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Deep Down/Inc · 10QSB · For 6/30/07

Filed On 8/20/07 4:45pm ET   ·   SEC File 0-30351   ·   Accession Number 1019687-7-2707

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  As Of               Filer                 Filing     As/For/On Docs:Pgs              Issuer               Agent

 8/20/07  Deep Down/Inc                     10QSB       6/30/07    5:60                                     Publicease Inc/FA

Quarterly Report -- Small Business   ·   Form 10-QSB
Filing Table of Contents

Document/Exhibit                   Description                      Pages   Size 

 1: 10QSB       Deep Down, Inc.                                     HTML    238K 
 2: EX-31.1     Certification                                       HTML     10K 
 3: EX-31.2     Certification                                       HTML     10K 
 4: EX-32.1     Certification                                       HTML      6K 
 5: EX-32.2     Certification                                       HTML      6K

10QSB   ·   Deep Down, Inc.

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  DEEP DOWN, INC.  
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_______________________

FORM 10-QSB
 
[X]     QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2007; or
 
[   ]     TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File No. 333-100137
 
DEEP DOWN, INC.
(Exact name of registrant as specified in its charter)
 
 
Nevada
 
75-2263732
  
 
(State of other jurisdiction of incorporation)
 
(I.R.S. Employer Identification No.)
  
 
 
 
 
  
 
15473 East Freeway
Channelview, Texas
 
 
77530
  
 
(Address of Principal Executive Office)
 
(Zip Code)
  

Registrant’s telephone number, including area code: (281) 862-2201

Securities registered pursuant to Section 12 (b) of the Act: NONE

Securities registered pursuant to Section 12 (g) of the Act: Common Stock $0.01 par value

Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirement for the past 90 days. Yes [X] No [   ]
 
Check if there is no disclosures of delinquent filers in response to Item 405 of Regulations S-B not contained in this form, and no disclosure will be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB. [   ]
 
Indicate by checkmark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [   ] No [X]
 
At August 15, 2007, the issuer had outstanding 67,870,171 shares of Common Stock, par value $0.01 per share.
 
Transitional Small Business Disclosure Format: Yes [   ] No [X]

 
 
 
 
 
 
 
DEEP DOWN, INC.
Report on Form 10-QSB

For the Quarter Ended June 30, 2007

INDEX
 

Page
PART I - FINANCIAL INFORMATION
1
Item 1. Financial Statements.
2
Consolidated Balance Sheets (unaudited)
2
Consolidated Statement of Operations (unaudited)
3
Consolidated Statement of Cash Flows (unaudited)
4
Notes
5
Item 2. Management's Discussion and Analysis
14
Item 3. Controls and Procedures
19
PART II - OTHER INFORMATION
20
Item 1. Legal Proceedings.
20
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
20
Item 3. Defaults Upon Senior Securities
20
Item 4. Submission of Matters to a Vote of Security Holders
20
Item 5. Other Information.
20
Item 6. Exhibits
21
SIGNATURES
22
 
 
 
 
 
 
 
 
PART I - FINANCIAL INFORMATION

Forward-Looking Information
 
The statements contained in this Quarterly Report on Form 10-QSB that are not historical fact are forward-looking statements (as such term is defined in the Private Securities Litigation Reform Act of 1995), within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. The forward-looking statements contained herein are based on current expectations that involve a number of risks and uncertainties. These statements can be identified by the use of forward-looking terminology such as “believes,” “expects,” “may,” “will,” “should,” “intend,” “plan,” “could,” “is likely,” or “anticipates,” or the negative thereof or other variations thereon or comparable terminology, or by discussions of strategy that involve risks and uncertainties. Deep Down wishes to caution the reader that these forward-looking statements that are not historical facts are only predictions. No assurances can be given that the future results indicated, whether expressed or implied, will be achieved. While sometimes presented with numerical specificity, these projections and other forward-looking statements are based upon a variety of assumptions relating to the business of Deep Down, which, although considered reasonable by Deep Down, may not be realized. Because of the number and range of assumptions underlying Deep Down’s projections and forward-looking statements, many of which are subject to significant uncertainties and contingencies that are beyond the reasonable control of Deep Down, some of the assumptions inevitably will not materialize, and unanticipated events and circumstances may occur subsequent to the date of this report. These forward-looking statements are based on current expectations and Deep Down assumes no obligation to update this information. Therefore, the actual experience of Deep Down and the results achieved during the period covered by any particular projections or forward-looking statements may differ substantially from those projected. Consequently, the inclusion of projections and other forward-looking statements should not be regarded as a representation by Deep Down or any other person that these estimates and projections will be realized, and actual results may vary materially. There can be no assurance that any of these expectations will be realized or that any of the forward-looking statements contained herein will prove to be accurate.
 
 
 
 
 
1
 
 
 
Item 1.   Financial Statements.
 
Deep Down, Inc.
Consolidated Balance Sheets
(unaudited)
 
 
   
June 30, 2007
  
December 31, 2006
  
Assets
              
Cash and equivalents
  
$
263,305
  
$
12,462
  
Accounts receivable
    
1,929,171
   
1,264,228
 
Prepaid expenses and other current assets
    
9,833
   
11,488
 
Inventory
    
115,487
   
145,487
 
Finished goods
    
502,253
   
-
 
Lease receivable, short term
    
414,000
   
-
 
Work in process
    
1,141,760
   
916,485
 
Total current assets
    
4,375,809
   
2,350,150
 
Property and equipment, net
    
1,704,269
   
845,200
 
Other assets
    
270,094
   
-
 
Lease receivable, long term
    
380,000
   
-
 
Goodwill
    
7,260,527
   
6,934,213
 
Total assets
  
$
13,990,699
  
$
10,129,563
  
               
Liabilities and Stockholders' Deficit
              
Accounts payable and accrued liabilities
  
$
3,466,316
  
$
816,490
  
Deferred revenue
    
270,628
   
190,000
 
Other current liabilities
    
72,202
   
-
 
Payable to shareholder, current portion
    
1,598,681
   
-
 
Current portion of long-term debt
    
468,810
   
410,731
 
Total current liabilities
    
5,876,637
   
1,417,221
 
Other liabilities
    
24,508
   
-
 
Payable to shareholder, long-term portion
    
401,319
   
-
 
Long-term debt
    
1,002,231
   
757,617
 
Series E redeemable exchangeable preferred stock, face value and
              
liquidation preference of $1,000 per share, no dividend preference,
              
authorized 10,000,000 aggregate shares of all series of Preferred stock
              
4,000 and 5,000 issued and outstanding, respectively
    
3,068,389
   
3,486,376
 
Series G redeemable exchangeable preferred stock, face value and
              
liquidation preference of $1,000 per share, no dividend preference,
              
authorized 10,000,000 aggregate shares of all series of Preferred stock
              
0 and 1,000 issued and outstanding, respectively
    
-
   
697,275
 
Total liabilities
    
10,373,084
   
6,358,489
 
               
Temporary equity:
              
Series D redeemable convertible preferred stock, $0.01 par value, face value and
             
liquidation preference of $1,000 per share, no dividend preference,
              
authorized 10,000,000 aggregate shares of all series of Preferred stock
              
5,000 issued and outstanding
    
4,419,244
   
4,419,244
 
Series F redeemable convertible preferred stock, $0.01 par value, face value and
             
liquidation preference of $1,000 per share, no dividend preference,
              
authorized 10,000,000 aggregate of all series of Preferred stock
              
0 and 3,000 issued and outstanding, respectively
    
-
   
2,651,547
 
Total temporary equity
    
4,419,244
   
7,070,791
 
               
Stockholders' deficit:
              
Series C convertible preferred stock, $0.001 par value, 7% cumulative dividend,
             
authorized 10,000,000 aggregate shares of all series of Preferred stock
              
22,000 shares issued and outstanding
    
22
   
22
 
Common stock, $0.01 par value, 490,000,000 shares authorized, 67,870,171
              
and 82,870,171 shares issued and outstanding, respectively
    
678,702
   
828,702
 
Paid in capital
   
979,256
   
(828,624
)
Retained earnings
    
(2,459,609
)
  
(3,299,817
)
Total stockholders' deficit
    
(801,629
)
  
(3,299,717
)
Total liabilities and stockholders' deficit
  
$
13,990,699
  
$
10,129,563
  
 
See accompanying notes to unaudited consolidated financial statements.
 
 
 
 
 
2
 
 
 
Deep Down, Inc.
Consolidated Statement of Operations
For the Three and Six Months Ended June 30, 2007
(unaudited)
 
 
   
Three Months Ended
  
Six Months Ended
  
       
           
Revenues
  
$
5,144,788
  
$
7,243,182
  
Cost of sales
    
3,293,313
   
4,545,402
 
Gross profit
    
1,851,475
   
2,697,780
 
               
Operating expenses:
              
Selling, general & administrative
    
1,087,680
   
1,747,331
 
Depreciation
    
90,196
   
154,221
 
Total operating expenses
    
1,177,876
   
1,901,552
 
               
Operating income
   
673,599
   
796,228
 
               
Other income (expense):
              
Gain on debt extinguishment
    
2,000,000
   
2,000,000
 
Interest expense
    
(1,276,770
)
  
(1,508,657
)
Total other income
    
723,230
   
491,343
 
               
Income from continuing operations
    
1,396,829
   
1,287,571
 
               
Income tax expense
    
(447,363
)
  
(447,363
)
Net income
 
$
949,466
  
$
840,208
  
               
               
Basic earnings per share
  
$
0.01
  
$
0.01
  
Diluted earnings per share
  
$
0.01
  
$
0.01
  
               
Shares used in computing basic per share amounts
    
67,870,171
   
74,417,132
 
Shares used in computing diluted per share amounts
    
93,799,839
   
100,315,405
 
 
See accompanying notes to unaudited consolidated financial statements.
 
 
 
 
 
3
 
 
 
Deep Down, Inc.
Consolidated Statements of Cash Flows
For the Six Months Ended June 30, 2007
(unaudited)
 
 
Cash flows from operating activities:
      
       
Net income
  
$
840,208
  
         
Adjustments to reconcile net income to net cash provided by operating activities:
        
Gain on extinguishment of debt
    
(2,000,000
)
Interest income
    
(16,290
)
Depreciation
    
154,221
 
Share-based compensation
    
39,565
 
Amortization of debt discount
    
1,391,506
 
Changes in assets and liabilities:
        
Lease receivable
    
(750,000
)
Accounts receivable
    
(531,356
)
Prepaid expenses and other current assets
    
1,655
 
Inventory
    
30,000
 
Finished goods
    
(502,253
)
Work in process
    
(119,552
)
Accounts payable and accrued liabilities
    
1,808,987
 
Deferred revenue
    
80,628
 
Net cash provided by operating activities
    
427,319
 
         
Cash flows from investing activities:
        
Cash paid for third party debt
   
(432,475
)
Cash received from sale of ElectroWave receivables
    
261,068
 
Cash deficit acquired in acquisition of a business
    
(18,974
)
Purchases of equipment
    
(442,788
)
Net cash used in investing activities
   
(633,169
)
         
Cash flows from financing activities:
        
Proceeds from sales-type lease
    
69,000
 
Borrowings on debt - related party
    
150,000
 
Payments of long-term debt
    
(222,307
)
Proceeds from sale of common stock, net of expenses
    
960,000
 
Payment for cancellation of common stock
    
(250,000
)
Redemption of preferred stock
    
(250,000
)
Net cash provided by financing activities
    
456,693
 
         
Change in cash and equivalents
    
250,843
 
         
Cash and equivalents, beginning of year
    
12,462
 
Cash and equivalents, end of period
  
$
263,305
  
         
Supplemental schedule of noncash investing and financing activities:
        
Acquisition of a business
  
$
(190,381
)
Exchange of receivables for acquisition of a business
  
$
171,407
  
Fixed assets purchased with capital lease
  
$
525,000
  
Exchange of preferred stock
  
$
3,366,778
  
Redemption of preferred stock
  
$
2,000,000
  
Supplemental Disclosures:
        
Cash paid for interest
  
$
117,151
  
Cash paid for taxes
  
$
-
  
 
See accompanying notes to unaudited consolidated financial statements.
 
 
 
 
 
4
 
 
 
DEEP DOWN, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
 
Note 1:   Description of Business

Deep Down, Inc, (“Deep Down”) a Nevada corporation, provides installation management, engineering services, support services and storage management services for the subsea controls, umbilicals & pipeline industries offshore. Deep Down also fabricates component parts for subsea distribution systems and assemblies.
 
On June 29, 2006, Subsea Acquisition Corporation (“Subsea”) was formed with the intent to acquire service providers to the offshore industry, and designers and manufacturers of subsea equipment, surface equipment and offshore rig equipment that are used by major integrated, large independent and foreign national oil and gas companies in offshore areas throughout the world. On November 21, 2006, Subsea acquired Deep Down, Inc, a Delaware corporation founded in 1997. Under the terms of this transaction, all of Deep Down, Inc.’s shareholders transferred ownership of all of Deep Down, Inc.’s common stock to Subsea in exchange for 5,000 shares of Subsea’s Series D Preferred Stock and 5,000 shares of Subsea’s Series E Preferred Stock resulting in Deep Down, Inc. becoming a wholly owned subsidiary of Subsea. On the same day, Subsea then merged with Deep Down, with the surviving company operating as Deep Down Inc. The purchase price based on the fair value of the Series D and E Preferred stock was $7,865,471.
 
On April 2, 2007, Deep Down purchased all of the assets and certain liabilities of Electrowave USA, Inc. a Texas Corporation. Deep Down formed a wholly-owned subsidiary, ElectroWave USA, Inc., (“ElectroWave”), a Nevada corporation, to complete the acquisition. ElectroWave offers products and services in the fields of electronic monitoring and control systems for the energy, military, and commercial business sectors.
 
Basis of Presentation
 
All accounts of Deep Down and its wholly owned subsidiaries are included in the consolidated financial statements for the appropriate periods. All significant inter-company transactions and accounts have been eliminated in consolidation. Since Deep Down was formed on June 29, 2006, comparative financial statements are not presented.
 
The accompanying unaudited financial statements as of June 30, 2007 and for the six months then ended have been prepared in accordance with generally accepted accounting principles for interim financial information. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for audited financial statements. In the opinion of Deep Down’s management, the interim information includes all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the results for the interim periods. The footnote disclosures related to the interim financial information included herein are also unaudited. Such financial information should be read in conjunction with the consolidated financial statements and related notes thereto as of December 31, 2006 and for the year then ended included in Deep Down’s annual report on Form 10-KSB/A for the fiscal year ended December 31, 2006.
 
The preparation of financial statements in accordance with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amount of assets and liabilities at the date of the financial statements and the reported amount of revenues and expenses during the reporting period. Significant estimates and assumptions have been used by management in conjunction with the estimated useful lives of fixed assets and the valuation of preferred stock. Actual results could differ from these estimates. Certain prior period amounts have been revised to conform to the current period presentation.
 
 
 
 
 
5
 
 
 
DEEP DOWN, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
 
Note 2:   Lease receivable
 
On May 18, 2007, Deep Down entered into a sales lease agreement with an unrelated third party. The leased equipment includes an a-frame, winching system, and hydraulic power unit, all constructed by Deep Down. The term of the lease is two years, and includes a purchase option for $35,000 at the conclusion of this term. Monthly rental payments, in the amount of $34,500 are due beginning May, 2007 through April 2009. The lease has been accounted for as a sales-type lease under the rules of FASB No. 13, Accounting for Leases.
 
 
       
Principal
  
Unearned income
  
Minimum lease payments receivable
  
$
828,000
              
Estimated residual value of leased property
    
35,000
             
     
863,000
   
863,000
   
(113,000
)
Less: Unearned interest income
    
(113,000
)
            
Net investment in sales-type leases
    
750,000
             
Net payments received during the quarter
    
(52,710
)
  
(69,000
)
  
16,290
 
Lease balance June 30, 2007
  
$
697,290
  
$
794,000
  
$
(96,710
)
Current portion
          
414,000
   
(72,202
)
Long-term portion
          
380,000
   
(24,508
)
 
Note 3:   Property and Equipment
 
Property and equipment consisted of the following as of June 30, 2007:

 
   
June 30, 2007
  
December 31, 2006
  
Building
  
$
46,476
  
$
46,474
  
Furniture and fixtures
    
13,505
   
11,806
 
Vehicles and trailers
    
71,196
   
66,662
 
Equipment
    
1,630,050
   
747,419
  
Construction in progress
    
124,424
   
-
  
Total
    
1,885,651
   
  872,361
 
Less: Accumulated depreciation
    
(181,382
)
  
(27,161
)
Property and equipment, net
  
$
1,704,269
  
$
    845