business. Deep Down employs a variety of
different pumping systems to meet industry needs and offers maximum
flexibility. Deep Down’s philosophy is to flush through the maximum
number of lines at the highest flow rate possible to maximize
efficiency. We have assembled a comprehensive list of offshore
pumping units and an assortment of chemical pumping skids. Our
equipment can be used to pump all of the standard offshore water based chemicals
as well as all offshore commissioning fluids such as Methanol and
diesel. The Company has been involved in the design, procurement,
testing, installation, and operation of the testing equipment. Deep
Down’s engineers and service technicians can also assist in writing the testing
procedures and sequences from simple FAT to very extensive multiple pressures
and fluids testing up to full system SIT procedures.
System Integration
Testing
. We have led the offshore industry move into the
digital age with our use of digital transducers to provide much greater levels
of accuracy compared to information gathered from conventional chart recorders.
We have a wide variety of digital pressure transducers, flow meters, and
temperature gauges. We have two wire data systems (4 port and one 16 port) as
well as 25 individual digital pressure and temperature recorders that are often
employed for installation monitoring activities. In addition to these units, the
Company also has three desks set up with data systems that are capable of
tracking from 4 to 15 individual sensors simultaneously. These capabilities, in
combination with subsea handling equipment, experienced personnel, and a
fully-equipped facility, render Deep Down ideal for managing SIT
operations.
Commissioning
. Deep
Down has been involved in most of the topside connections and commissioning
projects in the Gulf of Mexico since its formation in 1997. Our
commissioning team is often identified early in the project and participates in
all aspects of planning and risk assessment for the project. Due to
the limited time associated with project commissioning, it is extremely
important to perform detailed planning and engineering prior to arrival at the
offshore production platform location to reduce any possible shut in or down
time. Our engineers and technicians work closely with the project
managers and production platform engineers to help ensure that all aspects of
the installation or retrieval project, including potential risks and dangers,
are identified, planned for, and eliminated prior to arrival on the production
platform. Due to the different requirements for testing and
commissioning of subsea systems, we have an assortment of pumps and equipment to
deploy to ensure a safe and efficient commissioning program. We have
experience handling all types of commissioning fluids, including asphaltine
dispersants, diesel, methanol, xylene, corrosion inhibitors, water-based control
fluids, oil-based control fluids, 100% glycol, paraffin inhibitors, and
alcohol.
Storage
Management
. Our facility in Channelview covers more than
50,000 square feet of internal high quality warehousing capacity and 300,000
square feet of external storage and is strategically located in Houston's Ship
Channel area. Our warehouse is designed to provide clients with
flexible and cost effective warehousing and storage management
alternatives. Our professional and experienced warehouse staff,
combined with the very latest in information technology, results in a fully
integrated warehousing package designed to deliver effective solutions to client
needs. Among other capabilities, we are capable of providing long-term
specialized contract warehousing; long and short-term storage; modern materials
handling equipment; undercover loading areas; quality security systems;
integrated inventory management; packing and repacking; computerized stock
controls; and labeling.
Products
. We
provide installation support equipment and component parts and assemblies for
subsea distribution systems. We believe the key to successful
installations of hardware is to design the subsea system by considering
installation issues first, working backwards to the design of the hardware
itself. This is why we have been instrumental in the development of
hardware and techniques to simplify deepwater installations. We
design, manufacture, fabricate, inspect, assemble, test and market subsea
equipment, surface equipment and offshore rig equipment that are used by major
integrated, large independent and foreign national oil and gas companies in
offshore areas throughout the world. Our products are used during oil
and gas exploration, development and production operations on offshore drilling
rigs, such as floating rigs and jack-ups, and for drilling and production of oil
and gas wells on offshore platforms, tension leg platforms and moored vessels
such as floating production storage and offloading vessels
(“FPSO”). We have significant involvement in umbilical and steel
flying lead installations in the Gulf of Mexico and throughout the
world. A few of our major product lines are highlighted
below.
Flying Leads
. We
have developed a method to pull individual steel tubes, hoses, or electrical
cables to create a loose steel tube flying lead or short
umbilical. We can manufacture steel flying leads up to 10,000 feet in
length with any J-plate desired, with or without electrical cables
included. We have built flying leads with up to 14
tubes. Additional electrical lines and fiber optic cables can be
added to produce any combination required for the transportation of various
fluids, chemicals or data. The flying leads are then fitted with our
terminations and Morays
®
that are
attached to the multiple quick connection plate, and finished off with our
elastomeric bend limiters. The non-helix wound design allows for our
flying leads to be very installation friendly with minimal-bending
stiffness. A Moray
®
is the
termination head on the flying lead and connects the tubing assembly to the
junction plate. A compliant Moray
®
consists
of a 20-foot flexible flying lead with an electro-hydraulic Moray
®
that is
connected to a full-sized umbilical with the installation tension being applied
through an armor pot and slings extending by the compliant
section.
Bend Stiffener
Latchers
. Our spring-loaded bend stiffener latcher is used in
dynamic installations on floating vessels. Umbilical stiffener
latching mechanisms have always caused installation problems as well as
expensive diver operations for expansion developments. We believe we have
conceived the very first remote operated vehicle (“ROV”) installable latching
mechanism. During the umbilical installation, the bend stiffener
latcher can be latched in with a ROV and the umbilical can be pulled up the
remaining distance and hung off. This allows the bend stiffener
latcher to fit onto an existing flange, completely eliminating the need for
divers both prior to and during the installation. The bend stiffener
latcher can be designed to fit onto any existing flange on the bottom of an
existing I-tube.
Umbilical
Hardware
. Our operational team has been involved in more
umbilical installations than probably any other team in the
industry. Our blend of experiences with drilling contractors,
umbilical manufacturers, subsea engineers and installation contractors has been
effective in positioning us to act on behalf of oil and gas operators to ensure
key hardware installation is performed in the most efficient and safe
manner. This breadth of experiences gives us a unique perspective
when fabricating and designing terminations for umbilical
manufacturers. Our designs are often much lighter in weight and
smaller than the typical hardware that has been created and used in the past by
our competitors. Our engineering team has designed and fabricated
bending restrictors, armor pots, split barrels, tubing fittings and unions,
hinging umbilical splices and topsides terminations with our unique threaded
welded fittings, the compliant umbilical splice, and the bend stiffener
latcher. Our umbilical hardware has enabled our clients to use
installation friendly techniques for deploying hardware on the ocean
floor.
Bend Limiters
. We
offer both electrometric and steel bend limiters. Steel bend limiters
are typically utilized for steel tube umbilicals and have been designed with a
simple and reliable hinged attachment system which significantly decreases
installation time. Electrometric bend limiters are typically provided
for small diameter umbilicals or flying leads, as well as for their compliant
umbilical section, which turns a traditional umbilical into a ROV-friendly,
installable flying lead. Due to our ability to design and manufacture
bend limiters in-house, delivery time is greatly
reduced.
Umbilical
Splice
. We have created a unique method of converting spare
umbilicals into actual production umbilicals by splicing spare umbilicals
together to produce any length required. This methodology is achieved
through our Compliant Splice, which is a patent-pending termination system that
eliminates the burdens of dealing with umbilical splices during
installation. This design is capable of housing both electrical and
fiber optic Fiber Termination Assemblies while still allowing for the splice to
be spooled up onto a reel or carousel. This allows oil and gas operators to save
significant costs through utilization of existing capital investments in spare
umbilicals, which reduces field development costs and delivery time. An
optional mud mat is used to assist in carrying the splice over the chute and
functions to keep the splice out of the mud for easy inspection.
SeaStax
®
. SeaStax
®
embodies
our concept for offshore storage and space management to help optimize available
deck space on offshore installation vessels, drilling rigs and production
platforms. The key philosophy behind SeaStax
®
is to
take common offshore items and store them in a standard-sized container to allow
for the storage system to be stackable and interchangeable in subsurface
conditions. The current system utilizes newly-designed 550 gallon
tote tanks, baskets, and tool boxes that are all inter-changeable and
stackable. Using common dimensions and designs allows a variety of
different items to all be commonly stored and stacked, to minimize required
storage area. The stacking philosophy can be applied to other custom
applications if required. In order to maximize accessibility and to reduce
maintenance, a variety of options are available such as galvanizing, ladders,
and drip pans.
Installation
Aids
. To help our clients and to meet our own internal needs,
we have developed an extensive array of installation aids, including steel
flying lead installation systems, a 5-ton Caterpillar
®
tensioner, a 10-foot radius lay chute with work platform, many varieties of
buoyancy, clump weights, VIV strakes, mud mats, dual tank skids, gang
boxes, work vans, pumping and testing skids, control booths, fluid drum
carriers, crimping systems, load cells, 300 and 340-ton under-rollers, a
200-ton carousel, UTA running and parking deployment
frames, termination shelters, pipe straightners, ROV hooks and
shackles, stackable SeaStax
®
tanks,
baskets, and boxes, and ballgrab rental rigging.
Intellectual
Property.
We believe that an important part of the success of
our business is our patents, trade secrets, trademarks, copyrights, and other
intellectual property rights. We currently own one U.S. patent and
there are no foreign counterparts relating to our products and techniques and
have applied for five U.S. patents and there are no foreign counterparts related
to our products and techniques. We will need to pursue additional
protections for our intellectual property as we develop new products or
techniques and enhance existing products or techniques.
Moray
®
,
SeaStax
®
Quick-Loc
®
and
Flotec
®
are our
registered trademarks.
Services
and Products from Acquisitions
Through
our acquisitions of Flotation, Mako and ElectroWave, we have further increased
our service and product offerings. Several of such increased
offerings are described below.
Flotation
Flotation
engineers, designs and manufactures deepwater buoyancy systems using
high-strength Flotec
TM
syntactic foam and polyurethane
elastomers. Flotation’s product offerings include
distributed buoyancy for flexible pipes and umbilicals, drilling riser buoyance
modules, CoreTec
TM
drilling riser buoyancy modules, ROVits
TM
buoyancy, Hydro-Float mooring buoys, Stablemoor
TM
low-drag ADCP deployment solution, Quick-Loc™ cable floats, Hardball
TM
umbilical floats, Flotec™ cable and pipeline protection, Inflex
TM
polymer
bend restrictors, and installation buoyancy of any size and depth
rating.
The
majority of Flotation’s product offerings are made with Flotec
TM
syntactic
foam, a product composed of hollow glass microballoons, combined with epoxy
resin and a catalyst. These microballoons or microspheres are very small, 20-120
microns in diameter, and provide the buoyancy to syntactic foam. The
microballoons give syntactic foam its light weight, low thermal conductivity and
resistance to compressive stress that far exceeds other types of
foams. The microballoons come in different densities and strengths
which are required for greater depth applications. In some applications, the
liquid syntactic foam resulting from the combination of ingredients is poured
into high-density polyethylene shells that form the flotation device and encase
and protect the syntactic foam from damage.
Because
of historic purchaser dissatisfaction with Flotation’s principal competitor, the
Company was asked by oil companies to provide buoyancy products to the oil and
gas exploration and production sector. The most significant step for
Flotation to take in order to get into the oil business was to secure an ISO
9001:2000 registration for its manufacturing operation. Receipt of
those certificates allowed oil and gas clients to place their first orders with
Flotation Technologies.
Flotation’s
drilling riser product is marketed under the name CoreTec™. Flotation also
manufactures polyurethane products, including bend restrictors, impact
protection, drill riser auxiliary clamps and other custom-designed products,
including some buoyancy products with macrospheres. While the
overwhelming majority of Flotation‘s revenue comes from buoyancy products for
the petroleum production sector, Flotation also serves the oceanographic and
military markets.
Mako
Headquartered
in Morgan City, Louisiana, Mako serves the growing offshore petroleum and marine
industries with technical support services and products vital to offshore
petroleum production. Mako’s offerings are primarily, through rentals
of its remotely operated vehicles ("ROV"), topside and subsea equipment, and
support systems used in diving operations, maintenance and repair operations,
offshore construction, and environmental/marine surveys.
Diving Equipment
Rental.
Mako employs a permanent staff of highly qualified
technicians and mechanics to maintain and refurbish its equipment in between
rentals. Mako carries a wide array of equipment to service the diving
industry, including water blasting equipment, breathing air dive
compressors, hot water units with feed pumps, man rider winches, hydraulic
tools and hose reels, underwater video units, sonar units, magnetic
gradiometers, dive radios, lift bags, volume tanks, decompression
chambers, hot water pressure washers, and saturation
systems.
Offshore Construction
Equipment Rental.
Mako carries a wide array of equipment to
service the offshore construction industry, including air compressors, air
tuggers, blasting equipment, jet pumps, personnel baskets, air tools, welding
machines, diesel pumps, and air pumps.
ROV Equipment
Rental.
Mako provides the latest ROV tooling technology as
part of its rental fleet. Mako's ROV tooling rental fleet is
constantly growing, with the addition of tools as they are requested by our
customers. Mako has, as part of its rental inventory, a 2,000-foot
depth-rated inspection / light work class remotely-operated vehicle (ROV)
complete with a control van and launch / recovery system. Mako also
has, as part of its inventory, a 300-meter depth-rated Seaeye Falcon and a
1,500-meter depth rated Seaeye Lynx observation class ROV. ROV
services offered by Mako include platform inspection (Level I, II and III,
jack-up and template), platform installation and abandonment, surveys
(environmental, pipeline existing and as built, oceanographic, nuclear and
hydroelectric), search and recovery, salvage, subsea intervention (hot stab
operations, torque tool, well, pipeline commissioning, and stack landings),
telecommunication cable inspections (existing and as built), research
(fisheries, scientific and marine archeology), anchor handling (mooring and
anchor chain monitoring), ROV consulting and project management, ROV pilots and
technicians, and underwater cinematography. Mako provides an
extensive line of ROV tools, ROV clamps and ROV-friendly hooks and
shackles. Mako’s torque tools are state-of-the-art in
design.
Environmental Equipment
Rental.
Mako offers a line of equipment that is specifically
designed and built to service the demanding requirements of the environmental
industry. Systems are built in-house, housed on skids and include
protective frames to ensure that the equipment is well suited for the job
site. All rental equipment goes through extensive cleanup and
overhaul between rentals, ensuring that when it arrives on site, its ready to go
and will perform reliably.
Marine
Surveys.
Mako provides the offshore industry with a responsive
marine survey service. Mako’s surveyors have extensive experience in
the marine industry, and provide a reliable and timely service, encompassing
on-and-off hire surveys, damage surveys, engine surveys, loading / securing of
cargo (warranty), trip and tow, suitability surveys, valuation surveys, hull
audio gauging, owner representatives, and regulatory vessel
compliance.
ElectroWave
ElectroWave
offers products and services in the fields of electronic monitoring and control
systems for the energy, military, and commercial business sectors.
ElectroWave designs, manufactures, installs, and commissions integrated
Programmable Logic Controller (“PLC”) and Supervisory Control and Data
Acquisition (“SCADA”) based instrumentation and control systems, including
ballast control and monitoring, drilling instrumentation, vessel management
systems, marine advisory systems, machinery plant control and monitoring
systems, and closed circuit television systems. ElectroWave can take
projects from conceptual/system design through installation, commissioning, and
support. ElectroWave's understanding of system requirements and its ability to
quickly understand its customer’s needs allows them to produce quality products
and services on time and on budget.
ElectroWave
has supplied equipment on drilling production rigs operating throughout the
world, including Abu Dhabi, Angola, Australia, Azerbaijan, Brazil, Congo, Dubai,
Egypt, Equatorial Guinea, India, Indonesia, Kuwait, Mexico, Nigeria, Norway,
Russia, the United Kingdom, United States, Vietnam, and other
areas. ElectroWave is also a supplier of integrated marine systems for
ships with design, manufacture, and delivery of machinery plant control and
monitoring systems and/or alarm monitoring systems for 3 Molinari Class Staten
Island ferries, a United States Coast Guard ice breaker, one of the world’s
largest hopper dredges, and other vessels.
Below are
some of ElectroWave’s major products:
Drillers Display
System
. ElectroWave has two proprietary drillers display
systems. One of the proprietary systems was provided by one of our
customers and is installed only on that customer’s rigs. The other
proprietary drillers display system was developed internally and is installed in
rigs worldwide. Drillers display systems allow the driller to keep an eye
on all the important parameters required for monitoring activity. Viewing of mud
pits, trip pits, flow rates, weight on bit, hook load, and other activities are
available to the driller at a glance. Logging software provides data analysis at
a whole new level, bringing more efficient drilling operations and increased
production from each working rig. Over 30 of these systems are installed on
our customers' rigs worldwide, having over 800 rig-months of operating time,
over 1 million hours of cumulative up-time, with a total down time of 2.5
hours. Our two largest customers for ElectroWave’s drillers display
systems are Transocean Offshore and Diamond Offshore Drilling.
Machinery Plant Control
System
. The Machinery Plant Control and Monitoring Systems
(MPCMS) allow the operators of a vessel to reduce manning requirements by
integrating all of the machinery controls and monitoring systems into one. The
MPCMS can reduce the number of crew on one vessel by more than 50%, allowing the
vessel owner to save personnel expenses or allocate personnel to more critical
areas. ElectroWave's largest MPCMS system consists of over 5,000
points, consisting of hard wired sensors, contacts, and data over industrial
protocols such as Ethernet, Modbus, and Profibus. We have integrated
systems such as fire, flooding, ballast, fueling, bridge, propulsion, engines,
HVAC, deck machinery, air systems, emergency generators, lighting, and more,
into one system. An entire vessel can now almost be operated from one
station by a very minimal crew. Our MPCMS is currently in use on the
United States Coast Guard Ice Breaker Mackinaw.
Ballast
Console
. ElectroWave designs replacement ballast control
consoles for a number of customers. The consoles they are replacing have fallen
out of service and are typically only partially functioning. ElectroWave first
sends out a technician to perform a "site survey" during which our technician
will take copious notes about the existing installation, all of the wiring, and
any manuals that exist for the system. Our team then brings this information
back to our facility where we design replacement consoles that fit exactly where
the old console was, reducing hot work and re-wiring. After designing
a new console, drawings are sent to the rig managers, electricians, and company
electricians for verification. After drawings are verified, the console is
released for production. Upon receiving the console at our factory, our
electricians (some of which are ex-rig electricians) wire the console to match
the old system wiring. After through testing at our factory, the console is
shipped to the customer where it is installed by our field service personnel.
The new console is wired to operate exactly like the old system to reduce
re-training of ballast control officers and rig hands. After the console is
commissioned, our technicians will provide any support and training necessary
before leaving the site. We have installed ballast control systems
that are full touch screen capable, operating over 80 valves and more than 30
tanks. We have these type systems installed on the Coast Guard Ice Breaker
Mackinaw, and the 3 Molinari Class Staten Island ferries, the Molinari, Marchi,
and Spirit of America.
CCTV
System
. ElectroWave has tackled some very difficult CCTV
security and monitoring requirements. Post-911, the New York
Department of Transportation (NYDOT) wanted cameras to watch every available
compartment of their three new ferries. ElectroWave stepped up to the challenge
and provided NYDOT one of the most sophisticated CCTV systems available on
passenger transportation ferries. A system of cameras, coupled with digital
video recording, allow post-event tracing and security on one of the most-used
transportation devices in New York. CCTV is more than just security,
many (if not all) oil rigs have CCTV systems installed to keep an eye on the
safety of those working on the rig. Cameras watch unmanned spaces,
machinery spaces, and potential hazard zones for trouble. This helps to keep the
manning requirement on the rigs to a minimum while allowing for a safer working
environment. ElectroWave typically provides Pelco camera systems, but
is capable of integrating existing camera systems into new CCTV installations.
ElectroWave has also developed hardware and software in-house to allow the use
of Pan/Tilt/Zoom cameras from hazardous locations where PTZ keyboards cannot be
installed.
Ballast Monitoring
System
. ElectroWave has designed and implemented numerous
ballast monitoring systems. A ballast monitoring system is a method
of displaying the contents of the tanks on board the vessel. The
systems provided by ElectroWave ranges from simple racks of bubbler style
display units to integrated PLC touch screen systems visible throughout the
vessel. ElectroWave has also offered automated tank reporting systems with our
electronic PLC monitoring systems, allowing the operators to keep a liquid load
sheet available at any time.
Active Heave
Compensation
. ElectroWave was approached to implement an
algorithm to perform Active Heave Compensation. An "Active Heave Compensator",
or AHC, is designed to reduce or eliminate (in this case eliminate) the effects
of vessel heave during overboarding operations. This means that a package can be
held at a specific location in the water without the motion of the vessel on the
waves affecting the position of the package. The customer identified
the operational tolerance of the system to be 6" of movement of the package with
vessel heave of approximately 20 feet. The system that was implemented is
accurate to 0.6" of package movement with vessel heave up to 30 feet.
ElectroWave always delivers products to the best of our ability, often exceeding
customer requirements and expectations. ElectroWave implemented an
Allen Bradley PLC system to take data from a Motion Reference Unit (MRU) and
drive hydraulic actuators to compensate for the movement of the
vessel.
Manufacturing
Our
manufacturing facilities are in Channelview, Texas, a suburb of Houston, where
we conduct a broad variety of processes, including machining, fabrication,
inspection, assembly and testing. Our Manufactured Systems Division is devoted
to the design, manufacturing, testing, and commissioning of heavy equipment used
in both on- and offshore operations in a variety of markets and industries. The
manufacturing personnel have over 50 years of combined experience serving
commercial, government, military and academic customers in a variety of
applications. The facilities encompass over 8 acres, with approximately
60,000 square feet of manufacturing space with 4 overhead cranes and 7,000
square feet of office space. The Company is located with great access to both
I-10 and the Houston Ship Channel. The facilities have 120V, 240V and 480V
power. Our manufacturing plant is ISO 9001 and American Petroleum
Institute certified.
Our
manufacturing facility utilizes state-of-the-art computer numerically controlled
("CNC") machine tools and equipment, which contribute to the Company's product
quality and timely delivery. We maintain our equipment and tooling in
good working condition and upgrade our capabilities as needed to enhance the
cost-efficient manufacture of our specialized products. We purchase quality used
machine tools and equipment as they become available and store them at our
facility to be rebuilt, upgraded or refurbished as needed. We
maintain our high standards of product quality through the use of quality
assurance specialists who work with product manufacturing personnel throughout
the manufacturing process and inspect and document equipment as it is processed
through the Company's manufacturing facility. We have the capability
to manufacture various products from each of our product lines at our major
manufacturing facility and believe that this localized manufacturing capability
is essential in order to compete with our major competitors. We
maintain valuable relationships with several other companies that own additional
fabrication facilities in and around Houston, Texas. These other
companies provide excellent subcontract manufacturing support on an as-needed
basis. Our manufacturing process includes heat treatment, machining,
fabrication, inspection, assembly and testing. Our primary raw
material is steel. We routinely purchase raw materials from many suppliers on a
purchase order basis and do not have any long-term supply
contracts.
Flotation
has designed, developed, and assembled its own continuous liquid syntactic foam
production machine. This machine allows Flotation to produce the
large volume of foam required to make the 7-14 foot long drilling pipe flotation
risers that appear to be in high demand for offshore drilling in very deep
waters such as those of Brazil. These drill pipe risers will operate
effectively in water depths of up to 4,000 meters (13,000
feet). Flotation has foam that is capable of operating in water
depths of up to 7,000 meters (23,000
feet). Flotation’s drilling riser buoyancy design is
unique in the industry, and a patent application has been filed.
Customers
Demand
for our deep water equipment, surface equipment and offshore rig equipment and
services is substantially dependent on the condition of the oil and gas industry
to invest in substantial capital expenditures as well as continual maintenance
and improvements on its offshore exploration, drilling and production
operations. The level of these expenditures is generally dependent upon various
factors such as expected prices of oil and gas, exploration and production costs
of oil and gas, the level of offshore drilling and production
activity. The prevailing view of future oil and gas prices are
influenced by numerous factors affecting the supply and demand for oil and
gas. These factors include worldwide economic activity, interest
rates, cost of capital, environmental regulation, tax policies, and production
levels and prices set and maintained by producing nations and
OPEC. Capital expenditures are also dependent on the cost of
exploring for and producing oil and gas, the sale and expiration dates of
domestic and international offshore leases, the discovery rate of new oil and
gas reserves in offshore areas and technological advances. Oil and gas prices
and the level of offshore drilling and production activity have historically
been characterized by significant volatility.
Our
principal customers are major integrated oil and gas companies, large
independent oil and gas companies, foreign national oil and gas companies,
subsea equipment manufacturers and subsea equipment installation contractors
involved in offshore exploration, development and
production. Offshore drilling contractors, engineering and
construction companies, the military and other companies involved in maritime
operations represent a smaller customer base. Our customers include
Acergy SA; Aker Kvaerner ASA; Amerada Hess Corporation; Anadarko Petroleum
Corporation; Atlantic Shipyard; BHP Billiton Limited; BP PLC; Cabett Subsea
Products, Inc.; Cal Dive International, Inc.; Cameron International Corporation;
Chevron Corporation; Devon Energy Corporation; Diamond Offshore Drilling, Inc.;
Dril-Quip, Inc.; Duco Inc.; ExxonMobil Corporation; Helix Energy Solutions Group
Inc.; JDR Cable Systems (Holdings) Ltd; Kerr McGee Corporation; Marathon Oil
Corporation; Marinette Marine Corporation; Nexen Inc.; Noble Energy Inc.;
Oceaneering International, Inc.; Oil States Industries, Inc.; Royal Dutch Shell
PLC; Schlumberger Limited; Subsea 7, Inc.; Technip USA Holdings, Inc.;
TransOcean Offshore Inc.; United States Coast Guard; Veolia Environmental
Services, Inc. and United States Navy.
We are
not dependent on any one customer or group of customers. The number and variety
of our products required in a given period by a customer depends upon their
capital expenditure budget as well as the results of competitive bids.
Consequently, a customer may account for a material portion of revenues in one
period and may represent an immaterial portion of revenues in a subsequent
period. While we are not dependent on any one customer or group of customers,
the loss of one or more of our significant customers could, at least on a
short-term basis, have an adverse effect on the results of
our operations.
Marketing
and Sales
We market
our products and services throughout the world directly through our sales
personnel in our corporate headquarters in Channelview, Texas. We periodically
advertise in trade and technical publications of our customer
base. We also participate in industry conferences and trade shows to
enhance industry awareness of our products and services. Our
customers generally order products and services after consultation with us on
their project. Orders are typically completed within two weeks to
three months depending on the type of product or service. Larger and
more complex products may require four to six months to complete. Our
customers select our products and services based on the quality, reliability and
reputation of the product or service, price, timely delivery and advance
technology. For large drilling and production system orders, we
engage our project management team to coordinate customer needs with
engineering, manufacturing and service organizations, as well as with
subcontractors and vendors. Our profitability on projects is
dependent on performing accurate and cost-effective bids as well as performing
efficiently in accordance with bid specifications. Various factors
can adversely affect our performance on individual projects that could
potentially adversely affect the profitability of a project.
Product
Development and Engineering
The
technological demands of the oil and gas industry continue to increase as
offshore exploration and drilling operations expand into deeper and more hostile
environments. Conditions encountered in these environments include
well pressures of up to 15,000 psi, mixed flows of oil and gas under high
pressure that may also be highly corrosive, and water depths in excess of 5,000
feet. We are continually engaged in product development activities to
generate new products and improve existing products to meet our customers’
specific needs. We also focus our activities on reducing the overall
cost to the customer, which includes not only the initial capital cost but also
operating costs associated with its products.
We have
an established track record of introducing new products and product
enhancements. Our product development work is conducted at our
facilities in Channelview, Texas and in the field. Our application
engineering staff also provides engineering services to customers in connection
with the design and sales of our products. Our ability to develop new
products and maintain technological advantages is important to our future
success.
We
believe that the success of our business depends more on the technical
competence, creativity and marketing abilities of our employees than on any
individual patent, trademark or copyright. Nevertheless, as part of
our ongoing product development and manufacturing activities, our policy is to
seek patents when appropriate on inventions concerning new products and product
improvements. All patent rights for products developed by employees
are assigned to us.
Competition
The
principal competitive factors in the petroleum drilling and production and
maritime equipment markets are quality, reliability and reputation of the
product, price, technology, the ability to provide quality service and timely
delivery. We face significant competition from other manufacturers of
exploration, production and maritime equipment. Several of our
primary competitors are diversified multinational companies with substantially
larger operating staffs and greater capital resources and have a longer history
in the manufacturing of these types of equipment. We compete
principally with Dynacon, FMC, Halliburton Product Pipeline Services, Kvaerner,
Norson, Ocean Works, Oceaneering, VFL, and Halliburton Product Pipeline Services
on our umbilical services; Dynacon, Ocean Works and Odem on our Launch and
Recovery Systems; and Entech, Technip, Manatec and Pegasus on our installation
management services.
Flotation’s
principal competitors in the polyurethane area are Trelleborg AB, Balmoral
Group, Dunlaw Engineering Ltd., ABCO Industries Limited, and Whitefield Plastics
Corporation. Flotation’s principal competitor in the syntactic foam
is Trelleborg AB. CRP Group was acquired by the Trelleborg AB in January 2006
and now operates worldwide as Trelleborg Offshore, with North American
operations under the name Trelleborg Offshore, Inc. Other competitors
include Cumming Corp., located in Massachusetts; Matrix Composites &
Engineering Ltd., located in Australia; Balmoral Group, located in Scotland;
Syntech Materials, Inc., located in Virginia; and Marine Subsea Group, located
in Norway.
Employees
We have
165 employees as of July 16, 2008. Our employees are not covered by
collective bargaining agreements and we consider our employee relations to be
good. Our operations depend in part on our ability to attract a
skilled labor force. While we believe that our wage rates are
competitive and that our relationship with our skilled labor force is good, a
significant increase in the wages paid by competing employers could result in a
reduction of our skilled labor force, increases in the wage rates that we pay or
both.
Governmental
Regulations
A
significant portion of our business activities are subject to federal, state,
local and foreign laws and regulations and similar agencies of foreign
governments. The technical requirements of these laws and regulations are
becoming increasingly expensive, complex and stringent. These regulations
are administered by various federal, state and local health and safety and
environmental agencies and authorities, including the Occupational Safety and
Health Administration of the U.S. Department of Labor and the U.S. Environmental
Protection Agency. From time to time, we are also subject to a wide range
of reporting requirements, certifications and compliance as prescribed by
various federal and state governmental agencies. Expenditures relating to
such regulations are made in the normal course of our business and are neither
material nor place us at any competitive disadvantage. We do not currently
expect compliance with such laws will require us to make material
expenditures.
We are
also affected by tax policies, price controls and other laws and regulations
generally relating to the oil and gas industry, including those specifically
directed to offshore operations. Adoption of laws and regulations
that curtail exploration and development drilling for oil and gas could
adversely affect our operations by limiting demand for our services or
products.
Increased
concerns about the environment have resulted in offshore drilling in certain
areas being opposed by environmental groups, and certain areas have been
restricted. To the extent that new or additional environmental
protection laws that prohibit or restrict offshore drilling are enacted and
result in increased costs to the oil and gas industry in general, our business
could be materially affected. In addition, these laws may provide for
"strict liability" for damages to natural resources or threats to public health
and safety, rendering a party liable for the environmental damage without regard
to negligence or fault on the part of such party. Sanctions for
noncompliance may include revocation of permits, corrective action orders,
administrative or civil penalties and criminal prosecution. Certain
environmental laws provide for joint and several strict liabilities for
remediation of spills and releases of hazardous substances. In addition,
companies may be subject to claims alleging personal injury or property damage
as a result of alleged exposure to hazardous substances, as well as damage to
natural resources. Such laws and regulations may also expose us to
liability for the conduct of or conditions caused by others, or for our acts
that were in compliance with all applicable laws at the time such acts were
performed. Compliance with environmental laws and regulations may require
us to obtain permits or other authorizations for certain activities and to
comply with various standards or procedural requirements.
We cannot
determine to what extent our future operations and earnings may be affected by
new legislation, new regulations or changes in existing
regulations. We believe that our facilities are in substantial
compliance with current regulatory standards. Based on our experience
to date, we do not currently anticipate any material adverse effect on our
business or consolidated financial position as a result of future compliance
with existing environmental laws and regulations controlling the discharge of
materials into the environment. However, future events, such as
changes in existing laws and regulations or their interpretation, more vigorous
enforcement policies of regulatory agencies, or stricter or different
interpretations of existing laws and regulations, may require additional
expenditures which may be material.
DESCRIPTION
OF PROPERTY
Our
principal corporate offices and manufacturing space are located at 15473 East
Freeway, Channelview, Texas 77530. We lease the Channelview property
which consists of approximately 10.998 acres of land with approximately 60,000
square feet of manufacturing space with four overhead cranes and 7,000 square
feet of office space. We lease all buildings, structures, fixtures
and other improvements from JUMA, LLC, a company owned by Ronald E. Smith, CEO
and a director of Deep Down, Inc. and Mary L. Budrunas, a vice president and a
director of Deep Down, Inc. The base rate of $11,000 per month is
payable to JUMA through September 1, 2011, together with all costs of
maintaining, servicing, repairing and operating the premises, including
insurance, utilities and property taxes.
ElectroWave’s
offices and manufacturing space is located at the same location of Deep Down at
15473 East Freeway, Channelview, Texas 77530. ElectroWave’s
facilities are also included in the lease with JUMA, LLC.
Mako
Technologies, LLC leases its property and buildings from Sutton
Industries. Mako is located at 125 Mako Lane, Morgan City, LA
70380. The lease is for 5 years beginning on June 1,
2006. There is a 5 year option at the expiration of the initial
lease. At this location, Mako has its administrative offices and buildings
that serve as the support location for the Mako rental equipment.
Flotation
has owned and occupied its current Biddeford, Maine facility for approximately
one year. The facility contains approximately 6,000 square feet of
office space and approximately 40,000 square feet of manufacturing
space. Flotation is in the process of building a second continuous
mixer at a cost of $500,000. This mixer will augment the production
of foam on the same manufacturing line as the original mixer.
PATENTS,
TRADEMARKS AND COPYRIGHTS
The
Company currently holds one patent covering riser tensioner sensor
assembly. An additional five patents have been applied for and are in
process. Trademarked names of the Company include DRILSYS
TM
,
ELECTROWAVE
TM
, MUDSYS
TM
,
AQUASOX
TM
, MORAY
TM
and SEASTAX
TM
,
QUICK-LOC
®
,
FLOTEC
®
, and
PROTEUS™.
We also
obtained all the rights to the following inventions, including all provisional
applications in connection with the acquisition of Flotation:
|
|
·
|
Drilling
Riser Buoyancy Produced with Plastic Shell (inventors Timothy H. Cook,
Fred Maguire and David Capotosto);
|
|
|
·
|
Drilling
Riser Auxiliary Claim with Integral Mux Clamp (inventors Timothy H. Cook,
Fred Maguire and David Capotosto);
|
|
|
·
|
Clam
for Holding Distributed Buoyancy Modules (inventors David Capotosto and
William Stewart); and
|
|
|
·
|
Hinged
Distributed Buoyancy Module (inventors Timothy H. Cook and David
Capotosto).
|
DIRECTORS,
EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS
The
following table sets forth the name, age and position of our directors and
executive officers as of July 16, 2008. There are no other persons who can be
classified as a promoter or controlling person in relation to us. Our officers
and directors are as follows:
|
Name
|
Age
|
Position
Held With The Company
|
||
|
Robert
E. Chamberlain, Jr.
|
48
|
Chairman
of the Board, Chief Acquisitions Officer, and Director
|
||
|
Ronald
E. Smith*
|
49
|
President,
Chief Executive Officer and Director
|
||
|
Eugene
L. Butler
|
66
|
Chief
Financial Officer and Director
|
||
|
Mary
L. Budrunas*
|
56
|
Vice-President,
Director, and Corporate Secretary
|
||
|
Bradley
M. Parro
|
50
|
Vice-President
|
_________________________
* Ronald
E. Smith and Mary L. Budrunas are husband and wife.
Robert
E. Chamberlain, Jr., Chairman of the Board, Chief Acquisitions Officer, and
Director.
Mr. Chamberlain has served as Chairman and Director of the
Company since December 2006. Mr. Chamberlain has a B.S. in Chemical
Engineering and a B.S. in Biomedical Engineering from Northwestern University's
Technological Institute and an MBA from Northwestern University's Kellogg
Graduate School of Management. Mr. Chamberlain served as Vice President with
Solomon Brothers Inc. (1986 to 1992), where his responsibilities included
mergers, acquisitions, leveraged buyouts, merchant banking, divestitures,
corporate finance, capital raises, restructurings and new product development in
both the private and public markets. From 1992 through 1995, Mr. Chamberlain
served as Vice President for Laidlaw Securities and Dickinson & Co. where he
was responsible for generating public and private equity transactions. Since
1995, Mr. Chamberlain has assisted small emerging growth companies gain access
to the capital markets and develop well articulated strategic objectives through
consulting companies he controlled. Most recently, Mr. Chamberlain served as
Chairman, CEO, CFO and Director of a publicly-traded energy company involved in
the development of oil and gas opportunities, primarily in the Barnett Shale of
Texas.
Ronald
E. Smith, President, Chief Executive Officer and Director
. Mr. Smith
co-founded Deep Down in 1997 and has served as President and Director of the
Company since December 2006. Mr. Smith graduated from Texas A&M University
with a Bachelor of Science degree in Ocean Engineering in 1981. Mr. Smith worked
both onshore and offshore in management positions for Ocean Drilling and
Exploration Company (ODECO), Oceaneering Multiflex, Mustang Engineering and
Kvaerner before founding Deep Down. Mr. Smith’s interests include all types of
offshore technology, nautical innovations, state of the art communications,
diving technology, hydromechanics, naval architecture, dynamics of offshore
structures, diving technology and marketing of new or innovative concepts. Mr.
Smith is directly responsible for the invention or development of many
innovative solutions for the offshore industry, including the first steel tube
flying lead installation system.
Eugene
L. Butler, Chief Financial Officer and Director.
Mr. Butler
has served as Chief Financial Officer with Deep Down, Inc. since
June 2007. Mr. Butler was Managing Director of CapSources, Inc.,
an investment banking firm specializing in mergers, acquisitions and
restructurings, from 2002 until 2007. Prior to this, he has served in various
capacities as a director, president, chief executive officer, chief financial
officer and chief operating officer for Weatherford International, Inc., a $2
billion multinational service and equipment corporation serving the worldwide
energy market, from 1974 to 1991. He was elected to Weatherford’s
Board of Directors in May of 1978, elected president and chief operating officer
in 1979, and president and chief executive officer in 1984. He
successfully developed and implemented a turnaround strategy eliminating debt
and returning the company to profitability during a severe energy
recession. Mr. Butler also expanded operations into international
markets allowing Weatherford to become a major worldwide force with its offshore
petroleum products and services. Mr. Butler graduated from
Texas A&M University in 1963, and served as an officer in the U.S. Navy
until 1969 when he joined Arthur Andersen & Co. Mr.
Butler is distinguished by numerous medals and decorations, including the Bronze
Star with combat “V” and the Presidential Unit Citation for his service
with the river patrol force in Vietnam.
Mary L.
Budrunas, Vice-President, Director and Corporate Secretary.
Ms. Budrunas,
co-founder of Deep Down, Inc. along with current chief executive officer Ronald
E. Smith, has served as Vice-President and director of the Company since
December 2006. Ms. Budrunas is responsible for the Company’s
administrative functions, including human resources and
accounting. Ms. Budrunas has more than 30 years of logistical
management experience in manufacturing, fabrication, and industrial sourcing in
the oil and gas industry. Prior to Ms. Budrunas co-founding Deep Down in 1997,
she managed the purchasing efforts of many projects over a 10-year period for
Mustang Engineering, and previously directed procurement for a large petroleum
drilling and production facility project in Ulsan, Korea.
Bradley
M. Parro, Vice President.
Mr. Parro has served as Vice
President since May 2008. Prior to this, he was the Managing Director
for Continental Shelf Associates where he was responsible for business
development for the company’s Houston, Texas office. From 1998
through 2004, he served in various executive capacities, including chief
financial officer, chief operating officer and chief executive officer of
PetroCom, LLC, a $30 million wireless communications company serving the
offshore oil and gas industry. He also held the position of chief
financial officer for oilfield service providers Ceanic Corporation (formerly
NASDAQ: DIVE) and Perry Tritech, Inc. His experience includes mergers
and acquisitions, corporate restructuring, equity and sub-debt placement,
strategic planning and execution and executive financial and operational
management. Mr. Parro has a Bachelor of Science degree in finance
from the University of Illinois at Urbana-Champaign and a Master of Business
Administration degree from Loyola University of Chicago.
Corporate
Governance
The
Company promotes accountability for adherence to honest and ethical conduct;
endeavors to provide full, fair, accurate, timely and understandable disclosures
in reports and documents that the Company files with the Securities and Exchange
Commission (the “SEC”) and in other public communications made by the Company;
and strives to be compliant with applicable governmental laws, rules and
regulations. The Company has not formally adopted a written code of business
conduct and ethics that governs the Company’s employees, officers and directors
as the Company is not required to do so.
There
were no material changes to the procedures by which shareholders may recommend
nominees to the Company’s Board of Directors.
In lieu
of an Audit Committee, the Company’s Board of Directors is responsible for
reviewing and making recommendations concerning the selection of outside
auditors, reviewing the scope, results and effectiveness of the annual audit of
the Company's financial statements and other services provided by the Company’s
independent public accountants. The Board of Directors reviews the Company's
internal accounting controls, practices and policies. Our Board of Directors has
determined that no director qualifies as an audit committee financial expert as
defined in Item 407(d) (5) (ii) of Regulation S-B.
Section
16(a) Beneficial Ownership Reporting Compliance
Section
16(a) of the Securities Exchange Act of 1934, as amended, requires our directors
and executive officers, as well as persons beneficially owning more than 10% of
our outstanding common stock, to file reports of ownership and changes in
ownership with the SEC within specified time periods. Such officers, directors
and shareholders are required to furnish us with copies of all Section 16(a)
forms they file.
Based
solely on the review of such forms received by us, or written representations
from certain reporting persons, not all Section 16(a) filing requirements
applicable to our officers, directors and 10% shareholders were complied with
within a timely manner during the fiscal year ended December 31,
2007. During 2007, the number of Form 3s that were filed late totaled
six; the number of Form 4s that were filed late totaled six; and the number of
Form 5s that were filed late totaled seven. However all required
reports were filed by December 31, 2007.
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS
AND MANAGEMENT
The
following table lists the beneficial ownership as of July 16, 2008 of shares of
the Company’s Common Stock by (i) all persons and groups known by the Company to
own beneficially more than 5% of the outstanding shares of the Company’s Common
Stock, (ii) each director, (iii) each person who held the office of Chief
Executive Officer at any time during the year ended December 31, 2007, (iv) up
to two executive officers other than the Chief Executive Officer who were
serving as executive officers on December 31, 2007 and to whom the Company paid
more than $100,000 in compensation during the last fiscal year, (v) up to two
additional persons to whom the Company paid more than $100,000 during the last
fiscal year but who were not serving as an executive officer on December 31,
2007, and (vi) all directors and officers as a group. None of the directors,
nominees, or officers of the Company owned any equity security issued by the
Company’s subsidiaries. Information with respect to officers, directors and
their families is as of July 16, 2008, and is based on the books and records of
the Company and information obtained from each individual. Unless otherwise
stated, the business address of each individual or group is the same as the
address of the Company’s principal executive office.
|
Name
and address of
beneficial
owner (2)
|
Shares
|
Vested
Options /
Warrants
|
Percentage
of Voting Rights (1)
|
|
Ronald
E. Smith (3)(4)
|
44,629,876
|
-
|
25.16%
|
|
Mary
L. Budrunas (3)
|
44,629,876
|
-
|
25.16%
|
|
Robert
E. Chamberlain, Jr.(4)
|
25,358,375
|
-
|
14.30%
|
|
Eugene
L. Butler (4)
|
350,000
|
1,000,000
(5)
|
0.76%
(6)
|
|
All
directors and officers as a group (four persons)
|
70,338,251
|
1,000,000
|
40.00%(6)
|
(1) A
person is deemed to be the beneficial owner of securities that can be acquired
within 60 days from the date set forth above through the exercise of any option,
warrant or right. Shares of common stock subject to options, warrants or rights
that are currently exercisable or exercisable within 60 days are deemed
outstanding for computing the percentage of the person holding such options,
warrants or rights, but are not deemed outstanding for computing the percentage
of any other person. The amounts and percentages are based upon 177,350,630
shares of common stock outstanding as of July 16, 2008.
(2) The
address of each of the beneficial owners is c/o Deep Down, Inc., 15473 East
Freeway, Channelview, Texas 77530.
(3)
Reflects 26,216,871 shares owned by Ronald E. Smith and 18,413,005 shares owned
by Mary L. Budrunas, who are married to each other.
(4)
Shares owned include 350,000 shares of restricted stock issued on February 14,
2008 which become fully vested on the second anniversary of the grant, February
14, 2010.
(5)
Includes 1,000,000 options to purchase shares of the Company’s common stock at
an exercise price of $0.515 per share. Effective May 31, 2007, we hired Eugene
L. Butler as our Chief Financial Officer (“CFO”) for an initial term through May
31, 2010 with automatic annual renewals for an additional two years. He received
an aggregate of 3,000,000 stock options, of which the first 33% vested on the
first anniversary of the agreement, the second 33% on the second anniversary of
the agreement and the remaining 33% will vest on the third anniversary of the
agreement. The exercise price for the options, $0.515 per share, was determined
by the closing market price of the common stock on the date of
grant. The options expire on May 31, 2010.
(6) Based
on 178,350,630 shares of common stock outstanding, assuming the exercise of all
vested options held by Mr. Butler.
Disclosure
regarding our equity compensation plans as required by this item is incorporated
by reference to the information set forth under the section entitled “Market for
Common Equity and Related Stockholder Matters” above.
EXECUTIVE
COMPENSATION
The
following table summarizes all compensation paid to our Chief Executive Officer,
Chief Financial Officer and our two highest compensated named executive officers
(the “Named Executive Officers”) for the year ended December 31, 2007 and the
period from inception June 29, 2006 to December 31, 2006,
respectively.
Summary
Compensation Table
|
Name
and Principal Position
|
Year
|
Salary
($)
|
Bonus
($)
|
Stock
Awards
($)
(5)
|
Option
Awards
($)
(3)
|
All
Other
Compensation
($)
|
Total
($)
|
||||||||||||||
|
Ronald
E. Smith (4)
|
2007
|
$
|
269,231
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
269,231
|
||||||||
|
President,
Chief Executive Officer and Director
|
2006
|
$
|
27,110
|
$
|
1,710
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
28,820
|
||||||||
|
Robert E. Chamberlain,
Jr.
(1) (4)
|
2007
|
$
|
180,000
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
20,655
|
$
|
200,655
|
||||||||
|
Chairman
of the Board, Chief Acquisition Officer
and Director |
2006
|
$
|
16,670
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
16,670
|
||||||||
|
Mary
L. Budrunas
|
2007
|
$
|
134,615
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
134,615
|
||||||||
|
Vice-President,
Corporate Secretary and Director
|
2006
|
$
|
13,070
|
$
|
12,670
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
25,740
|
||||||||
|
Eugene L. Butler
(2)
(4)
|
2007
|
$
|
105,000
|
$
|
-
|
$
|
-
|
$
|
618,300
|
$
|
14,568
|
$
|
737,868
|
||||||||
|
Chief
Financial Officer and Director
|
2006
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
-
|
||||||||
(1)
Mr. Chamberlain was paid for consulting services he performed through Strategic
Capital Services, Inc. Other compensation consists of auto allowance payments of
$1,000 per month and $8,655 for payroll tax reimbursement which were paid during
fiscal 2008. Effective January 1, 2008, Mr. Chamberlain’s annual fee for
consulting services was increased to $225,000.
(2)
Mr. Butler began drawing an annual salary of $180,000 beginning May 31, 2007.
Option awards consist of 3,000,000 options granted on that date which vest in
three equal annual installments on the first three anniversary dates of the
grant date. Other compensation consists of auto allowance payments of
$1,000 per month and $7,568 for payroll tax reimbursement which were paid during
fiscal 2008. Effective January 1, 2008, Mr. Butler’s annual fee for consulting
services was increased to $225,000.
(3)
Option awards are based on expense recognized under FAS123(R). Awards
granted to Mr. Butler during fiscal year 2007 were granted with a strike price
equal to the quoted market price on the day of the grant and were valued at date
of grant using Black-Scholes option pricing models with the following
assumptions: 5% risk free rate, 52.7% volatility, expected life of 3 years and
zero dividends.
On
February 14, 2008, Deep Down issued 1,000,000 stock options to Msrs Smith,
Chamberlain and Butler with an exercise price of $1.50, which was in excess of
the day’s closing price of $0.42. The aggregate fair value of such options
(excluding estimated forfeitures) was approximately $145,764 based on the
Black-Scholes option pricing model using the following estimates: 2.8%
risk free rate, 61.3% volatility, an expected life of 3 years and zero
dividends. These options are not reflected on the table above since the grant
occurred after December 31, 2007.
(4)
In June, 2008, in recognition of the successful completion of the acquisition of
Flotation and the private placement of common stock, Msrs Smith, Chamberlain and
Butler were each awarded a cash performance bonus of $100,000 which was paid on
June 20, 2008. These bonuses are not reflected on the table above since they
occurred after December 31, 2007.
(5)
On February 14, 2008, Deep Down issued 350,000 shares of restricted common stock
to Msrs Smith, Chamberlain and Butler at a price of $0.42, the closing price of
Deep Down’s stock on that day. These restricted shares vest over a period of two
years. The aggregate fair value of such restricted stock was approximately
$441,000. These shares are not reflected on the table above since the grant
occurred after December 31, 2007.
Outstanding
Equity Awards at Fiscal Year-End
The
following table sets forth information concerning equity incentive plan awards
for each of the Named Executive Officers, outstanding as of December 31,
2007. The amounts reflected as Market Value are based on the closing
price of our Common Shares of $ 0.98 on December 31, 2007 (the last trading day
of our fiscal year ended December 31, 2007).
|
Option
Awards
|
|
Name
|
Number
of Securities Underlying Unexercised Options
(#)
Exercisable
|
Number
of Securities Underlying Unexercised Options
(#)
Unexercisable
|
Equity
Incentive Plan Awards: Number of Securities Underlying Unexercised
Unearned Options
(#)
|
Option
Exercise Price
($)
|
Option
Expiration
Date
|
|||||||||
|
Eugene
L. Butler, Chief Financial Officer
|
-
|
3,000,000
|
-
|
$
|
0.515
|
May
31, 2010
|
||||||||
The
vesting provisions for the Company’s stock options noted above will vest over a
three-year period.
See
footnotes (3) and (5) of the Summary Compensation Table for options and
restricted stock granted during fiscal year 2008.
Employment
Agreements
Effective
August 6, 2007, we signed an employment agreement with Ronald E. Smith, our
President and Chief Executive Officer (“CEO”) for an initial term through August
6, 2010 with automatic annual renewals for an additional two years. Under terms
of the employment agreement, Mr. Smith will receive an annual base salary of
$250,000 plus $1,000 per month auto allowance.
Effective
August 6, 2007, we signed a consulting agreement with Strategic Capital
Services, Inc. (“Strategic”) to provide the services of Robert E.
Chamberlain, who is our Chairman of the Board and Chief Acquisitions Officer
(“CAO”) for an initial term through August 6, 2010 with automatic
annual renewals for an additional two years. Under terms of the consulting
agreement, Mr. Chamberlain will receive an annual base salary of $180,000, which
was increased to $225,000 as of January 1, 2008, plus $1,000 per month auto
allowance, and payment to Strategic of an amount equal to Federal and State
payroll withholdings customarily withheld for an employee. Such amounts totaling
approximately $8,655 were paid in February 2008.
Effective
May 31, 2007, we hired Eugene L. Butler as our Chief Financial Officer (“CFO”)
for an initial term through May 31, 2010 with automatic annual renewals for an
additional two years. Under Mr. Butler's employment agreement, he will receive
an annual base salary of $180,000, which was increased to $225,000 as of January
1, 2008. He received an aggregate of 3,000,000 stock options, of which the first
33% will vest on the first anniversary of the agreement, the second 33% on the
second anniversary of the agreement and the remaining 33% will vest on the third
anniversary of the agreement. The exercise price for the options was determined
by the closing market price of the common stock on the date of
grant. Mr. Butler’s employment agreement contains an
indemnification provision that may require us to, among other things: indemnify
Mr. Butler against liabilities that may arise by reason of his status or service
as an officer to the fullest extent permitted under law. Effective
August 6, 2007, Mr. Butler’s employment agreement was replaced by a consulting
agreement with all the same provisions as the previous employment
agreement. The consulting agreement contains a provision that Deep
Down will remit to Mr. Butler an amount equal to Federal and State payroll
withholdings customarily withheld for an employee. Such amounts totaling
approximately $7,568 were paid in February 2008.
Effective
May 1, 2008, Deep Down entered into an employment agreement with Bradley M.
Parro to serve as Vice President of the Company. The employment
agreement is for a period of three years, during which time he is to be paid
$180,000 per year, and be eligible for bonuses under terms of the Deep Down
bonus plan. Mr. Parro is also eligible to receive an automobile
allowance of up to $1,000 per month. Additionally, pursuant to the
employment agreement, Mr. Parro was granted 300,000 stock options to purchase
shares of our common stock at an exercise price of $0.88 per
share. The options vest at the rate of one-third of the options
on the first, second and third anniversary of May 1, 2008, respectively, and
expire ten years from such date. Mr. Parro is not included on the tables
above as he was hired after December 31, 2007.
Compensation
of Directors
For the
year ended December 31, 2007, there were no cash payments or equity grants for
compensation to the Company’s former non-employee director, Daniel L. Ritz, Jr.
Mr. Ritz resigned as a director of the Company effective March 20,
2007. The directors of the Company are all also executive officers of
the Company and as directors do not receive any additional compensation related
to the performance of services as directors. The Company may agree to
provide compensation to non-employee directors in the future.
CERTAIN
RELATIONSHIPS AND
RELATED
TRANSACTIONS
We lease
all buildings, structures, fixtures and other improvements from JUMA, LLC, a
company owned by Ronald E. Smith, CEO and a director of Deep Down, Inc. and Mary
L. Budrunas, a vice president and a director of Deep Down, Inc. The
base rate of $15,000 per month is payable to JUMA through September 1, 2011,
together with all costs of maintaining, servicing, repairing and operating the
premises, including insurance, utilities and property taxes.
On March
28, 2008, Deep Down redeemed 4,500 shares of Series D preferred stock owned by
the Chief Executive Officer and director, and his wife, a Vice-President of Deep
Down. The Series D preferred shares were redeemed for 23,279,876
shares of common stock.
The
Company is a party to the employment agreements described herein with various of
our officers and directors.
None of
the Company’s directors are independent. However, the Company
believes that it would be exempt from some of the independence requirements of
NASDAQ ® due to the Company’s being a controlled company as defined in the
NASDAQ® rules. Under the NASDAQ® standards for “independence”, none
of our directors would qualify as independent generally or with respect to any
specific independence requirements for any committee member. However, as the
Company is not traded on the NASDAQ®, the Company is not required to comply with
NASDAQ® independence requirements at this time. At such time, if
ever, as the Company is traded on NASDAQ® or any alternative exchange, which
requires director independence, the Company plans to take steps at that time to
comply with such independence requirements.
CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING
AND FINANCIAL MATTERS
None.
INTEREST
OF NAMED EXPERTS AND COUNSEL
The
validity of the common stock offered by this Prospectus is being passed upon for
us by Sonfield & Sonfield, Houston, Texas, who does not hold any interest in
the Company, contingent or otherwise.
LEGAL
PROCEEDINGS
From time
to time we are involved in legal proceedings arising in the normal course of our
business. As of the date of this Prospectus, there are no material pending or
threatened legal proceedings regarding the Company which we are aware
of.
EXPERTS
The
consolidated financial statements of Deep Down, Inc. as of December 31, 2007 and
2006 and for the period from June 29, 2006 (inception) to December 31, 2006
included in this prospectus have been included in reliance on the report dated
March 31, 2008 of Malone & Bailey PC, an independent registered public
accounting firm, given on the authority of such firm as experts on accounting
and auditing. In addition, the historical financial statements of Flotation
Technologies, Inc. included in this prospectus have been included in reliance on
the report dated June 16, 2008 of Bruzgo & Kremer, LLC, an independent
public accounting firm, given on the authority of such firm as experts on
accounting and auditing.
Further,
the financial statements of Mako Technologies, Inc. as of and for the period
ended September 30, 2007 and as of and for the year ended December 31, 2006,
included in this prospectus have been included in reliance on the report dated
March 17, 2008 of Malone & Bailey PC, an independent registered public
accounting firm, given on the authority of such firm as experts on accounting
and auditing.
SHARES
AVAILABLE FOR FUTURE SALE
As of
July 16, 2008, we had outstanding 177,350,630 shares of our Common Stock, of
which 29,002,052 shares are freely tradable or covered by a current registration
statement and 57,142,857 shares will be freely tradable under this
Prospectus. The remaining 91,205,721 shares of our Common Stock
outstanding are “restricted securities” as defined in Rule 144 and are held by
our “affiliates” (as that term is defined in Rule 144 under the Securities Act).
These restricted securities may be sold in the future pursuant to registration
statements filed with the SEC or without registration under the Securities Act
to the extent permitted by Rule 144 or other exemptions under the Securities
Act.
As of
July 16, 2008, there were an aggregate of 8,775,000 shares of our Common Stock
issuable upon exercise of outstanding stock options and an aggregate of 638,812
shares of stock issuable upon exercise of outstanding warrants. On
July 3, 2008, the holder of 4,960,585 warrants exercised the warrants in a
cashless exercise for a total of 2,618,129 shares of common stock.
Until
September 4, 2008, we have agreed not to directly or indirectly, (1) offer for
sale, sell, pledge or otherwise dispose of (or enter into any transaction or
device which is designed to, or could be expected to, result in the disposition
by the Company at any time in the future of) any shares of common stock, or
securities convertible into or exchangeable for common stock, or sell or grant
options, rights or warrants with respect to any shares of common stock or
securities convertible into or exchangeable for common stock (other than option
grants to employees pursuant to existing plans in the ordinary course of
business), or (2) enter into any swap or other derivatives transaction that
transfer to another, in whole or in part, any of the economic benefits or risks
of ownership of such shares of common stock, whether any such transaction
described in clause (1) or (2) above is to be settled by delivery of common
stock or other securities, in cash or otherwise, without the prior written
consent of the Selling Shareholders or Dahlman Rose & Company,
LLC.
We may
register additional shares in the future in connection with acquisitions,
compensation or otherwise. We have not entered into any agreements or
understanding regarding any future acquisitions and cannot ensure that we will
be able to identify or complete any acquisition in the future. Sales
of shares of common stock in the public markets or through Rule 144 may have an
adverse effect on prevailing market prices for our common stock.
Rule 144
governs resale of "restricted securities" for the account of any person (other
than an issuer), and restricted and unrestricted securities for the account of
an "affiliate" of the issuer. Restricted securities generally include any
securities acquired directly or indirectly from an issuer or its affiliates
which were not issued or sold in connection with a public offering registered
under the Securities Act. An affiliate of the issuer is any person who directly
or indirectly controls, is controlled by, or is under common control with, the
issuer. Affiliates of the Company may include its directors, executive officers,
and persons directly or indirectly owning 10% or more of the outstanding common
stock. Under new rules adopted by the Commission, unregistered
resales of restricted securities of reporting companies are able to be made by
non-affiliates and affiliates after such securities have been held for six (6)
months (assuming the issuer remains current in its SEC periodic reporting
obligations for an additional six months, and subject to any affiliates
complying with certain volume limitations and other resale requirements as set
forth in Rule 144), and after one (1) year by affiliates and non-affiliates of
non-reporting companies, subject to certain requirements under Rule 144, as it
has been amended (including that there is current public information regarding
the issuer for sales by affiliates and that other volume limitations are
complied with for sales of affiliates, as described in greater detail in Rule
144).
We are
registering the shares to permit the Selling Shareholders to resell them in the
manner contemplated under the “Plan of Distribution” beginning on page
70. When we refer to “Selling Shareholders” in this Prospectus, we
mean the persons listed in the table below, and the pledgees, donees,
transferees, successors, and others who later come to hold any of the Selling
Shareholders’ interests in shares of our common stock other than through a
public sale.
The
shares offered by this Prospectus may be offered from time to time by the
Selling Shareholders. They may sell some, all or none of their
shares. We do not know how long the Selling Shareholders will hold
the shares before selling them. We currently have no agreements,
arrangements or understandings with the Selling Shareholders regarding the sale
of any of the shares.
The
following table sets forth the name of each selling shareholder, the number of
shares owned by each Selling Shareholder before this offering, the number of
shares that may be offered under this Prospectus, and the number of shares of
our common stock owned by the Selling Shareholders after this offering is
completed. The number of shares in the column “Number of Shares Being
Offered” represents all of the shares that a Selling Shareholder may offer under
this Prospectus. The number of shares in the column “Shares Owned
after the Offering” assumes the sale of all of the shares offered by the Selling
Shareholder under this Prospectus.
The
ownership of shares reported in the table below is based upon information
provided by each Selling Shareholder and SEC Form 4s, SEC Schedules 13D and 13G,
and other public documents filed with the Securities and Exchange
Commission. Unless otherwise noted, none of the share amounts set
forth below represents more than 5% of our outstanding common stock as of July
16, 2008. The percentages of shares owned after the offering are
based on 177,350,630 shares of our common stock outstanding as of July 16,
2008.
None of
the Selling Shareholders have, or within the past three years has had, any
position, office or other material relationship with us.
Based on
the information provided to us by the Selling Shareholders, none of the Selling
Shareholders is, or is affiliated with, a broker-dealer other than Jefferies
& Co., Ernest J. Dahlman, III and Dean O’Connor. Each of the
Selling Shareholders has represented to us that he or it had no agreements or
understanding, directly or indirectly, with any person to distribute the
securities.
The
Selling Shareholders may have sold or transferred, in transactions exempt from
the registration requirements of the Securities Act, some or all of their shares
since the date on which the information in the table is presented. Information
about the Selling Shareholders may change over time.
|
Shares
Owned After
Offering
(3)
|
|||||
|
Name
|
Shares
of Common Stock
Owned
Prior to Offering
|
Number
of Shares
Being
Offered
|
Number
|
Percent
|
|
|
Amended
and Restated Declaration of Trust of Morton A. Cohen, dated May 9,
2005
|
(a)
|
142,857
|
142,857
|
142,857
|
*
|
|
Andrew
Steven Codispoti
|
(b)
|
71,429
|
71,429
|
71,429
|
*
|
|
Aquanaut
Master Fund Ltd.
|
(c)
|
1,428,571
|
1,428,571
|
1,428,571
|
*
|
|
BlackGold
Capital Master Fund L.P.
|
(d)
|
1,428,571
|
1,428,571
|
1,428,571
|
*
|
|
Calm
Waters Partnership
|
(e)
|
3,571,429
|
3,571,429
|
3,571,429
|
*
|
|
Capital
Structure Opportunities, LP
|
(f)
|
102,000
|
102,000
|
102,000
|
*
|
|
Cardinal
Bear LLC
|
(g)
|
1,071,429
|
1,071,429
|
1,071,429
|
*
|
|
Clarion
Capital Corporation
|
(h)
|
428,572
|
428,572
|
428,572
|
*
|
|
Clarion
World Offshore Fund, Ltd.
|
(i)
|
142,857
|
142,857
|
142,857
|
*
|
|
Crestview
Capital Master, LLC
|
(j)
|
357,143
|
357,143
|
357,143
|
*
|
|
D.E.
Shaw Valence Portfolios, L.L.C.
|
(k)
|
7,142,857
|
7,142,857
|
7,142,857
|
*
|
|
Dubuque
Bank and Trust
|
(l)
|
2,857,143
|
2,857,143
|
2,857,143
|
*
|
|
Dean
O'Connor (1)
|
(m)
|
50,000
|
50,000
|
50,000
|
*
|
|
Ernest
J. Dahlman, III (2)
|
(n)
|
93,239
|
93,239
|
93,239
|
*
|
|
Greg
Imbruce
|
(o)
|
500,000
|
500,000
|
500,000
|
*
|
|
Hare
& Co.
|
(o)
|
38,750
|
38,750
|
38,750
|
*
|
|
Invenio
Partners
|
(p)
|
285,714
|
285,714
|
285,714
|
*
|
|
IOU
Limited Partnership
|
(q)
|
2,071,428
|
2,071,428
|
2,071,428
|
*
|
|
Jacobe
Partners, L.P.
|
(r)
|
428,571
|
428,571
|
428,571
|
*
|
|
Jefferies
& Co.
|
(s)
|
10,999
|
10,999
|
10,999
|
*
|
|
Mac
& Co.
|
(t)
|
106,570
|
106,570
|
106,570
|
*
|
|
Millennium
Partners, L.P.
|
(u)
|
7,857,143
|
7,857,143
|
7,857,143
|
*
|
|
Newland
Master Fund, Ltd.
|
(v)
|
3,000,000
|
3,000,000
|
3,000,000
|
*
|
|
OGI
Associates, LLC
|
(w)
|
2,071,429
|
2,071,429
|
2,071,429
|
*
|
|
PENFIRN
Co F/B/O: Roge Partners Fund
|
(x)
|
428,571
|
428,571
|
428,571
|
*
|
|
PENFIRN
Co F/B/O: Roge Select Opportunities Fund
|
(y)
|
428,571
|
428,571
|
428,571
|
*
|
|
Penn
Capital Management
|
(z)
|
167,000
|
167,000
|
167,000
|
*
|
|
Perella
Weinberg Partners Oasis Master Fund L.P.
|
(aa)
|
5,000,000
|
5,000,000
|
5,000,000
|
*
|
|
Peter
Kaltmon
|
(bb)
|
74,300
|
74,300
|
74,300
|
*
|
|
Schottenfeld
Group, LLC
|
(cc)
|
1,000,000
|
1,000,000
|
1,000,000
|
*
|
|
Tracy
W. Krohn
|
(dd)
|
5,714,286
|
5,714,286
|
5,714,286
|
*
|
|
UBS
O’Connor LLC F/B/O: O’Connor Pipes Corporate Strategies Master
Limited
|
(ee)
|
1,428,571
|
1,428,571
|
1,428,571
|
*
|
|
Wexford
Capital, LLC
|
(ff)
|
1,785,715
|
1,785,715
|
1,785,715
|
*
|
|
Wexford
Spectrum Trading Limited
|
(gg)
|
5,357,142
|
5,357,142
|
5,357,142
|
*
|
|
Stamatis
Molaris
|
(hh)
|
500,000
|
500,000
|
500,000
|
*
|
|
57,142,857
|
57,142,857
|
57,142,857
|
*
|
||
(1) Mr.
O’Connor is an employee of Dahlman Rose & Company, LLC, the placement agent
in the Company’s private placement of the shares of common stock being
registered for resale by the Selling Shareholders hereby.
(2) Mr.
Dahlman is President of Dahlman Rose & Company, LLC, the placement agent in
the Company’s private placement of the shares of common stock being registered
for resale by the Selling Shareholders hereby.
(3) No
amounts are in the excess of 5% based on 177,350,630 shares outstanding on July
16, 2008. See the Plan of Distribution for further information.
(a)
Amended and Restated Declaration of Trust of Morton A. Cohen, dated May 9, 2005
represented by Morton A. Cohen, of 3690 Orange Place Suite 400, Beachwood, OH
44122, has voting and investment control of these shares.
(b)
Andrew Steven Codispoti, of 142 W. 57
th
. St.
18
th
Floor, New York, NY, 10019, has voting and investment control of these shares.
The security holder is a registered broker-dealer and member of
FINRA.
(c)
Aquanaut Master Fund, Ltd. represented by Magnus Fyhr, of 700 Louisiana # 4260,
Houston, TX 77002, has investment and voting control of these
shares.
(d)
BlackGold Capital Master Fund, L.P. represented by Adam Flikerski and Erik
Dybesland, of 1400 Post Oak Blvd., Ste. 300, Houston, TX, 77056 has voting and
investment control of these shares.
(e) Calm
Waters Partnership, represented by Richard S. Strong, Managing Partner, of 115
S. 84
th
. St.,
Suite 200, Milwaukee, WI, 53214, has voting and investment control of these
shares.
(f) C/O
Penn Capital Management represented by Eric Green, of the Libertyview Building,
457 Haddonfield Road Suite 210, Cherry Hill, NJ, 08002, has voting and
investment control of these shares. (see notes o, s, t, z and bb).
(g)
Cardinal Bear LLC represented by Michael Baxter, member, of 11111 Santa Monica
Blvd. Suite 1100, Los Angeles, CA, 90025, has voting and investment control of
these shares.
(h)
Clarion
Capital Corporation represented by Morton A. Cohen, Chairman, of 3690 Orange
Place Suite 400, Beachwood, OH 44122 has voting and investment control of these
shares.
(i)
Clarion World Offshore Fund, Ltd. represented by Morton A. Cohen, Chairman, of
3690 Orange Place Suite 400, Beachwood, OH 44122, has voting and investment
control of these shares.
(j)
Crestview Capital Master, LLC represented by Stewart Flink, Robert Hoyt and
Daniel Warsh, of 95 Revere Drive Suite A, Northbrook, IL, 60062, has voting and
investment control over these shares. The security holder is a redistered
broker- dealer and member of FINRA.
(k) D.E.
Shaw Valence Portfolios, L.L.C. represented by David Quint, Senior Vice
President, of 120 W 45
th
St.,
39
th
Floor, New York, NY, 10036 has voting and investment control of these shares.
The selling security holder is under common control with D.E. Shaw Securities,
LLC, a broker dealer and a FINRA member firm.
(l)
Dubuque Bank and Trust, represented by Tom Peckosh and/or Sarah Reicks, of P.O.
Box 747, Dubuque, IA, 52004-0747, has voting and investment control of these
shares.
(m) Dean
O’ Connor represented by Dean O’Connor, Dahlman Rose & Co., of 420 East
54
th
Street, Apt. 25C, New York, NY, 10022, has voting and investment control of
these shares. The security holder is a registered broker-dealer and member of
FINRA.
(n)
Ernest J. Dahlman, III represented by the Robert Brinberg of Dahlman Rose &
Company, LLC, of 142 West 57
th
St,
18
th
Floor, New York, NY 10019, has voting and investment control of these shares.
The security holder is a registered broker-dealer and member of
FINRA.
(o) Greg
Imbruce represented by, Greg Imbruce of 93 Rockledge Drive, Stanford, CT, 06902,
has voting and investment control of these shares.
(ol) C/O
Penn Capital Management represented by Eric Green, of the Libertyview Building,
457 Haddonfield Road Suite 210, Cherry Hill, NJ, 08002, has voting and
investment control of these shares. (see notes f, s, t, z and
bb)
(p)
Invenio Partners represented by Norman Cohen, Portfolio Manager, of 142 West
57
th
Street 18
th
Floor,
New York, NY, 10016, has voting and investment control of these
shares.
(q) IOU
Limited Partnership, represented by George A. Weiss (Weiss Investment
Management, LLC), of One State Street 20
th
Floor,
Hartford, CT 06103, has voting and investment control of these shares. The
selling security holder is a registered broker dealer and member of
FINRA.
(r)
Jacobe Partners, L.P. represented by Jacobe Management, L.P., of 510 Bering Dr.
Suite 220, Houston, TX, 77057, has voting and investment control of these
shares.
(s) C/O
Penn Capital Management represented by Eric Green, of the Libertyview Building,
457 Haddonfield Road Suite 210, Cherry Hill, NJ, 08002, has voting and
investment control of these shares. (see notes f, o, t, z and
bb)
(t) C/O
Penn Capital Management represented by Eric Green, of the Libertyview Building,
457 Haddonfield Road Suite 210, Cherry Hill, NJ, 08002, has voting and
investment control of these shares (see notes f, o, s, z and
bb)
(u)
Millenium Partners, L.P., represented by Terry Feeney of 666 Fifth Avenue 8
th
Floor,
New York, NY 10103, has voting and investment control of these
shares.
(v)
Newland Master Fund, Ltd., represented by Ken Brodkewitz and Mike Vermut, of 350
Madison Ave. 11
th
Floor,
New York, NY,10017 has voting and investment control over these
shares.
(w) OGI
Associates, LLC, represented by George A. Weiss ( Weiss Investment Management,
LLC), of One State Street 20
th
Floor,
Hartford, CT 06103, has voting and investment control of these shares. The
selling security holder is a registered broker dealer and member of
FINRA.
(x)
PENFIRN Co. F/B/O: Roge Partners Fund represented by R.W. Roge & Co., Inc.,
of 1620 Dodge St. Stop 1060, Omaha, NE, 68197, has voting and investment control
of these shares.
(y)
Penfirn Co. F/B/O: Roge Select Opportunities Fund represented by R.W. Roge &
Co., Inc. of 1620 Dodge St. Stop 1060, Omaha, NE, 68197, has voting and
investment control of these shares.
(z) c/o
Penn Capital Management represented by Eric Green, of the Libertyview Building,
457 Haddonfield Road Suite 210, Cherry Hill, NJ, 08002, has voting and
investment control of these shares. (see notes f, o, s, t and
bb)
(aa)
Perella Weinberg Partners Oasis Master Fund L.P. represented by Rod Parsley, of
767 Fifth Avenue. 4
th
Floor,
New York, NY, 10153, has voting and investment control over these
shares.
(bb) c/o
Penn Capital Management represented by Eric Green, of the Libertyview Building,
457 Haddonfield Road Suite 210, Cherry Hill, NJ, 08002, has voting and
investment control of these shares. (see notes f, o, s, t and
z)
(cc)
Schottenfeld Group, LLC, represented by Lucas Rosen, member, of 800 Third Ave,
New York, NY 10022, has voting and investment control of these shares. The
selling security holder is a registered broker dealer and member of
FINRA.
(dd)
Tracy W. Krohn, represented by Tracy W. Krohn, of 9 Greenway Plaza, Suite 300,
Houston, TX, 77046, has voting and investment control of these
shares.
(ee) UBS
O’Connor LLC F/B/O: O’Connor Pipes Corporate Strategies Master Limited, of One
North Wacker Dr. 32
nd
Floor,
Chicago, IL, 60606, states that the security holder is a fund which cedes
investment control to UBS O’Connor LLC. The investment manager has voting and
investment control of these shares.
(ff) Wexford
Capital, LLC represented by Charles E. Davidson and Joseph Jacobs, of 411 West
Putnam Avenue, Greenwich, CT, 06830, has voting and investment control of these
shares.
(gg)
Wexford Spectrum Trading Limited, represented by Charles E. Davidson and Joseph
Jacobs, managing members, of Wexford Capital, LLC, of 411 West Putnam Avenue,
Greenwich, CT 06830, has voting and investment control of these
shares.
(hh) c/o
Fortis Banque (Suisse) SA, represented by R. Stephani, nominee holder, Bd des
Philosophes 20, CH-1205 Geneva.
We are registering shares of
common stock to permit the resale of such common stock by the holders from time
to time after the date of this Prospectus. We will not receive any of
the proceeds from the sale by the Selling Shareholders of the shares of common
stock. We will bear all fees and expenses incident to our obligation
to register the shares of common stock.
The
Selling Shareholders may sell all or a portion of the shares of common stock
beneficially owned by them and offered hereby from time to time directly or
through one or more underwriters, broker-dealers or agents. If the
shares of common stock are sold through underwriters or broker-dealers, the
Selling Shareholders will be responsible for underwriting discounts or
commissions or agent’s commissions. The shares of common stock may be
sold in one or more transactions at fixed prices, at prevailing market prices at
the time of the sale, at varying prices determined at the time of sale, or at
negotiated prices. These sales may be effected in transactions, which
may involve crosses or block transactions,
|
·
|
on
any national securities exchange or quotation service on which the
securities may be listed or quoted at the time of
sale;
|
|
·
|
in
the over-the-counter market;
|
|
·
|
in
transactions other than on these exchanges or systems or in the
over-the-counter market;
|
|
·
|
through
the writing of options, whether such options are listed on an options
exchange or otherwise;
|
|
·
|
ordinary
brokerage transactions and transactions in which the broker-dealer
solicits purchasers;
|
|
·
|
block
trades in which the broker-dealer will attempt to sell the shares as agent
but may position and resell a portion of the block as principal to
facilitate the transaction;
|
|
·
|
purchases
by a broker-dealer as principal and resale by the broker-dealer for its
account;
|
|
·
|
an
exchange distribution in accordance with the rules of the applicable
exchange;
|
|
·
|
privately
negotiated transactions;
|
|
·
|
short
sales;
|
|
·
|
pursuant
to Rule 144 under the Securities
Act;
|
|
·
|
broker-dealers
may agree with the Selling Shareholders to sell a specified number of such
securities at a stipulated price per
security;
|
|
·
|
a
combination of any such methods of sale;
and
|
|
·
|
any
other method permitted pursuant to applicable
law.
|
If the
Selling Shareholders effect such transactions by selling shares of common stock
to or through underwriters, broker-dealers or agents, such underwriters,
broker-dealers or agents may receive commissions in the form of discounts,
concessions or commissions from the Selling Shareholders or commissions from
purchasers of the shares of common stock for whom they may act as agent or to
whom they may sell as principal (which discounts, concessions or commissions as
to particular underwriters, broker-dealers or agents may be in excess of those
customary in the types of transactions involved). In connection with
sales of the shares of common stock or otherwise, the Selling Shareholders may
enter into hedging transactions with broker-dealers, which may in turn engage in
short sales of the shares of common stock in the course of hedging in positions
they assume. The Selling Shareholders may also sell shares of common
stock short and deliver shares of common stock covered by this Prospectus to
close out short positions and to return borrowed shares in connection with such
short sales. The Selling Shareholders may also loan or pledge shares
of common stock to broker-dealers that in turn may sell such
shares.
The
Selling Shareholders may pledge or grant a security interest in some or all of
the shares of common stock issuable upon conversion of the convertible notes
owned by them and, if they default in the performance of their secured
obligations, the pledgees or secured parties may offer and sell shares of common
stock from time to time pursuant to this Prospectus or any amendment to this
Prospectus under Rule 424(b)(3) or other applicable provision of the Securities
Act of 1933, as amended, amending, if necessary, the list of Selling
Shareholders to include the pledgee, transferee or other successors in interest
as Selling Shareholders under this Prospectus. The Selling
Shareholders also may transfer and donate the shares of common stock in other
circumstances in which case the transferees, donees, pledgees or other
successors in interest will be the selling beneficial owners for purposes of
this Prospectus.
The
Selling Shareholders and any broker-dealer participating in the distribution of
the shares of common stock may be deemed to be “underwriters” within the meaning
of the 1933 Act, and any commission paid, or any discounts or concessions
allowed to, any such broker-dealer may be deemed to be underwriting commissions
or discounts under the 1933 Act. At the time a particular offering of
the shares of common stock is made, a Prospectus supplement, if required, will
be distributed which will set forth the aggregate amount of shares of common
stock being offered and the terms of the offering, including the name or names
of any broker-dealers or agents, any discounts, commissions and other terms
constituting compensation from the Selling Shareholders and any discounts,
commissions or concessions allowed or reallowed or paid to
broker-dealers.
Under the
securities laws of some states, the shares of common stock may be sold in such
states only through registered or licensed brokers or dealers. In
addition, in some states the shares of common stock may not be sold unless such
shares of common stock have been registered or qualified for sale in such state
or an exemption from registration or qualification is available and is complied
with.
The
Selling Shareholders may choose not to sell any or may choose to sell less than
all of the shares of common stock registered pursuant to the registration
statement, of which this Prospectus forms a part.
The
Selling Shareholders and any other person participating in such distribution
will be subject to applicable provisions of the Securities Exchange Act of 1934,
as amended, and the rules and regulations thereunder, including, without
limitation, Regulation M of the 1934 Act, which may limit the timing of
purchases and sales of any of the shares of common stock by the Selling
Shareholders and any other participating person. Regulation M may
also restrict the ability of any person engaged in the distribution of the
shares of common stock to engage in market-making activities with respect to the
shares of common stock. All of the foregoing may affect the
marketability of the shares of common stock and the ability of any person or
entity to engage in market-making activities with respect to the shares of
common stock.
We will
pay all expenses of the registration of the shares of common stock pursuant to
the registration rights agreement, including, without limitation, Securities and
Exchange Commission filing fees and expenses in compliance with state securities
or “blue sky” laws; provided, however, that a Selling Shareholder will pay all
underwriting discounts and selling commissions, if any. We will
indemnify the Selling Shareholders against liabilities, including some
liabilities under the 1933 Act, in accordance with the registration rights
agreements, or the Selling Shareholders will be entitled to
contribution. We may be indemnified by the Selling Shareholders
against civil liabilities, including liabilities under the 1933 Act, that may
arise from any written information furnished to us by the Selling Shareholder
specifically for use in this Prospectus, in accordance with the related
registration rights agreement, or we may be entitled to
contribution.
Once sold
under the registration statement, of which this Prospectus forms a part, the
shares of common stock will be freely tradable in the hands of persons other
than our affiliates.
LEGAL
MATTERS
The
validity of the common stock offered by this Prospectus is being passed upon for
us by Sonfield & Sonfield, Houston, Texas.
We file
annual, quarterly, and current reports, proxy statements, and other information
with the SEC. You may read and copy any document we file at the SEC’s public
reference room located at 100 F Street, N.E., Washington, D.C.
20549. Please call the SEC at 1-800-SEC-0330 for further information
on the public reference room. Our filings with the SEC are also available to the
public at the SEC’s website at
http://www.sec.gov
.
You may also obtain
copies of the documents at prescribed rates by writing to the SEC’s Public
Reference Section at 100 F Street, N.E., Washington, D.C. 20549 or from us at no
cost by request to our address or telephone below.
Our
website is located at
http://www.deepdowninc.com
. The
contents of our website are not part of this Prospectus and should not be relied
upon as though they were a part of it.
We have
filed with the Commission a registration statement, which contains this
Prospectus, on Form S-1 under the Securities Act of 1933. The
registration statement relates to the common stock offered by the Selling
Shareholders. This Prospectus does not contain all of the information
set forth in the registration statement and the exhibits and schedules to the
registration statement. Please refer to the registration statement
and its exhibits and schedules for further information about us and the common
stock. Statements contained in this Prospectus as to the contents of
any contract or other document are not necessarily complete and, in each
instance, we refer you to the copy of that contract or document filed as an
exhibit to the registration statement.
INDEX
TO FINANCIAL STATEMENTS
|
Page
|
Deep Down, Inc.
|
Unaudited
Consolidated Financial Statements
|
||||
|
Condensed
Consolidated Balance Sheets as of March 31, 2008 and December 31,
2007
|
F-2
|
|||
|
Condensed
Consolidated Statements of Operations for the three months ended March 31,
2008 and 2007
|
F-3
|
|||
|
Condensed
Consolidated Statements of Cash Flows for the three months ended March 31,
2008 and 2007
|
F-4
|
|||
|
Notes
to Condensed Consolidated Financial Statements
|
F-5
|
|
Audited
Consolidated Financial Statements
|
||||
|
Reports
of Independent Registered Public Accounting Firm
|
F-13
|
|||
|
Consolidated
Balance Sheets as of December 31, 2007 and 2006
|
F-14
|
|||
|
Consolidated
Statements of Operations For the Year Ended December 31, 2007 and For the
Period Since Inception (June 29, 2006) to December 31,
2006
|
F-15
|
|||
|
Consolidated
Statements of Stockholders’ Equity For the Year Ended December 31, 2007
and For the Period Since Inception (June 29, 2006) to December 31,
2006
|
F-16
|
|||
|
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
|
F-17
|
|||
|
Notes
to Consolidated Financial Statements
|
F-19
|
|
Flotation
Technologies, Inc.
|
|
|
|
Reviewed
Financial Statements of Flotation Technologies, Inc. for the three month
interim period ended March 31, 2008 and Unaudited Financial Statements for
the three month interim period ended March 31, 2007
|
F-42
|
|
|
Audited
Financial Statements and Supplemental Information of Flotation
Technologies, Inc. for the years ended December 31, 2007 and
2006
|
F-55
|
|
|
Mako
Technologies, Inc.
|
||
|
Audited
Financial Statements of Mako Technologies, Inc. for the Nine Months
ended September 30, 2007 and the Year Ended December 31,
2006
|
F-70
|
DEEP
DOWN, INC.
CONSOLIDATED
BALANCE SHEETS
(Unaudited)
|
March
31,
2008
|
December
31,
2007
|
|||||||
|
ASSETS
|
||||||||
|
Cash
and equivalents
|
$ | 3,115,818 | $ | 2,206,220 | ||||
|
Restricted
cash
|
562,500 | 375,000 | ||||||
|
Accounts
receivable, net of allowance of $141,736 and $139,787
respectively
|
7,469,386 | 7,190,466 | ||||||
|
Prepaid
expenses and other current assets
|
418,984 | 312,058 | ||||||
|
Inventory
|
502,253 | 502,253 | ||||||
|
Lease
receivable, short-term
|
414,000 | 414,000 | ||||||
|
Work
in progress
|
1,106,891 | 945,612 | ||||||
|
Receivable
from Prospect, net
|
- | 2,687,333 | ||||||
|
Total
current assets
|
13,589,832 | 14,632,942 | ||||||
|
Property
and equipment, net
|
5,058,557 | 5,172,804 | ||||||
|
Other
assets, net of accumulated amortization of $111,854 and $54,560
respectively
|
1,052,550 | 1,109,152 | ||||||
|
Lease
receivable, long-term
|
69,500 | 173,000 | ||||||
|
Intangibles,
net
|
4,284,588 | 4,369,647 | ||||||
|
Goodwill
|
10,660,669 | 10,594,144 | ||||||
|
Total
assets
|
$ | 34,715,696 | $ | 36,051,689 | ||||
|
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
||||||||
|
Accounts
payable and accrued liabilities
|
$ | 2,966,215 | $ | 3,569,826 | ||||
|
Deferred
revenue
|
135,000 | 188,030 | ||||||
|
Payable
to Mako shareholders
|
1,243,571 | 3,205,667 | ||||||
|
Current
portion of long-term debt
|
330,399 | 995,177 | ||||||
|
Total
current liabilities
|
4,675,185 | 7,958,700 | ||||||
|
Long-term
debt, net of accumulated discount of $1,585,088 and $1,703,258
respectively
|
11,054,959 | 10,698,818 | ||||||
|
Series
E redeemable exchangeable preferred stock, par value $0.01, 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 500 issued and outstanding, respectively
|
- | 386,411 | ||||||
|
Total
liabilities
|
15,730,144 | 19,043,929 | ||||||
|
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, -0- and 5,000 issued and outstanding,
respectively
|
- | 4,419,244 | ||||||
|
Total
temporary equity
|
- | 4,419,244 | ||||||
|
Stockholders'
equity:
|
||||||||
|
Common
stock, $0.001 par value, 490,000,000 shares authorized,
115,846,019
|
||||||||
|
and
85,976,526 shares issued and outstanding, respectively
|
115,846 | 85,977 | ||||||
|
Paid-in
capital
|
21,306,461 | 14,849,847 | ||||||
|
Accumulated
deficit
|
(2,436,755 | ) | (2,347,308 | ) | ||||
|
Total
stockholders' equity
|
18,985,552 | 12,588,516 | ||||||
|
Total liabilities and stockholders' equity
|
$ | 34,715,696 | $ | 36,051,689 | ||||
|
See
accompanying notes to unaudited consolidated financial
statements.
|
||||||||
DEEP
DOWN, INC.
CONSOLIDATED
STATEMENTS OF OPERATIONS
(Unaudited)
|
Three
Months Ended
|
||||||||
|
March
31,
|
||||||||
|
2008
|
2007
|
|||||||
|
Revenues:
|
||||||||
|
Contract
revenue
|
$
|
5,337,529
|
$
|
1,602,281
|
||||
|
Rental
revenue
|
941,936
|
496,113
|
||||||
|
Total
revenues
|
6,279,465
|
2,098,394
|
||||||
|
Cost
of sales
|
3,876,371
|
1,252,089
|
||||||
|
Gross
Profit
|
2,403,094
|
846,305
|
||||||
|
Operating
expenses:
|
||||||||
|
Selling,
general & administrative
|
1,762,247
|
659,651
|
||||||
|
Depreciation
and amortization
|
298,149
|
64,025
|
||||||
|
Total
operating expenses
|
2,060,396
|
723,676
|
||||||
|
Operating
income
|
342,698
|
122,629
|
||||||
|
Other
income (expense):
|
||||||||
|
Gain
on sale of assets
|
28,355
|
-
|
||||||
|
Interest
income
|
39,164
|
-
|
||||||
|
Interest
expense
|
(769,030
|
)
|
(231,887
|
)
|
||||
|
Total
other expense
|
(701,511
|
)
|
(231,887
|
)
|
||||
|
Loss
before income taxes
|
(358,813
|
)
|
(109,258
|
)
|
||||
|
Income
tax benefit
|
269,366
|
-
|
||||||
|
Net
loss
|
$
|
(89,477
|
)
|
$
|
(109,258
|
)
|
||
|
Earnings
per share:
|
||||||||
|
Basic
and diluted
|
$
|
(0.00
|
)
|
$
|
(0.00
|
)
|
||
|
Weighted-average
common shares outstanding
|
87,185,242
|
81,036,838
|
||||||
See
accompanying notes to unaudited consolidated financial
statements.
DEEP
DOWN, INC.
CONSOLIDATED
STATEMENTS OF CASH FLOW
(Unaudited)
|
Three
Months Ended
|
||||||||
|
March
31,
|
||||||||
|
2008
|
2007
|
|||||||
|
Cash
flows from operating activities:
|
||||||||
|
Net
loss
|
$
|
(89,447
|
)
|
$
|
(109,258
|
)
|
||
|
Adjustments
to reconcile net income to net cash
|
||||||||
|
used
in operating activities:
|
||||||||
|
Amortization
of debt discount
|
231,760
|
179,587
|
||||||
|
Amortization
of deferred financing costs
|
56,915
|
-
|
||||||
|
Share-based
compensation
|
105,162
|
-
|
||||||
|
Allowance
for doubtful accounts
|
3,949
|
-
|
||||||
|
Depreciation
and amortization
|
298,150
|
64,025
|
||||||
|
Gain
on disposal of equipment
|
58,115
|
-
|
||||||
|
Changes
in assets and liabilities:
|
||||||||
|
Accounts
receivable
|
(282,869
|
)
|
(181,220
|
)
|
||||
|
Prepaid
expenses and other current assets
|
(107,239
|
)
|
15,111
|
|||||
|
Finished
goods
|
-
|
(355,568
|
)
|
|||||
|
Construction
in progress
|
(161,279
|
)
|
64,170
|
|||||
|
Accounts
payable and accrued liabilities
|
(603,631
|
)
|
395,236
|
|||||
|
Deferred
revenue
|
(53,030
|
)
|
72,000
|
|||||
|
Net
cash provided by (used in) operating activities
|
(543,444
|
)
|
144,083
|
|||||
|
Cash
flows from investing activities:
|
||||||||
|
Cash
paid for final acquisition costs
|
(66,525
|
)
|
-
|
|||||
|
Cash
paid for third party debt
|
-
|
(366,134
|
)
|
|||||
|
Cash
received from sale of ElectroWave receivables
|
-
|
261,068
|
||||||
|
Purchases
of equipment
|
(156,958
|
)
|
(290,373
|
)
|
||||
|
Restricted
cash
|
(187,500
|
)
|
-
|
|||||
|
Net
cash used in investing activities
|
(410,983
|
)
|
(395,439
|
)
|
||||
|
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
|
-
|
950,000
|
||||||
|
Proceeds
from sales-type lease
|
103,500
|
-
|
||||||
|
Proceeds
from Prospect Capital
|
2,687,333
|
-
|
||||||
|
Payments
of long-term debt
|
(926,808
|
)
|
(113,129
|
)
|
||||
|
Net
cash provided by financing activities
|
1,864,025
|
336,871
|
||||||
|
Change
in cash and equivalents
|
909,598
|
85,515
|
||||||
|
Cash
and equivalents, beginning of period
|
2,206,220
|
12,462
|
||||||
|
Cash
and equivalents, end of period
|
$
|
3,115,818
|
$
|
97,977
|
||||
|
Supplemental
schedule of noncash investing
|
||||||||
|
and
financing activities:
|
||||||||
|
Fixed
assets purchased with capital lease
|
$
|
-
|
$
|
525,000
|
||||
|
Exchange
of preferred stock
|
$
|
4,419,244
|
$
|
3,366,778
|
||||
|
Redemption
of preferred stock for debt
|
$
|
500,000
|
$
|
-
|
||||
|
Common
Shares issued as restricted stock
|
$
|
1,200
|
$
|
-
|
||||
|
Stock
issued for payment of shareholder debt
|
$
|
1,962,078
|
$
|
-
|
||||
|
Supplemental
Disclosures:
|
||||||||
|
Cash
paid for interest
|
$
|
480,356
|
$
|
52,301
|
||||
|
Cash
paid for taxes
|
$
|
275,000
|
$
|
-
|
||||
|
See
accompanying notes to unaudited consolidated financial
statements.
|
||||||||
DEEP
DOWN, INC.
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE
1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature
of Business
Deep
Down, Inc., a Nevada corporation, (“Deep Down Nevada” or “Deep Down” or the
“Company”) is the parent company to its wholly-owned subsidiaries: Deep Down,
Inc., a Delaware corporation (“Deep Down Delaware”), ElectroWave USA, Inc., a
Nevada corporation (“ElectroWave”), and Mako Technologies, LLC (“Mako”), a
Nevada limited liability company.
Deep Down
Delaware provides installation management, engineering services, support
services and storage management services for the subsea controls, umbilicals and
offshore pipeline industries. 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”) , topside and subsea
equipment, and diving support systems used in diving operations, maintenance and
repair operations, offshore construction, and environmental/marine
surveys.
Basis
of Presentation
The
accompanying unaudited consolidated financial statements have been prepared in
accordance with accounting principles generally accepted for interim financial
information and with the instructions to Form 10-Q and Article 8 of Regulation
S-X relating to smaller reporting companies. Accordingly, they do not
include all of the information and footnotes required by generally accepted
accounting principles (“GAAP”) for complete financial statements. In
the opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been
included. Operating results for the three-month period ended March
31, 2008 are not necessarily indicative of the results that may be expected for
the year ended December 31, 2008.
The
balance sheet at December 31, 2007 has been derived from the audited financial
statements at that date but does not include all of the information and
footnotes required by GAAP for complete financial statements.
For
further information, refer to the consolidated financial statements and
footnotes thereto included in our Annual Report on Form 10-KSB/A (Amendment No.
1) for the year ended December 31, 2007 filed on May 1, 2008.
Principles
of Consolidation
The
unaudited consolidated financial statements include the accounts of Deep Down’s
wholly-owned subsidiaries after the elimination of significant intercompany
accounts and transactions.
NOTE
2: ACCOUNTS RECEIVABLE
Accounts
receivable includes an allowance for uncollectible accounts of $141,736 and
$139,787 as of March 31, 2008 and December 31, 2007, respectively. Bad debt
expense totaled $3,949 and $1,852 for the three months ended March 31, 2008
and March 31, 2007, respectively.
DEEP
DOWN, INC.
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE
3: PROPERTY AND EQUIPMENT
Property
and equipment include the following:
|
March
31, 2008
|
December
31, 2007
|
|||||||
|
Building
|
$
|
231,055
|
$
|
195,305
|
||||
|
Furniture
and fixtures
|
63,777
|
63,777
|
||||||
|
Vehicles
and trailers
|
112,162
|
112,162
|
||||||
|
Leasehold
improvements
|
113,614
|
75,149
|
||||||
|
Equipment
|
2,021,054
|
2,004,167
|
||||||
|
Rental
Equipment
|
3,144,560
|
3,144,559
|
||||||
|
Total
|
5,686,222
|
5,595,118
|
||||||
|
Less:
Accumulated depreciation
|
(627,665
|
)
|
(422,314
|
)
|
||||
|
Property
and equipment, net
|
$
|
5,058,557
|
$
|
5,172,804
|
||||
Depreciation
expense for the three months ended March 31, 2008 and March 31, 2007 was
approximately $213,090 and $64,025,
respectively.
NOTE
4: LONG-TERM DEBT
The
following table summarizes long-term debt:
|
March
31, 2008
|
December
31, 2007
|
|||||||
|
Secured
credit agreement with Prospect Capital Corporation
|
||||||||
|
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
|
$
|
12,000,000
|
||||
|
Debt
discount, net of amortization of $254,101 and $135,931
respectively
|
(1,585,088
|
)
|
(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
|
||||||
|
Total
secured credit agreement and bank debt
|
10,414,912
|
11,212,786
|
||||||
|
6%
Subordinated Debenture beginning March 31, 2008; annual
|
-
|
|||||||
|
interest
payments, interest fixed at 6%; matures March 31, 2011
|
500,000
|
-
|
||||||
|
Capital
lease of equipment, monthly lease payments,
|
||||||||
|
interest
imputed at 11.2%
|
470,446
|
481,209
|
||||||
|
Total
long-term debt
|
11,385,358
|
11,693,995
|
||||||
|
Current
portion of long-term debt
|
(330,399
|
)
|
(995,177
|
)
|
||||
|
Long-term
debt, net of current portion
|
$
|
11,054,959
|
$
|
10,698,818
|
||||
DEEP
DOWN, INC.
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Secured
Credit Agreement
On
December 21, 2007, Deep Down entered into an amendment to our Credit
Agreement (the “Amendment”) to provide the funding for the cash portion of the
purchase of Mako. The total commitment available under the Amendment was
increased from $6.5 million to $13.0 million. Quarterly principal payments
increased to $250,000 beginning September 30, 2008, with the remaining balance
outstanding due August 6, 2011. Interest paid through March 31, 2008
was $480,356. Under the Credit Agreement, we are required to meet certain
covenants and restrictions. We must also maintain a debt service reserve
account of $750,000. As of March 31, 2008, $562,500 is separately
classified as “Restricted cash” on the accompanying balance sheet. At March
31, 2008, Deep Down is not
in compliance
with certain financial covenants or the requirement to have life insurance
on the CEO in the amount of $3,000,000. Deep Down has obtained
waivers from the lender for all the covenants that are not in
compliance.
In
connection with the second advance under the Credit Agreement on January 4,
2008, Deep Down capitalized an additional $261,941 in deferred financing
costs. Of this amount, $216,000 was paid in cash to various third
parties related to the financing, and the remainder of $45,946 represents the
Black Scholes valuation of warrants issued to one of these third party
vendors. The warrant was granted to purchase up to 118,812 shares of
common stock at an exercise price of $1.01 per share. The warrant has
a five-year term and is immediately exercisable. The fair value of
the warrant was estimated to be $45,946 based on the Black Scholes pricing
model. The assumptions used in the model included (1) expected
volatility of 61.3%, (2) expected term of 2.5 years, (3) discount rate of 3.2%
and (4) zero expected dividends. Provisions in the warrant
agreement allow for a cashless exercise provision, not to exceed 2% of
outstanding common stock at the time of exercise.
The
following table summarizes interest expense for the three months ended March 31,
2008 and March 31, 2007:
|
Three
Months Ended
|
||||||||
|
March
31,
|
||||||||
|
2008
|
2007
|
|||||||
|
Interest
Expense
|
$
|
480,356
|
$
|
52,300
|
||||
|
Accretion
|
113,589
|
179,587
|
||||||
|
Amortization
of debt discount
|
118,171
|
-
|
||||||
|
Amortization
of deferred financing
|
56,914
|
-
|
||||||
|
$
|
769,030
|
$
|
231,887
|
|||||
Exchange
of Remaining Series E Redeemable Exchangeable Preferred Stock to 6%
Subordinated Debenture
On March
31, 2008, 500 shares of the Series E Redeemable Exchangeable Preferred Stock
(“Series E”) were exchanged into a 6% Subordinated Debenture in an
outstanding principal amount of $500,000 (the “Debenture”). The
Debenture has a fixed interest rate of 6% interest per annum to be paid annually
on March 31st through maturity on March 31, 2011. The Series E had a face
value and liquidation preference of $1,000 per share, no dividend preference,
and were exchangeable at the holder’s option into 6% Subordinated Debenture due
three years from the date of the exchange. These shares carried voting rights
equal to 690 votes per share. The Series E Preferred Stock was valued based on
the discounted value of expected future cash flows (using a discount rate of
20%). At inception, Deep Down evaluated the Series E and has
classified as debt instruments from the date of issuance since the Series E are
exchangeable at the option of the holder thereof into Debenture. The
difference between the face value of the Series E and the discounted book value
recorded on the balance sheet, or original issue discount, was recorded
as non-cash interest expense for the duration of the term. Upon
exchange into the $500,000 subordinated debenture Deep Down recorded $113,589 in
interest expense for the accretion up to face value.
During
the quarter ended March 31, 2008 and in accordance with the terms of the
purchase of Mako, Deep Down paid $916,044 of notes payable.
DEEP
DOWN, INC.
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE
5: BUSINESS COMBINATIONS
Purchase
of Mako Technologies, Inc
.
Effective
December 1, 2007, Deep Down purchased 100% of the common stock of Mako
Technologies, Inc. Pursuant to the agreement and plan of merger, two
installments were paid to the Mako shareholders. The first
installment of $2,916,667 in cash and 6,574,074 restricted shares of common
stock of Deep Down, valued at $0.76 per share, was paid on January 4,
2008. The second installment of 2,802,969 restricted shares of common
stock of Deep Down valued at $0.70 was issued on March 28, 2008. The final
cash payment of $1,243,571 which was paid on April 11, 2008, is reflected
as “Payable to Mako shareholders” on the accompanying balance
sheets.
The
following unaudited pro forma combined condensed financial statements are based
on the historical financial statements of Mako and Deep Down after giving effect
to the acquisition of Mako. The unaudited pro forma condensed
combined statements of operations for the three months ended March 31, 2007 is
presented as if the acquisition had taken place on January 1, 2007 by combining
the historical results of Mako and Deep Down.
The
unaudited pro forma results were as follows:
|
Deep
Down, Inc.
|
|||||||||||||||
|
Unaudited
Pro forma Statements of Operations
|
|||||||||||||||
|
Historical
|
Historical
|
||||||||||||||
|
Deep
Down
|
Mako
|
Pro
Forma
|
|||||||||||||
|
Quarter
Ended
|
Quarter
Ended
|
Quarter
Ended
|
|||||||||||||
|
March
31,
|
March
31,
|
Pro
Forma
|
March
31,
|
||||||||||||
|
2007
|
2007
|
Adjustments
|
2007
|
||||||||||||
|
Revenues
|
$
|
2,098,394
|
$
|
849,929
|
$
|
-
|
$
|
2,948,323
|
|||||||
|
Cost
of sales
|
1,252,089
|
561,116
|
1,813,205
|
||||||||||||
|
Gross
profit
|
846,305
|
288,813
|
-
|
1,135,118
|
|||||||||||
|
Operating
expenses
|
723,676
|
406,933
|
93,039
|
(a)
|
1,223,648
|
||||||||||
|
Total
other income (expense)
|
(231,887
|
)
|
(17,974
|
)
|
(266,123
|
)
|
(b)
|
(515,984
|
)
|
||||||
|
Net
loss
|
$
|
(109,258
|
)
|
$
|
(136,094
|
)
|
$
|
(359,162
|
)
|
$
|
(604,514
|
)
|
|||
|
Earnings
per share:
|
|||||||||||||||
|
Basic
and diluted
|
$
|
-
|
$
|
(0.01
|
)
|
||||||||||
|
Weighted-average
common shares outstanding
|
81,036,838
|
(c)
|
90,413,881
|
||||||||||||
(a)
Amortization of the intangible assets at a rate of $28,353 per month for three
months; plus $7,980 adjustment to historical depreciation expense to adjust to
purchase accounting asset values.
(b)
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.
(c) A
total of 9,377,043 shares were issued for the total transaction. These pro forma
amounts give effect as if shares were issued January 1, 2007
DEEP
DOWN, INC.
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE
6: PREFERRED STOCK
Series
D Redeemable Convertible Preferred Stock as Temporary Equity
On March
28, 2008, the remaining outstanding 5,000 shares of Series D redeemable
convertible preferred stock (“Series D”) were converted into 25,866,518
restricted shares of common stock. The Series D had a face value and
liquidation preference of $1,000 per share, no dividend preference, and were
convertible into shares of common stock determined by dividing the face amount
by a conversion price of $0.1933. These shares carried voting rights equal
to one vote for every share of common stock into which the preferred stock is
convertible. These shares were redeemable at their face value on an
annual basis within 120 days after each calendar year-end beginning with the
year ending December 31, 2007 based on an amount equal to 15.625% of annual net
income. In the event that a holder declined redemption, such amounts
would have been reallocated to the other preferred stock holders that had
elected to redeem.
Deep Down
evaluated the Series D preferred stock for liability or equity presentation
and determined that the Series D preferred stock were more
appropriately classified as “Temporary equity” on the accompanying balance
sheets due to the conditional redemption feature.
NOTE
7: STOCK OPTIONS AND WARRANTS
Stock
Options and Warrants
Deep Down
has a stock based compensation plan - the 2003 Directors, Officers and
Consultants Stock Option, Stock Warrant and Stock Award Plan (the “Plan”). The
exercise price of the options, as well as the vesting period, is established by
Deep Down’s board of directors. The options granted under the Plan have vesting
periods that range from immediate vesting to vesting over five years, and the
contract terms of the options granted are up to ten years. Under the Plan the
total number of options permitted is 15% of issued and outstanding common
shares. During the three months ended March 31, 2008, Deep Down granted
3,250,000 options and cancelled 625,000 options under the Plan.
The total stock
based compensation expense for the three months ended March 31, 2008 and March
31, 2007, was $105,162 and -0-, respectively. The unamortized portion of
the estimated fair value of these stock options is $ 1,203,721 at March 31,
2008. Based on the shares of common stock outstanding at March 31, 2008,
there are 9,252,000 options available for grant under the Plan as of that
date.
During
the three months ended March 31, 2008, Deep Down granted 1,200,000 shares of
restricted common stock to certain officers and employees of Deep Down. These
restricted shares vest over a period of two years. Deep Down determined the fair
market value on the date of grant to be $504,000 and is recognizing the expense
ratably over the vesting period.
DEEP
DOWN, INC.
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Summary
of Stock Options
|
Options
Underlying
Shares
|
Weighted-
Average
Exercise
Price
|
Weighted-
Average Remaining Contractual
Term
(in
years)
|
Aggregate
Intrinsic Value (In-The-
Money)
Options)
|
|||||||||||||
|
Outstanding
at December 31, 2007
|
5,500,000
|
$
|
0.58
|
|||||||||||||
|
Grants
|
3,250,000
|
1.44
|
||||||||||||||
|
Cancellations
|
(625,000
|
)
|
0.76
|
|||||||||||||
|
Outstanding
at March 31, 2008
|
8,125,000
|
$
|
0.91
|
3.5
|
$
|
816,500
|
||||||||||
|
Exercisable
at March 31, 2008
|
625,000
|
$
|
0.76
|
4.0
|
$
|
72,500
|
||||||||||
The
following table summarizes outstanding options and their respective
exercise prices at March 31, 2008:
|
Exercise
Price
|
Options
Underlying
Shares
|
|||
|
$
|
0.30
- 0.49
|
175,000
|
||
|
$
|
0.50
- 0.69
|
4,175,000
|
||
|
$
|
0.70
- 0.99
|
425,000
|
||
|
$
|
1.00
- 1.29
|
350,000
|
||
|
$
|
1.30
- 1.50
|
3,000,000
|
||
|
8,125,000
|
||||
The fair
value of each stock option grant is estimated on the date of the grant using the
Black-Scholes model and is based on the following key assumptions for the year
ended December 31, 2007:
|
Dividend
yield
|
0%
|
|
|
Risk
free interest rate
|
2.64%
- 5.00%
|
|
|
Expected term
of options
|
3 -
4 years
|
|
|
Expected
volatility
|
53%
- 61%
|
Related
to the financing of Secured Credit Agreement Amendment and second advance in
January 2008, Deep Down issued warrants to purchase up to 118,812 shares of
common stock at an exercise price of $1.01 per share to a third
party. The warrant has a five-year term and is immediately
exercisable. The assumptions used in the Black Scholes model included (1)
expected volatility of 61.3%, (2) expected term of 2.5 years, (3) discount rate
of 3.18% and (4) zero expected dividends.
DEEP
DOWN, INC.
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
A summary
of warrant transactions follows:
|
Options
Underlying
Shares
|
Weighted-
Average
Exercise
Price
|
Weighted-
Average Remaining Contractual
Term
(in
years)
|
Aggregate
Intrinsic Value (In-The-
Money)
Options)
|
|||||||||||||
|
Outstanding
at December 31, 2007
|
5,399,397
|
$
|
0.53
|
|||||||||||||
|
Outstanding
at March 31, 2008
|
5,399,397
|
0.53
|
4.5
|
$
|
892,905
|
|||||||||||
|
Exercisable
at March 31, 2008
|
118,812
|
$
|
1.01
|
4.8
|
$
|
-
|
||||||||||
During
the three months ended March 31, 2008, 1,200,000 shares of restricted common
stock were granted to certain employees and officers of Deep Down.
The
following table summarizes outstanding warrants and their respective exercise
prices at March 31, 2008:
|
Exercise
Price
|
Options
Underlying
Shares
|
||
|
$
|
0.51
|
4,960,585
|
|
|
0.75
|
320,000
|
||
|
$
|
1.01
|
118,812
|
|
|
5,399,397
|
|||
NOTE
8: COMMITMENTS AND CONTINGENCIES
Litigation
We are
from time to time involved in legal proceedings arising in the normal course of
business. As of the date of this Quarterly Report on Form 10-Q, there are no
pending or threatened material legal proceedings.
NOTE
9: RELATED PARTY TRANSACTIONS
We paid
approximately $82,000 to JUMA, a corporation owned by Ronald E. Smith and Mary
Budrunas for costs associated with the preparation of the additional land
recently purchased by JUMA for our operations. The costs were associated with
permitting, land clearing, other closing costs and
preparation.
DEEP
DOWN, INC.
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10: RECENT
ACCOUNTING PRONOUNCEMENTS
In
September 2006, the FASB issued SFAS No. 157, Fair Value Measurements (“SFAS No.
157”). SFAS No. 157 establishes a framework for measuring fair value under
generally accepted accounting procedures and expands disclosures on fair value
measurements. This statement applies under previously established valuation
pronouncements and does not require the changing of any fair value measurements,
though it may cause some valuation procedures to change. Under SFAS No. 157,
fair value is established by the price that would be received to sell the item
or the amount to be paid to transfer the liability of the asset as opposed to
the price to be paid for the asset or received to transfer the liability.
Further, it defines fair value as a market specific valuation as opposed to an
entity specific valuation, though the statement does recognize that there may be
instances when the low amount of market activity for a particular item or
liability may challenge an entity’s ability to establish a market amount. In the
instances that the item is restricted, this pronouncement states that the owner
of the asset or liability should take into consideration what affects the
restriction would have if viewed from the perspective of the buyer or assumer of
the liability. This statement is effective for all assets valued in financial
statements for fiscal years beginning after November 15, 2007. Deep Down is
currently evaluating the impact of SFAS No. 157 on its financial position and
result of operations.
In
February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial
Assets and Financial Liabilities (“SFAS No. 159”), which provides companies with
an option to report selected financial assets and liabilities at fair
value. SFAS No. 159 also establishes presentation and disclosure
requirements designed to facilitate comparisons between companies that choose
different measurement attributes for similar types of assets and
liabilities. SFAS No. 159 is effective as of the beginning of an
entity’s first fiscal year beginning after November 15, 2007 with early adoption
allowed. Deep Down has not yet determined the impact, if any, that
adopting this standard might have on its financial statements.
In
December 2007, the FASB issued SFAS No. 141 (revised 2007), Business
Combinations (“SFAS No. 141(R)”) and No. 160, Non-controlling Interests in
Consolidated Financial Statements, an amendment of ARB No. 51 (“SFAS No. 160”).
SFAS No. 141(R) and SFAS No. 160 are products of a joint project between the
FASB and the International Accounting Standards Board. The revised
standards continue the movement toward the greater use of fair values in
financial reporting. SFAS No. 141(R) will significantly change how business
acquisitions are accounted for and will impact financial statements both on the
acquisition date and in subsequent periods. These changes include the expensing
of acquisition related costs and restructuring costs when incurred, the
recognition of all assets, liabilities and non-controlling interests at fair
value during a step-acquisition, and the recognition of contingent consideration
as of the acquisition date if it is more likely than not to be
incurred. SFAS No. 160 will change the accounting and reporting for
minority interests, which will be re-characterized as non-controlling interests
and classified as a component of equity. SFAS No. 141(R) and SFAS No.
160 are effective for both public and private companies for fiscal years
beginning on or after December 15, 2008 (January 1, 2009 for companies with
calendar year-ends). SFAS No. 141(R) will be applied prospectively. SFAS No. 160
requires retroactive adoption of the presentation and disclosure requirements
for existing minority interests. All other requirements of SFAS No. 160 shall be
applied prospectively. Early adoption is prohibited for both
standards. Deep Down is currently evaluating the effects of these
pronouncements on its financial position and results of operations.
NOTE
11: SUBSEQUENT EVENTS
Stock
Purchase Agreement with Flotation Technologies, Inc.
On April
17, 2008, we announced the execution of a Stock Purchase Agreement to purchase
all of the outstanding capital stock of Flotation Technologies,
Inc. The total purchase price for the acquisition is expected to be
approximately $23.3 million. Our closing of the purchase remains
subject to several conditions, including our obtaining financing for the payment
of the purchase price.
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the
Board of Directors and Stockholders of Deep Down, Inc., Houston,
Texas
We have
audited the accompanying consolidated balance sheets of Deep Down, Inc. (the
“Company”), as of December 31, 2007 and 2006 and the related consolidated
statements of operations, stockholders’ equity (deficit), and cash flows for the
year ended December 31, 2007. We have also audited the accompanying statements
of operations, stockholders’ deficit and cash flows for the period from
inception (June 29, 2006) through December 31, 2006. These
consolidated financial statements are the responsibility of the Company’s
management. Our responsibility is to express an opinion on
these consolidated financial statements based on our audits.
We
conducted our audits in accordance with the standards of Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. Deep Down is not required to have,
nor were we engaged to perform an audit of internal control over financial
reporting. Our audits included the consideration of internal control
over financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of Deep Down’s internal control over financial
reporting. Accordingly, we express no such opinion. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for our opinion.
In our
opinion, the financial statements referred to above present fairly, in all
material respects, the financial position of Deep Down, Inc. as of December 31,
2007 and 2006, and the results of its operations and cash flows for the periods
described, in conformity with U.S. generally accepted accounting
principles.
/s/ MALONE & BAILEY,
PC
www.malone-bailey.com
Houston,
Texas
March 31,
2008
|
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:
|
||||||||
|
SeriSeries
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
|
||||||
|
SeriSeries
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
|
||||
See
accompanying notes to consolidated financial statements.
|
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 (expense)
|
(335,662
|
)
|
(62,126
|
)
|
||||
|
Income
(loss) before income taxes
|
1,322,182
|
(3,277,567
|
)
|
|||||
|
Income
tax expense
|
(369,673
|
)
|
(22,250
|
)
|
||||
|
Net
income (loss)
|
$
|
952,509
|
$
|
(3,299,817
|
)
|
|||
|
Basic
earnings (loss) per share
|
$
|
0.01
|
$
|
(0.04
|
)
|
|||
|
Weighted-average
shares outstanding, basic
|
73,917,190
|
76,701,569
|
||||||
|
Diluted
earnings (loss) per share
|
$
|
0.01
|
$
|
(0.04
|
)
|
|||
|
Weighted-average
shares outstanding, fully-diluted
|
104,349,455
|
76,701,569
|
||||||
See
accompanying notes to consolidated financial statements.
|
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 (loss)
|
-
|
-
|
-
|
-
|
-
|
(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 (loss)
|
-
|
-
|
-
|
-
|
-
|
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
|
|||||||||||||||
(a)
Shares were stated at par value of $0.01 in error, the correct par value of
$0.001 is reflected, with the offset to Paid-in Capital
See
accompanying notes to consolidated financial statements.
|
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
|
|
For
the Year Ended
December
31, 2007
|
From
Inception
June
29, 2006 to
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
|
See
accompanying notes to consolidated financial statements.
|
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
|
$
|
-
|
||||
See
accompanying notes to consolidated financial statements.
Notes
to Consolidated Financial Statements for the year ended December 31,
2007
and
the period from inception (June 29, 2006) through December 31, 2006
Note
1: Nature
of Business and Summary of Significant Accounting Policies
Nature
of Business
Deep
Down, Inc. (“Deep Down Nevada”), a Nevada corporation, is the parent company to
its wholly owned subsidiaries: Deep Down, Inc. (“Deep Down Delaware”) a Delaware
corporation, ElectroWave USA, Inc., a Texas corporation, (“ElectroWave”), and
Mako Technologies, LLC (“Mako”).
|
·
|
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.
|
On June
29, 2006, Subsea Acquisition Corporation (“Subsea”) was formed with the intent
to acquire service providers to the offshore industry, and designers and
manufacturers of subsea equipment, surface equipment and offshore rig equipment
that are used by major integrated, large independent and foreign national oil
and gas companies in offshore areas throughout the world. On November 21, 2006,
Subsea acquired Deep Down, Inc., a Delaware corporation founded in 1997. Under
the terms of this transaction, all of Deep Down, Inc.’s shareholders transferred
ownership of all of Deep Down, Inc.’s common stock to Subsea in exchange for
5,000 shares of Subsea’s Series D Preferred Stock and 5,000 shares of Subsea’s
Series E Preferred Stock resulting in Deep Down, Inc. becoming a wholly owned
subsidiary of Subsea. On the same day, Subsea then merged with Deep Down, with
the surviving company operating as Deep Down Inc. The purchase price was based
on the fair value of the Series D and E Preferred stock of
$7,865,471.
On April
2, 2007, Deep Down purchased all of the assets and certain liabilities of
ElectroWave USA, Inc. a Texas corporation for $171,407. Deep Down
formed a wholly-owned subsidiary, ElectroWave USA, Inc. (“ElectroWave”), a
Nevada corporation, to complete the acquisition.
On
December 1, 2007, Deep Down purchased 100% of the common stock of Mako
Technologies, Inc., a Louisiana corporation for a total purchase price of
$11,307,000, including transaction fees of $188,369. Deep Down formed
a wholly-owned subsidiary, Mako, LLC (“Mako”), a Nevada limited liability
corporation, to complete the acquisition. See further discussion in Note 3
“Business Combinations”.
Summary
of Significant Accounting Policies
Principles
of consolidation:
The
consolidated financial statements include the accounts of Deep Down Nevada and
its wholly-owned subsidiaries for the year ended December 31, 2007 and the
period from inception June 29, 2006 to December 31, 2006.
All
significant inter-company transactions and balances have been eliminated in
consolidation.
Use
of Estimates
The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
Notes
to Consolidated Financial Statements for the year ended December 31,
2007
and
the period from inception (June 29, 2006) through December 31, 2006
Cash
and Equivalents and Restricted Cash
Deep Down
considers all highly liquid investments with maturities from date of purchase of
three months or less to be cash equivalents. Cash and equivalents consist of
cash on deposit with foreign and domestic banks and, at times, may exceed
federally insured limits.
Per the
terms of its secured credit agreement, Deep Down is required to keep cash on
hand equal to the previous six months interest payment on the debt arising under
such credit agreement. At December 31, 2007, this amount approximated $375,000
which is reflected on the balance sheet as restricted cash.
Fair
Value of Financial Instruments
The
estimated fair value of Deep Down’s financial instruments is as follows at
December 31, 2007:
|
·
|
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.
|
Accounts
Receivable
Deep Down
provides an allowance for doubtful accounts on trade receivables based on
historical collection experience and a specific review of each customer’s trade
receivable balance. When specific accounts are determined to be uncollectable,
they are expensed to bad debt expense in that period. Until August 2007, Deep
Down had factored some of its receivables with a bank. See further
discussion in Note 4. At December 31, 2007 and 2006, Deep Down
estimated its allowance for doubtful accounts to be $139,787 and $81,809,
respectively.
Concentration
of Credit Risk
Deep Down
maintains cash balances at several banks. Accounts at the institution are
insured by the Federal Deposit Insurance Corporation (FDIC) up to $100,000. Deep
Down had approximately $2.6 million of uninsured cash balances at December 31,
2007.
As of
December 31, 2007, four of Deep Down’s customers accounted for 11%, 9%, 7% and
7% of total accounts receivable, respectively. For the year ended December 31,
2007, Deep Down’s four largest customers accounted for 7%, 7%, 6% and 6% of
total revenues, respectively. For the period from inception June 29,
2006 to December 31, 2006, Deep Down’s four largest customers accounted for 16%,
14%, 13% and 11% of total revenues, respectively.
Inventory
and Work in Progress
Inventory
is stated at lower of cost (first-in, first out) or net realizable
value. Inventory consists of an A-frame that is being marketed to
customers requiring off-shore launching or overboarding activities. Work in
Progress is made up primarily unbilled amounts of labor and third party material
costs that are in process but not yet billed to a customer. Amounts at December
31, 2007 and 2006 were $945,612 and $916,485, respectively.
Property
and Equipment
Property
and equipment are stated at cost, net of accumulated depreciation. Depreciation
and amortization is computed using the straight-line method over the estimated
useful lives of the respective assets. Buildings are amortized over 36 years,
and leasehold improvements are amortized over the shorter of the assets' useful
lives or lease terms. Equipment lives range from two to seven years, computers
and electronic lives are from two to three years, and furniture and fixtures are
two to seven years.
Notes
to Consolidated Financial Statements for the year ended December 31,
2007
and
the period from inception (June 29, 2006) through December 31, 2006
Replacements
and betterments are capitalized, while maintenance and repairs are expensed as
incurred. It is Deep Down’s policy to include amortization expense on assets
acquired under capital leases with depreciation expense on owned
assets.
Goodwill
and Intangible Assets
Goodwill
represents the cost in excess of the fair value of net assets acquired in
business combinations. Statement of financial accounting standards (SFAS) No.
142, “Goodwill and Other Intangible Assets” (SFAS 142), prescribes the process
for impairment testing of goodwill on an annual basis or more often if a
triggering event occurs. Goodwill is not amortized, and there were no indicators
of impairment at December 31, 2007.
Deep Down
evaluates the carrying value of goodwill during the fourth quarter of each year
and between annual evaluations if events occur or circumstances change that
would more likely than not reduce the fair value of the reporting unit below its
carrying amount. Such circumstances could include a significant adverse change
in legal factors or in business or the business climate or unanticipated
competition. When evaluating whether goodwill is impaired, Deep Down compares
the fair value of the business to its carrying amount, including goodwill. The
fair value of the reporting unit is estimated using an income, or discounted
cash flow approach. If the carrying amount of the business exceeds its fair
value, then the amount of the impairment loss must be measured. The impairment
loss would be calculated by comparing the implied fair value of reporting unit
goodwill to its carrying amount.
Deep
Down’s intangible assets consist of assets acquired in the purchase of the Mako
subsidiary, specifically customer list, a non-compete covenant and trademarks
related to Mako’s ROVs. Deep Down is amortizing the intangible assets
over their useful lives ranging from 5 to 25 years on the straight line
basis
Long-Lived
Assets
SFAS No.
144, "Accounting for the Impairment or Disposal of Long-Lived Assets," requires
that Deep Down periodically review the carrying amounts of its property and
equipment and its finite-lived intangible assets to determine whether current
events or circumstances indicate that such carrying amounts may not be
recoverable. The carrying amount of a long-lived asset is not recoverable if it
exceeds the sum of the undiscounted cash flows expected to result from the use
and eventual disposition of the asset. If it is determined that an impairment
loss has occurred, the loss is measured as the amount by which the carrying
amount of the long-lived asset exceeds its fair value.
Lease
Obligations
Deep Down
leases land and buildings under noncancelable operating leases. Deep
Down leases its corporate headquarters from an entity owned by the CEO and his
wife, a vice president and director. in addition to several vehicles,
modular office buildings and office equipment which are also recorded as
operating leases and are expensed. Deep Down also leases a 100-ton
mobile gantry crane under a capital lease, which is included with Equipment on
the consolidated balance sheet.
At the
inception of the lease, Deep Down evaluates each agreement to determine whether
the lease will be accounted for as an operating or capital lease. The term of
the lease used for this evaluation includes renewal option periods only in
instances in which the exercise of the renewal option can be reasonably assured
and failure to exercise such option would result in an economic
penalty.
Revenue
Recognition
Deep
Down’s contract revenue is made up of customized product and service
revenue. Revenue from fabrication and sale of equipment is recognized
upon transfer of title to the customer which is upon shipment or when
customer-specific acceptance requirements are met. Service revenue is recognized
as the service is provided. Rental revenue is recognized pro-rata
over the period the rental occurs based on daily or monthly
rates. Shipping and handling charges paid by Deep Down are included
in cost of goods sold.
Notes
to Consolidated Financial Statements for the year ended December 31,
2007
and
the period from inception (June 29, 2006) through December 31, 2006
Income
Taxes
Deep Down
has adopted the provisions of SFAS No. 109,
“Accounting for Income Taxes"
which requires recognition of deferred tax liabilities and assets for the
expected future tax consequences of events that have been included in the
consolidated financial statements or tax returns. Under this method, deferred
tax liabilities and assets are determined based on the difference between the
financial statement and tax basis of assets and liabilities using enacted tax
rates in effect for the year in which the differences are expected to
reverse.
Stock
Based Compensation
Effective
with its inception, June 29, 2006, Deep Down accounts for stock-based
compensation issued to employees and non-employees as required by SFAS No.
123(R) “Accounting for Stock Based Compensation” (“SFAS No. 123(R)”). Under
these provisions, Deep Down records expense based on the fair value of the
awards utilizing the Black-Scholes pricing model for options and
warrants.
Earnings
per Common Share
SFAS No. 128,
Earnings Per Share
(“EPS”) requires earnings per share to be computed and reported as both
basic EPS and diluted EPS. Basic EPS is computed by dividing net income by the
weighted average number of common shares outstanding for the period. Diluted EPS
is computed by dividing net income by the weighted average number of common
shares and dilutive common stock equivalents (convertible notes and interest on
the notes, stock awards and stock options) outstanding during the period.
Dilutive EPS reflects the potential dilution that could occur if options to
purchase common stock were exercised for shares of common stock. Deep Down had
no dilutive securities as of December 31, 2006. The following is a
reconciliation of the number of shares (denominator) used in the basic and
diluted EPS computations:
|
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
|
||||||
Dividends
Deep Down
has no formal dividend policy or obligations. Our loan documents have a
restrictive provision whereby dividends are not permitted to be paid on the
Company’s common stock.
Reclassifications:
Certain
amounts have been reclassified to be consistent with the presentation for all
periods, with no effect on the net loss or stockholders’ equity.
Advertising
costs:
Advertising
and promotion costs, which totaled approximately $58,303 and $0 during the
twelve months ended December 31, 2007 and the period from inception June 29,
2006 to December 31, 2006, respectively, are expensed as
incurred.
Notes
to Consolidated Financial Statements for the year ended December 31,
2007
and
the period from inception (June 29, 2006) through December 31, 2006
Recent
Accounting Pronouncements
In July
2006, the Financial Accounting Standards Board (“FASB”) issued FASB
Interpretation No. 48, Accounting for Uncertainty in Income Taxes (FIN 48) – an
interpretation of FASB Statement No. 109, Accounting for Income Taxes (“SFAS No.
109”) (“FIN 48”). FIN 48 clarifies the accounting for uncertainty in income
taxes recognized in accordance with SFAS No. 109 and prescribes a recognition
threshold and measurement attribute for the financial statement recognition and
measurement of a tax position taken or expected to be taken in a return.
Guidance is also provided on de-recognition, classification, interest and
penalties, accounting in interim periods, disclosure and transition. FIN 48 is
effective for fiscal years beginning after December 15, 2006. Deep
Down adopted the provisions of FIN 48 in 2007 and no material uncertain tax
positions were identified. Thus, the adoption of FIN 48 did not have
an impact on Deep Down’s financial statements.
In
September 2006, the FASB issued SFAS No. 157, Fair Value Measurements (“SFAS No.
157”). SFAS No. 157 establishes a framework for measuring fair value under
generally accepted accounting procedures and expands disclosures on fair value
measurements. This statement applies under previously established valuation
pronouncements and does not require the changing of any fair value measurements,
though it may cause some valuation procedures to change. Under SFAS No. 157,
fair value is established by the price that would be received to sell the item
or the amount to be paid to transfer the liability of the asset as opposed to
the price to be paid for the asset or received to transfer the liability.
Further, it defines fair value as a market specific valuation as opposed to an
entity specific valuation, though the statement does recognize that there may be
instances when the low amount of market activity for a particular item or
liability may challenge an entity’s ability to establish a market amount. In the
instances that the item is restricted, this pronouncement states that the owner
of the asset or liability should take into consideration what affects the
restriction would have if viewed from the perspective of the buyer or assumer of
the liability. This statement is effective for all assets valued in financial
statements for fiscal years beginning after November 15, 2007. Deep Down is
currently evaluating the impact of SFAS No. 157 on its financial position and
result of operations.
In
February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial
Assets and Financial Liabilities (“SFAS No. 159”), which provides companies with
an option to report selected financial assets and liabilities at fair
value. SFAS No. 159 also establishes presentation and disclosure
requirements designed to facilitate comparisons between companies that choose
different measurement attributes for similar types of assets and
liabilities. SFAS No. 159 is effective as of the beginning of an
entity’s first fiscal year beginning after November 15, 2007 with early adoption
allowed. Deep Down has not yet determined the impact, if any, that
adopting this standard might have on its financial statements.
In
December 2007, the FASB issued SFAS No. 141 (revised 2007), Business
Combinations (“SFAS No. 141(R)”) and No. 160, Noncontrolling Interests in
Consolidated Financial Statements, an amendment of ARB No. 51 (“SFAS No. 160”).
SFAS No. 141(R) and SFAS No. 160 are products of a joint project between the
FASB and the International Accounting Standards Board. The revised
standards continue the movement toward the greater use of fair values in
financial reporting. SFAS No. 141(R) will significantly change how business
acquisitions are accounted for and will impact financial statements both on the
acquisition date and in subsequent periods. These changes include the expensing
of acquisition related costs and restructuring costs when incurred, the
recognition of all assets, liabilities and noncontrolling interests at fair
value during a step-acquisition, and the recognition of contingent consideration
as of the acquisition date if it is more likely than not to be
incurred. SFAS No. 160 will change the accounting and reporting for
minority interests, which will be recharacterized as noncontrolling interests
and classified as a component of equity. SFAS No. 141(R) and SFAS No.
160 are effective for both public and private companies for fiscal years
beginning on or after December 15, 2008 (January 1, 2009 for companies with
calendar year-ends). SFAS No. 141(R) will be applied prospectively. SFAS No. 160
requires retroactive adoption of the presentation and disclosure requirements
for existing minority interests. All other requirements of SFAS No. 160 shall be
applied prospectively. Early adoption is prohibited for both
standards. Deep Down is currently evaluating the effects of these
pronouncements on its financial position and results of
operations.
In
December 2007, the SEC staff issued Staff Accounting Bulletin (“SAB”) 110,
Share-Based Payment, which amends SAB 107, Share-Based Payment, to permit public
companies, under certain circumstances, to use the simplified method in SAB 107
for employee option grants after December 31, 2007. Use of the simplified method
after December 2007 is permitted only for companies whose historical data about
their employees’ exercise behavior does not provide a reasonable basis for
estimating the expected term of the options. Deep Down did not have stock
options outstanding until fiscal 2007, and has not exercised any shares, thus
does not have adequate historical data to determine option lives. Therefore,
Deep Down will continue to use the simplified method as allowed under the
provision of SAB 110.
Notes
to Consolidated Financial Statements for the year ended December 31,
2007
and
the period from inception (June 29, 2006) through December 31, 2006
Note
2: Lease
receivable
On May
18, 2007, Deep Down entered into a sales lease agreement with an unrelated third
party. The leased equipment includes an a-frame, winching system, and hydraulic
power unit, all constructed by Deep Down. The term of the lease is two years,
and includes a purchase option for $35,000 at the conclusion of this term.
Monthly rental payments, in the amount of $34,500 are due beginning May, 2007
through April 2009. The lease has been accounted for as a sales-type
lease under the rules of FASB No. 13, Accounting for Leases.
|
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
|
||||||||||
Note
3: Business
Combinations
Purchase
of Mako Technologies, Inc
.
Effective
December 1, 2007, Deep Down purchased 100% of the common stock of Mako,
Technologies Inc., a Louisiana corporation. Deep Down formed a wholly owned
subsidiary, Mako Technologies, LLC, (“Mako”) a Nevada limited liability
corporation, to complete the acquisition. Headquartered in Morgan City,
Louisiana, Mako serves the growing offshore petroleum and marine industries with
technical support services, and products vital to offshore petroleum production,
through rentals of its ROV’s, topside and subsea equipment, and diving support
systems used in diving operations, maintenance and repair operations, offshore
construction, and environmental/marine surveys.
The
acquisition of Mako has been accounted for using purchase accounting since Deep
Down acquired substantially all of the assets, debts, employees, intangible
contracts and business of Mako.
The
purchase price in the original agreement was based on a maximum of
$5.0 million in cash and 11,269,841 restricted shares of common stock of Deep
Down valued at $0.76 per share, the market price of Deep Down’s common stock on
December 18, 2007, the date of the press release announcing the purchase, for a
value of $8.6 million for a total potential purchase price of approximately
$13.6 million. Included in the purchase price is approximately
$188,369 of transaction costs incurred by Deep Down.
The first
installment of $2,916,667 in cash and 6,574,074 shares of restricted common
stock of Deep Down, valued at $0.76 per share was paid on January 4, 2008 and
the balance of $3,205,667 made up of $1,243,578 in cash and 2,802,985 shares of
restricted common stock of Deep Down valued at $0.70 will be paid by April 15,
2008. This second installment was based on verification of adjusted EBITDA
amounts of Mako for the fiscal year ending December 31,
2007. These amounts were verified and agreed upon by all the
parties on March 27, 2008 and the total $3,025,667 is presented as a payable to
Mako shareholders at December 31, 2007.
On
December 21, 2007, Deep Down signed an amendment to its original credit
agreement with Prospect Capital for an additional $6.5 million for the Mako
acquisition. On January 4, 2008, Deep Down received an additional
advance of $6.0 million under its secured credit agreement (the “Credit
Agreement”) with Prospect Capital Corporation (“Prospect”) to fund the cash
portion of its acquisition of Mako.
Notes
to Consolidated Financial Statements for the year ended December 31,
2007
and
the period from inception (June 29, 2006) through December 31, 2006
The first
payment to shareholders of Mako is reflected on the accompanying consolidated
balance sheet as of December 31, 2007 due to the certainty of payment, and the
intention of all parties to complete this payment prior to fiscal year end. The
second payment of $3,025,667 is reflected as a payable to shareholders due to
the timing of payments in the subsequent fiscal year. The financing
with Prospect is also reflected as of December 31, 2007 since the funds were
generally used to pay the shareholders of Mako. The net proceeds received from
Prospect of $5,604,000 are offset by the first cash payment to shareholders of
Mako of $2,916,667 resulting in a balance of $2,687,333 reflected as “Receivable
from Prospect” on the consolidated balance sheet at December 31,
2007.
The table
below reflects the breakdown of the purchase price payments:
|
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
|
||||||
The
purchase price of $11,307,000 included approximately $188,369 of transaction
expenses, plus the assumption of leases of real and personal property and
ongoing accounts payable and bank loans in exchange for substantially all of the
assets, including construction in progress, fixed assets and accounts receivable
and the transfer of all employees. The acquisition price was allocated to the
assets acquired and liabilities assumed based upon their estimated fair values
with the excess being recorded in goodwill. The following table
summarizes the estimated fair values of the assets acquired and liabilities
assumed at the date of acquisition:
|
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
|
Deep Down
hired an independent valuation expert to provide a preliminary estimate for the
fair market value of the assets purchased. As a result, part of the purchase
price was allocated to specifically identified intangible assets. The
following table below summarizes the intangible assets purchased in the
transaction:
|
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
|
|||||||
The
allocation of the purchase price was based on preliminary
estimates. Estimates and assumptions are subject to change upon the
receipt of management’s review of the final amounts and final tax
returns. This final evaluation of net assets acquired is expected to
be completed no later than one year from the acquisition date and any future
changes in the value of the net assets acquired will be offset by a
corresponding change in goodwill.
Notes
to Consolidated Financial Statements for the year ended December 31,
2007
and
the period from inception (June 29, 2006) through December 31, 2006
Additionally,
as part of Prospect’s requirements, Deep Down paid $918,709, as the remaining
balances due on Mako’s long-term debt and accrued interest, in January
2008.
The
following unaudited pro forma combined condensed financial statements are based
on the historical financial statements of Mako and Deep Down after giving effect
to the acquisition of Mako. The unaudited pro forma condensed combined
statements of operations for the twelve months ended December 31, 2007 is
presented as if the acquisition had taken place on January 1, 2007 by combining
the historical results of Mako and Deep Down.
The
unaudited pro forma results were as follows:
|
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.
|
Notes
to Consolidated Financial Statements for the year ended December 31,
2007
and
the period from inception (June 29, 2006) through December 31, 2006
Purchase of ElectroWave USA,
Inc.
On April
2, 2007, Deep Down purchased all of the assets and certain liabilities of
ElectroWave USA, Inc., a Texas corporation. Deep Down formed a wholly
owned subsidiary, ElectroWave USA, Inc. (“ElectroWave”), a Nevada corporation,
to complete the acquisition. ElectroWave offers products and services in the
fields of electronic monitoring and control systems for the energy, military,
and commercial business sectors.
The
acquisition of ElectroWave has been accounted for using purchase accounting as
Deep Down acquired substantially all of the assets, debts, employees, intangible
contracts and business of ElectroWave.
The
purchase price of $171,407 includes the payment of bank and other debts of
ElectroWave totaling $432,475, net of $261,068 received from the factoring of
ElectroWave’s receivables. The purchase included the assumption of leases of
real and personal property and ongoing accounts payable in exchange for
substantially all of the assets, including inventory, fixed assets and accounts
receivable and the transfer of all employees. The acquisition price was
allocated to the assets acquired and liabilities assumed based upon their
estimated fair values with the excess being recorded in goodwill. The
following table summarizes the estimated fair values of the assets acquired and
liabilities assumed at the date of acquisition:
|
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
|
||
The
allocation of the purchase price was based on preliminary
estimates. Estimates and assumptions are subject to change upon the
receipt of management’s review of the final amounts and final tax
returns. This final evaluation of net assets acquired is expected to
be completed no later than one year from the acquisition date and any future
changes in the value of the net assets acquired will be offset by a
corresponding change in goodwill.
No pro
forma amounts are presented as the impact would not be material.
In
addition, Deep Down may issue up to an aggregate of 460 shares of convertible
preferred stock over the next two years, as an additional contingent purchase
cost, if the operations of ElectroWave reach certain financial milestones based
on net income for the fiscal years ending December 31, 2008 and
2009. For the period from acquisition April 2, 2007 through December
31, 2007, ElectroWave had a net loss, so no additional consideration is due for
that time frame. The contingent consideration for the fiscal years ending
December 31, 2008 and 2009 is not considered in the initial purchase price
allocation due to its uncertain nature.
Notes
to Consolidated Financial Statements for the year ended December 31,
2007
and
the period from inception (June 29, 2006) through December 31, 2006
Purchase of Deep Down, Inc.
by Subsea on November 21, 2006
On
November 21, 2006, Subsea acquired Deep Down, Inc., a Delaware corporation
founded in 1997. Under the terms of this transaction, all of Deep Down, Inc.’s
shareholders transferred ownership of all of Deep Down, Inc.’s common stock to
Subsea in exchange for 5,000 shares of Subsea’s Series D Preferred Stock and
5,000 shares of Subsea’s Series E Preferred Stock resulting in Deep Down, Inc.
becoming a wholly owned subsidiary of Subsea. On the same day, Subsea then
merged with Deep Down, Inc., with the surviving company operating as Deep Down,
Inc. The purchase price based on the fair value of the Series D and E Preferred
stock was $7,865,471. This transaction was accounted for as a purchase, with
Subsea being the acquirer based on the change in voting control. The acquisition
price was allocated to the assets acquired and liabilities assumed based upon
their estimated fair values with the excess being recorded in goodwill. The
following table summarizes the estimated preliminary fair values of the assets
acquired and liabilities assumed at the date of acquisition:
|
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
|
During
fiscal 2007, Deep Down paid approximately $242,924 to the former shareholders of
the Sub-chapter S corporation Deep Down, Inc. (Delaware), which represents the
income taxes due on the income from the time of purchase through the filing of
revised tax status as a C-Corporation, which is reflected as an adjustment to
goodwill since these payments related to the original agreements. There will be
no further adjustments to goodwill as the one year period of evaluation has
passed, and the final tax returns have been filed.
Note
4: Accounts
Receivable
Management
has established an allowance for uncollectible accounts of $139,787 and $81,809
as of December 31, 2007 and 2006. Bad debt expense totaled $ 110,569 and $1,294
for the year ended December 31, 2007 and the period from inception June 29, 2006
to December 31, 2006, respectively.
Until
August 2007, Deep Down factored certain accounts receivables with a bank. Under
the terms of the arrangement, Deep Down received proceeds equal to 80% of the
value of the receivable at the date of transfer. Upon collection of the
receivable, the bank remits the remaining 20%, less fees and interest. Fees
ranged from 0.25% to 2% depending on the age of the receivable and interest is
prime plus 2%. The arrangement contained provisions that indicated Deep Down was
responsible for up to 20% of end-user customer payment defaults on factored
receivables. As of December 31, 2007, all receivables under this
arrangement have been collected and Deep Down no longer has a factoring
program.
Notes
to Consolidated Financial Statements for the year ended December 31,
2007
and
the period from inception (June 29, 2006) through December 31, 2006
Note
5: Property
and Equipment
Property
and equipment consisted of the following as of December 31, 2007 and
2006:
|
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
|
||||
In
February 2007, Deep Down entered into a capital lease transaction for the lease
of a 100-ton mobile gantry crane valued at $525,000, which is included with
Equipment above.
Depreciation
expense was $426,964 and $27,161 for the year ended December 31, 2007 and the
period from inception June 29, 2006 to December 31, 2006,
respectively. Accumulated depreciation on equipment under capital
lease is $62,500 at December 31, 2007.
Notes
to Consolidated Financial Statements for the year ended December 31,
2007
and
the period from inception (June 29, 2006) through December 31, 2006
Note
6: Long-Term
Debt
At
December 31, 2007 and 2006 long-term debt consisted of the
following:
|
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
|
||||
Notes
to Consolidated Financial Statements for the year ended December 31,
2007
and
the period from inception (June 29, 2006) through December 31, 2006
Secured
credit agreement
On August
6, 2007, Deep Down entered into a $6.5 million secured Credit Agreement with
Prospect, and received an advance of $6.0 million on that date. Funds were used
to pay off other bank indebtedness, redeem $1,400,000 of the Series E Preferred
Shares outstanding, pay off $150,000 owing to an officer, and to provide working
capital to accelerate development of its corporate growth strategies.
Indebtedness through the Credit Agreement is secured by all of Deep Down’s
assets.
The
original Credit Agreement provides for a 4-year term, an annual interest rate of
15.5%, with the ability to defer up to 3.0% of interest through a PIK
(paid-in-kind) feature and principal payments of $75,000 per quarter beginning
September 30, 2008, with the remaining balance outstanding due August 6,
2011. Interest payments are payable monthly, in arrears, on each
month end commencing on August 31, 2007. Interest paid through
December 31, 2007 was $377,167. Deep Down paid the full 15.5% and did
not exercise the PIK feature for the monthly periods through December
2007.
On
December 21, 2007, Deep Down entered into an amendment to the Credit Agreement
(the “Amendment”) to provide the funding for the cash portion of the purchase of
Mako. The total commitment available under the Amendment was increased to $13.0
million, and the quarterly principal payments increased to $250,000, with the
dates of all payments remaining the same. The interest terms and loan covenants
also remained substantially the same under the Amendment. Deep Down was advanced
an additional $6.0 million on January 4, 2008 under terms of the
Amendment. As discussed in Note 3, this additional advance and the
related debt discounts and deferred financing cost have been reflected as of
December 31, 2007. The revised payment terms and increase in
principal and debt discount balances are reflected in the 5-year schedule of
required payments below.
Terms of
the Credit Agreement also include a detachable warrant to purchase up to
4,960,585 shares of common stock at an exercise price of $0.507 per
share. The warrant has a five-year term and becomes exercisable on
the two-year anniversary of the original financing, August 6,
2009. The proceeds of the debt were allocated to the warrants based
on its estimated relative fair value at the measurement date of when the final
agreement was signed and announced and reflected as a discount to the
debt. Although the terms of the warrant were agreed to on May 24,
2007, the measurement date for valuation was determined to be the date of
closing of the Credit Agreement. The relative fair value of the
warrant was estimated to be $1,479,189 based on the Black Scholes pricing
model. The assumptions used in the model included (1) expected
volatility of 52.7%, (2) expected term of 3.5 years, (3) discount rate of 5% and
(4) zero expected dividends. Provisions in the warrant
agreement allow for a cashless exercise provision, not to exceed 2% of
outstanding common stock at the time of exercise.
Additionally,
in connection with the initial advance in August 2007, Deep Down pre-paid
$180,000 in points to the lender which was treated as a discount to the
note. The discount associated with the value of the warrants and the
pre-paid points are being amortized into interest expense over the life of the
note agreement using the effective interest method. A total of
$135,931 has been amortized into interest expense through December 31,
2007.
In
connection with the second advance in January 4, 2008, Deep Down pre-paid
$180,000 in points to the lender which was treated as a discount to the
note. This addition to the debt discount is included in the 5-year
payment schedule below.
In
connection with the warrant, Deep Down entered into a registration rights
agreement where the holder has certain demand registration rights in the
future. There are no stipulated liquidated damages in the
agreement. Deep Down evaluated the warrants and the registration
rights agreement for liability treatment under SFAS 133 and EITF 00-19 and
determined that the warrants and registration rights did not meet the definition
of a liability under the authoritative guidance.
Notes
to Consolidated Financial Statements for the year ended December 31,
2007
and
the period from inception (June 29, 2006) through December 31, 2006
Under the
Credit Agreement, Deep Down is required to meet certain covenants and
restrictions, in addition to maintaining “key man” life insurance with respect
to the CEO in the amount of at least $3.0 million. The financial
covenants are reportable each quarter, and fluctuate over defined time frames,
with the initial period being the quarters ending December 31, 2007 through June
30, 2008. Financial covenants include maintaining total debt to
consolidated EBITDA below 3.5 to 1, consolidated EBITDA to
consolidated net interest expense on the total debt greater than 2 to 1, free
cash flow to debt service greater than 1 to 1, and EBITDA in excess of
$2,000,000 (annual calculation only) as each term is defined in the Credit
Agreement. Other covenants include limitations on issuance of common
stock, liens, transactions with affiliates, additional indebtedness and
permitted investments, among others. Deep Down must also maintain a
debt service reserve account of $375,000 which is reflected as restricted cash
on the balance sheet. At December 31, 2007, Deep Down was in
compliance with the financial covenants and restricted cash requirement,
however, it has obtained life insurance for the CEO in the amount of $2.0
million so it is not in compliance with that restriction. Deep Down obtained a
waiver from the lender on March 28, 2008. Deep Down is working on obtaining the
additional $1.0 million required life insurance.
Deep Down
capitalized a total of $555,314 in deferred financing costs related to the
original amounts borrowed under the Credit Agreement. Of this amount,
$442,194 was paid in cash to various third parties related to the financing, and
the remainder of $113,120 represents the Black Scholes valuation of warrants
issued to one of these third party vendors. The warrant is a
detachable warrant to purchase up to 320,000 shares of common stock at an
exercise price of $0.75 per share (calculated as the volume weighted average
closing price of the common stock for the ten days immediately preceding the
closing of the Credit Agreement which took place on August 6,
2007). The warrant has a five-year term and becomes exercisable on
the two-year anniversary of the original financing, August 6,
2009. The assumptions used in the Black Scholes model included (1)
expected volatility of 52.7%, (2) expected term of 3.5 years, (3) discount rate
of 5% and (4) zero expected dividends. The deferred financing
cost is being amortized using the effective interest method over the term of the
note. A total of $54,560 of deferred financing cost was amortized
into interest expense through December 31, 2007.
In
connection with the second advance under the Credit Agreement on January 4,
2008, Deep Down capitalized an additional $261,941 in deferred financing
costs. Of this amount, $216,000 was paid in cash to various third
parties related to the financing, and the remainder of $45,946 represents the
Black Scholes valuation of warrants issued to one of these third party
vendors. The detachable warrant was granted to purchase up to 118,812
shares of common stock at an exercise price of $1.01 per share. The
warrant has a five-year term and is immediately exercisable. The fair
value of the warrant was estimated to be $45,946 based on the Black Scholes
pricing model. The assumptions used in the model included (1)
expected volatility of 61.3%, (2) expected term of 2.5 years, (3) discount rate
of 3.2% and (4) zero expected dividends. Provisions in the
warrant agreement allow for a cashless exercise provision, not to exceed 2% of
outstanding common stock at the time of exercise.
Payment
of bank loans and accounts receivable factoring arrangement
On August
7, 2007, Deep Down paid the remaining balances due on prior bank loans for a
total of $936,073, including accrued interest through that date. Total principal
payments on these loans for the twelve months ended December 31, 2007 were
$1,168,348. Additionally, as of August 2007, Deep Down is no longer factoring
accounts receivable with this bank. As of December 31, 2007, all receivables
under this arrangement have been collected.
Payment
of shareholder payable
During
the second quarter of fiscal 2007, Deep Down executed a Securities Redemption
Agreement (the “Agreement”) with the former CFO of Deep Down to redeem 4,000
shares of Series E exchangeable preferred stock at a discounted price of $500
per share for a total of $2,000,000. The discount of $500 per share
from the face value of $1,000 was accounted for as a substantial modification of
debt, thereby generating a gain on extinguishment of debt which is reflected as
other income on the income statement. Deep Down accreted the
remaining discount of $1,102,385 attributable to such shares on the date of
redemption. On August 16, 2007, Deep Down made the initial payment of
$1,400,000 under the terms of the securities redemption agreement, and 2
payments of $20,000 each were made during August and September
2007. The final balance due of $560,000 was paid with 543,689 shares
of common stock on valued at the closing market price on October 2,
2007.
Notes
to Consolidated Financial Statements for the year ended December 31,
2007
and
the period from inception (June 29, 2006) through December 31, 2006
Payment
of subsidiary debt
As part
of the net assets acquired in the purchase of Mako, Deep Down assumed notes
payable in the amount of approximately $916,044 plus accrued interest. Deep Down
paid the remaining balances due for a total of $918,709, including accrued
interest, in January 2008; the principal balance of these notes is included in
the current portion of long-term debt on the accompanying consolidated balance
sheet.
Payment
table
The table
below includes the additional advance of $6.0 million under the Amendment to the
Credit Agreement in January 2008, plus the related debt discount of
approximately $180,000 in lenders’ fees related to that additional advance.
Aggregate principal maturities of long-term debt were as follows for years ended
December 31:
|
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
|
||||
Capital
lease
In
February 2007, Deep Down purchased under a seller-financed capital lease, a
100-ton mobile gantry crane and related equipment. The equipment was
delivered and placed into service in March 2007. In accordance with
Financial Accounting Standards Board SFAS 13 “Accounting for Leases” as amended,
the lease was capitalized and the lease obligation and related assets recognized
on Deep Down’s consolidated balance sheet. The total value of the
lease payments discounted at an 11.2% interest rate, or $525,000, was
capitalized. The off-setting lease obligation is $481,209 at December 31,
2007.
Note
7: Stock
Options and Warrants
Adoption
of FAS 123(R)
Effective
April 21, 2005, the Financial Accounting Standards Board (“FASB”) issued SFAS
123(R), which is a revision of SFAS 123. SFAS 123(R) supersedes APB 25 and
amends Statement of Accounting Standards No. 95, “Statement of Cash Flows”.
Generally, the approach in SFAS 123(R) is similar to the approach described in
SFAS 123. However, SFAS123(R) requires all share-based payments to employees,
including grants of employee stock options, to be recognized in Deep Down’s
Statement of Operations based on their fair values. Deep Down adopted
the provisions of SFAS 123(R) in the first quarter of 2007. As Deep
Down had no outstanding stock options at December 31, 2006, the initial adoption
of SFAS 123(R) had no impact to Deep Down.
Stock
Options Granted During 2007
Deep Down
has a stock based compensation plan - the 2003 Directors, Officers and
Consultants Stock Option, Stock Warrant and Stock Award Plan (the “Plan”). The
exercise price of the options, as well as the vesting period, is established by
Deep Down’s board of directors. The options granted under the Plan have vesting
periods that range from immediate vesting to vesting over five years, and lives
of the options granted are up to ten years. Under the Plan the total number of
options permitted is 15% of issued and outstanding common shares. During the
year ended December 31, 2007, Deep Down granted 5,500,000 options under the
Plan. Deep Down issued an aggregate of 1,500,000 stock options to
various consultants, of which 300,000 were issued with an exercise price of
$0.30, $0.50, $0.75, $1.00, and $1.25, respectively. Additionally,
Deep Down issued an aggregate of 1,000,000 stock options to various
employees with an exercise price of $0.50 and 3,000,000 stock options to an
officer and director with an exercise price of $0.515.
Notes
to Consolidated Financial Statements for the year ended December 31,
2007
and
the period from inception (June 29, 2006) through December 31, 2006
Since Deep
Down does not have a sufficient trading history to determine the volatility of
its own stock, it based its estimates of volatility on a representative peer
group consisting of companies in the similar industry, with similar market
capitalizations and similar stage of development. Deep Down is
expensing all stock options on a straight line basis over their respective
expected service periods. Total stock based compensation expense for
the year ended December 31, 2007 was $187,394. Deep Down had no stock
based grants prior to fiscal 2007.
The
unamortized portion of the estimated fair value of these stock options is
$636,656 at December 31, 2007. Based on the common shares outstanding at
December 31, 2007, there are 7,396,000 available for grant under the Plan as of
that date.
Summary
of Stock Options
A summary
of stock option transactions follows:
|
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
|
||||||||||
|
Exercisable
at December 31, 2007
|
562,500
|
$
|
0.76
|
4.3
|
$
|
156,375
|
||||||||||
The
following summarizes Deep Down’s outstanding options and their respective
exercise prices at December 31, 2007:
|
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
|
|||||
The fair
value of each stock option grant is estimated on the date of the grant using the
Black-Scholes model and is based on the following key assumptions for the year
ended December 31, 2007:
|
Dividend
yield
|
0%
|
||
|
Risk
free interest rate
|
5%
|
||
|
Expected
life of options
|
3 - 4 years
|
||
|
Expected
volatility
|
53%
- 55%
|
||
Notes
to Consolidated Financial Statements for the year ended December 31,
2007
and
the period from inception (June 29, 2006) through December 31, 2006
Summary
of Warrants:
On August
6, 2007, as part of the secured Credit Agreement described in Note 6, Deep Down
issued 4,960,585 warrants to its creditor. All warrants were issued with
an exercise price of $0.507, expire in five years (or earlier in the event of
termination) and vest on the second anniversary of the agreement. The
aggregate relative fair value of such warrants (excluding estimated forfeitures)
was approximately $1,479,189 based on the Black-Scholes option pricing model
using the following estimates: 5% risk free rate, 52.7% volatility, and an
expected life of 3.5 years.
Deep Down
issued warrants to a third party related to the financing. The
warrant is a detachable warrant to purchase up to 320,000 shares of common stock
at an exercise price of $0.75 per share (calculated as the volume weighted
average closing price of the common stock for the ten days immediately preceding
the closing of the Prospect financing which took place on August 6,
2007). The warrant has a five-year term and becomes exercisable on
the two-year anniversary of the financing, August 6, 2009. The
assumptions used in the Black Scholes model included (1) expected volatility of
52.7%, (2) expected term of 3.5 years, (3) discount rate of 5% and (4) zero
expected dividends.
Related
to the secured Credit Agreement Amendment and second advance described in Note
6, Deep Down issued warrants to a third party related to the
financing. The warrant is a detachable warrant to purchase up to
118,812 shares of common stock at an exercise price of $1.01 per
share. The warrant has a five-year term and is immediately
exercisable. The assumptions used in the Black Scholes model included
(1) expected volatility of 61.3%, (2) expected term of 2.5 years, (3) discount
rate of 3.18% and (4) zero expected dividends.
A summary
of warrant transactions follows:
|
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
|
||||||||||
|
Exercisable
at December 31, 2007
|
-
|
$
|
-
|
|||||||||||||
The
following summarizes Deep Down’s outstanding warrants and their respective
exercise prices 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
|
|||
Notes
to Consolidated Financial Statements for the year ended December 31,
2007
and
the period from inception (June 29, 2006) through December 31, 2006
Note
8: Preferred
Stock
Series
E and G Classified as Liabilities
The
Series E and G redeemable exchangeable preferred stock have a face value and
liquidation preference of $1,000 per share, no dividend preference, and are
exchangeable at the holder’s option into 6% Subordinated Notes due three years
from the date of the exchange. These shares carry voting rights equal to 690
votes per share. The Series E and G preferred stock were valued based on the
discounted value of their expected future cash flows (using a discount rate of
20%). Deep Down evaluated the Series E and G preferred stock and has
classified them as debt instruments from the date of issuance due to the fact
that they are exchangeable at the option of the holder thereof into
Notes. The difference between the face value of the Series E and G
preferred stock and the discounted book value recorded on the balance sheet, or
original issue discount, is deemed to be non-cash interest expense from the date
of issuance through the term of the Stock.
Deep Down
has been accreting this original issue discount using the effective interest
method. Interest expense related to the accretion of the original
issue discount totaled approximately $1,644,990 and $40,149 for the year ended
December 31, 2007 and 2006 respectively. This total includes the accelerated
accretion of approximately $1,017,707 to accrete to face value 4,000 shares plus
approximately $72,799 to accrete to face value 250 shares, plus approximately
$260,520 to accrete to face value 1,250 shares, respectively, of Series E
preferred stock that were redeemed during the year ended December 31, 2007, as
further detailed below.
In
February 2007, Deep Down redeemed 250 shares of Series E redeemable,
exchangeable preferred stock held by its CEO at the face value of $1,000 per
share for a total of $250,000. Deep Down accreted the remaining
discount of $72,799 attributable to such shares on the date of redemption as
interest expense.
In May
2007, Deep Down executed a Securities Redemption Agreement (the “Agreement”)
with a stockholder (the former CFO of Deep Down) to redeem 4,000 shares of
Series E redeemable, exchangeable preferred stock at a discounted price of $500
per share for a total of $2,000,000. The discount of $500 per share
from the face value of $1,000 was accounted for as a substantial modification of
debt, thereby generating a gain on extinguishment of debt which is reflected in
other income. Deep Down accreted the remaining discount of $1,017,707
attributable to such shares on the date of redemption as interest
expense. The shareholder placed all 4,000 shares into an escrow
account as of the execution of this agreement. Terms of the payment to the
shareholder are: 2,800 shares at $500 for a total of $1,400,000 paid in August
2007, with the remaining shares to being redeemed monthly beginning August 31,
2007 at a rate of 40 shares at $500 per share, or $20,000 per
month. The final balance outstanding of $560,000 was paid with
543,689 shares of common stock in October 2007.
On
September 13, 2007, Deep Down redeemed 2,250 shares owned by the CEO and
director, and his wife, a Vice-President and director of Deep
Down. The Series E preferred shares were redeemed for 2,250,000
shares of common stock at the closing price of $0.66 totaling
$1,473,750. Since the shareholders are related parties, no accretion
interest was recorded related to the redemption. The difference
between the carrying value of the Series E shares of $1,685,463 and the common
stock market value was recorded to Paid in Capital.
Additionally,
in October 2007, Deep Down redeemed 1,250 shares of Series E redeemable,
exchangeable preferred stock at the face value of $1,000 per share for a total
of $1,250,000. The Series E preferred shares were redeemed for 1,213,592 shares
of common stock at the closing price of $1.03. Deep Down accreted the
remaining discount of $260,520 attributable to such shares on the date of
redemption and recorded it as interest expense.
Notes
to Consolidated Financial Statements for the year ended December 31,
2007
and
the period from inception (June 29, 2006) through December 31, 2006
All
Series G preferred shares were cancelled and exchanged during the first quarter
of 2007. Accordingly, there is no future discount accretion relating to the
Series G preferred shares. See “Series F and G Cancellation and
Issuance of Additional Series E” below.
The
unamortized discounts related to the Series E and Series G preferred stock
were as follows:
|
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
|
|||||
A summary
of Series E and Series G preferred stock transactions follows:
|
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
|
-
|
||||||
Series
F and G Cancellation and Issuance of Additional Series E
On March
20, 2007, Deep Down finalized the terms of an agreement with a former
non-employee director who surrendered 25,000,000 shares of common stock for
$250,000 in cash. The market value of those shares was $7,250,000. Additionally,
he surrendered 1,500 shares of Series F convertible preferred stock with a value
of $1,325,773 and 500 shares of Series G exchangeable preferred stock with a
value of $357,615 to Deep Down for cancellation in exchange for 1,250 shares of
Series E exchangeable preferred stock valued at $945,563. The Series E Preferred
Stock was valued based on the discounted value of its expected future cash flows
(using a discount rate of 20%). The difference between the values of
the preferred shares surrendered and the newly issued was $737,826 which is
reflected in paid in capital on the accompanying consolidated balance sheet. In
addition, he also kept 500 shares of Series E exchangeable preferred stock he
previously owned and agreed to tender his resignation from the
Board.
On March
20, 2007, Deep Down issued 2,000 shares of Series E exchangeable preferred stock
to John C. Siedhoff, then Chief Financial Officer, and director, valued at
$1,512,901 for the surrender of his ownership of 1,500 shares of Series F
convertible preferred stock valued at $1,325,773 and 500 shares of Series G
exchangeable preferred stock valued at $357,616, which were returned to the
transfer agent for cancellation. The Series E Preferred Stock was
valued based on the discounted value of its expected future cash flows (using a
discount rate of 20%). The difference between the values of the
surrendered shares and the newly issued was $170,489 which is reflected in paid
in capital on the accompanying consolidated balance sheet. Deep Down has treated
this as a modification of a share-based payment in accordance with the
provisions of SFAS No. 123R, “Share-Based Payments”.
Notes
to Consolidated Financial Statements for the year ended December 31,
2007
and
the period from inception (June 29, 2006) through December 31, 2006
Series
D and F Classified as Temporary Equity
The
Series D redeemable convertible preferred stock have a face value and
liquidation preference of $1,000 per share, no dividend preference, and are
convertible into shares of common stock determined by dividing the face amount
by a conversion price of $0.1933. These shares carry voting rights
equal to one vote for every share of common stock into which the preferred stock
is convertible. These shares are redeemable at their face value on an
annual basis within 120 days after each calendar year-end beginning with the
year ending December 31, 2007 based on an amount equal to 15.625% of annual net
income. In the event that a holder declines redemption, such amounts
are reallocated to the other preferred stock holders that have elected to
redeem.
The
Series F preferred stock has the same terms as described above, with the
exception of the amount of redemption is equal to 9.375% of annual net
income.
Deep Down
evaluated the Series D and F preferred stock for liability or equity
presentation and determined that the instruments were more appropriately
classified as temporary equity due to the conditional redemption
feature.
On March
28, 2008, holders of the Series D preferred stock converted 5,000 of the
outstanding shares into 25,866,518 shares of common stock.
Series
C Preferred Stock
On April
22, 2005, MediQuip issued 22,000 Series C convertible preferred stock which
remained after the reverse merger. The Series C shares had a face value and a
liquidation preference of $12.50 per share, a cumulative dividend of 7% payable
at the conversion date, and were convertible into shares of common stock
determined by dividing the face amount by a conversion price of $0.0625. These
shares carried no voting rights. All of the Series C shares were
converted in the fourth quarter of fiscal 2007 to 4,400,000 shares of Deep
Down’s common stock.
Note
9: Common
Stock
Private
Placements
On March
20, 2007, Deep Down completed the sale of 10,000,000 shares of common stock in a
private placement for $1,000,000. A total of 1,025,000 shares were purchased by
the CEO and director, and his wife, a Vice-President and director of
Deep Down. The shares are restricted securities as defined in Rule 144 of the
Securities Act of 1933 and contain a restrictive legend, which restricts the
ability of the holders to sell these shares for a period of no less than six
months. Funds from such private placement sale were used to redeem certain
outstanding exchangeable preferred stock and for working capital.
On
October 12, 2007, Deep Down closed an agreement with Ironman Energy Capital,
L.P. for a private placement of 3,125,000 shares of common stock at $0.96 per
share, or $3,000,000 in the aggregate, pursuant to an agreement reached on
October 2, 2007 when the closing price was $1.03 per share.
In
connection with this private placement, the Deep Down entered into registration
rights agreement, under which, upon demand registration by the holder after
December 31, 2008, Deep Down could be subject to liquidating damages in the
amount of 1% of the proceeds for every 30 days a registration statement is not
declared effective. Deep Down is currently evaluating the probability of
incurring these liquidated damages as a contingent liability and not yet
determined the potential impact on the financial statements.
Other
stock issuances
On
September 13, 2007, Deep Down redeemed 2,250 shares of Series E preferred stock
owned by the Chief Executive Officer and director, and his wife, a
Vice-President and director of Deep Down. The Series E preferred
shares were redeemed for 2,250,000 shares of common stock at the closing price
of $0.66.
Notes
to Consolidated Financial Statements for the year ended December 31,
2007
and
the period from inception (June 29, 2006) through December 31, 2006
On
October 2, 2007, Deep Down made the final payment of $560,000 under the terms of
a securities redemption and shareholder payable agreement by issuing 543,689
shares of common stock valued at the closing price of $1.03 on the same
day.
Note
10: Income
Taxes
Prior to
the reverse merger, Deep Down was a Subchapter S entity and the tax attributes
flowed through to the individual owners. Thus any prior net operating losses
will not be available to be utilized to offset future taxable
income.
Income
tax expense for the year ended December 31, 2007 and period from inception June
29, 2006 to December 31, 2007 totaled $ 369,673 and $22,250,
respectively.
A
reconciliation of the differences between the effective and statutory income tax
rates are as follows for the year ended December 31, 2007 and the period from
inception June 29, 2006 to December 31, 2006:
|
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%
|
||||||||||
Net
deferred tax assets at December 31, 2007 totaled $75,823 and consisted primarily
of deferred tax assets related to timing differences associated with the
recognition of debt discount and deferred financing costs. Deferred
tax assets are included in other long-term assets in the accompanying
consolidated balance sheet. Deferred tax assets at December 31, 2007
and 2006 are not material.
A
valuation allowance is established when it is more likely than not that some of
the deferred tax assets will not be realized. Management analyzed its
current operating results and future projections and determined that a valuation
allowance was not needed at December 31, 2007.
Note
11: Related
party transactions
Deep Down
borrowed $150,000 from an officer, with no stated interest, due on demand, as of
June 30, 2007 which was used for working capital purposes. Deep Down
paid the loan balance in full during the third quarter of 2007.
On
September 13, 2007, Deep Down redeemed 2,250 shares of Series E preferred stock
owned by the Chief Executive Officer and director, and his wife, a
vice-president and director of Deep Down. The Series E preferred
shares were redeemed for 2,250,000 shares of common stock at the closing price
of $0.655. See further discussion under Note 8.
We lease
all buildings, structures, fixtures and other improvements from JUMA, LLC, a
limited liability company owned by Ronald E. Smith, CEO and director of Deep
Down, Inc., and Mary L. Budrunas, a vice-president and director of Deep Down,
Inc. The base rate of $11,000 per month is payable to JUMA through September 1,
2011, together with all costs of maintaining, servicing, repairing and operating
the premises, including insurance, utilities and property taxes.
Deep Down
paid approximately $82,000 to JUMA for costs associated with the preparation of
the additional land recently purchased by JUMA for Deep Down’s
operations. The costs were associated with permitting, land clearing
and preparation.
Notes
to Consolidated Financial Statements for the year ended December 31,
2007
and
the period from inception (June 29, 2006) through December 31, 2006
Note
12: Commitments
and Contingencies
Litigation
Deep Down
is from time to time involved in legal proceedings arising from the normal
course of business. As of the date of this report, Deep Down is not currently
involved in any legal proceedings.
Capital
Lease
In
February 2007, Deep Down purchased under a seller-financed capital lease, a
100-ton mobile gantry crane and related equipment. The equipment was
delivered and placed into service in March, 2007. In accordance with
Financial Accounting Standards Board SFAS 13 “Accounting for Leases” as amended,
the lease was capitalized and the lease obligation and related assets recognized
on Deep Down’s consolidated balance sheet. The total value of the
lease payments discounted at an 11.2% interest rate, or $525,000, was
capitalized. The off-setting lease obligation is $481,209 at December 31,
2007.
Operating
Leases
Deep Down
leases land and buildings under two noncancelable operating leases and is
responsible for the related maintenance, insurance and property taxes. One of
these leases is with a company that is wholly owned by one of our officer’s, who
is also a Director, of Deep Down. This lease calls for 60 monthly payments of
$11,000 and began as of September, 2006.
Deep Down
also leases several trucks under a 36 month noncancelable operating lease with a
third party. Monthly payments of $7,657 began in April 2007.
Additionally, Deep Down leases 2 modular office buildings from a third party
under noncancelable operating leases. The initial term of each lease
is two years with three extensions of 1 year each available. The
leases began in April and July 2007, respectively, and have monthly payments of
$1,849 and $1,518, respectively. Deep Down was required to pay for site
preparations, installation and city permits for the buildings, which have been
recorded as leasehold improvements and are being depreciated over the two-year
initial lease terms.
Mako
leases office space under a five year operating lease which began in June 2006
and terminates on May 31, 2011, at $7,300 per month. Mako may renew this lease
for two additional terms of five years upon the expiration of the initial term.
Should this option be exercised, the base monthly rental shall be increased or
decreased by the Consumer Price Index net change as of the starting date of any
renewal term. Basic rent expense charged to operations for the month ended
December 31, 2007 was $7,300.
At
December 31, 2007, future minimum lease obligations were as
follows:
|
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
|
||||||
Rent
expense totaled $186,866 and $69,856 for the year ended December 31, 2007 and
the period from inception June 29, 2006 to December 31, 2006,
respectively.
Notes
to Consolidated Financial Statements for the year ended December 31,
2007
and
the period from inception (June 29, 2006) through December 31, 2006
Note
13: Subsequent
Events
Redemption
of Series D Preferred Stock
The
Series D preferred stock have a face value and a liquidation preference of
$1,000 per share, and are convertible into shares of common stock determined by
dividing the face amount by a conversion price of $0.1933. These shares carried
no voting rights. In January and March 2008, Deep Down converted all
5,000 of the Series D shares to 25,866,518 shares of Deep Down’s common stock.
The CEO and director, and his wife, a vice president and director, converted
4,500 of the 5,000 shares of Series D Preferred Stock.
Stock
based compensation
During
the first quarter of 2008, Deep Down issued stock options and shares of
restricted stock to certain executives and employees. In conjunction with his
employment on January 22, 2008, Michael Teal, the Corporate Controller, was
issued 250,000 options at a vesting price of $0.70. All of the shares
underlying the stock options granted were Incentive Stock Options as defined by
the Internal Revenue Code. One third of the options will vest on January
22, 2008, 2009 and 2010, and will expire on January 22, 2013. Deep
Down estimated that the aggregate fair value of such stock options totaled
$74,900 based on the Black-Scholes option pricing model using the following
estimates: 2.64% risk free rate, 61.3% volatility, expected life of 3
years and zero dividends.
Additionally,
on February 14, 2009, Deep Down issued a total of 3.0 million options to certain
executives, with a vesting price of $1.50. The closing stock price on that day
was $0.42. One third of the options will vest on February 14, 2008,
2009 and 2010, and will expire on February 14, 2013. Deep Down
estimated that the aggregate fair value of such stock options was $145,764 based
on the Black-Scholes option pricing model using the following key assumptions
of: 2.81% risk free rate, 61.3% volatility, expected life of 3 years
and zero dividends.
Deep Down
issued a total of 1.2 million shares of restricted stock to certain executives
and employees on February 14, 2008. These shares become exercisable on the two
year anniversary of the grant, February 14, 2010. The shares were valued at the
closing stock price on that day of $0.42, and Deep Down valued the shares at
$504,000 which will be amortized over the two year period until the shares are
fully vested
FLOTATION
TECHNOLOGIES, INC.
FINANCIAL
STATEMENTS
March
31, 2008 – Three Month Interim Period
Balance
Sheet * Statement of Operations * Stockholder Equity *Statement of Cash
Flow
December
31, 2007 – Annual Period
Balance
Sheet * Stockholder Equity
March
31, 2007 – Three Month Interim Period
Statement
of Operations * Statement of Cash Flow
Accountants’
Review Report-March 31, 2008 Financial Statements
Accountants’
Audited Information-December 31, 2007 Financial Statements
Accountants’
Compilation Report-March 31, 2007 Financial Statements
Bruzgo
&
Kremer,
LLC
B
RUZGO &
K
REMER, LLC
225
Commercial Street, Suite 500
P.O.
Box 4892
Portland,
Maine 04112
Telephone
(207)-874-7700
Fax
(207)-874-7701
ACCOUNTANTS’
REVIEW REPORT
Stockholder
Flotation Technologies,
Inc
.
We
have reviewed the balance sheet of Flotation Technologies, Inc., as of the three
month Interim period ended March 31, 2008 and the related statement of
operations, changes in stockholders’ equity, and cash flow for the three months
ended March 31, 2008, in accordance with Statements on Standards for Accounting
and Review Services issued by the American Institute of Certified Public
Accountants. All information included in these financial statements is the
representation of the management of Flotation Technologies, Inc.
A
review consists principally of inquiries of Company personnel and analytical
procedures applied to financial data. It is substantially less in scope than an
audit in accordance with generally accepted auditing standards, the objective of
which is the expression of an opinion regarding the financial statements taken
as a whole. Accordingly, we do not express such an opinion.
Based
on our review, we are not aware of any material modifications that should be
made to the accompanying financial statements in order for them to be in
conformity with generally accepted accounting principles.
The
Company’s financial statements for the year ended December 31, 2007 were audited
by us, and we expressed an unqualified opinion on them in our report dated April
20, 2008. We have not performed any auditing procedures on the financial
statements since April 20, 2008.
The
March 31, 2007 statement of operations and the statement of cash flow for the
three month Interim period then ended were compiled by us in accordance with
Statements on Standards for Accounting and Review Services issued by the
American Institute of Certified Public Accountants. A compilation is limited to
presenting in the form of financial statements information that is the
representation of management. We have not audited or reviewed the March 31, 2007
financial statements presented and, accordingly, do not express an opinion or
any other form of assurance on them.
The
Company has elected not to present a March 31, 2007 balance sheet or related
footnote disclosures. The Company has also elected not to present the December
31, 2007 statement of operations or cash flow previously audited by us, in this
financial statement presentation. Presentations of these statements
and any related disclosures are required by generally accepted accounting
principles. If the omitted financial statements or disclosures were included in
this financial statement presentation, they might influence the user’s
conclusions about the Company’s financial position, results of operations, and
cash flows. Accordingly, the March 31, 2007 and December 31, 2007 partial
financial statements presented here, for comparative purposes with the reviewed
March 31, 2008 financial statements, are not designed for those who are not
informed about such matters.
/s/
Bruzgo & Kremer, LLC
Portland,
Maine
June
30, 2008
FLOTATION
TECHNOLOGIES, INC.
Balance
Sheets
Interim
Period Three Months Ended March 31, 2008 and Annual Period December 31,
2007
ASSETS
|
Reviewed
|
Audited
|
|||||||
|
3-31-08
|
12-31-07
|
|||||||
|
Current
assets
|
||||||||
|
Cash
|
$ | 852,444 | $ | 1,197,451 | ||||
|
Trade
accounts receivable
|
2,704,565 | 2,303,411 | ||||||
|
Inventories
|
807,551 | 1,278,212 | ||||||
|
Prepaid
expenses
|
22,225 | 20,602 | ||||||
|
Total
current assets
|
4,386,785 | 4,799,676 | ||||||
|
Property,
plant and equipment, at cost
|
||||||||
|
Land,
buildings, and improvements
|
3,088,565 | 3,044,565 | ||||||
|
Machinery
and equipment
|
1,471,608 | 1,430,433 | ||||||
|
Office
furniture and fixtures
|
81,102 | 81,102 | ||||||
| 4,641,275 | 4,556,100 | |||||||
|
Less
accumulated depreciation
|
(988,301 | ) | (877,722 | ) | ||||
|
Net
property, plant and equipment
|
3,652,974 | 3,678,378 | ||||||
|
Other
assets
|
||||||||
|
Intangible
assets, net of amortization
|
21,050 | 21,415 | ||||||
|
Total
assets
|
$ | 8,060,809 | $ | 8,499,469 | ||||
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
Reviewed
|
Audited
|
|||||||
|
3-31-08
|
12-31-07
|
|||||||
|
Current
liabilities
|
||||||||
|
Bank
lines of credit
|
$ | - | $ | - | ||||
|
Current
portion of long-term debt
|
52,700 | 66,000 | ||||||
|
Accounts
payable
|
1,340,550 | 878,576 | ||||||
|
Customer
deposits
|
63,593 | 1,530,959 | ||||||
|
Accrued
expenses
|
111,104 | 312,937 | ||||||
|
Due
to stockholders
|
631,719 | 651,446 | ||||||
|
Total
current liabilities
|
2,199,666 | 3,439,918 | ||||||
|
Long-term
debt, excluding current portion
|
1,697,763 | 1,697,497 | ||||||
|
Total
liabilities
|
3,897,429 | 5,137,415 | ||||||
|
Stockholders’
equity
|
||||||||
|
Common
stock, no par value; authorized 1,000 shares,
|
||||||||
|
issued
and outstanding 1,000 shares
|
200 | 200 | ||||||
|
Retained
earnings
|
4,163,180 | 3,361,854 | ||||||
|
Total
stockholders’ equity
|
4,163,380 | 3,362,054 | ||||||
|
Total
liabilities and stockholders' equity
|
$ | 8,060,809 | $ | 8,499,469 | ||||
FLOTATION
TECHNOLOGIES, INC.
Statement
of Operations
Interim
Periods - Three Months Ended March 31, 2008 and March 31, 2007
|
Reviewed
|
Unaudited
|
|||||||
|
3-31-08
|
3-31-07
|
|||||||
|
Revenues
|
$ | 4,877,108 | $ | 1,021,611 | ||||
|
Cost
of goods sold
|
3,377,955 | 649,929 | ||||||
|
Gross
profit
|
1,499,153 | 371,682 | ||||||
|
General
and administrative expenses
|
662,959 | 511,554 | ||||||
|
Income
(loss) from operations
|
836,194 | (139,872 | ) | |||||
|
Other
income (expense)
|
||||||||
|
Other
income, interest & exchange rate
|
2,119 | 7,336 | ||||||
|
Interest
expense
|
( 36,987 | ) | (9,227 | ) | ||||
|
Net
other income (expense)
|
(34,868 | ) | (1,891 | ) | ||||
|
Net
income (loss)
|
$ | 801,326 | $ | (141,763 | ) | |||
See accompanying notes and accountants’ review report.
FLOTATION
TECHNOLOGIES, INC.
Statement
of Changes in Stockholders’ Equity
Interim
Period Three Months Ended March 31, 2008 and Annual Period December 31,
2007
|
Common
Stock
|
Retained
Earnings
|
Total
Stockholders'
Equity
|
||||||||||
|
Balances,
December 31, 2006
|
$ | 200 | $ | 1,269,747 | $ | 1,269,947 | ||||||
|
Net
income for 2007
|
- | 4,057,832 | 4,057,832 | |||||||||
|
Distributions
|
- | (1,965,725 | ) | (1,965,725 | ) | |||||||
|
Balances,
December 31, 2007
|
$ | 200 | $ | 3,361,854 | $ | 3,362,054 | ||||||
|
Net
income for 2008, 1/1 to 3/31
|
- | 801,326 | 801,326 | |||||||||
|
Distributions
|
- | - | - | |||||||||
|
Balance,
March 31, 2008, Interim
|
$ | 200 | $ | 4,163,180 | $ | 4,163,380 | ||||||
See accompanying notes and accountants’ review report.
FLOTATION
TECHNOLOGIES, INC.
Statements
of Cash Flows
Interim
Period - Three Months Ended March 31, 2008 and March 31, 2007
(Three
Month Cash Flow From Prior Annual Year Ended December 31, 2007 and
2006)
|
Reviewed
|
Unaudited
|
|||||||
|
3-31-08
|
3-31-07
|
|||||||
|
Cash
flows from operating activities
|
||||||||
|
Net
income (loss)
|
$ | 801,326 | $ | (141,763 | ) | |||
|
Adjustments
to reconcile net income to net cash provided by operating
activities:
|
||||||||
|
Depreciation
and amortization
|
110,944 | 79,637 | ||||||
|
Decrease
(increase) in:
|
||||||||
|
Accounts
receivable
|
(401,154 | ) | 475,131 | |||||
|
Inventory
|
470,661 | (340,039 | ) | |||||
|
Prepaid
expenses
|
(1,623 | ) | (25,574 | ) | ||||
|
Increase
(decrease) in:
|
||||||||
|
Accounts
payable
|
461,974 | 129,517 | ||||||
|
Accrued
expenses and other
|
(201,833 | ) | 21,015 | |||||
|
Customer
deposits
|
(1,467,366 | ) | 690,195 | |||||
|
Net
cash provided (used) by operating activities
|
(227,071 | ) | 888,119 | |||||
|
Cash
flows from investing activities
|
||||||||
|
Acquisition
of equipment and plant improvements
|
(85,176 | ) | (512,452 | ) | ||||
|
Other
investing activities
|
- | - | ||||||
|
Net
cash provided (used) by investing activities
|
(85,176 | ) | (512,452 | ) | ||||
|
Cash
flows from financing activities
|
||||||||
|
Net
borrowings (repayments) on lines of credit
|
- | - | ||||||
|
Borrowings,
long term bank debt
|
- | 142,768 | ||||||
|
Receipt
(repayment) of stockholder advances
|
(19,727 | ) | - | |||||
|
Distributions
to stockholders
|
- | (45,000 | ) | |||||
|
Payments
on long-term debt, bank and related party
|
(13,033 | ) | (16,803 | ) | ||||
|
Net
cash provided (used) by financing activities
|
(32,760 | ) | 80,965 | |||||
|
Net
increase (decrease) in cash
|
(345,007 | ) | 456,632 | |||||
|
Cash,
beginning of period(01/01/08-01/01/07)
|
1,197,451 | 747,744 | ||||||
|
Cash,
end of period
|
$ | 852,444 | $ | 1,204,376 | ||||
|
Supplemental
disclosure of cash flow information
|
||||||||
|
Interest
paid
|
$ | 36,987 | $ | 9,227 | ||||
See accompanying notes and accountants’ review report.
FLOTATION
TECHNOLOGIES, INC.
Notes
to Financial Statements
Interim
Period Three Months Ended March 31, 2008 and Annual Period December 31,
2007
Nature of
Business
Flotation Technologies,
Inc. is a world leader in the engineering, design and manufacturing of deepwater
buoyancy systems using high-strength Flotec
TM
syntactic foams and polyurethane elastomers. Focused on the offshore oil,
oceanographic, seismic and government markets, Flotation Technologies delivers
world-class buoyancy products for a host of marine applications such as:
distributed buoyancy for flexible pipes and umbilicals, drilling riser buoyancy
modules, ROV buoyancy, QuickLoc
TM
cable
floats, FLOTECT
TM
cable
and pipeline protection, Inflex
TM
polymer
bend restrictors and installation buoyancy of any size and depth
rating.
1.
Summary of Significant
Accounting Policies
Use of
Estimates
The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Fair Value of Financial
Instruments
Statement
of Financial Accounting Standards No. 107, "Disclosures about Fair Value of
Financial Instruments", requires the Company to disclose estimated fair values
for its financial instruments. Fair value estimates, methods, and assumptions
are set forth below for the Company's financial instruments:
The
carrying amounts of cash, accounts receivables, other current assets, accounts
payable, accrued liabilities and current portion and non-current portion of
notes payable approximate fair value because of the short maturity of those
instruments.
Cash
The
Company maintains its cash in bank deposit accounts, which, at times, may exceed
federally insured limits. The Company has never experienced any losses in such
accounts and management believes the Company is not exposed to any significant
risk on bank deposit accounts.
FLOTATION
TECHNOLOGIES, INC.
Notes
to Financial Statements
Interim
Period Three Months Ended March 31, 2008 and Annual Period December 31,
2007
1.
Summary of Significant
Accounting Policies (Continued)
Accounts Receivable -
Recognition of Bad Debts
The
Company considers all accounts to be fully collectible; accordingly, no
allowance for doubtful accounts is provided. If any amount becomes
uncollectible, it will be charged to operations when that determination is
made.
Customer Credit
Policy
Credit is
extended to customers in the normal course of business after management performs
appropriate credit evaluation.
Inventory
Inventories
are stated at cost. Costs of raw materials and supplies are determined on a
current cost basis. Cost of finished goods and work in process inventory is
determined by accumulating raw material costs and adding supplies and labor
costs using a standard burden rate.
Property, Plant and
Equipment
Property,
plant and equipment is recorded at cost and depreciated over estimated useful
lives using both straight-line and accelerated methods. Small tools and certain
computer equipment are expensed when purchased due to rapid wear and short
estimated useful life.
Useful
lives are estimated as follows:
|
Category
|
Years
|
|||
|
Plants
|
25
|
|||
|
Plant
Improvements & Equipment
|
10
|
|||
|
Office
Fixtures & Equipment
|
3
to 7
|
Intangible
Assets
Intangible
assets consist of loan costs and are stated at cost and are amortized on the
straight-line method over the life of the loan, which is the estimated useful
life.
FLOTATION
TECHNOLOGIES, INC.
Notes
to Financial Statements
Interim
Period Three Months Ended March 31, 2008 and Annual Period December 31,
2007
1.
Summary of Significant
Accounting Policies (Concluded)
Income
Taxes
The
Company and the stockholders have elected to be taxed under the provisions of
Subchapter “S” of the Internal Revenue Code. Income, losses, and other tax
attributes are passed through to the stockholder and taxed at the personal
level. Cash distributions are made to stockholders to pay for personal income
tax liabilities, federal and state, incurred from the allocation of Company
taxable income.
2.
Inventory
|
Reviewed
|
Audited
|
||||||||
|
Inventory
consists of the following:
|
3-31-08
|
12-31-07
|
|||||||
|
Raw
materials
|
$ | 341,621 | $ | 390,294 | |||||
|
Work
in process
|
321,691 | 827,554 | |||||||
|
Finished
goods
|
144,239 | 60,364 | |||||||
| $ | 807,551 | $ | 1,278,212 | ||||||
3.
Intangibles
|
Reviewed
|
Audited
|
||||||||
|
The
following is a summary of intagible assets:
|
3-31-08
|
12-31-07
|
|||||||
|
Loan
costs
|
$ | 21,902 | $ | 21,902 | |||||
|
Less
accumulated amortization
|
(852 | ) | (487 | ) | |||||
| $ | 21,050 | $ | 21,415 | ||||||
|
Amortization
expense
|
$ | 365 | $ | 2,087 | |||||
FLOTATION
TECHNOLOGIES, INC.
Notes
to Financial Statements
Interim
Period Three Months Ended March 31, 2008 and Annual Period December 31,
2007
|
4.
|
Debt
|
The
Company had a $750,000 working capital line of credit secured by substantially
all the assets of the Company. The Company had a $450,000 equipment
line of credit secured by the equipment acquired. The interest rate for both
credit lines approximated Wall Street Prime less 0.50%. The working capital line
is up for renewal June 30, 2008. The equipment line can be termed out over a
four year fixed period on June 30
th
of the
fiscal year. There was no balance on the equipment line and none on the working
capital line as of March 31, 2008. Both credit lines were guaranteed by the
stockholders and secured by Company assets. The rate as of March 31, 2008 was
7.25%.
Long-term
debt consists of the following:
|
Reviewed
|
Audited
|
|||||||
|
Bank
Debt
|
3-31-08
|
12-31-07
|
||||||
|
Note
payable to bank, monthly installments of $13,287,
|
||||||||
|
interest
at 7%. Amortization on 20 year schedule.
|
||||||||
|
Collateralized
by substantially all assets
|
||||||||
|
of
the Company; guaranteed by stockholders.
|
$ | 1,667,831 | $ | 1,674,785 | ||||
|
Related Party
Debt
|
||||||||
|
Note
payable to stockholder at fixed 7% rate, due in
|
||||||||
|
monthly
installments of $1,360, including interest;
|
||||||||
|
final
payment due January 2011; uncollateralized.
|
40,155 | 43,900 | ||||||
|
Note
payable to stockholder at fixed 7.5% rate, due in
|
||||||||
|
monthly
installments of $550, including interest;
|
||||||||
|
final
payment is due September 2011; uncollateralized.
|
21,017 | 21,852 | ||||||
|
Note
payable to stockholders’ relative, interest at prime
|
||||||||
|
rate
plus 1% per annum payable biannually; principal
|
||||||||
|
due
in monthly installments of $500; uncollateralized.
|
21,460 | 22,960 | ||||||
|
Less
current portion
|
(52,700 | ) | (66,000 | ) | ||||
|
Long-term
debt, excluding current portion
|
$ | 1,697,763 | $ | 1,697,497 | ||||
FLOTATION
TECHNOLOGIES, INC.
Notes
to Financial Statements
Interim
Period Three Months Ended March 31, 2008 and Annual Period December 31,
2007
4.
Debt-continued
All
aforementioned long term debt, bank and related party, was paid off in full on
June 5, 2008 due to the acquisition of Company Stock. See Footnote 9. Thus,
there is no disclosure of the scheduled maturities for the next five years on
the long term debt.
5.
Employee Retirement
Plan
The
Company has a salary deferral plan covering all employees who meet certain age
and service requirements. The Company is required to contribute two percent (2%)
of all eligible employee compensation under this plan. Company contributions for
the interim period March 31, 2008 amounted to $8,863. Company contributions for
the year ended December 31, 2007 amounted to $29,208.
6.
Advertising
Costs
Costs
relating to advertising are expensed as incurred. Advertising costs
for the interim period March 31, 2008 amounted to $40,613. Advertising costs for
the year ended December 31, 2007 amounted to $61,356.
7.
Sale, Purchase and
Rental of Building
On
November 1, 2006 the Company executed an agreement to purchase a new facility
located at20 Morin Street, Biddeford. The purchase price was $1,980,000 and the
closing was August 23,
2007. On
December 15, 2006, the Company executed an agreement to sell its current
production facility at 432 Elm Street, Biddeford for $1,400,000. The closing
date was April 24, 2007. Proceeds from the sale were dedicated to the
purchase and improvement of the new facility, pursuant to a real estate exchange
contract.
The
Company gained occupancy of the Morin Street facility on December 1, 2006
pursuant to a short term net lease arrangement which required monthly rent
payments of $16,398. The lease expired upon the purchase on August 23,
2007.
8.
Joint
Venture
In 2006,
the Company became a 50% member in
Lankhorst Flotec Offshore,
LLC
. The LLC purpose is to share marketing costs in the
promotion of joint products with another member. Since inception
of the
venture no material assets or liabilities existed in the LLC and all costs were
expensed and no
investment
in the LLC was recognized for financial statement purposes.
FLOTATION
TECHNOLOGIES, INC.
Notes
to Financial Statements
Interim
Period Three Months Ended March 31, 2008 and Annual Period December 31,
2007
9.
Subsequent
Events
Sale of Company:
On April
17, 2008, Deep Down Inc. announced it had executed a stock purchase agreement
with the then Company shareholders to purchase all the outstanding stock of the
Company. The purchase price approximated $23 million. The purchase was completed
on June 5, 2008 and the Company is a wholly owned subsidiary of Deep Down, Inc.
as of the date of this report. A portion of the sale proceeds received were used
to pay off all Company long term debt, bank and related party, and any current
liabilities due to stockholder at closing.
Liquidation of Joint
Venture:
On February 28, 2008 the Company and
its joint venture member cancelled and liquidated Lankhorst
Flotec
Offshore LLC. See Footnote 8.
See
accountants’ review report.
F-54
FLOTATION
TECHNOLOGIES, INC.
FINANCIAL
STATEMENTS
AND
SUPPLEMENTARY
INFORMATION
December
31, 2007 and December 31, 2006
With
Independent Auditors’ Report
|
Bruzgo
&
Kremer,
LLC
|
B
RUZGO &
K
REMER, LLC
225
Commercial Street, Suite 500
P.O.
Box 4892
Portland,
Maine 04112
Telephone
(207)-874-7700
Fax
(207)-874-7701
INDEPENDENT
AUDITORS’ REPORT
Stockholder
Flotation
Technologies, Inc.
Biddeford,
ME 04005
We
have audited the accompanying balance sheet of Flotation Technologies, Inc., a
Maine corporation, as of December 31, 2006, and the related statements of
operations, changes in stockholders’ equity, and cash flow for the year then
ended. These financial statements are the responsibility of the Company’s
management. Our responsibility is to express an opinion of these financial
statements based on our audit.
We
conducted our audit in accordance with auditing standards generally accepted in
the United States of America. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes consideration of internal
control over financial reporting as a basis for designing audit procedures that
are appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company’s internal control over financial
reporting. Accordingly, we express no such opinion. An audit includes examining,
on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In
our opinion, the financial statements referred to above present fairly, in all
material respects, the financial position of Flotation Technologies, Inc. as of
December 31, 2006, and the results of its operations and its cash flow for the
year then ended in conformity with accounting principles generally accepted in
the United States of America.
Our
audit was conducted for the purpose of forming an opinion on the basic financial
statements taken as a whole. The supplementary information included in the
accompanying Schedule 1) Cost of Goods Sold, and 2) General and Administrative
Expenses is presented for additional analysis purposes and is not a required
part of the basic financial statements. Such information has been subjected to
the auditing procedures applied in the audit of the basic financial statements
and, in our opinion, is fairly stated in all material aspects in relation to the
basic financial statements taken as a whole.
The
financial statements for the year ended December 31, 2007 were audited by us,
and we expressed an unqualified opinion on them in our report dated April 20,
2008. In addition, the supplementary information for the year ended December 31,
2007, contained in Schedules 1) and 2), was subjected to the auditing procedures
applied in the audit of the basic financial statements, and our report stated
that it was fairly stated in all material respects to the basic financial
statements taken as a whole. We have not performed any auditing procedures on
either the financial statements or on the supplementary information since April
20, 2008.
/s/
Bruzgo & Kremer, LLC
Portland,
Maine
June
16, 2008
FINANCIAL
STATEMENTS – CERTIFIED BUSINESS VALUATIONS – TAX AND ESTATE
COMPLIANCE
FLOTATION
TECHNOLOGIES, INC.
Balance
Sheets
December
31, 2007 and December 31, 2006
ASSETS
|
2007
|
2006
|
|||||||
|
Current
assets
|
||||||||
|
Cash
|
$ | 1,197,451 | $ | 747,744 | ||||
|
Trade
accounts receivable
|
2,303,411 | 1,319,724 | ||||||
|
Inventories
|
1,278,212 | 274,818 | ||||||
|
Prepaid
expenses
|
20,602 | 20,302 | ||||||
|
Total
current assets
|
4,799,676 | 2,362,588 | ||||||
|
Property,
plant and equipment, at cost
|
||||||||
|
Land,
buildings, and improvements
|
3,044,565 | 799,312 | ||||||
|
Machinery
and equipment
|
1,430,433 | 651,935 | ||||||
|
Office
furniture and fixtures
|
81,102 | 73,866 | ||||||
| 4,556,100 | 1,525,113 | |||||||
|
Less
accumulated depreciation
|
(877,722 | ) | (731,433 | ) | ||||
|
Net
property, plant and equipment
|
3,678,378 | 793,680 | ||||||
|
Other
assets
|
||||||||
|
Intangible
assets, net of amortization
|
21,415 | 1,600 | ||||||
|
Total
assets
|
$ | 8,499,469 | $ | 3,157,868 | ||||
See
accompanying notes and independent auditors' report.
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
2007
|
2006
|
|||||||
|
Current
liabilities
|
||||||||
|
Bank
lines of credit
|
$ | - | $ | - | ||||
|
Current
portion of long-term debt
|
66,000 | 90,602 | ||||||
|
Accounts
payable
|
878,576 | 256,246 | ||||||
|
Customer
deposits
|
1,530,959 | 1,025,700 | ||||||
|
Accrued
expenses
|
312,937 | 67,197 | ||||||
|
Due
to stockholders
|
651,446 | 10,337 | ||||||
|
Total
current liabilities
|
3,439,918 | 1,450,082 | ||||||
|
Long-term
debt, excluding current portion
|
1,697,497 | 437,839 | ||||||
|
Total
liabilities
|
5,137,415 | 1,887,921 | ||||||
|
Stockholders’
equity
|
||||||||
|
Common
stock, no par value; authorized 1,000 shares,
|
||||||||
|
issued
and outstanding 1,000 shares
|
200 | 200 | ||||||
|
Retained
earnings
|
3,361,854 | 1,269,747 | ||||||
|
Total
stockholders’ equity
|
3,362,054 | 1,269,947 | ||||||
|
Total
liabilities and stockholders' equity
|
$ | 8,499,469 | $ | 3,157,868 | ||||
See accompanying notes and independent auditors' report.
FLOTATION
TECHNOLOGIES, INC.
December
31, 2007 and December 31, 2006
|
2007
|
2006
|
|||||||
|
Revenues
|
$ | 13,410,002 | $ | 6,379,575 | ||||
|
Cost
of goods sold
|
8,117,600 | 3,699,075 | ||||||
|
Gross
profit
|
5,292,402 | 2,680,500 | ||||||
|
General
and administrative expenses
|
2,001,047 | 1,635,752 | ||||||
|
Income
from operations
|
3,291,355 | 1,044,748 | ||||||
|
Other
income (expense)
|
||||||||
|
Other
income, interest & exchange rate
|
40,401 | 43,292 | ||||||
|
Interest
expense
|
(65,039 | ) | (50,316 | ) | ||||
|
Gain
on plant sale
|
791,115 | - | ||||||
|
Net
other income (expense)
|
766,477 | (7,024 | ) | |||||
|
Net
income
|
$ | 4,057,832 | $ | 1,037,724 | ||||
See
accompanying notes and independent auditors' report.
FLOTATION
TECHNOLOGIES, INC.
December
31, 2007 and December 31, 2006
|
Common
Stock
|
Retained
Earnings
|
Total
Stockholders’
Equity
|
||||||||||
|
Balances,
December 31, 2005 - Compiled
|
$ | 200 | $ | 352,288 | $ | 352,488 | ||||||
|
Net
income for 2006
|
- | 1,037,724 | 1,037,724 | |||||||||
|
Distributions
|
- | (120,265 | ) | (120,265 | ) | |||||||
|
Balances,
December 31, 2006 - Audited
|
$ | 200 | $ | 1,269,747 | $ | 1,269,947 | ||||||
|
Net
income for 2007
|
- | 4,057,832 | 4,057,832 | |||||||||
|
Distributions
|
- | (1,965,725 | ) | (1,965,725 | ) | |||||||
|
Balance,
December 31, 2007 - Audited
|
$ | 200 | $ | 3,361,854 | $ | 3,362,054 | ||||||
See
accompanying notes and independent auditors' report.
FLOTATION
TECHNOLOGIES, INC.
December
31, 2007 and December 31, 2006
|
2007
|
2006
|
|||||||
|
Cash
flows from operating activities
|
||||||||
|
Net
income
|
$ | 4,057,832 | $ | 1,037,724 | ||||
|
Adjustments
to reconcile net income to net
|
||||||||
|
cash
provided by operating activities:
|
||||||||
|
Depreciation
and amortization
|
322,130 | 72,365 | ||||||
|
Book
gain on plant sale
|
(791,115 | ) | - | |||||
|
Decrease
(increase) in:
|
||||||||
|
Accounts
receivable
|
(983,687 | ) | (769,280 | ) | ||||
|
Inventory
|
(1,003,394 | ) | (463 | ) | ||||
|
Prepaid
expenses
|
(300 | ) | (8,919 | ) | ||||
|
Increase
(decrease) in:
|
||||||||
|
Accounts
payable
|
622,330 | 26,694 | ||||||
|
Accrued
expenses and other
|
245,740 | 18,729 | ||||||
|
Customer
deposits
|
505,259 | 892,170 | ||||||
|
Net
cash provided (used) by operating activities
|
2,974,795 | 1,269,020 | ||||||
|
Cash
flows from investing activities
|
||||||||
|
Intangibles
acquired
|
(21,902 | ) | - | |||||
|
Acquisition
of new plant, related improvements & equipment
|
(3,805,236 | ) | (184,207 | ) | ||||
|
Sale
of plant, proceeds
|
1,391,610 | - | ||||||
|
Net
cash provided (used) by investing activities
|
(2,435,528 | ) | (184,207 | ) | ||||
|
Cash
flows from financing activities
|
||||||||
|
Net
borrowings (repayments) on lines of credit
|
- | (223,570 | ) | |||||
|
Borrowings,
long term bank debt
|
1,885,387 | - | ||||||
|
Receipt
(repayment) of stockholder advance
|
(10,337 | ) | 2,101 | |||||
|
Distributions
to stockholders
|
(1,314,279 | ) | (120,265 | ) | ||||
|
Payments
on long-term debt, bank and related party
|
(650,331 | ) | (78,642 | ) | ||||
|
Net
cash provided (used) by financing activities
|
(89,560 | ) | (420,376 | ) | ||||
|
Net
increase (decrease) in cash
|
449,707 | 664,437 | ||||||
|
Cash,
beginning of year
|
747,744 | 83,307 | ||||||
|
Cash,
end of year
|
$ | 1,197,451 | $ | 747,744 | ||||
|
Supplemental
disclosure of cash flow information
|
||||||||
|
Interest
paid
|
$ | 65,039 | $ | 50,316 | ||||
|
Schedule
of non-cash financing activity
|
||||||||
|
Accrued
shareholder distributions
|
$ | 651,446 | $ | - | ||||
See
accompanying notes and independent auditors' report.
FLOTATION
TECHNOLOGIES, INC.
Notes
to Financial Statements
December
31, 2007 and December 31, 2006
Nature of
Business
Flotation Technologies,
Inc. is a world leader in the engineering, design and manufacturing of deepwater
buoyancy systems using high-strength Flotec
TM
syntactic foams and polyurethane elastomers. Focused on the offshore oil,
oceanographic, seismic and government markets, Flotation Technologies delivers
world-class buoyancy products for a host of marine applications such as:
distributed buoyancy for flexible pipes and umbilicals, drilling riser buoyancy
modules, ROV buoyancy, QuickLoc
TM
cable
floats, FLOTECT
TM
cable
and pipeline protection, Inflex
TM
polymer
bend restrictors and installation buoyancy of any size and depth
rating.
1.
Summary of Significant
Accounting Policies
Use of
Estimates
The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Fair Value of Financial
Instruments
Statement
of Financial Accounting Standards No. 107, "Disclosures about Fair Value of
Financial Instruments", requires the Company to disclose estimated fair values
for its financial instruments. Fair value estimates, methods, and assumptions
are set forth below for the Company's financial instruments:
The
carrying amounts of cash, accounts receivables, other current assets, accounts
payable, accrued liabilities and current portion and non-current portion of
notes payable approximate fair value because of the short maturity of those
instruments.
Cash
The
Company maintains its cash in bank deposit accounts, which, at times, may exceed
federally insured limits. The Company has never experienced any losses in such
accounts and management believes the Company is not exposed to any significant
risk on bank deposit accounts.
FLOTATION
TECHNOLOGIES, INC.
Notes
to Financial Statements
December
31, 2007 and December 31, 2006
1.
Summary of Significant
Accounting Policies (Continued)
Accounts Receivable -
Recognition of Bad Debts
The
Company considers all accounts to be fully collectible; accordingly, no
allowance for doubtful accounts is provided. If any amount becomes
uncollectible, it will be charged to operations when that determination is
made.
Customer Credit
Policy
Credit is
extended to customers in the normal course of business after management performs
a credit evaluation.
Inventory
Inventories
are stated at cost. Costs of raw materials and supplies are determined on
current cost. Cost of finished goods and work in process inventory is determined
by accumulating raw material costs and adding supplies and labor costs using an
estimated burden rate.
Property, Plant and
Equipment
Property,
plant and equipment is recorded at cost and depreciated over estimated useful
lives using both straight-line and accelerated methods. Small tools and certain
computer equipment are expensed when purchased due to rapid wear and short
estimated useful life.
Useful
lives are estimated as follows:
|
Category
|
Years
|
|
Plants
|
25
|
|
Plant
Improvements & Equipment
|
10
|
|
Office
Fixtures & Equipment
|
3
to 7
|
Intangible
Assets
Intangible
assets consist of loan costs and are stated at cost and are amortized on the
straight-line method over the life of the loan, which is the estimated useful
life.
FLOTATION
TECHNOLOGIES, INC.
Notes
to Financial Statements
December
31, 2007 and December 31, 2006
1.
Summary of Significant
Accounting Policies (Concluded)
Income
Taxes
The
Company and the stockholders have elected to be taxed under the provisions of
Subchapter “S” of the Internal Revenue Code. Income, losses, and other tax
attributes are passed through to the stockholder and taxed at the personal
level. Cash distributions are made to stockholders to pay for personal income
tax liabilities, federal and state, incurred from the allocation of Company
taxable income.
2.
Inventory
|
Inventory
consists of the following:
|
2007
|
2006
|
||||||
|
Raw
materials
|
$ | 390,294 | $ | 160,361 | ||||
|
Work
in process
|
827,554 | 45,773 | ||||||
|
Finished
goods
|
60,364 | 68,684 | ||||||
| $ | 1,278,212 | $ | 274,818 | |||||
3.
Intangibles
|
The
following is a summary of intangible assets:
|
2007
|
2006
|
||||||
|
Loan
costs
|
$ | 21,902 | $ | 3,597 | ||||
|
Licenses/trademark
|
-0- | 16,000 | ||||||
| 21,902 | 19,597 | |||||||
|
Less
accumulated amortization
|
(487 | ) | (17,997 | ) | ||||
| $ | 21,415 | $ | 1,600 | |||||
|
Amortization
expense
|
$ | 2,087 | $ | 3,220 | ||||
Trademark/license
intangibles were fully amortized in year 2007.
FLOTATION
TECHNOLOGIES, INC.
Notes
to Financial Statements
December
31, 2007 and December 31, 2006
|
4.
|
Debt
|
The
Company has a $750,000 working capital line of credit secured by substantially
all the assets of the Company. The Company has a $450,000 in 2007 and
a $411,000 in 2006 equipment line of credit secured by the equipment acquired.
The interest rate for both credit lines approximates Wall Street Prime less
0.50%. The working capital line is up for renewal June 30, 2008. The equipment
line can be termed out over a four year fixed period on June 30
th
of the
fiscal year. There is no balance outstanding on the equipment line and the
working capital line as of December 31, 2007 and 2006. Both credit lines are
guaranteed by the stockholders and secured by Company assets. The rate was 7.25%
as of 2007 and 8.5% as of 2006.
Long-term
debt consists of the following:
|
Bank
Debt
|
2007
|
2006
|
||||||
|
Note
payable to bank, monthly installments of $13,287,
|
||||||||
|
interest
at 7%. Amortization on 20 year schedule.
|
||||||||
|
Collateralized
by substantially all assets
|
||||||||
|
of
the Company; guaranteed by stockholders.
|
$ | 1,674,785 | $ | 398,186 | ||||
|
Equipment
notes (2), paid off before term in 2007.
|
- | 18,020 | ||||||
|
Related Party
Debt
|
||||||||
|
Note
payable to stockholder at fixed 7% rate, due in
|
||||||||
|
monthly
installments of $1,360, including interest;
|
||||||||
|
final
payment due January 2011; uncollateralized.
|
43,900 | 56,658 | ||||||
|
Note
payable to stockholder at fixed 7.5% rate, due in
|
||||||||
|
monthly
installments of $550, including interest;
|
||||||||
|
final
payment is due September 2011; uncollateralized.
|
21,852 | 26,617 | ||||||
|
Note
payable to stockholders’ relative, interest at prime
rate
plus 1% per annum payable biannually; principal
|
||||||||
|
due
in monthly installments of $500; uncollateralized.
|
22,960 | 28,960 | ||||||
|
Less
current portion
|
66,000 | 90,602 | ||||||
|
Long-term
debt, excluding current portion
|
$ | 1,697,497 | $ | 437,839 | ||||
FLOTATION
TECHNOLOGIES, INC.
Notes
to Financial Statements
December
31, 2007 and December 31, 2006
4.
Debt
(Concluded)
Maturities
expected on existing bank and shareholder long-term debt for the next five years
are as follows:
|
2008
|
$ | 66,000 | ||
|
2009
|
71,300 | |||
|
2010
|
76,000 | |||
|
2011
|
64,400 | |||
|
2012
|
55,900 | |||
5.
Employee Retirement
Plan
The
Company has a salary deferral plan covering all employees who meet certain age
and service requirements. The Company is required to contribute two percent (2%)
of all eligible employee compensation under this plan. The salary deferral plan
required a contribution of $29,208 for 2007 and $26,195 for 2006.
6.
Advertising
Costs
Costs
relating to advertising are expensed as incurred. The Company incurred
advertising and related costs amounting to $61,356 in 2007 and $10,997 in
2006.
7.
Sale, Purchase and
Rental of Building
On
November 1, 2006 the Company executed an agreement to purchase a new facility
located at 20 Morin Street, Biddeford. The purchase price was $1,980,000 and the
closing was August 23, 2007. On December 15, 2006, the Company executed an
agreement to sell the production facility at 432 Elm Street, Biddeford for
$1,400,000. The closing date was April 24, 2007. Proceeds from the
sale were dedicated to the purchase and improvement of the new facility,
pursuant to a real estate exchange contract.
The
Company gained occupancy of the Morin Street facility on December 1, 2006
pursuant to a short-term net lease arrangement, which required monthly rent
payments of $16,398. The lease expired upon the purchase on August 23,
2007.
8.
Joint
Venture
In 2006,
the Company became a 50% member in
Lankhorst Flotec Offshore,
LLC
. The LLC purpose is to share marketing costs in the
promotion of joint products with another member. In year 2006 and
2007, no material assets or liabilities exist in the LLC. All costs have been
expensed and no investment in the LLC is recognized for financial statement
purposes.
FLOTATION
TECHNOLOGIES, INC.
Notes
to Financial Statements
December
31, 2007 and December 31, 2006
9.
Subsequent
Events
Sale of Company:
On April
17, 2008, Deep Down Inc. announced it executed a stock purchase agreement with
the then Company shareholders to purchase all the outstanding stock of the
Company. The purchase approximated $23 million. The purchase was
completed on June 5, 2008 and the Company is a wholly owned
subsidiary of Deep Down, Inc. as of the date of this report.
Liquidation of Joint
Venture:
On February 28, 2008 the Company and
its joint venture member cancelled and liquidated Lankhorst Flotec
Offshore LLC. See Footnote 8.
Schedule
1
FLOTATION
TECHNOLOGIES, INC.
Cost
of Goods Sold
December
31, 2007 and December 31, 2006
|
2007
|
2006
|
|||||||
|
Direct
materials
|
$ | 3,891,841 | $ | 1,866,264 | ||||
|
Indirect
material
|
1,048,627 | 324,430 | ||||||
|
Direct
labor
|
1,372,030 | 793,138 | ||||||
|
Workers
compensation, employee health insurance
|
126,521 | 69,125 | ||||||
|
Freight
|
449,886 | 152,206 | ||||||
|
Outside
services/engineering
|
324,189 | 167,583 | ||||||
|
Commissions
|
35,574 | 19,884 | ||||||
|
Depreciation
|
274,212 | 64,833 | ||||||
|
Plant
insurance
|
48,514 | 27,130 | ||||||
|
Repairs,
maintenance and small tools
|
355,927 | 141,174 | ||||||
|
Utilities
|
98,139 | 73,308 | ||||||
|
Rent,
Plant
|
92,140 | - | ||||||
|
Total
cost of goods sold
|
$ | 8,117,600 | $ | 3,699,075 | ||||
Schedule
2
FLOTATION
TECHNOLOGIES, INC.
General
and Administrative Expenses
December
31, 2007 and December 31, 2006
|
2007
|
2006
|
|||||||
|
Officers’
compensation
|
$ | 244,579 | $ | 203,531 | ||||
|
Administrative
and sales payroll
|
807,789 | 648,206 | ||||||
|
Advertising
|
61,356 | 10,997 | ||||||
|
Trade
shows
|
36,501 | 39,537 | ||||||
|
Depreciation
|
45,831 | 4,312 | ||||||
|
Amortization
|
2,087 | 3,220 | ||||||
|
Dues
and licenses
|
709 | 4,814 | ||||||
|
Worker’s
compensation, employee health insurance
|
74,674 | 63,852 | ||||||
|
Supplies,
postage and break room costs
|
89,074 | 57,934 | ||||||
|
Real
estate and property taxes
|
15,997 | 16,168 | ||||||
|
Equipment
rental
|
32,474 | 9,451 | ||||||
|
Telephone
|
17,374 | 15,687 | ||||||
|
Education,
travel and vehicle
|
148,279 | 129,178 | ||||||
|
Research
and development
|
184,313 | 202,556 | ||||||
|
Employee
retirement plan
|
29,208 | 26,195 | ||||||
|
Data
base and computer operations
|
48,225 | 69,016 | ||||||
|
Professional
services
|
65,572 | 40,123 | ||||||
|
Morin
Street rental, repairs, and utilities
|
48,823 | 39,425 | ||||||
|
Lankhorst
Flotec Offshore marketing costs
|
37,661 | 42,198 | ||||||
|
Other
Expenses
|
10,521 | 9,352 | ||||||
|
Total
general and administrative expenses
|
$ | 2,001,047 | $ | 1,635,752 | ||||
See independent
auditors' report.
MAKO
TECHNOLOGIES, INC.
Audited
Financial Statements
For the
Nine Months Ended September 30, 2007 and
the Year
Ended December 31, 2006
TABLE OF
CONTENTS
|
Page
|
||
|
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
|
F-72
|
|
|
FINANCIAL
STATEMENTS
|
||
|
Balance
Sheets
|
F-73
|
|
|
Statements
of Operations
|
F-74
|
|
|
Statements
of Changes in Stockholders' Equity
|
F-75
|
|
|
Statements
of Cash Flows
|
F-76
|
|
|
Notes
to Financial Statements
|
F-77
|
|
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the
Board of Directors
Mako
Technologies, Inc.
Morgan
City, Louisiana
We have
audited the accompanying consolidated balance sheets of Mako Technologies, Inc.
("the "Company") as of September 30, 2007 and December 31, 2006 and the
related statements of operations, stockholders’ equity, and cash flows for the
period and year then ended. These financial statements are the responsibility of
the Company’s management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform an audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The Company is not required to
have, nor were we engaged to perform, an audit of its internal control over
financial reporting. Our audit included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company’s internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our
opinion, the financial statements referred to above present fairly, in all
material respects, the financial position of Mako Technology, Inc. as of
September 30, 2007 and December 31, 2006, and the results of operations and
cash flows for the period and year then ended, in conformity with accounting
principles generally accepted in the United States of America.
/s/
Malone & Bailey, PC
www.malone-bailey,com
Houston,
TX
March 17,
2008
MAKO
TECHNOLOGIES, INC.
Balance
Sheets
See
accompanying notes to financial statements.
MAKO
TECHNOLOGIES, INC.
Statements
of Operations
For the
Nine Months Ended September 30, 2007, and the Year Ended December 31,
2006
|
September
30,
|
December
31,
|
|||||||
|
2007
|
2006
|
|||||||
|
REVENUE
|
||||||||
|
Service
revenue
|
$ | 3,001,561 | $ | 3,798,045 | ||||
|
Rental
revenue
|
960,347 | 2,300,380 | ||||||
|
Sales
revenue
|
329,354 | 316,554 | ||||||
|
Total
revenue
|
4,291,262 | 6,414,979 | ||||||
|
EXPENSES
|
||||||||
|
Cost
of services, rentals, and sales
|
1,833,323 | 2,413,551 | ||||||
|
Operating
expenses
|
1,245,259 | 1,572,106 | ||||||
|
Depreciation
expense
|
351,439 | 342,980 | ||||||
|
Executive
compensation
|
416,563 | 307,481 | ||||||
|
Total
expenses
|
3,846,584 | 4,636,118 | ||||||
|
Net
income from operations
|
444,678 | 1,778,861 | ||||||
|
OTHER
INCOME (EXPENSE)
|
||||||||
|
Litigation
settlement
|
7,950 | - | ||||||
|
Gain
(loss) on sale of equipment
|
(14,609 | ) | 21,255 | |||||
|
Interest
expense
|
(49,041 | ) | (53,020 | ) | ||||
|
Total
other income (expense)
|
(55,700 | ) | (31,765 | ) | ||||
|
Net
income before provision for income tax expense
|
388,978 | 1,747,096 | ||||||
|
PROVISION
FOR INCOME TAX EXPENSE
|
||||||||
|
Income
tax expense - deferred
|
49,664 | 182,030 | ||||||
|
Income
tax expense - current
|
173,212 | 489,792 | ||||||
|
Total
provision for income tax expense
|
222,876 | 671,822 | ||||||
|
NET
INCOME
|
$ | 166,102 | $ | 1,075,274 | ||||
|
EARNINGS
PER SHARE
|
$ | 830.51 | $ | 5,376.37 | ||||
|
SHARES
USED IN COMPUTING PER SHARE AMOUNTS
|
200 | 200 | ||||||
MAKO
TECHNOLOGIES, INC.
Statements
of Changes in Stockholders’ Equity
For the
Nine Months Ended September 30, 2007, and the Year Ended December 31,
2006
|
Common
|
Retained
|
|||||||
|
Stock
|
Earnings
|
|||||||
|
BALANCE,
December 31, 2005
|
$ | 3,000 | $ | 761,028 | ||||
|
Net
income
|
- | 1,075,274 | ||||||
|
BALANCE,
December 31, 2006
|
3,000 | 1,836,302 | ||||||
|
Net
income
|
- | 166,102 | ||||||
|
BALANCE,
September 30, 2007
|
$ | 3,000 | $ | 2,002,404 | ||||
MAKO
TECHNOLOGIES, INC.
Statements
of Cash Flows
For the
Nine Months Ended September 30, 2007, and the Year Ended December 31,
2006
|
September
30,
|
December
31,
|
|||||||
|
2007
|
2006
|
|||||||
|
CASH
FLOWS FROM OPERATING ACTIVITIES
|
||||||||
|
Net
income
|
$ | 166,102 | $ | 1,075,274 | ||||
|
Adjustments
to reconcile net income to net cash provided
|
||||||||
|
by
operating activities:
|
||||||||
|
Depreciation
|
351,439 | 342,980 | ||||||
|
(Gain)/loss
on sale of equipment
|
14,609 | (21,255 | ) | |||||
| Deferred taxes | 49,664 | 182,030 | ||||||
|
Changes
in assets and liabilities:
|
||||||||
|
(Increase)
decrease in accounts receivable
|
(399,895 | ) | 255,851 | |||||
|
Increase
in other receivables
|
(7,950 | ) | - | |||||
|
Increase
in prepaid expenses and other current assets
|
(99,029 | ) | (75,890 | ) | ||||
|
Decrease
in work in progress
|
18,246 | 31,391 | ||||||
|
Increase
in other assets
|
- | (105 | ) | |||||
|
Increase
(decrease) in accounts payable
|
310,219 | (236,181 | ) | |||||
|
Increase
(decrease) in accounts payable - related party
|
(51,309 | ) | 46,579 | |||||
|
Increase
(decrease) in accrued expenses
|
(254,835 | ) | 250,336 | |||||
| (68,841 | ) | 775,736 | ||||||
|
Net
cash provided by operating activities
|
97,261 | 1,851,010 | ||||||
|
CASH
FLOWS FROM INVESTING ACTIVITIES
|
||||||||
|
Proceeds
from sale of equipment
|
1,009 | 27,785 | ||||||
|
Purchase
of property, plant and equipment
|
(356,082 | ) | (1,239,654 | ) | ||||
|
Net
cash used by investing activities
|
(355,073 | ) | (1,211,869 | ) | ||||
|
CASH
FLOWS FROM FINANCING ACTIVITIES
|
||||||||
|
Proceeds
from debt
|
1,054,724 | 1,051,149 | ||||||
|
Repayment
of debt
|
(1,101,620 | ) | (1,336,247 | ) | ||||
|
Net
cash used by financing activities
|
(46,896 | ) | (285,098 | ) | ||||
|
Net
increase (decrease) in cash
|
(304,708 | ) | 354,043 | |||||
|
CASH
at beginning of period
|
487,773 | 133,730 | ||||||
|
CASH
at end of period
|
$ | 183,065 | $ | 487,773 | ||||
|
SUPPLEMENTAL
DISCLOSURES OF CASH FLOW INFORMATION
|
||||||||
|
CASH
PAID DURING THE YEAR FOR:
|
||||||||
|
Interest
|
$ | 49,041 | $ | 53,020 | ||||
|
Income
tax
|
$ | 334,739 | $ | 246,553 | ||||
See
accompanying notes to financial statements.
MAKO
TECHNOLOGIES, INC.
Notes to
Financial Statements
NOTE
1 SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES
Organization and Nature of
Operations
Mako
Technologies, Inc. ("Mako") was incorporated under the laws of the State of
Louisiana, as Hydraquip of Morgan City, Inc. on February 22, 1994. We
changed our name to Mako Technologies, Inc. as of July 19, 2001. Mako’s
fiscal year end is December 31.
Mako’s
business is concentrated in the oil and gas industry providing the offshore
industry with commercial diving equipment. Mako stores and maintains remotely
operated vehicles ("ROV"s), ROV tooling, diving, and related equipment for
rental to the offshore industry. Mako transacts business through subcontractors
dealing with both major oil and gas companies and local independent oil and gas
companies.
Use of
Estimates
In
preparing the financial statements, management makes estimates and assumptions
that affect the reported amounts of assets and liabilities in the balance sheet
and revenue and expenses in the statement of operations. Actual results could
differ from those estimates.
Cash
Equivalents
Mako
considers all highly liquid instruments with maturities of three months or less
to be cash equivalents.
Allowance for Uncollectible
Accounts
Mako
provides for estimated losses on accounts receivable based on prior bad debt
experience and a review of existing receivables. Based on these factors, Mako
has established an allowance for uncollectible accounts of $47,643 and $24,221
as of September 30, 2007 and December 31, 2006, respectively.
Property, Plant and
Equipment
Property,
plant, and equipment are stated at cost. Expenditures for major renewals and
betterments are capitalized while minor replacements, maintenance, and repairs,
which do not improve or extend the useful life of such assets, are charged to
operations as incurred. When assets are sold, retired, or disposed of, their
cost and related accumulated depreciation are removed from the accounts and any
resulting gain or loss is reflected in the statement of operations.
MAKO
TECHNOLOGIES, INC.
Notes to
Financial Statements
NOTE
1 SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Property, Plant, and
Equipment (continued)
Depreciation
is computed using the straight-line method over the useful lives of the assets,
which are as follows:
|
Estimated
|
|||
|
useful
|
|||
|
Asset
Category
|
life
years
|
||
|
Equipment
|
3 -
7
|
||
|
Vehicles
|
5
|
||
|
Furniture,
fixtures and leasehold improvements
|
5 -
7
|
Property,
plant, and equipment consist of the following:
|
September
30,
2007
|
December
31,
2006
|
||||||||
|
Equipment
|
$ | 113,241 | $ | 92,950 | |||||
|
Equipment
- Rental
|
3,310,413 | 3,038,515 | |||||||
|
Vehicles
|
71,698 | 71,698 | |||||||
|
Furniture
and fixtures
|
97,049 | 80,424 | |||||||
|
Leasehold
improvements
|
63,373 | 63,373 | |||||||
| 3,655,774 | 3,346,960 | ||||||||
|
Less: accumulated
depreciation
|
(1,581,760 | ) | (1,261,971 | ) | |||||
| $ | 2,074,014 | $ | 2,084,989 |
Revenue
Recognition
We
recognize equipment rental revenue on a straight-line basis. Our rental contract
periods are daily, weekly, or monthly. Revenues from the sale of rental
equipment and new equipment are recognized at the time of delivery to, or pick
up by, the customer and when collectability is reasonably assured. Sales of
contractor supplies are also recognized at the time of delivery to, or pick up
by, the customer. Service revenue is recognized as the service is
provided.
MAKO
TECHNOLOGIES, INC.
Notes to
Financial Statements
NOTE
1 SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Income
Taxes
Mako has
adopted the provisions of SFAS No. 109, “Accounting for Income Taxes” which
requires recognition of deferred tax liabilities and assets for the expected
future tax consequences of events that have been included in the financial
statements or tax returns. Under this method, deferred tax liabilities and
assets are determined based on the difference between the financial statement
and tax basis of assets and liabilities using enacted tax rates in effect for
the year in which the differences are expected to reverse.
Recently Issued Accounting
Pronouncements
In July
2006, the FASB issued FASB Interpretation No. 48, “Accounting for Uncertain Tax
Positions” (“FIN 48”). FIN 48 clarifies the accounting for uncertainty in income
taxes recognized in an enterprise’s financial statements in accordance with FASB
Statement No. 109, “Accounting for Income Taxes.” It prescribes a recognition
threshold and measurement attribute for the financial statement recognition and
measurement of a tax position taken or expected to be taken in a tax return. FIN
48 also provides guidance on derecognition, classification, interest and
penalties, accounting in interim periods, disclosure, and transition. FIN 48 is
effective for fiscal years beginning after December 15, 2006. Mako does not
expect the adoption of FIN 48 to have a significant impact on Mako’s results of
operations, financial position, or cash flow.
NOTE
2 NOTES
PAYABLE
|
September
30,
|
December
31,
|
|||||||
|
2007
|
2006
|
|||||||
|
Note
payable to MidSouth Bank, payable in monthly
|
||||||||
|
installments
bearing interest at 7.75% per annum,
|
||||||||
|
maturing
February 12, 2007, collateralized by insurance
|
||||||||
|
policies.
|
$ | - | $ | 41,607 | ||||
|
Note
payable to Regions Bank, payable in monthly
|
||||||||
|
installments
bearing interest at 8.25% per annum,
|
||||||||
|
maturing
June 10, 2008, cross-collateralized.
|
228,514 | - | ||||||
| $ | 228,514 | $ | 41,607 | |||||
MAKO
TECHNOLOGIES, INC.
Notes to
Financial Statements
NOTE
3 LONG-TERM
DEBT
|
September
30,
|
December
31,
|
|||||||
|
2007
|
2006
|
|||||||
|
Note
payable to Regions Bank, payable in monthly
|
||||||||
|
installments
bearing interest at 7.85% per annum,
|
||||||||
|
maturing
September 28, 2010, collateralized by life
|
||||||||
|
insurance
policy and equipment.
|
$ | 350,985 | $ | 457,746 | ||||
|
Revolving
line-of-credit of $500,000 from Regions Bank,
|
||||||||
|
maturing
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 new equipment.
|
131,893 | 438,068 | ||||||
|
Note
payable to Regions Bank payable in monthly
|
||||||||
|
installments
bearing interest at 7.85% per annum,
|
||||||||
|
maturing
January 25, 2011, collateralized by equipment
|
||||||||
|
and
life insurance policy.
|
179,133 | - | ||||||
| 662,011 | 895,814 | |||||||
|
Less: current
portion
|
(376,644 | ) | (555,459 | ) | ||||
|
Long-term
portion
|
$ | 285,367 | $ | 340,355 | ||||
|
Maturities
of long-term debt are as follows:
|
||||||||
|
2007
|
$ | 191,297 | $ | 555,459 | ||||
|
2008
|
249,586 | 126,945 | ||||||
|
2009
|
168,350 | 137,277 | ||||||
|
2010
|
52,778 | 76,133 | ||||||
| $ | 662,011 | $ | 895,814 | |||||
On
January 26, 2007, Mako borrowed $439,163 from Regions Bank at a 7.85% interest
rate. The loan is due on January 25, 2011. Mako intends to use a portion of the
proceeds to pay $438,068 of 7.82% short term notes, and accordingly that amount
has been classified as short-term debt at December 31, 2006.
NOTE
4 INCOME
TAXES
Deferred
income taxes arise from temporary differences resulting from income and expense
items reported for financial accounting and tax purposes in different periods.
Deferred taxes are classified as current or non-current, depending on the
classification of the assets and liabilities to which they relate. Deferred
taxes arising from temporary differences that are not related to an asset or
liability are classified as current or non-current depending on the periods in
which the temporary differences are expected to reverse. Temporary differences
giving rise to the deferred tax liability consist of the excess of depreciation
for tax purposes over the amount for financial reporting
purposes.
MAKO
TECHNOLOGIES, INC.
Notes to
Financial Statements
NOTE
4 INCOME TAXES
(CONTINUED)
Mako has
available at September 30, 2007 and December 31, 2006, $47,643 and $24,221,
respectively, of allowance for uncollectible accounts adjustment that may be
applied against future taxable income.
The
components of the provision for income taxes from continuing operations for the
nine months ended September 30, 2007 and the year ended December 31, 2006 are as
follows:
|
September
30,
|
December
31,
|
|||||||
|
2007
|
2006
|
|||||||
|
Current
|
||||||||
|
Federal
|
$ | 169,052 | $ | 480,567 | ||||
|
State
|
4,160 | 9,225 | ||||||
| 173,212 | 489,792 | |||||||
|
Deferred
|
49,664 | 182,030 | ||||||
|
Total
|
$ | 222,876 | $ | 671,822 | ||||
Amounts
for deferred tax assets and liabilities are as follows:
|
September
30,
|
December
31,
|
|||||||
|
2007
|
2006
|
|||||||
|
Deferred
tax asset relating to:
|
||||||||
|
Allowance
for uncollectible accounts receivable
|
$ | 16,199 | $ | 8,235 | ||||
|
Deferred
tax liability relating to:
|
||||||||
|
Property
and equipment, net
|
(509,149 | ) | (451,521 | ) | ||||
|
Net
deferred tax liability
|
$ | (492,950 | ) | $ | (443,286 | ) | ||
MAKO
TECHNOLOGIES, INC.
Notes to
Financial Statements
NOTE
5 RELATED PARTY
TRANSACTIONS
Rental
payments of $40,995 and $15,155 were paid to the Jacob Marcell (majority
shareholder and president) and Thaddeus Marcell Jr. Partnership (common owned
company) for the use of equipment for the nine months ended September 30, 2007
and the year ended December 31, 2006, respectively. Payments of $1,217,717 and
$1,139,903 were made to Div Tech Supply, Inc. (a company owned by Jacob Marcell)
for providing shared employee services for the nine months ended September 30,
2007 and the year ended December 31, 2006, respectively. Amounts paid to Div
Tech Supply, Inc. in excess of the actual payroll costs have been
reclassified into executive compensation and were $98,671 and $96,483 for the
nine months ended September 30, 2007 and the year ended December 31, 2006,
respectively.
Mako made
payments of $68,074 to Mako Deepwater, Inc., an affiliated entity, for the
purchase of equipment and supplies for the nine months ended September 30, 2007.
Payments of $2,400 were made to Mako Properties, LLC, an affiliated entity of
Mako, for the rental of two apartments for ROV personnel for the nine
months ended September 30, 2007. Mako purchased apartment furniture for $6,300
and rental equipment for $10,000 from the majority shareholder and president
during the nine months ended September 30, 2007.
Ocean
Specialists, Inc. is a 15% shareholder and is paid to provide the marketing,
advertising, and corporate planning for Mako. Payments of $29,458 and $14,400
were made to Ocean Specialists, Inc. for the nine months ended September 30,
2007 and the year ended December 31, 2006, respectively.
Mako has
advanced funds to officers, but included these amounts in officer compensation.
Expenses paid on behalf of the majority shareholder and president for the nine
months ended September 30, 2007 and the year ended December 31, 2006 were
$223,688 and $68,890, respectively.
MAKO
TECHNOLOGIES, INC.
Notes to
Financial Statements
NOTE
6 COMMITMENTS AND
CONTINGENCIES
Litigation
Mako was
sued by Torch Liquidating Trust seeking to recover alleged preferential payments
made by the debtor, Torch Offshore, Inc., to Mako. Subsequent to the date of
this report, a settlement was reached whereby the Torch Liquidating Trust has
agreed to accept $10,000 in full and complete settlement of its claim. Torch
Liquidating Trust currently holds a maritime lien claim of $17,950 which will be
reduced by the aforementioned settlement with a net distribution to Mako of
$7,950. The settlement distribution is shown on the balance sheet as “Other
receivables.”
Rent of Principal
Office
Mako
leases office space under a five year operating lease which commenced in June
2006 and terminates on May 31, 2011, at $7,300 per month. Mako may renew this
lease for two additional terms of five years upon the expiration of the initial
term. Should this option be exercised, the base monthly rental shall be
increased or decreased by the Consumer Price Index net change as of the starting
date of any renewal term. Basic rent expense charged to operations through
September
30, 2007 and during
2006 was $65,737 and $19,200, respectively. Payments made in 2006 in lieu of
rental payments for leasehold improvements totaled $59,180.
Future
minimum lease payments under the non-cancelable operating lease are as
follows:
|
Year
|
||||
|
2007
|
$ | 87,600 | ||
|
2008
|
87,600 | |||
|
2009
|
87,600 | |||
|
2010
|
87,600 | |||
|
2011
|
36,500 | |||
MAKO
TECHNOLOGIES, INC.
Notes to
Financial Statements
NOTE
7 SUBSEQUENT
EVENT
Merger with Deep Down,
Inc.
Effective
December 1, 2007 the shareholders of Mako entered into a purchase agreement with
Deep Down, Inc., a Nevada corporation, to sell their shares of
Mako for a total purchase price of $13,753,449.
INFORMATION
NOT REQUIRED IN PROSPECTUS
|
Item 13.
|
Other
Expenses of Issuance and
Distribution.
|
The
following table sets forth the various expenses payable by the Registrant in
connection with the sale and distribution of the securities being registered
hereby. Normal commission expenses and brokerage fees are payable individually
by the Selling Shareholders. All amounts are estimated except the SEC
registration fee.
|
Amount
|
||||
|
SEC
registration fee
|
$
|
1,752
|
||
|
Accounting
fees and expenses
|
|
25,000
|
*
|
|
|
Legal
fees and expenses
|
|
25,000
|
*
|
|
|
Blue
Sky and related expenses
|
15,000
|
*
|
||
|
Printing
expenses
|
*
|
|||
|
Miscellaneous
fees and expenses
|
|
7,500
(1)
|
*
|
|
|
Total
|
$
|
74,252
|
*
|
|
(1) To be
borne 100% by the Registrant.
*
Estimated.
|
Item 14.
|
Indemnification
of Directors and Officers.
|
The
Company’s Amended and Restated Articles of Incorporation and
Section 78.7502 of the Nevada Revised Statutes provide in relevant part
that the Company shall have the power to indemnify any person who was or is a
party or is threatened to be made a party to any threatened, pending or
completed action, suit or proceeding (other than an action by or in the right of
the Company) by reason of the fact that such person is or was a director,
officer, employee or agent of the Company, or is or was serving at the request
of the Company as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise, against expenses,
including attorneys’ fees, judgments, fines and amounts paid in settlement
actually and reasonably incurred by him in connection with the action, suit or
proceeding if such person is not liable under Section 78.138 of the Nevada
Revised Statutes or it is determined that he acted in good faith and in a manner
he reasonably believed to be in or not opposed to the best interests of the
Company, and with respect to any criminal action or proceeding, had no
reasonable cause to believe his conduct was unlawful.
Similar
indemnity is authorized for such persons against expenses (including attorneys’
fees) actually and reasonably incurred in defense or settlement of any
threatened, pending or completed action or suit by or in the right of the
Company, if such person acted in good faith and in a manner he reasonably
believed to be in or not opposed to the best interests of the Company, and
provided further that (unless a court of competent jurisdiction otherwise
provides) such person shall not have been adjudged liable to the Company.
Pursuant to the Company’s Bylaws and Section 78.751 of the Nevada Revised
Statutes, any such indemnification may be made only as authorized in each
specific case upon a determination by the stockholders or disinterested
directors that indemnification is proper because the indemnitee has met the
applicable standard of conduct.
Under the
Company’s Amended and Restated Articles of Incorporation and Section 78.7502 of
the Nevada Revised Statutes, where an officer or a director is successful on the
merits or otherwise in the defense of any action referred to above, we must
indemnify him against the expenses which such officer or director actually or
reasonably incurred.
As
permitted by Section 78.037 of the Nevada Revised Statutes, the Registrant's
Amended and Restated Articles of Incorporation eliminate the liability of its
directors and officers to the Registrant and its stockholders for damages for
breach of fiduciary duty, except for acts or omissions which involve intentional
misconduct, fraud or a knowing violation of law, or for the payment of
distributions in violation of Section 78.300 of the Nevada Revised Statutes. To
the extent that this provision limits the remedies of the Registrant and its
stockholders to equitable remedies, it might reduce the likelihood of derivative
litigation and discourage the Registrant's management or stockholders from
initiating litigation against its directors or officers for breach of their
fiduciary duties. Additionally, equitable remedies may not be effective in many
situations. If a stockholder's only remedy is to enjoin the
completion of an action, such remedy would be ineffective if the stockholder
does not become aware of a transaction or event until after it has been
completed. In such a situation, it is possible that the Registrant and its
stockholders would have no effective remedy against directors or
officers.
The
Registrant has purchased insurance on behalf of its directors and officers
against certain liabilities that may be asserted against, or incurred by, such
persons in their capacities as directors or officers of the Registrant, or that
may arise out of their status as directors or officers of the Registrant,
including liabilities under the federal and state securities laws.
The above
discussion of the Nevada Revised Statutes and the Registrant's Amended and
Restated Articles of Incorporation is not intended to be exhaustive and is
qualified in its entirety by the Nevada Revised Statutes and such
Articles.
Neither
our Bylaws nor our Articles of Incorporation include any specific
indemnification provisions for our officers or directors against liability under
the Securities Act of 1933, as amended. Additionally, insofar as indemnification
for liabilities arising under the Securities Act of 1933, as amended (the "Act")
may be permitted to directors, officers and controlling persons of the small
business issuer pursuant to the foregoing provisions, or otherwise, the small
business issuer has been advised that in the opinion of the Securities and
Exchange Commission, such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable.
Item
15. Recent Sales of Unregistered Securities.
On March
20, 2007, Deep Down completed the sale of 10,000,000 restricted shares of common
stock in a private placement for $1,000,000. A total of 1,025,000 shares were
purchased by the Chief Executive Officer and director, and his wife, a
Vice-President of Deep Down. Funds were used to redeem certain outstanding
exchangeable preferred stock and for working capital. We claim an exemption from
registration provided by Section 4(2) of the Securities Act and/or Regulation D
promulgated thereunder.
On March
20, 2007, Deep Down finalized the terms of an agreement with a former director,
who agreed to return 25,000,000 shares of common stock, 1,500 shares of Series F
convertible preferred stock, and 500 shares of Series G exchangeable preferred
stock to the treasury for cancellation in exchange for 1,250 shares of Series E
exchangeable preferred stock and $250,000 cash. Separately, John C.
Siedhoff, former Deep Down Chief Financial Officer, agreed to exchange 1,500
shares of Series F convertible preferred stock and 500 shares of Series G
exchangeable preferred stock for 2,000 shares of Series E exchangeable preferred
stock. We claim an exemption from registration provided by Section
4(2) of the Securities Act and/or Regulation D promulgated
thereunder.
On May
17, 2007, Deep Down executed a Securities Redemption Agreement with John C.
Siedhoff, former Deep Down CFO, to redeem 4,000 shares of Series E exchangeable
preferred stock at a discounted price of $500 per share for a total of
$2,000,000. The discount of $500 per share from the face value of $1,000 was
accounted for as a substantial modification of debt, thereby generating a gain
on extinguishment of debt which is reflected as other income on
the statement of operations. Deep Down accreted the remaining discount of
$1,102,385 attributable to such shares on the date of redemption. On August 16,
2007, Deep Down made the initial payment of $1,400,000 under the terms of the
securities redemption agreement, and 2 payments of $20,000 each were made during
August and September 2007. The final balance due of $560,000 was paid with
543,789 shares of common stock on October 2, 2007. We claim an exemption from
registration provided by Section 4(2) of the Securities Act and/or Regulation D
promulgated thereunder.
Effective
May 31, 2007, we entered into an Employment Agreement with our Chief Financial
Officer, Eugene L. Butler (which was later replaced by an identical consulting
agreement). Included in Mr. Butler’s compensation under the
employment agreement was the grant of 3,000,000 stock options, of which the
first 33% vested on the first anniversary of the agreement, the second 33% on
the second anniversary of the agreement and the remaining 33% will vest on the
third anniversary of the agreement. The exercise price for the options, $0.515
per share, was determined by the closing market price of the common stock on the
date of grant. The options expire on May 31, 2010. We claim an
exemption from registration provided by Section 4(2) of the Securities Act
and/or Regulation D promulgated thereunder.
On
September 17, 2007, Deep Down exchanged 2,250 shares ($2,250,000 aggregate face
value) of Series E Redeemable Exchangeable Preferred Stock from Ronald E. Smith,
president and chief executive officer of Deep Down, and Mary L. Budrunas,
director of Deep Down, for 2,250,000 shares of common stock. The
Preferred Stock had a face value and liquidation preference of $1,000 per share,
no dividend preference, and was exchangeable at the holder’s option after June
30, 2007, into 6% subordinated notes due three years from the date of
exchange.
On
October 2, 2007, Ironman Energy Capital, L.P. agreed to purchase 3,125,000
restricted shares of common stock of the Company at $0.96 per share, or
$3,000,000 in the aggregate. Proceeds were used primarily for working
capital and other general corporate purposes. These shares of restricted common
stock are exempt from registration requirements provided by Section 4(2) of the
Securities Act and/or Regulation D promulgated thereunder.
On
October 2, 2007, Deep Down exchanged 1,250 shares ($1.25 million aggregate face
value) of Series E Redeemable Exchangeable Preferred Stock for 1,213,592 shares
of common stock. The Preferred Stock had a face value and liquidation
preference of $1,000 per share, no dividend preference, and was exchangeable at
the holder’s option after June 30, 2007, into 6% subordinated notes due three
years from the date of exchange. These shares of restricted common stock are
exempt from registration requirements provided by Section 4(2) of the Securities
Act and/or Regulation D promulgated thereunder.
On
October 2, 2007, Deep Down agreed to eliminate an obligation to pay $20,000 per
month for the next 28 months, or an aggregate of $560,000, by exchanging this
obligation for 543,689 shares of common stock. These shares of
restricted common stock are exempt from registration requirements provided by
Section 4(2) of the Securities Act and/or Regulation D promulgated
thereunder. This obligation arose out of a series of transactions as
disclosed above on May 17, 2007.
On April
22, 2005, MediQuip issued 22,000 Series C convertible preferred stock which
remained after the reverse merger. The Series C shares had a face value and a
liquidation preference of $12.50 per share, a cumulative dividend of 7% payable
at the conversion date, and were convertible into shares of common stock
determined by dividing the face amount by a conversion price of $0.0625. These
shares carried no voting rights. All of the Series C shares were
converted in the fourth quarter of fiscal 2007 to 4,400,000 shares of Deep
Down’s common stock. These shares of restricted common stock are exempt from
registration requirements provided by Section 4(2) of the Securities Act and/or
Regulation D promulgated thereunder.
Effective
December 1, 2007, Deep Down purchased 100% of the common stock of Mako
Technologies, Inc. (“Mako”), a Louisiana corporation. The total
purchase price of Mako was $11.3 million. The first installment of $2.9 million
in cash and 6,574,074 shares of common stock of Deep Down, valued at $0.76 per
share were paid on January 4, 2008, and the balance of $1.2 million in
cash was paid on April 11, 2008 and 2,802,969 shares of common stock of Deep
Down valued at $0.70 were issued March 28, 2008. These shares of
restricted common stock are exempt from registration requirements provided by
Section 4(2) of the Securities Act and/or Regulation D promulgated
thereunder.
In
January and March 2008, Deep Down issued a total of 25,866,518 shares of common
stock to the holders of 5,000 shares of Series D preferred stock. The
Series D preferred shares had a face and liquidation value of $5,000 per share
and were convertible into common stock at a conversion price of $0.1933 per
share. These shares of restricted common stock are exempt from registration
requirements provided by Section 4(2) of the Securities Act and/or Regulation D
promulgated thereunder.
On
February 14, 2008, Deep Down issued a total of 1.2 million restricted common
shares to certain officers and employees based on the closing price on that day
of $0.42. The shares vest over a period of two years. These shares of restricted
common stock are exempt from registration requirements provided by Section 4(2)
of the Securities Act and/or Regulation D promulgated thereunder.
On June
5, 2008, Deep Down entered into a Purchase Agreement with accredited investors
to sell and issue to the Purchasers in reliance on the exemption from
registration in Section 4(2) of the Securities Act of 1933, as amended, an
aggregate of 57,142,857 shares, or $40.0 million of shares, of the Company’s
common stock at a price of $0.70 per share, for net proceeds of approximately
$37.1 million.
In June
2008, in connection with the acquisition of Flotation, Deep Down issued
1,714,286 shares of common stock to the selling stockholders and 600,000
incentive common stock purchase options to employees of Flotation with an
exercise price of $1.15 per share. In addition, warrants to purchase
200,000 common shares at $0.70 per share were issued to the affiliated entity
for acquisition of the related technology. The warrants are
exercisable at any time from June 3, 2009 through September 3, 2011 and include
piggyback registration rights with respect to the underlying shares of common
stock. These shares of restricted common stock are exempt from
registration requirements provided by Section 4(2) of the Securities Act and/or
Regulation D promulgated thereunder.
On June
17, 2008, Deep Down effected a cashless exercise of 50,000 employee stock
options for a net common shares issued totaling 29,339.
Effective
July 3, 2008, holders of 4,960,585 warrants effected a cashless exercise for
2,618,129 restricted common shares of Deep Down. These shares of restricted
common stock are exempt from registration requirements provided by Section 4(2)
of the Securities Act and/or Regulation D promulgated
thereunder.
ITEM
16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
|
Exhibit Number
|
Description of Exhibit
|
|
2.1
(1)
|
Agreement
and Plan of Reorganization among MediQuip Holdings, Inc., Deep Down, Inc.,
and the majority shareholders of Deep Down, Inc.
|
|
3.1
(1)
|
Certificate
of Incorporation of MediQuip Holdings, Inc.
|
|
3.2
(2)
|
Certificate
of Amendment to Articles of Incorporation providing for Change of Name to
Deep Down, Inc.
|
|
3.3
(1)
|
By
Laws of Deep Down, Inc.
|
|
3.4
(1)
|
Form
of Certificate Designation of Series D Redeemable Convertible Preferred
Stock.
|
|
3.5
(1)
|
Form
of Certificate Designation of Series E Redeemable Exchangeable Preferred
Stock.
|
|
3.6
(1)
|
Form
of Certificate Designation of Series F Redeemable Convertible Preferred
Stock.
|
|
3.7
(1)
|
Form
of Certificate Designation of Series G Redeemable Exchangeable Preferred
Stock.
|
|
3.8*
|
Amendment
to Articles of Incorporation.
|
|
3.9*
|
Amended
and Restated Bylaws.
|
|
4.1
(1)
|
Common
Stock Purchase Warrant for 4,960,585 common stock of Deep Down, Inc.
issued to Prospect Capital Corporation effective May 25,
2007.
|
|
4.2
(2)
|
Common
Stock Purchase Warrant for 320,000 shares issued to Dragonfly Capital
Partners, LLC dated August 6, 2007.
|
|
4.3
(2)
|
Common
Stock Purchase Warrant for 118,812 shares issued to Dragonfly Capital
Partners, LLC dated January 4, 2008.
|
|
4.4
(1)
|
Registration
Rights Agreement, dated August 6, 2007, among Deep Down, Inc. and Prospect
Capital Corporation.
|
|
4.5
(3)
|
Private
Placement Memorandum.
|
|
4.6
*
|
Supplement
No. 1 to Private Placement Memorandum.
|
|
4.7
(3)
|
Securities
Purchase Agreement
|
|
4.8
(3)
4.9
(5)
|
Common
Stock Purchase Warrant (No. 4), dated June 5, 2008
6%
Subordinated Debenture of Deep Down, Inc. dated March 31,
2008.
|
|
4.10
*
|
2003
Directors, Officers and Consultants Stock Option, Stock Warrant and Stock
Award Plan
|
|
5.1
*
|
Opinion
of Sonfield & Sonfield, counsel to the Company, as to the legality of
the Common Stock being registered.
|
|
10.1
(1)
|
Credit
Agreement, dated as of August 6, 2007, among Deep Down, Inc., as borrower,
the financial institutions from time to time party thereto, and Prospect
Capital Corporation.
|
|
10.2
(2)
|
First
Amendment to Credit Agreement, dated as of December 21, 2007, among Deep
Down, Inc., as borrower, and Prospect Capital Corporation, as agent and
lender
|
|
10.3
(1)
|
Guarantee
and Collateral Agreement, dated as of August 6, 2007, among Deep Down,
Inc., as borrower and as Grantor, and Prospect Capital Corporation as
Administrative Agent
|
|
10.4†
(2)
|
Consulting
Agreement, dated as of August 6, 2007, between Deep Down, Inc. and
Strategic Capital Services, Inc. regarding the services of Robert
Chamberlain
|
|
10.5†
(2)
|
Employment
Agreement, dated as of August 6, 2007, between Deep Down, Inc. and Ronald
E. Smith
|
|
10.6†
(2)
|
Consulting
Agreement, dated as of August 6, 2007, between Deep Down, Inc. and Eugene
L. Butler & Associates regarding the services of Eugene L.
Butler
|
|
10.7
(2)
|
Agreement
and Plan of Merger among Deep Down, Inc., Mako Technologies, LLC, Mako
Technologies, Inc. and the shareholders of Mako Technologies, Inc. dated
December 17, 2007
|
|
10.8
(1)
|
Agreement
and Plan of Reorganization among Deep Down, Inc., ElectroWave (USA), Inc.,
a Nevada corporation, ElectroWave (USA) Inc., a Texas corporation,
Pinemont IV, Martin L. Kershman and Ronald W. Nance.
|
|
10.9
(2)
|
Lease
Agreement dated September 1, 2006 between Deep Down, Inc., a Delaware
corporation, as tenant, and JUMA, L.L.C. (incorporated by reference from
Exhibit 10.4 to our Annual Report on Form 10-KSB for the fiscal year ended
December 31, 2007 filed on March 31, 2008).
|
|
10.10
(1)
|
Lease
Agreement dated June 1, 2006, between Mako Technologies, Inc., as Lessee
and Sutton Industries, as Lessor.
|
|
10.11(4)
|
Stock
Purchase Agreement dated April 17, 2008, among Deep Down, Inc., Flotation
Technologies, Inc. and the selling stockholders named therein
|
|
10.12*
|
Employment
Agreement with David A. Capotosto
|
|
10.13*
|
Employment
Agreement with Bradley M. Parro
|
|
21.1*
|
Subsidiary
list
|
|
23.1
*
|
Consent
of Malone & Bailey, PC, Independent Registered Public Accounting
Firm.
|
|
23.2
*
|
Consent
of Sonfield & Sonfield (included in Exhibit 5.1).
|
|
23.3*
|
Consent
of Bruzgo & Kremer, LLC, Independent Public Accounting
Firm
|
|
23.4*
|
Consent
of Malone & Bailey, PC, Independent Registered Public Accounting
Firm.
|
|
24.1*
|
Power
of Attorney
|
* Filed
or furnished herewith.
(1) Filed
as an exhibit to our Report on Form 10-KSB/A, filed with the Commission on May
1, 2008, and incorporated herein by reference.
(2) Filed
as an exhibit to our Report on Form 10-KSB, filed with the Commission on April
1, 2008, and incorporated herein by reference.
(3) Filed
as an exhibit to our Report on Form 8-K/A, filed with the Commission on June 9,
2008, and incorporated herein by reference.
(4) Filed
as an exhibit to our Report on Form 8-K, filed with the Commission on April 21,
2008, and incorporated herein by reference.
(5) Filed
as an exhibit to our Quarterly Report on Form 10-Q, filed with the Commission on
May 16, 2008, and incorporated herein by reference.
† Exhibit
constitutes a management contract or compensatory plan or
arrangement.
|
Undertakings.
|
||||||||
|
(a)
|
The
undersigned Registrant hereby undertakes:
|
|||||||
|
(1)
|
To
file, during any period in which offers or sales are being made, a
post-effective amendment to this Registration
Statement:
|
|||||||
|
(i)
|
to
include any Prospectus required by Section 10(a)(3) of the Securities
Act;
|
|||||||
|
(ii)
|
to
reflect in the Prospectus any facts or events arising after the effective
date of this Registration Statement (or the most recent post-effective
amendment hereof) which, individually or in the aggregate, represent a
fundamental change in the information set forth in this Registration
Statement; and
|
|||||||
| (iii) |
to
include any material information with respect to the plan of distribution
not previously disclosed in this Registration Statement or any material
change to such information in this Registration
Statement;
|
|||||||
provided,
however, that paragraphs (a)(1)(i), (a)(1)(ii), and (a)(1)(iii) do not apply if
the information required to be included in a post-effective amendment by those
paragraphs is contained in reports filed with or furnished to the Commission by
the Registrant pursuant to Section 13 or Section 15(d) of the Exchange Act that
are incorporated by reference in this Registration Statement or is contained in
a form of Prospectus filed pursuant to 424(b) that is part of this Registration
Statement.
|
(C)
|
If
the registrant is subject to Rule 430C, each Prospectus filed pursuant to
Rule 424(b) as part of a registration statement relating to an offering,
other than registration statements relying on Rule 430B or other than
Prospectuses filed in reliance on Rule 430A, shall be deemed to be part of
and included in the registration statement as of the date it is first used
after effectiveness. Provided, however, that no statement made in a
registration statement or Prospectus that is part of the registration
statement or made in a document incorporated or deemed incorporated by
reference into the registration statement or Prospectus that is part of
the registration statement will, as to a purchaser with a time of contract
of sale prior to such first use, supersede or modify any statement that
was made in the registration statement or Prospectus that was part of the
registration statement or made in any such document immediately prior to
such date of first use.
|
|||||||||||
|
(5)
|
That,
for the purpose of determining liability of the registrant under the
Securities Act of 1933 to any purchaser in the initial distribution of the
securities, the undersigned registrant undertakes that in a primary
offering of securities of the undersigned registrant pursuant to this
registration statement, regardless of the underwriting method used to sell
the securities to the purchaser, if the securities are offered or sold to
such purchaser by means of any of the following communications, the
undersigned registrant will be a seller to the purchaser and will be
considered to offer or sell such securities to such
purchaser:
|
|||||||||||
|
|
(i)
|
Any
preliminary Prospectus or Prospectus of the undersigned registrant
relating to the offering required to be filed pursuant to Rule
424;
|
||||||||||
|
(ii)
|
Any
free writing Prospectus relating to the offering prepared by or on behalf
of the undersigned registrant or used or referred to by the undersigned
registrant;
|
|||||||||||
|
(iii)
|
The
portion of any other free writing Prospectus relating to the offering
containing material information about the undersigned registrant or its
securities provided by or on behalf of the undersigned registrant;
and
|
|||||||||||
|
(iv)
|
Any
other communication that is an offer in the offering made by the
undersigned registrant to the purchaser.
|
|||||||||||
|
(b)
|
Insofar
as indemnification for liabilities arising under the Securities Act may be
permitted to directors, officers and controlling persons of the Registrant
pursuant to the foregoing provisions, or otherwise, the Registrant has
been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable. In the event that a claim
for indemnification against such liabilities (other than the payment by
the Registrant of expenses incurred or paid by a director, officer or
controlling person of the Registrant in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, the
Registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against
public policy as expressed in the Securities Act and will be governed by
the final adjudication of such
issue.
|
|||||||||||
Pursuant
to the requirements of the Securities Act of 1933, the Registrant certifies that
it has reasonable grounds to believe that it meets all of the requirements for
filing on Form S-1 and has caused this registration statement to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of
Houston, State of Texas, on the 21st day of July, 2008.
|
|
DEEP
DOWN, INC.
|
||
|
By:
|
/s/ Ronald E. Smith
|
||
|
Ronald
E. Smith, President and Chief Executive Officer
(Principal
Executive Officer)
|
|||
|
By:
|
/s/ Eugene L. Butler
|
||
|
Eugene
L. Butler, Chief Financial Officer
|
|||
|
(Principal
Accounting Officer)
|
|||
SIGNATURES
Pursuant
to the requirements of the Securities Act of 1933, this registration statement
has been signed by the following persons in the capacities and on the date
indicated:
|
Name
|
Title
|
Date
|
||
|
/s/Ronald
E. Smith
|
President,
Chief Executive Officer and Director
|
July
21, 2008
|
||
|
Ronald
E. Smith
|
(Principal
Executive Officer)
|
|||
|
/s/ Eugene L. Butler
|
Chief
Financial Officer and Director
|
July
21 , 2008
|
||
|
Eugene
L. Butler
|
(Principal
Financial Officer and Principal Accounting Officer)
|
|||
|
/s/
Robert E. Chamberlain, Jr.
|
Chairman
of the Board,
|
July
21, 2008
|
||
|
Robert
E. Chamberlain, Jr.
|
Chief
Acquisition Officer and Director
|
|||
|
/s/
Mary L. Budrunas
|
Vice
President, Corporate Secretary and Director
|
July
21, 2008
|
||
|
Mary
L. Budrunas
|
|
Exhibit Number
|
Description of Exhibit
|
|
1.1
|
Dahlman
Rose Underwriting Agreement
|
|
2.1
(1)
|
Agreement
and Plan of Reorganization among MediQuip Holdings, Inc., Deep Down, Inc.,
and the majority shareholders of Deep Down, Inc.
|
|
3.1
(1)
|
Certificate
of Incorporation of MediQuip Holdings, Inc.
|
|
3.2
(2)
|
Certificate
of Amendment to Articles of Incorporation providing for Change of Name to
Deep Down, Inc.
|
|
3.3
(1)
|
By
Laws of Deep Down, Inc.
|
|
3.4
(1)
|
Form
of Certificate Designation of Series D Redeemable Convertible Preferred
Stock
|
|
3.5
(1)
|
Form
of Certificate Designation of Series E Redeemable Exchangeable Preferred
Stock
|
|
3.6
(1)
|
Form
of Certificate Designation of Series F Redeemable Convertible Preferred
Stock
|
|
3.7
(1)
|
Form
of Certificate Designation of Series G Redeemable Exchangeable Preferred
Stock
|
|
3.8*
|
Amendment
to Articles of Incorporation (has not been filed to date, pending
shareholder approval)
|
|
3.9*
|
Amended
and Restated Bylaws (pending shareholder approval)
|
|
4.1
(1)
|
Common
Stock Purchase Warrant for 4,960,585 common stock of Deep Down, Inc.
issued to Prospect Capital Corporation effective May 25,
2007.
|
|
4.2
(2)
|
Common
Stock Purchase Warrant for 320,000 shares issued to Dragonfly Capital
Partners, LLC dated August 6, 2007
|
|
4.3
(2)
|
Common
Stock Purchase Warrant for 118,812 shares issued to Dragonfly Capital
Partners, LLC dated January 4, 2008
|
|
4.4
(1)
|
Registration
Rights Agreement, dated August 6, 2007, among Deep Down, Inc. and Prospect
Capital Corporation.
|
|
4.5
(3)
|
Private
Placement Memorandum
|
|
4.6
(3)
|
Supplement
No. 1 to Private Placement Memorandum
|
|
4.7
(3)
|
Securities
Purchase Agreement
|
|
4.8
(3)
4.9
(5)
|
Common
Stock Purchase Warrant (No. 4), dated June 5, 2008
6%
Subordinated Debenture of Deep Down, Inc. dated March 31,
2008.
|
|
4.10*
|
2003
Directors, Officers and Consultants Stock Option, Stock Warrant and Stock
Award Plan.
|
|
5.1
*
|
Opinion
of Sonfield & Sonfield, counsel to the Company, as to the legality of
the Common Stock being registered.
|
|
10.1
(1)
|
Credit
Agreement, dated as of August 6, 2007, among Deep Down, Inc., as borrower,
the financial institutions from time to time party thereto, and Prospect
Capital Corporation.
|
|
10.2
(2)
|
First
Amendment to Credit Agreement, dated as of December 21, 2007, among Deep
Down, Inc., as borrower, and Prospect Capital Corporation, as agent and
lender
|
|
Exhibit Number
|
Description of Exhibit
|
|
10.3
(1)
|
Guarantee
and Collateral Agreement, dated as of August 6, 2007, among Deep Down,
Inc., as borrower and as Grantor, and Prospect Capital Corporation as
Administrative Agent
|
|
10.4†
(2)
|
Consulting
Agreement, dated as of August 6, 2007, between Deep Down, Inc. and
Strategic Capital Services, Inc. regarding the services of Robert
Chamberlain
|
|
10.5†
(2)
|
Employment
Agreement, dated as of August 6, 2007, between Deep Down, Inc. and Ronald
E. Smith
|
|
10.6†
(2)
|
Consulting
Agreement, dated as of August 6, 2007, between Deep Down, Inc. and Eugene
L. Butler & Associates regarding the services of Eugene L.
Butler
|
|
10.7
(2)
|
Agreement
and Plan of Merger among Deep Down, Inc., Mako Technologies, LLC, Mako
Technologies, Inc. and the shareholders of Mako Technologies, Inc. dated
December 17, 2007
|
|
10.8
(1)
|
Agreement
and Plan of Reorganization among Deep Down, Inc., ElectroWave (USA), Inc.,
a Nevada corporation, ElectroWave (USA) Inc., a Texas corporation,
Pinemont IV, Martin L. Kershman and Ronald W. Nance.
|
|
10.9
(2)
|
Lease
Agreement dated September 1, 2006 between Deep Down, Inc., a Delaware
corporation, as tenant, and JUMA, L.L.C
|
|
10.10
(1)
|
Lease
Agreement dated June 1, 2006, between Mako Technologies, Inc., as Lessee
and Sutton Industries, as Lessor.
|
|
10.11(4)
|
Stock
Purchase Agreement dated April 17, 2008, among Deep Down, Inc., Flotation
Technologies, Inc. and the selling stockholders named therein
|
|
10.12*
|
Employment
Agreement with David A. Capotosto
|
|
10.13*
|
Employment
Agreement with Bradley M. Parro
|
|
21.1*
|
Subsidiary
list
|
|
23.1
*
|
Consent
of Malone & Bailey, PC, Independent Registered Public Accounting
Firm.
|
|
23.2
*
|
Consent
of Sonfield & Sonfield (included in Exhibit 5.1).
|
|
23.3*
|
Consent
of Bruzgo & Kremer, LLC, Independent Public Accounting
Firm
|
|
23.4*
|
Consent
of Malone & Bailey, PC, Independent Registered Public Accounting
Firm.
|
|
24.1*
|
Power
of Attorney
|
* Filed
or furnished herewith.
(1) Filed
as an exhibit to our Report on Form 10-KSB/A, filed with the Commission on May
1, 2008, and incorporated herein by reference.
(2) Filed
as an exhibit to our Report on Form 10-KSB, filed with the Commission on April
1, 2008, and incorporated herein by reference.
(3) Filed
as an exhibit to our Report on Form 8-K/A, filed with the Commission on June 9,
2008, and incorporated herein by reference.
(4) Filed
as an exhibit to our Report on Form 8-K, filed with the Commission on April 21,
2008, and incorporated herein by reference.
(5) Filed
as an exhibit to our Quarterly Report on Form 10-Q, filed with the Commission on
May 16, 2008, and incorporated herein by reference.
† Exhibit
constitutes a management contract or compensatory plan or
arrangement.
II-11