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.
Recent Developments
On April 2, 2007, Deep Down acquired substantially all of the assets of ElectroWave USA, Inc. a Texas corporation. Deep Down formed a wholly-owned subsidiary, ElectroWave USA, Inc. ("ElectroWave"), a Nevada corporation, to complete the acquisition. ElectroWave offers products and services in the fields of electronic monitoring and control systems for the energy, military, and commercial business sectors.
The purchase price of $171,407 includes the payment of bank and other debts of ElectroWave and the assumption of leases of real and personal property and ongoing accounts payable in exchange for substantially all of the assets, including inventory, fixed assets and accounts receivable and the transfer of all employees. Prior to the date of acquisition, Deep Down paid $432,475 to three creditors of ElectroWave and received $261,068 of proceeds from the sale of Electrowave's receivables. In addition, Deep Down may issue up to an aggregate of 460 shares of convertible preferred stock over the next three years, as an additional contingent purchase cost, if the operations of ElectroWave reach certain financial milestones based on net income for the fiscal years ending December 31, 2007, 2008 and 2009.
On May 15, 2007, Deep Down accepted John C. Siedhoff's resignation from the board of directors and his resignation as Chief Financial Officer, effective April 30, 2007. On June 5, 2007, Deep Down engaged Eugene L. Butler to serve as its new Chief Financial Officer. Mr. Butler will also fill a vacancy on the board of directors. Additionally, Mary L. Budrunas was appointed to the board of directors.
During the second quarter, Deep Down executed a Securities Redemption Agreement (the "Agreement") with the former CFO of Deep Down to redeem 4,000 shares of Series E exchangeable preferred stock at a discounted price of $500 per share for a total of $2,000,000. The discount of $500 per share from the face value of $1,000 was accounted for as a substantial modification of debt, thereby generating a gain on extinguishment of debt which is reflected as other income on the income statement. Deep Down accreted the remaining discount of $1,102,385 attributable to such shares on the date of redemption. On August 16, 2007 Deep Down made the initial payment of $1,400,000 under the terms of the securities redemption agreement, and 2 payments of $20,000 each were made during August and September 2007. The final balance due of $560,000 was paid with common stock on October 2, 2007.
On August 6, 2007 Deep Down, Inc. entered into a $6 million secured credit agreement (the "Agreement") with Prospect Capital Corporation to pay off bank indebtedness, redeem some of the preferred shares outstanding, payoff $150,000 owing to an officer and to provide working capital to accelerate development of its corporate growth strategies. The Agreement provides for a 4-year term, an annual interest rate of 15.5% with the ability to defer up to 3.0% through a PIK (paid-in-kind) feature and principal payments of $75,000 per quarter beginning September 30, 2008, with the remaining balance outstanding due August 6, 2011. Interest payments are payable monthly, in arrears, on each month end commencing on August 31, 2007. The Agreement requires Deep Down to maintain certain reporting and financial covenants. Terms of the Agreement also include a warrant to purchase up to 4,960,585 shares of common stock at an exercise price of $0.507 per share. The warrant has a five-year term and becomes exercisable on the two-year anniversary of the financing. The aggregate relative fair value of such warrants (excluding estimated forfeitures) was approximately $1,479,189 based on the Black-Scholes option pricing model.
On June 21, 2007 Deep Down, Inc. entered into a non-binding Letter of Intent to purchase Mako Technologies, Inc., a Louisiana corporation for a total acquisition price of approximately $14,500,000 consisting of a combination of cash, unsecured notes, and common stock. This transaction has not been completed as of the filing of this report. Completion of this acquisition is subject to satisfactory due diligence and financing.
Overview
We are an installation engineering and management company focused on the offshore segment of the energy industry. We can custom design and manufacture product or modify existing equipment to meet customer specifications. We design, manufacture, fabricate, sell and service highly-engineered subsea equipment, surface equipment and offshore rig equipment for use in deepwater, harsh environment and severe service applications. Our principal products consist of flying lead installation, maintenance and termination systems; buoyancy and rigging systems; high and low pressure testing and monitoring systems; latch systems; lay chutes; rollers; tensioners; and offshore storage and space management systems. We also provide installation, retrieval, storage and management services in connection with the use of our products.
Deep Down has developed its broad line of subsea equipment, surface equipment and offshore rig equipment primarily through internal product development efforts. In many cases, these products were developed in direct response to customer requests for solutions to critical problems in the field. We are instrumental in achieving solutions for our clients to simplify installation procedures and reduce costs.
The acquisition of ElectroWave has expanded our product lines to include products and services in the fields of electronic monitoring and control systems for the energy, military, and commercial business sectors. ElectroWave designs, manufactures, installs, and commissions integrated PLC and SCADA based instrumentation and control systems, including ballast control and monitoring, drilling instrumentation, vessel management systems, marine advisory systems, machinery plant control and monitoring systems, and closed circuit television systems.
Product and service innovations and capabilities during the first nine months of 2007 include the following highlights:
• Use of nine new Rapid Deployment Cartridges ("RDC") increased productivity for the installation of Steel Flying Leads ("SFLs") and greatly improved the ability to carry more flying leads on the deck of an installation vessel, saving valuable vessel time and reducing the number of trips to and from the dock. Deep Down can carry up to eighteen SFLs within a very small footprint on the deck of a marine vessel with these RDCs.
• Successful installation of new Electrical Hydraulic Loose Tube SFLs. This new product innovation greatly extends the typical range for delivering electronic capabilities in SFLs up to 10,000 feet and reduces the need for in-field umbilicals in certain applications.
• Successful installation of umbilical bend stiffeners on the Independence HUB has established a new standard in the BS Latcher design for ultra high bending moment applications in 8,000 foot and deeper water depths.
• Successful completion of the relocation of the ElectroWave assets, operations and personnel to Deep Down's headquarters during April and the commencement of operations in that location.
• Completed and installed Active Have Compensated In-Line Winch System for offshore deepwater use.
