TABLE OF CONTENTS

 

	PART I FINANCIAL INFORMATION	Page No.
Item 1.	Financial Statements
	Unaudited Consolidated Balance Sheets - June 30, 2008 and December 31, 2007	4
	Unaudited Consolidated Statements of Operations - For the Three and Six Months Ended June 30, 2008 and 2007	5
	Unaudited Consolidated Statements of Stockholders’ Equity - For the Six Months Ended June 30, 2008	6
	Unaudited Consolidated Statements of Cash Flows - For the Six Months Ended June 30, 2008 and 2007	7
	Notes to Unaudited Consolidated Financial Statements	9
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	21
Item 4T.	Controls and Procedures	27
PART II OTHER INFORMATION
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	27
Item 4.	Submission of Matters to a Vote of Security Holders	28
Item 5.	Other Information	28
Item 6.	Exhibits	29
Signatures		31
Exhibit Index		32

 

 

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ITEM 1.  FINANCIAL STATEMENTS

 

DEEP DOWN, INC.

CONSOLIDATED BALANCE SHEETS

(Unaudited)

 

		June 30, 2008				December 31, 2007
ASSETS
Cash and equivalents		$	4,085,543			$	2,206,220
Restricted cash			-				375,000
Accounts receivable, net of allowance of $818,992 and $139,787 respectively			8,614,961				7,190,466
Prepaid expenses and other current assets			710,213				312,058
Inventory			179,343				502,253
Lease receivable, short-term			414,000				414,000
Work in progress			681,790				945,612
Receivable from Prospect, net			-				2,687,333
Total current assets			14,685,850				14,632,942
Property and equipment, net			10,651,053				5,172,804
Other assets, net of accumulated amortization of $0 and $54,560 respectively			550,819				1,109,152
Lease receivable, long-term			500				173,000
Intangibles, net			18,745,713				4,369,647
Goodwill			13,001,556				10,594,144
Total assets		$	57,635,491			$	36,051,689
LIABILITIES AND STOCKHOLDER'S EQUITY
Accounts payable and accrued liabilities		$	3,070,105			$	3,569,826
Deferred revenue			725,521				188,030
Payable to Mako shareholders			-				3,205,667
Current portion of long-term debt			47,477				995,177
Total current liabilities			3,843,103				7,958,700
Long-term debt, net of accumulated discount of $0 and $1,703,258 respectively			919,381				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			4,762,484				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, 174,732,501
and 85,976,526 shares issued and outstanding, respectively			174,733				85,977
Paid-in capital			60,000,402				14,849,847
Accumulated deficit			(7,302,128	)			(2,347,308	)
Total stockholders' equity			52,873,007				12,588,516
Total liabilities and stockholders' equity		$	57,635,491			$	36,051,689
See accompanying notes to unaudited consolidated financial statements.

 

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DEEP DOWN, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

 

		For the Three Months Ended								For the Six Months Ended
		June 30,								June 30,
		2008				2007				2008				2007
Revenues
Contract revenue		$	5,670,385			$	4,508,635			$	11,007,914			$	6,110,916
Rental revenue			2,249,811				636,153				3,191,747				1,132,266
Total revenues			7,920,196				5,144,788				14,199,661				7,243,182
Cost of sales			5,496,427				3,293,313				9,372,798				4,545,402
Gross profit			2,423,769				1,851,475				4,826,863				2,697,780
Operating expenses:
Selling, general & administrative			3,681,643				1,103,902				5,443,890				1,763,622
Depreciation and amortization			543,128				90,196				841,277				154,221
Total operating expenses			4,224,771				1,194,098				6,285,167				1,917,843
Operating income (loss)			(1,801,002	)			657,377				(1,458,304	)			779,937
Other income (expense):
Gain (loss) on debt extinguishment			(446,412	)			2,000,000				(446,412	)			2,000,000
Interest income			27,346				16,290				66,510				16,290
Interest expense			(2,690,534	)			(1,276,770	)			(3,459,564	)			(1,508,657	)
Other expense			(39,771	)			-				(11,416	)			-
Total other income (expense)			(3,149,371	)			739,520				(3,850,882	)			507,633
Income (loss) before income taxes			(4,950,373	)			1,396,897				(5,309,186	)			1,287,570
Benefit from (provision for) income taxes			85,000				(447,363	)			354,366				(447,363	)
Net income (loss)		$	(4,865,373	)		$	949,534			$	(4,954,820	)		$	840,207
Earnings per share:
Basic		$	(0.04	)		$	0.01			$	(0.05	)		$	0.01
Weighted-average common shares outstanding			132,666,860				67,870,171				109,326,053				74,417,132
Diluted		$	(0.04	)		$	0.01			$	(0.05	)		$	0.01
Weighted-average common shares outstanding			132,666,860				93,799,839				109,326,053				100,315,405
See accompanying notes to unaudited consolidated financial statements.

 

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DEEP DOWN, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(Unaudited)

 

		For the Six Months Ended June 30, 2008
		Common Stock								Paid-in				Accumulated
		Shares				Amount				Capital				Deficit				Total
Balance at December 31, 2007			85,976,532			$	85,977			$	14,849,847			$	(2,347,308	)		$	12,588,516
Net loss			-				-				-				(4,954,820	)			(4,954,820	)
Exchange of Series D preferred stock			25,866,518				25,867				4,393,377								4,419,244
Stock issued for acquisition of Mako			2,802,969				2,803				1,959,275								1,962,078
Stock issued for acquisition of Flotation			1,714,286				1,714				1,421,143								1,422,857
Warrants issued for acquisition of Flotation							-				121,793								121,793
Restricted stock issued			1,200,000				1,200				(1,200	)							-
Stock issued in private placement			57,142,857				57,143				37,002,527								37,059,670
Cashless exercise of stock options			29,339				29				(29	)							-
Stock based compensation			-				-				253,669								253,669
Balance at June 30, 2008			174,732,501			$	174,733			$	60,000,402			$	(7,302,128	)		$	52,873,007
See accompanying notes to unaudited consolidated financial statements.

 

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DEEP DOWN, INC.

CONSOLIDATED STATEMENTS OF CASH FLOW

(Unaudited)

 

		Six Months Ended
		June 30,
		2008				2007
Cash flows from operating activities:
Net loss		$	(4,954,820	)		$	840,208
Adjustments to reconcile net income to net cash
used in operating activities:
Gain on extinguishment of debt			-				(2,000,000	)
Interest income			(30,467	)			(16,290	)
Amortization of debt discount			1,816,847				1,391,506
Amortization of deferred financing costs			762,700				-
Share-based compensation			253,669				39,565
Bad debt expense			832,328				-
Depreciation and amortization			898,998				154,221
Loss on disposal of equipment			9,136				-
Changes in assets and liabilities:
Lease receivable			-				(750,000	)
Accounts receivable			(254,958	)			(531,356	)
Prepaid expenses and other current assets			(586,618	)			1,655
Inventory			(179,343	)			(472,253	)
Work in progress			1,135,005				(119,552	)
Accounts payable and accrued liabilities			(1,601,586	)			1,808,987
Deferred revenue			537,491				80,628
Net cash provided by operating activities		$	(1,361,618	)		$	427,319
Cash flows from investing activities:
Cash paid for acquisition of Flotation			(22,116,140	)			-
Cash paid for acquisition of Mako			(1,319,967	)			-
Cash paid for third party debt			-				(432,475	)
Cash received from sale of ElectroWave receivables			-				261,068
Cash deficit acquired an acquisition of a business			-				(18,974	)
Purchases of equipment			(687,060	)			(442,788	)
Restricted cash			375,000				-
Net cash used in investing activities		$	(23,748,167	)		$	(633,169	)
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			37,059,670				960,000
Proceeds from long term debt			2,687,333				-
Proceeds from sales-type lease			172,500				69,000
Borrowings on debt - related party			-				150,000
Payments of long-term debt			(12,930,395	)			(222,307	)
Net cash provided by (used in) financing activities		$	26,989,108			$	456,693
Change in cash and equivalents			1,879,323				250,843
Cash and equivalents, beginning of period			2,206,220				12,462
Cash and equivalents, end of period		$	4,085,543			$	263,305
See accompanying notes to unaudited consolidated financial statements.

 

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DEEP DOWN, INC.

CONSOLIDATED STATEMENTS OF CASH FLOW

(Unaudited)

 

		Six Months Ended
		June 30,
		2008				2007
Supplemental schedule of noncash investing
and financing activities:
Acquisition of a business		$	-			$	(190,381	)
Exchange of receivables for acquisition of a business		$	-			$	171,407
Warrants issued for acquisition of Flotation		$	121,793			$	-
Stock issued for acquisition of Flotation		$	1,422,857			$	-
Stock issued for acquisition of Mako		$	1,962,078			$	-
Fixed assets purchased with capital lease		$	-			$	525,000
Fixed assets transferred from Inventory		$	502,253			$	-
Exchange of Series D preferred stock		$	4,419,244
Exchange of Series E preferred stock		$	-			$	3,366,778
Redemption of Series E preferred stock		$	-			$	2,000,000
Exchange of Series E preferred stock for subordinated debenture		$	500,000			$	-
Common shares issued as restricted stock		$	1,200			$	-
Supplemental Disclosures:
Cash paid for interest		$	880,017			$	117,151
Cash paid for pre-payment penalties		$	446,413			$	-
Cash paid for taxes		$	275,000			$	-
See accompanying notes to unaudited consolidated financial statements.

 

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DEEP DOWN, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 1: GENERAL

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”),  Mako Technologies, LLC (“Mako”), a Nevada limited liability company, and Flotation Technologies, Inc. (“Flotation”), a Maine corporation. The results of Flotation are included in the consolidated financial statements herein effective May 1, 2008, the effective date of acquisition for accounting purposes.

 

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, marine 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.

Flotation engineers, designs and manufactures deepwater buoyancy systems using high-strength FlotecTM syntactic foam and polyurethane elastomers.  Flotation’s  product offerings include distributed buoyancy for flexible pipes and umbilicals, drilling riser buoyance modules, CoreTecTM drilling riser buoyancy modules, ROVitsTM buoyancy, Hydro-Float mooring buoys, StablemoorTM low-drag ADCP deployment solution, Quick-Loc™ cable floats, HardballTM umbilical floats, Flotec™ cable and pipeline protection, InflexTM polymer bend restrictors, and installation buoyancy of any size and depth rating.

 

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 June 30, 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 audited consolidated financial statements and footnotes thereto included in our Annual Report on Form 10-KSB/A (Amendment No. 3) for the year ended December 31, 2007 filed on August 8, 2008.

Prior period information presented in these financial statements includes reclassifications which were made to conform such information to the current period presentation.  These reclassifications had no material effect on our previously reported net loss or stockholders' equity.

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.

 

 

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NOTE 2: ACCOUNTS RECEIVABLE

Accounts receivable includes an allowance for uncollectible accounts of $818,992 and $139,787 as of June 30, 2008 and December 31, 2007, respectively. Bad debt expense totaled $832,328 and $11,555 for the six months ended June 30, 2008 and June 30, 2007, respectively. 

 

NOTE 3: PROPERTY AND EQUIPMENT

Property and equipment include the following:

 

		June 30, 2008				December 31, 2007
Land		$	2,270,439			$	13,148
Building			1,246,072				182,156
Furniture and fixtures			139,044				63,777
Vehicles and trailers			99,837				112,162
Leasehold improvements			301,919				75,149
Equipment			3,834,594				2,004,167
Rental Equipment			3,659,714				3,144,559
Total			11,551,619				5,595,117
Less: Accumulated depreciation			(900,566	)			(422,314	)
Property and equipment, net		$	10,651,053			$	5,172,804

Depreciation expense for the six months ended June 30, 2008 and June 30, 2007 was approximately $505,063 and $154,221, respectively.

 

To accommodate our growth in operations during the six months ended June 30, 2008, we leased additional property from JUMA and incurred $98,139 in leasehold improvements to stabilize the ground and prepare the surface for the movement and storage of the heavy equipment we manufacture and rent at our corporate headquarters.

 

In connection with the purchase of Flotation, Deep Down acquired land along with a building and improvements with a fair market value of $3,264,100 which houses its 46,925 square foot light industrial manufacturing facility on a 3.61 acre site in Maine.

On June 30, 2008, Deep Down transferred equipment with a cost basis of $502,253 from inventory to its rental equipment fleet.

 

 

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NOTE 4: LONG-TERM DEBT

The following table summarizes long-term debt:

 

		June 30, 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
Debt discount, net of amortization of $254,101 and $135,931 respectively			-				(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			-				11,212,786
6% Subordinated Debenture beginning March 31, 2008; annual							-
interest payments, interest fixed at 6%; matures March 31, 2011			507,479				-
Capital lease of equipment, monthly lease payments,
interest imputed at 11.2%			459,379				481,209
Total long-term debt			966,858				11,693,995
Current portion of long-term debt			(47,477	)			(995,177	)
Long-term debt, net of current portion		$	919,381			$	10,698,818

 

Secured Credit Agreement

 

On August 6, 2007, Deep Down entered into a $6.5 million secured credit agreement, (the “Credit Agreement”) with Prospect Capital Corporation, (“Prospect”) and received an advance of $6.0 million on that date.  The Credit Agreement provided 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 were payable monthly, in arrears, on each month-end commencing on August 31, 2007. Deep Down paid the full 15.5% and did not exercise the PIK feature for the monthly periods through June 2008.   

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 from $6.5 million to $13.0 million. Amounts borrowed were $6.0 million.  Quarterly principal payments increased to $250,000 beginning September 30, 2008.  Cash interest paid for the three and six months ended June 30, 2008 was $361,667 and $821,500, respectively. Under the Credit Agreement, Deep Down was required to meet certain covenants and restrictions as well as maintain a debt service reserve account.  As of December 31, 2007, $375,000 is separately classified as “Restricted cash” on the accompanying balance sheets. 

 

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In connection with the second advance under the Credit Agreement on January 4, 2008, Deep Down capitalized an additional $261,946 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 issued to purchase up to 118,812 shares of common stock at an exercise price of $1.01 per share.

On June 12, 2008, Deep Down paid $12,492,912 to Prospect to pay the balance outstanding under the Credit Agreement and related interest and early termination fees.  In connection with the early payoff, Deep Down accelerated the remaining deferred financing costs totaling $661,149 and recorded this charge as interest expense. Additionally, $1,490,955 in debt discounts were accelerated and recorded as interest expense. Early termination fees of approximately $446,412 were recognized as a loss on early extinguishment of debt.  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 shares of Deep Down common stock.

In January 2008, in accordance with the terms of the purchase of Mako, Deep Down paid $916,044 of notes payable plus accrued interest of $2,664.

Exchange of 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 (the “Debenture”) in an outstanding principal amount of $500,000.  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. Upon exchange into the Debenture, Deep Down recorded $113,589 in interest expense for the accretion up to face value. See the additional discussion of the terms of the Series E preferred stock at Note 6. Interest expense on the Debenture of approximately $7,479 has been recognized for the three and six months ended June 30, 2008.

NOTE 5: ACQUISITIONS

Purchase of Mako Technologies, Inc.

Effective December 1, 2007, Deep Down purchased 100% of the common stock of Mako. 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 per share, was issued on March 28, 2008. The final cash payment of $1,243,571, which was paid on April 11, 2008, was included in the “Payable to Mako shareholders” balance on the accompanying balance sheet at December 31, 2007.

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 final amounts and final tax returns.  This final evaluation of net assets acquired will be offset by a corresponding change in goodwill and is expected to be complete within one year from the purchase date.

The acquistion of Mako was accounted for using the purchase method of accounting in accordance with Statement of Financial Accounting Standards (“SFAS”) 141, “Business Combinations” (“SFAS 141”) since Deep Down acquired substantially all of the assets, certain liabilities, employees, and business of Mako.

Purchase of Flotation Technologies, Inc.

On June 5, 2008, Deep Down completed the acquisition of 100% of the capital of Flotation, 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 SFAS 141 since Deep Down acquired substantially all of the assets, certain liabilities, employees, and business of Flotation.

 

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The purchase price of Flotation was $23,895,830 and consisted of $22,100,000 cash and 1,714,286 shares of common stock valued at $0.83 per common share plus transaction costs of $251,180. In addition, warrants to purchase 200,000 shares of common stock at $0.70 per share were issued to an entity affiliated with the selling shareholders 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 selling shareholders used approximately $1,800,000 of the $22,100,000 cash received to pay outstanding 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 $37,059,670 in net proceeds, at a price of $0.70 per share. Deep Down used $22,100,000 in proceeds from this private placement 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 their continued 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.

The table below reflects the breakdown of the purchase price as noted above:

 

Summary of purchase price:
Cash		$	22,100,000
Certain transaction costs			251,180
Fair market value of common stock			1,422,857
Fair market value of warrants issued			121,793
Total purchase price		$	23,895,830

 

The purchase price of $23,895,830 was in exchange for all of the outstanding capital stock of Flotation. 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 on May 1, 2008:

 

Summary of net assets acquired:
Cash and cash equivalents		$	235,040
Accounts receivable			2,105,519
Construction in progress			871,183
Prepaid expenses			15,904
Property, plant and equipment, net			4,846,190
Intangibles			14,797,000
Goodwill			2,157,307
Total assets acquired		$	25,028,143
Accounts payable and accrued liabilities			1,132,313
Total liabilities acquired		$	1,132,313
Net assets acquired		$	23,895,830

 

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 $1,200,000 and will be depreciated over estimated useful lives of 3 to 40 years using the straight-line method.

 

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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 final amounts and final tax returns.  This final evaluation of net assets acquired will be offset by a corresponding change in goodwill and is expected to be complete within one year of the purchase date.

Unaudited pro forma condensed combined financial statements

The following unaudited pro forma combined condensed financial statements include Flotation and Mako for the periods presented as if the acquisitions had occurred on the first date of the respective periods and are presented for informational purposes only. These results are not necessarily indicative of the results of operations that actually would have been achieved had the acquisitions been consummated as of the beginning of the period presented, or are they intended to be a projection of future results. The unaudited pro forma results were as follows:

 

Unaudited Pro Forma Combined Condensed Statements of Operations
	For the Three Months ended June 30, 2008														For the Six Months ended June 30, 2008
	Historical														Historical
				One Month														Four Months								Combined
				April 30,			Flotation					Combined						April 30,			Flotation					Condensed
				2008			Pro Forma					Pro Forma						2008			Pro Forma					Pro Forma
	Deep Down			Flotation			Entries					Results			Deep Down			Flotation			Entries					Results
Revenues	$	7,920,196		$	1,064,364		$	-				$	8,984,560		$	14,199,661		$	5,941,472		$	-				$	20,141,133
Cost of sales		5,496,427			627,224			-					6,123,651			9,372,798			4,005,179			-					13,377,977
Gross profit		2,423,769			437,140			-					2,860,909			4,826,863			1,936,293			-					6,763,156
Total operating expenses		4,224,771			305,220			75,604		(d/e	)		4,605,595			6,285,167			968,179			302,416		(d/e	)		7,555,762
Operating income (loss)		(1,801,002	)		131,920			(75,604	)				(1,744,686	)		(1,458,304	)		968,114			(302,416	)				(792,606	)
Total other income (expense)		(3,149,371	)		(22,467	)		-					(3,171,838	)		(3,850,882	)		(57,335	)		-					(3,908,217	)
Income (loss) from
continuing operations		(4,950,373	)		109,453			(75,604	)				(4,916,524	)		(5,309,186	)		910,779			(302,416	)				(4,700,823	)
Income tax benefit (expense)		85,000			-			(12,524	)	(f)			72,476			354,366			-			(225,094	)	(f)			129,272
Net income (loss)	$	(4,865,373	)	$	109,453		$	(88,128	)			$	(4,844,048	)	$	(4,954,820	)	$	910,779		$	(527,510	)			$	(4,571,551	)
Basic earnings (loss) per share	$	(0.04	)									$	(0.03	)	$	(0.05	)									$	(0.03	)
Shares used in computing
basic per share amounts		132,666,860								(g)			174,707,676			109,326,053								(g)			161,161,117
Diluted earnings (loss) per share	$	(0.04	)									$	(0.03	)	$	(0.05	)									$	(0.03	)
Shares used in computing
diluted per share amounts		132,666,860								(g)			174,707,676			109,326,053								(g)			161,161,117

The historical results of Deep Down for the three and six months ended June 30, 2008 contain two months of results for Flotation operations since its acquisition was effective May 1, 2008.  The weighted-average shares of stock used in computing basic and diluted per share amounts give effect to the 2,802,969 Mako shares issued on March 31, 2008 and the total of 58,857,143 common shares of Deep Down issued in June 2008; 57,142,857 in connection with the Private Placement, and 1,714,286 to Flotation shareholders, as if all these shares were issued January 1, 2008.

 

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Unaudited Pro Forma Combined Condensed Statement of Operations
For the Three Months ended June 30, 2007
																				Combined
	Historical									Mako					Flotation					Condensed
										Pro Forma					Pro Forma					Pro Forma
	Deep Down			Mako			Flotation			Entries					Entries					Results
Revenues	$	5,144,788		$	1,768,876		$	1,329,446		$	-				$	-				$	8,243,110
Cost of sales		3,293,313			561,385			974,265			-					-					4,828,963
Gross profit		1,851,475			1,207,491			355,181			-					-					3,414,147
Total operating expenses		1,177,876			957,572			711,176			122,367		(a)			226,811		(d/e	)		3,195,802
Operating income (loss)		673,599			249,919			(355,995	)		(122,367	)				(226,811	)				218,345
Total other income (expense)		723,230			(28,571	)		1,399,087			(266,269	)	(b)			-					1,827,477
Income (loss) from
continuing operations		1,396,829			221,348			1,043,092			(388,636	)				(226,811	)				2,045,822
Income tax benefit (expense)		(447,363	)		(17,309	)		-			143,795					(302,024	)	(f)			(622,901	)
Net income (loss)	$	949,466		$	204,039		$	1,043,092		$	(244,841	)			$	(528,835	)			$	1,422,921
Basic earnings (loss) per share	$	0.01																		$	0.01
Shares used in computing
basic per share amounts		67,870,171																(c/g	)		136,104,357
Diluted earnings (loss) per share	$	0.01																		$	0.01
Shares used in computing
diluted per share amounts		93,799,839																(c/g	)		162,034,025

 

Unaudited Pro Forma Combined Condensed Statement of Operation
For the Six Months ended June 30, 2007
																				Combined
	Historical									Mako					Flotation					Condensed
										Pro Forma					Pro Forma					Pro Forma
	Deep Down			Mako			Flotation			Entries					Entries					Results
Revenues	$	7,243,182		$	2,618,805		$	2,351,057		$	-				$	-				$	12,213,044
Cost of sales		4,545,402			1,122,501			1,463,530			-					-					7,131,433
Gross profit		2,697,780			1,496,304			887,527			-					-					5,081,611
Total operating expenses		1,901,552			1,364,505			1,376,736			244,734		(a)			453,624		(d/e	)		5,341,151
Operating income (loss)		796,228			131,799			(489,209	)		(244,734	)				(453,624	)				(259,540	)
Total other income (expense)		491,343			(46,545	)		1,390,538			(532,391	)	(b)			-					1,302,945
Income (loss) from continuing operations		1,287,571			85,254			901,329			(777,125	)				(453,624	)				1,043,405
Income tax expense		(447,363	)		(17,309	)		-			287,536					(165,651	)	(f)			(342,787	)
Net income (loss)	$	840,208		$	67,945		$	901,329		$	(489,589	)			$	(619,275	)			$	700,618
Basic earnings per share	$	0.01																		$	-
Shares used in computing
basic per share amounts		74,417,132																(c/g	)		142,651,318
Diluted earnings per share	$	0.01																		$	-
Shares used in computing
diluted per share amounts		100,315,405																(c/g	)		168,549,591

 

The unaudited pro forma combined condensed statements include the following pro forma assumptions and entries for Mako:

a)

Amortization of the intangible assets at a rate of $40,789 per month for the respective periods.

b)

Represents cash interest plus amortization of deferred financing costs and debt discounts for the Credit Agreement.  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.

 

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Taxes are calculated on the pro forma entries at Deep Down’s estimated combined effective rate of 37%.

The unaudited pro forma combined condensed statements include the following pro forma assumptions and entries for Flotation:

d)

Recognition of stock based compensation from employee stock options issued in connection with the acquisition of Flotation. Deep Down estimated $7,343 per month for the respective time periods.

e)

Amortization of the intangible assets at a rate of $68,261 per month based on the lives in the table above.

f)

Represents estimated income tax accruals for the historical income plus all pro forma adjustments 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.

g)

A total of 58,857,143 common shares of Deep Down were issued; 57,142,857 in connection with the Private Placement, and 1,714,286 to Flotation shareholders. These pro forma amounts give effect as if shares were issued January 1, 2007.

The table below reflects the assumptions used for warrant and option grants related to Flotation during the six months ended June 30, 2008:

 

Risk free interest rate	2.52% - 3.18%
Expected life of options	2 - 2.5 years
Expected volatility	51.7% - 61.3%

 

NOTE 6: PREFERRED STOCK

Series D Redeemable Convertible Preferred Stock Classified as Temporary Equity Instruments

On March 28, 2008, the 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.  The Series D had been valued at inception at $4,419,244 based on the Black-Scholes fair value of the Series D.

Exchange of Series E Redeemable Exchangeable Preferred Stock Classified as Debt Instruments to 6% Subordinated Debenture

On March 31, 2008, 500 shares of the Series E Preferred Stock were exchanged into the 6% Debenture in an outstanding principal amount of $500,000.  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. See additional discussion of the Debenture in Note 4.

NOTE 7: COMMON STOCK

Private Placement

 

On June 5, 2008, Deep Down sold 57,142,857 shares, for $40,000,000 at a per-share price of $0.70. After transaction costs, net proceeds were $37,059,670. Dahlman Rose & Company, LLC acted as exclusive placement agent for the financing.

Deep Down used $22,100,000 of the net proceeds to fund the cash portion of the Flotation purchase, and used $12,492,912 to repay outstanding debt, along with early termination fees to Prospect on June 12, 2008, with the remainder being retained for working capital purposes.

In connection with the private placement, Deep Down entered into a registration rights agreement where the holder has certain demand registration rights. Deep Down filed an S-1 Registration Statement on July 21, 2008. If the Registration Statement is not declared effective by September 3, 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, Deep Down shall be required to pay daily damages to the purchasers.  Deep Down evaluated the registration rights agreement for liability treatment under Financial Accounting Standards Board (“FASB”) Statement No. 5, “Accounting for Contingencies” and Financial Statement Staff Position (FSP) EITF 00-19(2) “Accounting for Registration Payment Arrangements” and determined that the registration rights did not meet the definition of a liability under the authoritative guidance since management believes the liability is not estimable at this time.

 

 

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NOTE 8: STOCK BASED COMPENSATION 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”). We account for stock-based compensation expense under Statement of Financial Accounting (“SFAS”) No. 123 (Revised 2004), “Share-based Payment,” (“SFAS No. 123(R)”). 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 six months ended June 30, 2008, Deep Down granted 4,200,000 options and 1,200,000 shares of restricted stock and cancelled 875,000 options due to forfeitures under the Plan. Based on the shares of common stock outstanding at June 30, 2008, there are approximately 16,235,000 options available for grant under the Plan as of that date.

Restricted Stock

On February 14, 2008, Deep Down issued an aggregate of 1,200,000 shares of restricted common stock to Ronald E. Smith, CEO; Robert E. Chamberlain, Chairman; and Eugene L. Butler, CFO under terms of the Plan. The shares were valued at a price of $0.42 based on the closing price of common stock on that date. The shares vest on the second anniversary of the grant date, and Deep Down is amortizing the related stock based compensation of $504,000 over the 2 year period. For the six months ended June 30, 2008 Deep Down recognized a total of $94,500 in stock based compensation related to these issued shares of restricted stock.

The following table summarizes Deep Down’s restricted stock activity for the six months ended June 30, 2008:

 

		Restricted Shares				Weighted- Average Grant Price				Aggregate Intrinsic Value
Outstanding at December 31, 2007			-
Grants			1,200,000			$	0.42
Outstanding at June 30,2008			1,200,000			$	0.42			$	624,000

Stock Option Activity During 2008

During the six months ended June 30, 2008, Deep Down granted 4,200,000 options under the Plan as detailed below.  On June 17, 2008, a cashless exercise of 50,000 employee stock options for 29,339 net common shares was issued in accordance with terms of the Plan.

During the six months ended June 30, 2008, Deep Down granted an aggregate of 350,000 stock options to various employees with exercise prices between $0.71 and $0.88, reflecting the respective days’ closing prices. The fair value of such options was approximately $114,737 based on the Black-Scholes option pricing model.  Additionally, Deep Down issued 600,000 stock options to employees of Flotation in connection with that acquisition.

On February 14, 2008, Deep Down issued an aggregate of 3,000,000 stock options to Ronald E. Smith, Robert E. Chamberlain, and Eugene L. Butler, with an exercise price of $1.50, which was in excess of the day’s closing price of $0.42. The fair value of such options was approximately $145,764 based on the Black-Scholes option pricing model.

  

Additionally, on January 22, 2008, Deep Down issued 250,000 stock options to an officer with an exercise price of $0.70, the closing price of Deep Down’s common stock on that date.  These options have since been forfeited due to the officer’s departure in May, 2008.

All of the options issued during 2008 have terms for vesting at the rate of one third of the total grant annually on the anniversary of their respective grant dates.

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 same industry, with similar market capitalizations and similar stage of development.

 

 

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Summary of Stock Options

Deep Down is expensing all stock options on a straight line basis over their respective expected service periods.  The total stock based compensation expense for the six months ended June 30, 2008 and June 30, 2007, was $159,169 and $39,565, respectively.  The unamortized portion of the estimated fair value of outstanding stock options is $949,885 at June 30, 2008.

The following table summarizes Deep Down’s stock option activity for the six months ended June 30, 2008:

 

	Shares Underlying Options			Weighted- Average Exercise Price			Weighted- Average Remaining Contractual Term (in years)			Aggregate Intrinsic Value (In-The-Money)
Outstanding at December 31, 2007		5,500,000		$	0.58
Grants		4,200,000			1.35
Exercises		(50,000	)		0.50
Forfeitures		(875,000	)		0.74
Outstanding at June 30,2008		8,775,000		$	0.93			3.0		$	1,944,750
Exerciseable at June 30,2008		1,970,834		$	0.60			2.7		$	729,292

 

The following summarizes Deep Down’s outstanding options and their respective exercise prices at June 30, 2008:

 

Exercise Price			Shares Underlying Options
$	0.30 - 0.49			175,000
$	0.50 - 0.69			4,125,000
$	0.70 - 0.99			525,000
$	1.00 - 1.29			950,000
$	1.30 - 1.50			3,000,000
				8,775,000

 

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 six months ended June 30, 2008:

 

Dividend yield	0%
Risk free interest rate	2.64% - 2.84%
Expected life of options	3 years
Expected volatility	53.3% - 63.3%

 

Summary of Warrants

In connection with the purchase of Flotation, warrants to purchase 200,000 common shares at $0.70 per share were issued to an entity affiliated with the selling stockholders in consideration for the acquisition of 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 and included this value in the purchase price allocation related to Flotation.

On August 6, 2007, as part of the Credit Agreement described above in Note 4, Deep Down issued 4,960,585 detachable warrants to its creditor. All warrants were issued with an exercise price of $0.507, expired in five years (or earlier in the event of termination) and vested on the earlier of the second anniversary of the agreement or upon payment in full of the debt. On July 3, 2008, the creditor exercised all of its outstanding 4,960,585 warrants for a total of 2,618,129 restricted shares of Deep Down common stock in a cashless exercise.

 

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Additionally, related to the Credit Agreement described in Note 4, Deep Down issued 320,000 detachable warrants at an exercise price of $0.75 per share to a third party related to the financing. The warrant has a five-year term and became exercisable in connection with the early payoff of the debt.  Also, in connection with the Amendment to the Credit Agreement, Deep Down issued detachable warrants to purchase up to 118,812 shares of common stock at an exercise price of $1.01 per share to the same third party. The warrant has a five-year term and was immediately exercisable. See the additional discussion concerning such warrants in Note 4.

A summary of warrant transactions follows:

	Shares Underlying Warrants			Weighted- Average Exercise Price			Weighted- Average Remaining Contractual Term (in years)			Aggregate Intrinsic Value (In-The-Money)
Outstanding at December 31, 2007		5,399,397		$	0.53
Grants		200,000			0.70
Outstanding at June 30,2008		5,599,397		$	0.54			4.4		$	2,241,852
Exerciseable at June 30,2008		5,399,397		$	0.54			4.4		$	2,193,852

 

The following summarizes Deep Down’s outstanding warrants and their respective exercise prices at June 30, 2008:

 

Exercise Price			Shares Underlying Warrants
$	0.51			4,960,585
$	0.70 - 0.99			520,000
$	1.01			118,812
				5,599,397

 

The fair value of each warrant grant is estimated on the date of the grant using the Black-Scholes model and is based on the following key assumptions for the six months ended June 30, 2008:

 

Dividend yield	0%
Risk free interest rate	2.52% - 3.18%
Expected life of options	2 - 2.5 years
Expected volatility	51.7% - 61.3%

 

NOTE 9: 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.

 

Operating Leases

Deep Down leases land under an operating lease and is responsible for related maintenance, insurance and property taxes.  On May 1, 2008, Deep Down and JUMA, LLC, a related party, amended the original lease that began as of September, 2006 to provide for the additional acreage leased resulting in a $4,000 per month increase in rent.  See Note 10 below for further discussion of the related party.

 

NOTE 10:  RELATED PARTY TRANSACTIONS

 

Deep Down leases all buildings, structures, fixtures and other improvements at the Channelview, Texas location from JUMA, LLC, a company owned by Ronald E. Smith, CEO and a director of Deep Down and Mary L. Budrunas, a vice president and a director of Deep Down. 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 Ronald Smith and Mary Budrunas.  The Series D preferred shares were redeemed for 23,279,876 shares of common stock.

 

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During the six months ended June 30, 2008, Deep Down granted an aggregate of 1,200,000 restricted shares of common stock and an aggregate of 3,000,000 stock options to Ronald E. Smith, President and Chief Executive Officer, Robert E. Chamberlain, Jr., Chairman and Chief Acquisition Officer, and Eugene L. Butler, Chief Financial Officer, under the terms of the Deep Down, Inc. Stock Option Plan. Deep Down also awarded in recognition of their completion of the acquisition of Flotation and private placement of common stock, a performance bonus of $300,000 in the aggregate.

 

NOTE 11:  SUBSEQUENT EVENTS

On July 3, 2008, Prospect exercised their outstanding 4,960,585 warrants in a cashless exercise for a total of 2,618,129 shares of Deep Down common stock.

 

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PART II – OTHER INFORMATION

 

ITEM 2. UNREGISTERED SALES OF EQUITY AND USE OF PROCEEDS

On June 5, 2008, Deep Down entered into the Purchase Agreement to sell and issue to certain purchasers, purchasing in reliance on the exemption from registration in Section 4(2) of the Securities Act of 1933, an aggregate of 57,142,857 shares, of Deep Down’s common stock at a price of $0.70 per share. The net proceeds for Deep Down from such private placement was approximately $37.1 million. 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.

In June 2008, in connection with the acquisition of Flotation, Deep Down issued an aggregate of 1,714,286 shares of common stock to shareholders of Flotation, valued at $0.83 per share, 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 an entity affiliated with the selling shareholders 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 non-insider employee at an exercise price of $0.50 per share for net common shares issued totaling 29,339. These shares of common stock are exempt from registration requirements provided by Section 4(2) of the Securities Act and/or Regulation D promulgated thereunder.

Effective July 3, 2008, Prospect Capital Corporation, the holders of 4,960,585 warrants originally issued in connection with Deep Down’s secured credit agreement, effected a cashless exercise of all of their warrants for 2,618,129 shares of common stock of Deep Down at an exercise price of $0.507. These shares of common stock are exempt from registration requirements provided by Section 4(2) of the Securities Act and/or Regulation D promulgated thereunder.

 

 

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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

On May 16, 2008 (the “Record Date”), Deep Down received written consents from stockholders representing a majority of our outstanding voting interests on the close of business on the Record Date, in lieu of a meeting, approving amendments to our Articles of Incorporation and Bylaws to provide the following: i) A division of the board of directors into three classes, approximately equal in size and each director to serve for a three year term ; ii) Prohibiting  action by written consent of the shareholders without prior approval by the board of directors; iii) Limiting authority for the call of special meetings of the shareholders to the board of directors or a committee of the board; and iv) Requiring shareholder nominations for election of directors or proposals for new business to be delivered or mailed to the company not less than 30 or more sixty days prior to the meeting.

On July 21, 2008, Deep Down, Inc. filed Schedule 14C to report the results of the actions related to these matters.

 

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INDEX TO EXHIBITS

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. 2) 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).
3.8	Amendment to Articles of Incorporation (incorporated by reference from Exhibit A to our Preliminary Information Statement filed on June 19, 2008 and revised and re-filed on July 21, 2008).
3.9	Amended and Restated Bylaws (incorporated by reference from Exhibit B to our Preliminary Information Statement filed on June 19, 2008 and revised and re-filed on July 21, 2008).
4.1	Common Stock Purchase Warrant (No. 4) dated June 5, 2008 (incorporated by reference from Exhibit 4.1 to our Form 8-K/A filed on June 9, 2008).
4.2	Stock Option, Stock Warrant and Stock Award Plan (incorporated by reference from Exhibit 4.10 to our Registration Statement on Form S-1, filed on July 21, 2008).
10.1	Confidential Private Placement Memorandum dated May 16, 2008 (incorporated by reference from Exhibit 20.1 to our Form 8-K/A filed on June 9, 2008).
10.2	Supplement No.1 to Confidential Private Placement Memorandum dated June 2, 2008 (incorporated by reference from Exhibit 4.6 to our Registration Statement on Form S-1, filed on July 21, 2008).
10.3	Purchase Agreement dated as of June 2, 2008 (incorporated by reference from Exhibit 10.1 to our Form 8-K/A filed on June 9, 2008).
10.4	Dahlman Rose Underwriting Agreement dated May 6, 2008
10.5	Stock Purchase Agreement dated April 17, 2008, among Deep down, Inc., Flotation Technologies, Inc. and the selling stockholders named therein (incorporated by reference  to our Report on Form 8-K, filed with the Commission on April 21, 2008)
10.6 †	Employment Agreement with David A. Capotosto (incorporated by reference from Exhibit 4.10 to our Registration Statement on Form S-1, filed on July 21, 2008).
10.7 †	Employment Agreement with Bradley M. Parro (incorporated by reference from Exhibit 4.10 to our Registration Statement on Form S-1, filed on July 21, 2008).
10.8*	Amended Lease Agreement dated May 1, 2008 between Deep Down, Inc., a Delaware corporation, as tenant, and JUMA, L.L.C. December 31, 2007 filed on 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.

* Filed or furnished herewith

† Exhibit constitutes a management contract or compensatory plan or arrangement