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 if a smaller reporting company)
|
Smaller
reporting company x
|
Page
No.
|
||
Item
1.
|
Financial
Statements
|
|
Unaudited
Consolidated Balance Sheets - September 30, 2008 and December 31,
2007
|
1
|
|
Unaudited
Consolidated Statements of Operations - For the Three and Nine months
Ended September 30, 2008 and 2007
|
2
|
|
Unaudited
Consolidated Statements of Stockholders’ Equity - For the Nine months
Ended September 30, 2008
|
3
|
|
Unaudited
Consolidated Statements of Cash Flows - For the Nine months Ended
September 30, 2008 and 2007
|
4
|
|
Notes
to Unaudited Consolidated Financial Statements
|
6
|
|
Item
2.
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
|
21
|
Item
3.
|
Qualitative
and Quantitative Market Risks
|
28
|
Item
4T.
|
Controls
and Procedures
|
28
|
PART
II OTHER INFORMATION
|
||
|
||
Item 1. | Legal Proceedings |
29
|
Item 1A. | Risk Factors |
29
|
Item
2.
|
Unregistered
Sales of Equity Securities and Use of Proceeds
|
29
|
Item 3. | Defaults Upon Senior Securities |
29
|
Item
4.
|
Submission
of Matters to a Vote of Security Holders
|
29
|
Item
5.
|
Other
Information
|
30
|
Item
6.
|
Exhibits
|
31
|
Signatures
|
31
|
|
Exhibit
Index
|
32
|
September
30, 2008
|
December
31, 2007
|
|||||||
ASSETS
|
||||||||
Cash
and equivalents
|
$ | 5,155,069 | $ | 2,206,220 | ||||
Restricted
cash
|
- | 375,000 | ||||||
Accounts
receivable, net of allowance of $345,649 and $139,787
respectively
|
7,197,552 | 7,190,466 | ||||||
Prepaid
expenses and other current assets
|
850,030 | 312,058 | ||||||
Inventory
|
820,922 | 502,253 | ||||||
Lease
receivable, short-term
|
- | 414,000 | ||||||
Costs
and estimated earnings in excess of billings on uncompleted
contracts
|
1,661,829 | 749,455 | ||||||
Receivable
from Prospect, net
|
- | 2,687,333 | ||||||
Total
current assets
|
15,685,402 | 14,436,785 | ||||||
Property
and equipment, net
|
12,219,276 | 5,368,961 | ||||||
Other
assets, net of accumulated amortization of $0 and $54,560
respectively
|
277,402 | 1,109,152 | ||||||
Lease
receivable, long-term
|
- | 173,000 | ||||||
Intangibles,
net
|
18,418,196 | 4,369,647 | ||||||
Goodwill
|
12,985,718 | 10,594,144 | ||||||
Total
assets
|
$ | 59,585,994 | $ | 36,051,689 | ||||
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
||||||||
Accounts
payable and accrued liabilities
|
$ | 3,589,093 | $ | 3,569,826 | ||||
Billings
in excess of costs and estimated earnings on uncompleted
contracts
|
367,259 | 188,030 | ||||||
Payable
to Mako shareholders
|
- | 3,205,667 | ||||||
Current
portion of long-term debt
|
48,816 | 995,177 | ||||||
Total
current liabilities
|
4,005,168 | 7,958,700 | ||||||
Deferred
tax liabilities, net
|
45,362 | - | ||||||
Long-term
debt, net of accumulated discount of $0 and $1,703,258
respectively
|
914,225 | 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
|
4,964,755 | 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, 177,350,630
and
85,976,526 shares issued and
outstanding,
respectively
|
177,351 | 85,977 | ||||||
Paid-in
capital
|
60,167,948 | 14,849,847 | ||||||
Accumulated
deficit
|
(5,724,060 | ) | (2,347,308 | ) | ||||
Total
stockholders' equity
|
54,621,239 | 12,588,516 | ||||||
Total
liabilities and stockholders' equity
|
$ | 59,585,994 | $ | 36,051,689 | ||||
See
accompanying notes to unaudited consolidated financial
statements.
|
For
the Three Months Ended
|
For
the Nine Months Ended
|
|||||||||||||||
September
30,
|
September
30,
|
|||||||||||||||
2008
|
2007
|
2008
|
2007
|
|||||||||||||
Revenues
|
||||||||||||||||
Contract
revenue
|
$ | 11,039,041 | $ | 3,819,536 | $ | 22,046,957 | $ | 9,930,453 | ||||||||
Rental
revenue
|
613,521 | 1,066,019 | 3,805,268 | 2,198,284 | ||||||||||||
Total
revenues
|
11,652,562 | 4,885,555 | 25,852,225 | 12,128,737 | ||||||||||||
Cost
of sales
|
6,350,318 | 3,625,020 | 15,462,187 | 8,300,707 | ||||||||||||
Gross
profit
|
5,302,244 | 1,260,535 | 10,390,038 | 3,828,030 | ||||||||||||
Operating
expenses:
|
||||||||||||||||
Selling,
general & administrative
|
3,733,254 | 949,376 | 9,413,939 | 2,712,997 | ||||||||||||
Depreciation
and amortization
|
17,366 | 20,861 | 882,779 | 44,797 | ||||||||||||
Total
operating expenses
|
3,750,620 | 970,237 | 10,296,718 | 2,757,794 | ||||||||||||
Operating
income
|
1,551,624 | 290,298 | 93,320 | 1,070,236 | ||||||||||||
Other
income (expense):
|
||||||||||||||||
Gain
(loss) on debt extinguishment
|
- | - | (446,412 | ) | 2,000,000 | |||||||||||
Interest
income
|
36,977 | 32,645 | 103,487 | 48,935 | ||||||||||||
Interest
expense
|
(24,704 | ) | (241,639 | ) | (3,484,268 | ) | (1,750,296 | ) | ||||||||
Other
income
|
17,060 | 15,052 | 5,644 | 15,052 | ||||||||||||
Total
other income (expense)
|
29,333 | (193,942 | ) | (3,821,549 | ) | 313,691 | ||||||||||
Income
(loss) before income taxes
|
1,580,957 | 96,356 | (3,728,229 | ) | 1,383,927 | |||||||||||
Benefit
from (provision for) income taxes
|
(2,889 | ) | 99,613 | 351,477 | (347,750 | ) | ||||||||||
Net
income (loss)
|
$ | 1,578,068 | $ | 195,969 | $ | (3,376,752 | ) | $ | 1,036,177 | |||||||
Earnings
(loss) per share:
|
||||||||||||||||
Basic
|
$ | 0.01 | $ | - | $ | (0.03 | ) | $ | 0.01 | |||||||
Weighted-average
common shares outstanding
|
176,093,714 | 68,285,932 | 131,744,393 | 72,626,591 | ||||||||||||
Diluted
|
$ | 0.01 | $ | - | $ | (0.03 | ) | $ | 0.01 | |||||||
Weighted-average
common shares outstanding
|
177,413,975 | 100,307,773 | 131,744,393 | 100,584,062 | ||||||||||||
See
accompanying notes to unaudited consolidated financial
statements.
|
For
the Nine Months Ended September 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
|
- | - | - | (3,376,752 | ) | (3,376,752 | ) | |||||||||||||
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 | ) | - | |||||||||||||||
Warrant
exercises
|
2,618,129 | 2,618 | (2,618 | ) | - | |||||||||||||||
Stock
based compensation
|
- | - | 423,833 | 423,833 | ||||||||||||||||
Balance
at September 30, 2008
|
177,350,630 | $ | 177,351 | $ | 60,167,948 | $ | (5,724,060 | ) | $ | 54,621,239 | ||||||||||
See
accompanying notes to unaudited consolidated financial
statements.
|
Nine
Months Ended
|
||||||||
September
30,
|
||||||||
2008
|
2007
|
|||||||
Cash
flows from operating activities:
|
||||||||
Net
loss
|
$ | (3,376,752 | ) | $ | 1,036,176 | |||
Adjustments
to reconcile net income to net cash provided by
|
||||||||
(used
in) operating activities:
|
||||||||
Gain
on extinguishment of debt
|
- | (2,000,000 | ) | |||||
Interest
income
|
(54,975 | ) | - | |||||
Amortization
of debt discount
|
1,816,847 | 1,427,960 | ||||||
Amortization
of deferred financing costs
|
762,700 | 15,988 | ||||||
Share-based
compensation
|
423,833 | 113,480 | ||||||
Bad
debt expense
|
1,052,668 | 16,305 | ||||||
Depreciation
and amortization
|
1,641,508 | 247,503 | ||||||
Loss
on disposal of equipment
|
160,692 | 7,948 | ||||||
Changes
in assets and liabilities:
|
||||||||
Lease
receivable
|
- | (788,520 | ) | |||||
Accounts
receivable
|
942,111 | (2,006,548 | ) | |||||
Prepaid
expenses and other current assets
|
(453,018 | ) | (96,581 | ) | ||||
Inventory
|
(820,922 | ) | 45,000 | |||||
Finished
goods
|
- | (515,601 | ) | |||||
Costs
and estimated earnings in excess of billings on uncompleted
contracts
|
(41,191 | ) | (913,435 | ) | ||||
Accounts
payable and accrued liabilities
|
(1,058,090 | ) | 2,072,684 | |||||
Billings
in excess of costs and estimated earnings on uncompleted
contracts
|
179,229 | (190,000 | ) | |||||
Net
cash provided by (used in) operating activities
|
$ | 1,174,640 | $ | (1,527,641 | ) | |||
Cash
flows from (used in) investing activities:
|
||||||||
Cash
paid for acquisition of Flotation
|
(22,161,863 | ) | - | |||||
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
|
(2,564,114 | ) | (600,636 | ) | ||||
Restricted
cash
|
375,000 | (375,000 | ) | |||||
Net
cash used in investing activities
|
$ | (25,670,944 | ) | $ | (1,166,017 | ) | ||
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
|
587,000 | 172,500 | ||||||
Borrowings
on debt - related party
|
- | 150,000 | ||||||
Payments
on debt - related party
|
- | (150,000 | ) | |||||
Borrowings
on long-term debt
|
- | 6,000,000 | ||||||
Increase
in deferred financing fees
|
- | (442,198 | ) | |||||
Creation
of debt discount due to lender's fees
|
- | (180,000 | ) | |||||
Payments
of long-term debt
|
(12,888,850 | ) | (2,641,671 | ) | ||||
Net
cash provided by financing activities
|
$ | 27,445,153 | $ | 3,368,631 | ||||
Change
in cash and equivalents
|
2,948,849 | 674,973 | ||||||
Cash
and equivalents, beginning of period
|
2,206,220 | 12,462 | ||||||
Cash
and equivalents, end of period
|
$ | 5,155,069 | $ | 687,435 | ||||
See
accompanying notes to unaudited consolidated financial
statements.
|
Nine
Months Ended
|
||||||||
September
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 | $ | - | ||||
Correction
of common stock per value to paid in capital
|
$ | - | $ | 114,750 | ||||
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
|
$ | - | $ | 3,685,463 | ||||
Exchange
of Series E preferred stock for subordinated debenture
|
$ | 500,000 | $ | - | ||||
Common
shares issued as restricted stock
|
$ | 1,200 | $ | - | ||||
Creation
of debt discount due to warrants issued to lender
|
$ | - | $ | 1,479,189 | ||||
Creation
of deferred financing fee due to warrants issued to third
party
|
$ | - | $ | 113,120 | ||||
Supplemental
Disclosures:
|
||||||||
Cash
paid for interest
|
$ | 904,721 | $ | 306,349 | ||||
Cash
paid for pre-payment penalties
|
$ | 446,413 | $ | - | ||||
Cash
paid for taxes
|
$ | 275,000 | $ | 14,970 | ||||
|
||||||||
See
accompanying notes to unaudited consolidated financial
statements.
|
September
30, 2008
|
December
31, 2007
|
|||||||
Land
|
$ | 461,955 | $ | - | ||||
Building
|
3,242,351 | 195,305 | ||||||
Leasehold
improvements
|
342,430 | 75,149 | ||||||
Furniture
and fixtures
|
143,509 | 63,777 | ||||||
Vehicles
and trailers
|
105,836 | 112,161 | ||||||
Equipment
|
3,691,527 | 1,809,474 | ||||||
Rental
Equipment
|
4,741,084 | 3,144,559 | ||||||
Computer
and office equipment
|
446,563 | 194,693 | ||||||
Construction
in progress
|
358,910 | 196,157 | ||||||
Total
|
13,534,165 | 5,791,275 | ||||||
Less:
Accumulated depreciation
|
(1,314,889 | ) | (422,314 | ) | ||||
Property
and equipment, net
|
$ | 12,219,276 | $ | 5,368,961 |
Summary
of purchase price:
|
||||
Cash
|
$ | 22,100,000 | ||
Certain
transaction costs
|
296,904 | |||
Fair
market value of common stock
|
1,422,857 | |||
Fair
market value of warrants issued
|
121,793 | |||
Total
purchase price
|
$ | 23,941,554 |
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
|
4,907,752 | |||
Intangibles
|
14,797,000 | |||
Goodwill
|
2,141,469 | |||
Total
assets acquired
|
$ | 25,073,867 | ||
|
||||
Accounts
payable and accrued liabilities
|
1,132,313 | |||
Total
liabilities acquired
|
$ | 1,132,313 | ||
Net
assets acquired
|
$ | 23,941,554 |
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 |
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%
|
Unaudited
Pro Forma Combined Condensed Statements of Operations
|
||||||||||||||||||||
For
the Nine Months ended September 30, 2008
|
||||||||||||||||||||
Historical
|
||||||||||||||||||||
Four
Months
|
Combined
|
|||||||||||||||||||
April
30,
|
Flotation
|
Condensed
|
||||||||||||||||||
2008
|
Pro
Forma
|
Pro
Forma
|
||||||||||||||||||
Deep
Down
|
Flotation
|
Entries
|
Results
|
|||||||||||||||||
Revenues
|
$ | 25,852,225 | $ | 5,941,472 | $ | - | $ | 31,793,697 | ||||||||||||
Cost
of sales
|
15,462,187 | 4,005,179 | - | 19,467,366 | ||||||||||||||||
Gross
profit
|
10,390,038 | 1,936,293 | - | 12,326,331 | ||||||||||||||||
Total
operating expenses
|
10,296,718 | 968,179 | 302,416 |
(d/e)
|
11,567,313 | |||||||||||||||
Operating
income (loss)
|
93,320 | 968,114 | (302,416 | ) | 759,018 | |||||||||||||||
Total
other expense
|
(3,821,549 | ) | (57,335 | ) | - | (3,878,884 | ) | |||||||||||||
Income
(loss) from
|
||||||||||||||||||||
continuing
operations
|
(3,728,229 | ) | 910,779 | (302,416 | ) | (3,119,866 | ) | |||||||||||||
Benefit
from (provision for) income taxes
|
351,477 | - | (225,094 | ) |
(f)
|
126,383 | ||||||||||||||
Net
income (loss)
|
$ | (3,376,752 | ) | $ | 910,779 | $ | (527,510 | ) | $ | (2,993,483 | ) | |||||||||
Basic
earnings (loss) per share
|
$ | (0.03 | ) | $ | (0.02 | ) | ||||||||||||||
Shares
used in computing
|
||||||||||||||||||||
basic
per share amounts
|
131,744,393 | 166,174,982 | ||||||||||||||||||
Diluted
earnings (loss) per share
|
$ | (0.03 | ) | $ | (0.02 | ) | ||||||||||||||
Shares
used in computing
|
||||||||||||||||||||
diluted
per share amounts
|
131,744,393 | 166,174,982 | ||||||||||||||||||
See
accompanying notes to unaudited pro forma combined condensed financial
statements.
|
Unaudited
Pro Forma Combined Condensed Statement of Operations
|
|||||||||||||
For
the Three Months ended September 30,
2007
|
Combined
|
||||||||||||||||||||||||||
Historical
|
Mako
|
Flotation
|
Condensed
|
|||||||||||||||||||||||
Pro
Forma
|
Pro
Forma
|
Pro
Forma
|
||||||||||||||||||||||||
Deep
Down
|
Mako
|
Flotation
|
Entries
|
Entries
|
Results
|
|||||||||||||||||||||
Revenues
|
$ | 4,885,555 | $ | 1,672,457 | $ | 4,635,810 | $ | - | $ | - | $ | 11,193,822 | ||||||||||||||
Cost
of sales
|
3,625,020 | 710,822 | 2,744,365 | - | - | 7,080,207 | ||||||||||||||||||||
Gross
profit
|
1,260,535 | 961,635 | 1,891,445 | - | - | 4,113,615 | ||||||||||||||||||||
Total
operating expenses
|
970,237 | 648,756 | 463,023 | 122,367 | (a) | 226,812 | (d/e) | 2,431,195 | ||||||||||||||||||
Operating
income (loss)
|
290,298 | 312,879 | 1,428,422 | (122,367 | ) | (226,812 | ) | 1,682,420 | ||||||||||||||||||
Total
other income (expense)
|
(193,942 | ) | (9,156 | ) | (613,878 | ) | (266,410 | ) | (b) | - | (1,083,386 | ) | ||||||||||||||
Income
(loss) from continuing operations
|
96,356 | 303,723 | 814,544 | (388,777 | ) | (226,812 | ) | 599,034 | ||||||||||||||||||
Benefit
from (provision for) income taxes
|
99,613 | (205,567 | ) | - | 143,847 | (217,461 | ) | (f) | (179,568 | ) | ||||||||||||||||
Net
income (loss)
|
$ | 195,969 | $ | 98,156 | $ | 814,544 | $ | (244,930 | ) | $ | (444,273 | ) | $ | 419,466 | ||||||||||||
Basic
earnings (loss) per share
|
$ | - | $ | - | ||||||||||||||||||||||
Shares
used in computing
|
||||||||||||||||||||||||||
basic
per share amounts
|
68,285,932 | (c/g) | 136,520,118 | |||||||||||||||||||||||
Diluted
earnings (loss) per share
|
$ | - | $ | - | ||||||||||||||||||||||
Shares
used in computing
|
||||||||||||||||||||||||||
diluted
per share amounts
|
100,307,773 | (c/g) | 168,541,959 | |||||||||||||||||||||||
See
accompanying notes to unaudited pro forma combined condensed financial
statements.
|
Unaudited
Pro Forma Combined Condensed Statement of Operations
|
||||||||||||||||||||||||||
For
the Nine Months ended September 30, 2007
|
||||||||||||||||||||||||||
Combined
|
||||||||||||||||||||||||||
Historical
|
Mako
|
Flotation
|
Condensed
|
|||||||||||||||||||||||
Pro
Forma
|
Pro
Forma
|
Pro
Forma
|
||||||||||||||||||||||||
Deep
Down
|
Mako
|
Flotation
|
Entries
|
Entries
|
Results
|
|||||||||||||||||||||
Revenues
|
$ | 12,128,737 | $ | 4,291,262 | $ | 6,986,867 | $ | - | $ | - | $ | 23,406,866 | ||||||||||||||
Cost
of sales
|
8,300,707 | 1,833,323 | 4,510,795 | - | - | 14,644,825 | ||||||||||||||||||||
Gross
profit
|
3,828,030 | 2,457,939 | 2,476,072 | - | - | 8,762,041 | ||||||||||||||||||||
Total
operating expenses
|
2,757,794 | 2,013,261 | 1,536,860 | 367,101 | 680,436 | (d/e) | 7,355,452 | |||||||||||||||||||
Operating
income (loss)
|
1,070,236 | 444,678 | 939,212 | (367,101 | ) | (a) | (680,436 | ) | 1,406,589 | |||||||||||||||||
Total
other income (expense)
|
313,691 | (55,700 | ) | 776,661 | (790,118 | ) | (b) | - | 244,534 | |||||||||||||||||
Income
(loss) from continuing operations
|
1,383,927 | 388,978 | 1,715,873 | (1,157,219 | ) | (680,436 | ) | 1,651,123 | ||||||||||||||||||
|
||||||||||||||||||||||||||
Benefit
from (provision for) income taxes
|
(347,750 | ) | (222,876 | ) | - | 428,171 | (383,112 | ) | (f) | (525,567 | ) | |||||||||||||||
Net
income (loss)
|
$ | 1,036,177 | $ | 166,102 | $ | 1,715,873 | $ | (729,048 | ) | $ | (1,063,548 | ) | $ | 1,125,556 | ||||||||||||
Basic
earnings per share
|
$ | 0.01 | $ | 0.01 | ||||||||||||||||||||||
Shares
used in computing
|
||||||||||||||||||||||||||
basic
per share amounts
|
72,626,591 | (c/g) | 140,860,777 | |||||||||||||||||||||||
Diluted
earnings per share
|
$ | 0.01 | $ | 0.01 | ||||||||||||||||||||||
Shares
used in computing
|
||||||||||||||||||||||||||
diluted
per share amounts
|
100,584,062 | (c/g) | 168,818,248 | |||||||||||||||||||||||
See
accompanying notes to unaudited pro forma combined condensed financial
statements.
|
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 was payable at
15.5% on the outstanding principal, and the related fees were amortized
using the effective interest method over the applicable 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.
|
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
remaining useful 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.
|
Average
|
|||||||||
Remaining
|
|||||||||
Useful
Life
|
September
30, 2008
|
December
31, 2007
|
|||||||
Customer
relationship
|
8-25
Years
|
$ | 3,515,000 | $ | 2,869,000 | ||||
Non-Compete
Covenant
|
3-5
Years
|
1,334,000 | 458,000 | ||||||
Trademarks
|
25-40
Years
|
3,110,000 | 1,071,000 | ||||||
Technology
|
25
Years
|
11,209,000 | - | ||||||
Total
gross balances
|
19,168,000 | 4,398,000 | |||||||
Less:
Accumulated amortization
|
(749,804 | ) | (28,353 | ) | |||||
Intangible
assets, net
|
$ | 18,418,196 | $ | 4,369,647 |
Amount
|
||||
Carrying
amount as of December 31, 2007
|
$ | 10,594,144 | ||
Goodwill
acquired during the year
|
2,391,574 | |||
Carrying
amount as of September 30, 2008
|
$ | 12,985,718 |
September
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
|
515,041 | - | ||||||
Capital
lease of equipment, monthly lease payments,
|
||||||||
interest
imputed at 11.2%
|
448,000 | 481,209 | ||||||
Total
long-term debt
|
963,041 | 11,693,995 | ||||||
Current
portion of long-term debt
|
(48,816 | ) | (995,177 | ) | ||||
Long-term
debt, net of current portion
|
$ | 914,225 | $ | 10,698,818 |
Restricted
Shares
|
Weighted-
Average
Grant Price
|
Aggregate
Intrinsic
Value
|
||||||||||
Outstanding
at December 31, 2007
|
- | |||||||||||
Grants
|
1,200,000 | $ | 0.42 | |||||||||
Outstanding
at September 30,2008
|
1,200,000 | $ | 0.42 | $ | 228,000 |
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 September 30, 2008
|
8,775,000 | $ | 0.93 | 3.0 | $ | 463,000 | ||||||||||
Exerciseable
at September 30, 2008
|
2,033,334 | $ | 0.60 | 2.7 | $ | 194,167 |
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
|
Dividend
yield
|
0%
|
Risk
free interest rate
|
2.64%
- 2.84%
|
Expected
life of options
|
3
years
|
Expected
volatility
|
53.3%
- 63.3%
|
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 | ||||||||||||||
Exercised
|
(4,960,585 | ) | 0.51 | |||||||||||||
Outstanding
at September 30, 2008
|
638,812 | $ | 0.78 | 4.3 | $ | - | ||||||||||
Exerciseable
at September 30, 2008
|
438,812 | $ | 0.82 | 4.3 | $ | - |
Exercise
Price
|
Shares
Underlying Warrants
|
|
$ 0.70
- 0.99
|
520,000
|
|
$ 1.01
|
118,812
|
|
638,812
|
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%
|
Dividend
yield
|
0%
|
Risk
free interest rate
|
2.64%
- 2.84%
|
Expected
life of options
|
3
years
|
Expected
volatility
|
53.3%
- 63.3%
|
-
|
the
division of our board of directors into three classes approximately equal
in size, with each director to serve for a three-year
term,
|
-
|
the
prohibition of action taken by written consent of Deep Down’s stockholders
without the prior approval of Deep Down’s board of
directors,
|
-
|
the
prohibition on removal of directors except for cause by the affirmative
vote of the holders of 75% of the outstanding shares of our capital stock
entitled to vote on the election of directors,
and
|
-
|
the
requirement that any stockholder nominations for election as a director or
proposals of new business to be delivered or mailed to Deep Down not less
than 30 or more than 60 days prior to the meeting proposed for taking
action on such matter,
|
-
|
the
prohibition on repealing or amending provisions contained in the Articles
of Incorporation and Bylaws without the affirmative vote of holders of 75%
of the outstanding shares of our capital stock entitled to vote with
regard to such matter.
|
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.
|
10.1*
|
Credit
Agreement, dated as of November 11, 2008, between Deep Down, Inc., as
borrower, and Whitney National Bank, as lender
|
10.2*
|
Guaranty,
dated as of November 11, 2008, by Electrowave USA, Inc., Flotation
Technologies, Inc., Mako Technologies, LLC, and Deep Down, Inc. for the
benefit of Whitney National Bank
|
10.3*
|
Security
Agreement, dated as of November 11, 2008, among Deep Down, Inc.,
Electrowave USA, Inc., Flotation Technologies, Inc., Mako Technologies,
LLC, and Deep Down, Inc. for the benefit of Whitney National
Bank
|
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
|
November
14, 2008
|
||
Ronald
E. Smith
|
(Principal
Executive Officer)
|
|||
/s/
EUGENE L. BUTLER
|
Chief
Financial Officer
|
November
14, 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. 2) for the fiscal year ended December 31, 2007 filed on
May 1, 2008).
|
10.1*
|
Credit
Agreement, dated as of November 11, 2008, between Deep Down, Inc., as
borrower, and Whitney National Bank, as lender
|
10.2*
|
Guaranty,
dated as of November 11, 2008, by Electrowave USA, Inc., Flotation
Technologies, Inc., Mako Technologies, LLC, and Deep Down, Inc. for the
benefit of Whitney National Bank
|
10.3*
|
Security
Agreement, dated as of November 11, 2008, among Deep Down, Inc.,
Electrowave USA, Inc., Flotation Technologies, Inc., Mako Technologies,
LLC, and Deep Down, Inc. for the benefit of Whitney National
Bank
|
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.
|