x
|
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
¨
|
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
Nevada
|
75-2263732
|
|
(State
or other jurisdiction of incorporation)
|
(I.R.S.
Employer Identification No.)
|
|
15473
East Freeway Channelview,Texas
|
77530
|
|
(Address
of Principal Executive Office)
|
(Zip
Code)
|
Large accelerated
filer ¨
|
Accelerated
filer ¨
|
|
Non-accelerated
filer ¨ (Do
not check is smaller reporting company)
|
Smaller reporting
company x
|
Page
No.
|
||
Item
1.
|
Financial
Statements
|
|
Consolidated
Balance Sheets - March 31, 2008 (Unaudited) and December 31,
2007
|
2
|
|
Unaudited
Consolidated Statements of Operations-Three Months Ended March 31, 2008
and 2007
|
3
|
|
Unaudited
Consolidated Statements of Cash Flows-Three Months Ended March 31, 2008
and 2007
|
4
|
|
Notes
to Unaudited Consolidated Financial Statements
|
5
|
|
Item
2.
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
|
12
|
Item
3.
|
Quantitative
and Qualitative Disclosures About Market Risks
|
13
|
Item
4T.
|
Controls
and Procedures
|
13
|
PART
II OTHER INFORMATION
|
||
Item
2.
|
Unregistered
Sales of Equity Securities and Use of Proceeds
|
13
|
Item
5.
|
Other
Information
|
14
|
Item
6.
|
Exhibits
|
14
|
|
||
Signatures
|
15
|
|
Exhibit
Index
|
16
|
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.
|
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 |
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.
|
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 |
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 |
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 |
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
|
85,976,526 |
(c)
|
95,353,569 |
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 |
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 |
Dividend
yield
|
0%
|
|
Risk
free interest rate
|
2.64%
- 5.00%
|
|
Expected term
of options
|
3 -
4 years
|
|
Expected
volatility
|
53%
- 61%
|
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 | $ | - |
Exercise
Price
|
Options
Underlying
Shares
|
||
$ | 0.51 | 4,960,585 | |
0.75 | 320,000 | ||
$ | 1.01 | 118,812 | |
5,399,397 |
Exhibit Number
|
Description of Exhibit
|
|
2.1
|
Agreement
and Plan of Reorganization among MediQuip Holdings, Inc., Deep Down, Inc.,
and the majority shareholders of Deep Down, Inc. (incorporated by
reference from Exhibit 2.1 to our Annual Report on Form 10-KSB/A
(Amendment No. 1) for the fiscal year ended December 31, 2007 filed on May
1, 2008).
|
|
3.1
|
Certificate
of Incorporation of MediQuip Holdings, Inc. (incorporated by reference
from Exhibit 3.1 to our Annual Report on Form 10-KSB for the fiscal year
ended December 31, 2007 filed on March 31, 2008).
|
|
3.2
|
Certificate
of Amendment to Articles of Incorporation providing for Change of Name to
Deep Down, Inc. (incorporated by reference from Exhibit 3.2 to our Annual
Report on Form 10-KSB for the fiscal year ended December 31, 2007 filed on
March 31, 2008).
|
|
3.3
|
By
Laws of Deep Down, Inc. (incorporated by reference from Exhibit 3.3 to our
Annual Report on Form 10-KSB/A (Amendment No. 1) for the fiscal year ended
December 31, 2007 filed on May 1, 2008).
|
|
3.4
|
Form
of Certificate of Designation of Series D Redeemable Convertible Preferred
Stock (incorporated by reference from Exhibit 3.4 to our Annual Report on
Form 10-KSB/A (Amendment No. 1) for the fiscal year ended December 31,
2007 filed on May 1, 2008).
|
|
3.5
|
Form
of Certificate of Designation of Series E Redeemable Exchangeable
Preferred Stock (incorporated by reference from Exhibit 3.5 to our Annual
Report on Form 10-KSB/A (Amendment No. 1) for the fiscal year ended
December 31, 2007 filed on May 1,
2008).
|
3.6
|
Form
of Certificate of Designation of Series F Redeemable Convertible Preferred
Stock (incorporated by reference from Exhibit 3.6 to our Annual Report on
Form 10-KSB/A (Amendment No. 1) for the fiscal year ended December 31,
2007 filed on May 1, 2008).
|
|
3.7
|
Form
of Certificate of Designation of Series G Redeemable Exchangeable
Preferred Stock (incorporated by reference from Exhibit 3.7 to our Annual
Report on Form 10-KSB/A (Amendment No. 1) for the fiscal year ended
December 31, 2007 filed on May 1, 2008).
|
|
4.1†
|
6%
Subordinated Debenture of Deep Down, Inc. dated March 31,
2008.
|
|
31.1†
|
Certification
of Chief Executive Officer Pursuant to Rules 13a-14(a) and 15d-14(a) of
the Securities Exchange Act of 1934.
|
|
31.2†
|
Certification
of Chief Financial Officer Pursuant to Rules 13a-14 and 15d-14 of the
Securities Exchange Act of 1934.
|
|
32.1†
|
Section
1350 Certification of the President and Chief Executive Officer of Deep
Down, Inc.
|
|
32.2†
|
Section
1350 Certification of the Chief Financial Officer of Deep Down,
Inc.
|
DEEP
DOWN, INC.
|
||
(Registrant)
|
Signature
|
Title
|
Date
|
||
/s/
RONALD E. SMITH
|
President,
CEO and Director
|
May
16, 2008
|
||
Ronald
E. Smith
|
(Principal
Executive Officer)
|
|||
/s/
EUGENE L. BUTLER
|
Chief
Financial Officer
|
May
16, 2008
|
||
Eugene
L. Butler
|
(Principal
Financial Officer)
|
Exhibit Number
|
Description of Exhibit
|
|
2.1
|
Agreement
and Plan of Reorganization among MediQuip Holdings, Inc., Deep Down, Inc.,
and the majority shareholders of Deep Down, Inc. (incorporated by
reference from Exhibit 2.1 to our Annual Report on Form 10-KSB/A
(Amendment No. 1) for the fiscal year ended December 31, 2007 filed on May
1, 2008).
|
|
3.1
|
Certificate
of Incorporation of MediQuip Holdings, Inc. (incorporated by reference
from Exhibit 3.1 to our Annual Report on Form 10-KSB for the fiscal year
ended December 31, 2007 filed on March 31, 2008).
|
|
3.2
|
Certificate
of Amendment to Articles of Incorporation providing for Change of Name to
Deep Down, Inc. (incorporated by reference from Exhibit 3.2 to our Annual
Report on Form 10-KSB for the fiscal year ended December 31, 2007 filed on
March 31, 2008).
|
|
3.3
|
By
Laws of Deep Down, Inc. (incorporated by reference from Exhibit 3.3 to our
Annual Report on Form 10-KSB/A (Amendment No. 1) for the fiscal year ended
December 31, 2007 filed on May 1, 2008).
|
|
3.4
|
Form
of Certificate of Designation of Series D Redeemable Convertible Preferred
Stock (incorporated by reference from Exhibit 3.4 to our Annual Report on
Form 10-KSB/A (Amendment No. 1) for the fiscal year ended December 31,
2007 filed on May 1, 2008).
|
|
3.5
|
Form
of Certificate of Designation of Series E Redeemable Exchangeable
Preferred Stock (incorporated by reference from Exhibit 3.5 to our Annual
Report on Form 10-KSB/A (Amendment No. 1) for the fiscal year ended
December 31, 2007 filed on May 1, 2008).
|
|
3.6
|
Form
of Certificate of Designation of Series F Redeemable Convertible Preferred
Stock (incorporated by reference from Exhibit 3.6 to our Annual Report on
Form 10-KSB/A (Amendment No. 1) for the fiscal year ended December 31,
2007 filed on May 1, 2008).
|
|
3.7
|
Form
of Certificate of Designation of Series G Redeemable Exchangeable
Preferred Stock (incorporated by reference from Exhibit 3.7 to our Annual
Report on Form 10-KSB/A (Amendment No. 1) for the fiscal year ended
December 31, 2007 filed on May 1, 2008).
|
|
4.1†
|
6%
Subordinated Debenture of Deep Down, Inc. dated March 31,
2008.
|
|
31.1†
|
Certification
of Chief Executive Officer Pursuant to Rules 13a-14(a) and 15d-14(a) of
the Securities Exchange Act of 1934.
|
|
31.2†
|
Certification
of Chief Financial Officer Pursuant to Rules 13a-14 and 15d-14 of the
Securities Exchange Act of 1934.
|
|
32.1†
|
Section
1350 Certification of the President and Chief Executive Officer of Deep
Down, Inc.
|
|
32.2†
|
Section
1350 Certification of the Chief Financial Officer of Deep Down Down,
Inc.
|