SECURITIES AND EXCHANGE COMMISSION

WASHINGTON D.C. 20549

 

FORM 10-Q10-Q/A

 

OR

Commission File No. 0-30351

(Exact name of registrant as specified in its charter)

 

 

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

 

 

Unless otherwise indicated, references to “we”, “us”“we,” “us,” and “our” in this Quarterly Report on Form 10-Q10-Q/A refer collectively to Deep Down, Inc., a Nevada corporation, and its wholly-owned subsidiaries.

Deep Down, Inc., a Nevada corporation (“Deep Down”), 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, a Nevada limited liability company (“Mako”), Flotation Technologies, Inc., a Maine corporation (“Flotation”), and Deep Down International Holdings, LLC, a Nevada corporation (“DDIH”) since its formation in February 2009.

Readers should consider the following information as they review this Quarterly Report on Form 10-Q:10-Q/A :

The statements contained or incorporated by reference in this Quarterly Report on Form 10-Q10-Q/A that are not historical facts 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(“the “Exchange Act”).  All statements other than statements of historical fact are, or may be deemed to be, forward-looking statements.  Forward-looking statements include any statement that may project, indicate or imply future results, events, performance or achievements.  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,” “expect,” “may,” “will,” “should,” “intend,” “plan,” “could,” “estimate” or “anticipate” or the negative thereof or other variations thereon or comparable terminology, or by discussions of strategy that involve risks and uncertainties.

Given the risks and uncertainties relating to forward-looking statements, investors should not place undue reliance on such statements.  Forward-looking statements included in this Quarterly Report on Form 10-Q10-Q/A speak only as of the date of this Report and are not guarantees of future performance.  Although we believe that the expectations reflected in the forward-looking statements are reasonable, such expectations may prove to have been incorrect.  All subsequent written and oral forward-looking statements attributable to us, or persons acting on our behalf, are expressly qualified in their entirety by these cautionary statements.

Descriptions of documents and agreements contained in this Quarterly Report on Form 10-Q10-Q/A are provided in summary form only, and such summaries are qualified in their entirety by reference to the actual documents and agreements filed as exhibits to our  Annual Report on Form 10-K for the year ended December 31, 2009, other periodic and current reports we file with the Securities and Exchange Commission (“SEC”) or this Quarterly Report on Form 10-Q.10-Q/A .

TABLE OF CONTENTS

PART I.I FINANCIAL INFORMATION

 

 

ITEM 1.  FINANCIAL STATEMENTS

DEEP DOWN, INC.

CONSOLIDATED BALANCE SHEETS

 (Unaudited)

 

DEEP DOWN, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

 

DEEP DOWN, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

 (Unaudited)

 

The accompanying unaudited consolidated financial statements of Deep Down, Inc. and its wholly-owned subsidiaries (“Deep Down”, “we”, “us” or “our”the “Company”) were prepared in accordance with the rules and regulations of the Securities and Exchange Commission (the “Commission”) pertaining to interim financial information and instructions to Form 10-Q.  As permitted under those rules, certain footnotes or other financial information that are normally required by United States generally accepted accounting principles (“US GAAP”) can be condensed or omitted.  Therefore, these statements should be read in conjunction with the audited consolidated financial statements and footnotes thereto included in our Annual Report on Form 10-K for the year e ndedended December 31, 2009, filed on April 15, 2010 with the Commission.

Preparation of financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, the disclosed amounts of contingent assets and liabilities and the reported amounts of revenues and expenses.  If the underlying estimates and assumptions upon which the financial statements are based change in future periods, actual amounts may differ from those included in the accompanying unaudited consolidated financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included.  

In the notes to the unaudited consolidated financial statements, all dollar and share amounts are in thousands except for per share data or unless otherwise indicated.

Prior period information presented in these consolidated financial statements includes reclassifications which were made to conform to the current period presentation. Specifically, depreciation expense included in cost of sales has been presented as a separate line on the face of the statements of operations.  Additionally, deferred revenues have been split out from billings in excess of costs and estimated earnings on uncompleted contracts on the face of the balance sheets.  These reclassifications had no effect on our previously reported gross profit, net loss or stockholders’ equity.

The unaudited consolidated financial statements presented herein include the accounts of Deep Down, Inc. and its wholly-owned subsidiaries for the sixthree months ended June 30,March 31, 2010 and 2009.  All intercompany transactions and balances have been eliminated.

During the sixthree months ended June 30,March 31, 2010 and 2009, the operations of Deep Down’s operating segments, Deep Down Delaware, ElectroWave, Mako and Flotation, have been aggregated into a single reporting segment. Additionally, we have aggregated ElectroWave’s operations into Deep Down Delaware as a single operating segment due to similar production processes and cost savings related to office and administrative support. While the operating segments have different product lines,lines; they are very similar. They are all service-based operations revolving around our personnel’s expertise in the deepwaterdeep water industry, and any equipment is produced to customer-specified designsa customer specified design and engineered using Deep Down personnelpersonnel’s expertise, with installation and project management beingas part of our service revenue to the customer. Additionally, the segments have similar customers and distribution methods, and their economic characteristics are similar with regard to their gross margin percentages. Our operations are basedlocated in the United States althoughthough we al so generate revenues fromoccasionally make sales to international customers.

The components of net property, plant and equipment are summarized below:below (in thousands):

On May 29, 2009, we consummated a purchase transaction with JUMA Properties, LLC (“JUMA”), a company owned by Ronald E. Smith, President, CEO and Director of Deep Down and wife Mary L. Budrunas, Vice President, Corporate Secretary and Director of Deep Down.  Pursuant to a Purchase and Sale Agreement dated May 22, 2009, we acquired certain property and improvements located in Channelview, Texas, where certain of our operations are currently located (the “Channelview Property”). The Channelview Property consists of 8.203 acres and was purchased for $2,600. The transaction was conducted on an arms-length basis with the purchase price being determined primarily on the basis of an independent appraisal, and in accordance with normal terms and conditions. See additional discussion in Note 9,8, Long-Term Debt.  Prior to May 29, 2009, we leased the Channelview Proper tyProperty from JUMA at a base rate of $15 per month.  In connection with the purchase of the Channelview Property, the lease between us and JUMA was terminated.   We incurred no early termination penalties from JUMA in connection with this termination.

The components of long-term debt are summarized below:below (in thousands):

We entered into the New Agreement with Whitney, dated as of April 14, 2010, to address covenant violations we had under our Credit Agreement which we originally entered into on November 11, 2008.  Under the terms of the New Agreement, our noncompliance with the prior terms of the financial covenants and certain other covenants under the Credit Agreement werehas been waived (the effect of such noncompliance would have entitled the holders of all debt under the Credit Agreement and payment terms were restructured.under a loan agreement between Flotation and TD Bank, to call such debt immediately due and payable and would have required us to classify all debt outstanding under these facilities as current in our audited consolidated balance sheet at December 31, 2009).  We continue to remain current on payments of our principal, interest and fee obligations with Whitney and TD Bank.  However, under the terms of the New Agreement, all of the indebtedness outstanding under such agreement, which is an aggregate principal amount of $3,391$3,583 at June 30,March 31, 2010, will all be due on April 15, 2011, unless we are able to refinance all or a portion of such indebtedness. Additionally,indebtedness and we no longer have access to a line of credit under the New Agreement.

We originally entered into our Credit Agreement with Whitney in November 2008.  The Credit Agreement originally provided a commitment to lend to us the lesser of $2,000 or 80 percent of eligible receivables (generally defined as current due accounts receivable in which the lender has a first priority security interest).  All of this commitment was also available for Whitney to issue letters of credit (“L/C”) for our benefit.  In December 2008, we then entered into an amendment of the Credit Agreement that provided for us to receive a term loan in the principal amount of $1,150.  Then, in May 2009, we entered into another amendment to the Credit Agreement providing for us to receive another term loan in the principal amount of $2,100.  We used the proceeds from the December 2008 term loan to purchase a piece of equipment (a remotely operated vehicle) and we used the proceeds of the May 2009 term loan to purchase real property in Channelview, Texas.  There was $850 outstanding under the revolving credit line available under the Credit Agreement on March 31, 2010 and December 31, 2009.2009, respectively. We have issued an irrevocable transferable standby L/C in the ordinary course of business, with an annual commission rate of 2.4 percent for $1,107 during the year ended December 31, 2009 related to a large contract that is expected to be completed during the first fiscal quarter of 2011. TheUnder the New Agreement does not obligate Whitney to issue new L/Cs.there is no further revolving line of credit available.

We were originally obligated to repay the December 2008 term loan on the basis of monthly installments of $35, with the initial payment on February 1, 2009 and a final payment of all unpaid principal and accrued interest on January 2, 2012.  Outstanding amounts of principal of the December 2008 term loan accrue interest at a rate of 6.5 percent per annum.  Under the terms of the New Agreement, thewe are required to continue to make monthly installment payments and interest rate offor the December 2008 term loan remainin the sameamount of $35 and the outstanding principal amount of such loan continues to accrue interest at the rate of 6.5 percent per annum.  However, the final balloon payment of $347all unpaid principal and accrued interest on the December 2008 term loan of $343 is now due on April 15, 2011. As of June 30,March 31, 2010, the outstanding principal amount of the December 2008 term loan was $639.$730.

We were originally obligated to repay the May 2009 term loan on the basis of monthly installments of $18, with the initial payment on June 1, 2009 and a final payment of all unpaid principal and accrued interest on May 1, 2024.  Outstanding amounts of principal of the May 2009 term loan accrue interest at a rate of 6.5 percent per annum.  Under the terms of the New Agreement, thewe are required to continue to make monthly installment payments and interest rate offor the May 2009 term loan remainin the same,amount of $18 and the outstanding principal amount of such loan continues to accrue interest at the rate of 6.5 percent per annum. However, the final balloon payment of $1,927all unpaid principal and accrued interest on the May 2009 term loan of $1,928 is now due on April 15, 2011.  As of June 30,March 31, 2010, the outstanding principal amount of the May 2009 term loan was $1,982.is $2,003.

Upon entry into the New Agreement, in April 2010, our indebtedness in the amount of $850 outstanding under the revolving credit line of the Credit Agreement was converted to a term loan. This April 2010 term loan requires us to make monthly installments in the amount of $40 plus the amount of accrued and unpaid interest beginning on May 1, 2010 and a final balloon payment of $410all unpaid principal and accrued interest of $450 on April 15, 2011.  Outstanding amounts of principal of the April 2010 term loan accrue interest at a rate of 6.5 percent per annum. As

Fees on L/Cs issued under the New Agreement accrue at a rate of June 30, 2010,3.5 percent to 2.5 percent (based on our leverage ratio) of the outstanding principal amount of the April 2010 term loan was $770.applicable L/C; and unused amounts under the L/C facility incur unused fees of 0.5 percent to 0.25 percent (also based on our leverage ratio).

Each of our subsidiaries has guaranteed our obligations under the Credit Agreement, including as amended and restated under the New Agreement, and as such, our obligations in connection with the New Agreement are generally secured by a first priority lien on all of our subsidiaries’ non-real property assets.  With regard to the Channelview, PropertyTexas property purchased with the proceeds of the May 2009 term loan, we also entered into a Deed of Trust, Security Agreement and UCC Financing Statement for Fixture Filing (collectively, the “Deed of Trust”) creating a lien on such property.

The New Agreement also removed a provision that permitted us to obtain additional indebtedness from a third party in the event Whitney declined to increase its commitment of indebtedness to us.  As such, we expect to have to refinance the indebtedness outstanding under the New Agreement at any such time as we seek to obtain new financing from a third party.

During fiscal 2009, Flotation, our wholly-owned subsidiary, obtained loan proceeds from TD Bank in the principal amount of $2,160 (the “TD Bank Loan”).$2,160.  Under the terms of the TD Bank Loan,loan agreement, we are obligated to make payments in monthly installments of $15, with an initial payment on March 13, 2009 and a final payment of the unpaid principal and accrued interest in February 2029.  The interest rate on the TD Bank Loan is 5.75 percent.

The TD Bank Loanloan is secured by Flotation’s operating premises in Biddeford, Maine under a mortgage and security agreement and a collateral assignment of leases and rents.  The TD Bank loan required us to enter into a debt subordination agreement that subordinated any debt Flotation owes to Deep Down, other than accounts payable between them arising in the ordinary course of business.  Additionally, the TD Bank Loan required a “negative pledge” that prohibits Flotation and Deep Down from granting security interests in Flotation’s personal property, other than such security interests granted in respect of our Revolver or New Agreement, as appropriate, with Whitney, as appropriate.Whitney.

Under the TD Bank Loan,loan, we are required to meet certain covenants and restrictions.  The financial covenants are reportable annually beginning with the year ended December 31, 2009, and are specific to the Flotation subsidiary financials.  The TD Bank Loan financial covenants include maintaining debt service coverage ratios, pre and post distributions, which are ratios of Flotation’s earnings after tax plus interest, depreciation, amortization and distributions to consolidated net interest expense and principal payments on the total debt, below 1.5 to 1.0 and including distributions of 2.0 to 1.0, and consolidated net worth after deducting other assets as are properly classified as “Intangible Assets” (“Tangible Net Worth”) in excess of $9,500.  Ot herOther covenants include limitations on issuance of liens, transactions with affiliates, and additional indebtedness among others.  At December 31, 2009, we were not in compliance with the financial covenants, and on April 15, 2010, we obtained a waiver for these covenants as of December 31, 2009.

We have several vehicle loans outstanding with aggregated principal balances of $50$57 as of June 30,March 31, 2010. Interest rates on these loans are between 5.5 and 6.0 percent, and the maturities are on various dates between January 2011 and September 2012.  Additionally, we have a subordinated debenture with a principal amount of $500 which originated from the exchange of preferred stock in a priorprevious year.  The debenture has a fixed interest rate of 6.0 percent per annum, which is required to be paid annually beginningon March 31, 200931st through maturity on March 31, 2011, when the unpaid principal balance is due. 

During the sixthree months ended June 30,March 31, 2010, we granted 2,250250 options. Additionally, a total of 2,000 option awards which were originally issued on February 14, 2008 to two executives were cancelled in March 2010 and not reissued; the related accelerated expense of $47 is included in the total share-basedstock-based option expense noted below for the sixthree months ended June 30,March 31, 2010.  During the sixthree months ended June 30,March 31, 2009, we revised the estimated rate of forfeitures to 30 percent from 0 percent based on the history of stock option cancellations and management’s estimates of expected future forfeiture rates, resulting in a reduction of share-basedstock-based compensation expense of $116 for the three months ended June 30,March 31, 2009.

Income tax expense during interim periods is based on applying the estimated annual effective income tax rate on interim period operations, which may vary from the statutory rate due to the impact of permanent items relative to our net income as well as by any valuation allowance recorded.  We employ an asset and liability approach that results in the recognition of deferred tax liabilities and assets for the expected future tax consequences of temporary differences between the financial basis and the tax basis of those assets and liabilities.  A valuation allowance is established when it is more likely than not that some of the deferred tax assets will not be realized.  Management analyzed its current operating results and future projections and determined that a full valuation allowance was needed due to our cumulative losses in recent years.

Our Board of Directors and Management recognize that related person transactions present a heightened risk of conflicts of interest, and therefore we review all relationships and transactions in which we and our directors, director nominees and executive officers or their immediate family members, as well as holders of more than 5 percent5% of any class of our voting securities and their family members, have a direct or indirect material interest.  As required under SEC rules, transactions that are determined to be directly or indirectly material to us or a related person are disclosed in the appropriate annual and/or quarterly statements filed with the SEC.

Ronald E. Smith, President, CEO and Director of Deep Down and Eugene Butler, Executive Chairman of Deep Down, are partners in Ship and Sail, Inc. (“Ship and Sail”), a vendor of Deep Down. During the sixthree months ended June 30,March 31, 2010, we made payments of $10 to Ship and Sail, and we expensed the prepaid balance of $38 as of December 31, 2009 during the first quarter of 2010. The payments and expense to Ship and Sail related to services provided by that entity for the support of the development of marine technology which is currently being marketed. We have no future plans to conduct business with Shipplanned for production during fiscal 2010, including specialized services for provision of vessel access for design and Sail.testing, and office space and related utilities.

Additionally, during the sixthree months ended June 30,March 31, 2010, we recorded expenses to JUMA, a company owned by Ronald E. Smith, and his wife Mary L. Budrunas, Vice President, Corporate Secretary and Director of Deep Down, in the amount of $20, of$13, which $8amount is included in accounts payable as of June 30,March 31, 2010 and was paid in April 2010.  Payments relate to the monthly rental of a boat owned by JUMA, in connection with the development of marine technology as discussed above. The arrangement between JUMA and Deep Down was approved by the Board of Directors through December 31, 2010.

In January 2010, we loaned South Texas Yacht Services, a vendor of Deep Down, $100.  The owner of South Texas Yacht Services is in a business alliance with Ship and Sail.  The note receivable, included in other assets on the unaudited consolidated balance sheet, bears interest at a rate of 5.5 percent per annum and monthly principal and interest payments in the amount of $2 commenced in April 2010. The final principal and interest payment is due March 24, 2015.2015; the note bears interests of 5.5 percent and is payable monthly in the amount of $2 beginning in April 2010. As of August 16,May 17, 2010, the payments on thisthe note were current.

Periodically, we are involved in legal proceedings arising from the normal course of business. As of the date of this Quarterly Report on Form 10-Q,10-Q/A , we are currently not involved in any pending material pending legal proceedings.

We lease certain offices, facilities, equipment and vehicles under non-cancellable operating and capital leases expiring at various dates through 2016.

Certain customers could require us to issue a standby letter of credit (“L/C”) in the ordinary course of business to ensure performance under terms of the contract and with associated vendors and subcontractors. In the event of default, the creditor could demand payment from the issuing bank for the amount of the L/C. Our revolving line of credit (“Revolver”) and subsequent New Agreement with Whitney, provides for L/Cs, as discussed in Note 9 Long-Term Debt above. During the year ended December 31, 2009, we issued a $1,107 irrevocable transferrable standby L/C in the normal course of business, with an annual commission rate of 2.4 percent. This L/C remains outstanding under the New Agreement as of June 30,March 31, 2010.

Basic earnings per share (“EPS”) is calculated by dividing net income (loss) by the weighted-average number of common shares outstanding for the period. Diluted EPS is calculated by dividing net income (loss) by the weighted-average number of common shares and dilutive common stock equivalents (warrants, stock awards and stock options) outstanding during the period. Dilutive EPS reflects the potential dilution that could occur if options to purchase common stock were exercised for shares of common stock. There were no potentially dilutive securities for the three or six months ended June 30,March 31, 2010 and 2009 that were excluded from the computation of diluted earnings per share because their effect would have been anti-dilutive or the exercise price for the outstanding warrants and options exceeded the averag eaverage market price for our common stock.

On May 3, 2010, we announced the execution of a Stock Purchase Agreement, effective as of May 3, 2010 (the “Purchase Agreement”), by and among Deep Down, Cuming Corporation, a Massachusetts corporation (“Cuming”), and the stockholders of Cuming (the “Selling Stockholders”), pursuant to which we have agreed to purchase all of the issued and outstanding shares of Cuming’s common stock (the “Acquisition”) for a purchase price of  $47,000 (less an amount of certain liabilities to be assumed, estimated to be an approximate amount of $13,000 based upon Cuming’s balance sheet as of December 31, 2009 and further subject to a purchase price adjustment for working capital) (“Cash Price”), plus 25,000 shares of common stock of Deep Down to be deli vereddelivered to the Selling Stockholders at the closing.  Upon the signing of the Purchase Agreement, Deep Down and the Selling Stockholders entered into an Escrow Agreement (the “Escrow Agreement”) pursuant to which Deep Down has deposited with an escrow agent approximately 8,333 shares of its common stock (“Escrowed Stock”) to be (i) delivered to the Selling Stockholders if Deep Down does not meet certain conditions and the Purchase Agreement is terminated or (ii) applied against Deep Down’s obligation to deliver 25,000 shares of common stock at closing.  Such shares were valued at the closing stock price of $0.057 as of June 30, 2010, for a total value of $475, which is recorded on the deposit line on the accompanying balance sheet.

Consummation of the Acquisition is subject to certain conditions, including the following (among other customary conditions for a transaction of this type):

The Purchase Agreement contains customary representations and warranties that the parties have made to each other.  The Purchase Agreement also contains standard indemnification provisions that require the indemnifying party to pay for any losses in excess of $500 that result from the failure of any representation or warranty to be true and correct.  The indemnification is subject to a cap of $25,000 other than for certain fundamental representations and warranties (for which case there is no capped limitation).  At closing a portion of the Cash Price will be deposited in an escrow account for purposes of the purchase price adjustment and for potential indemnity claims.

Under terms of the Purchase Agreement, eitherEither of Deep Down or the Selling Stockholders may terminate the Purchase Agreement if the Acquisition is not completed by July 31,June 30, 2010, provided the party wishing to terminate is not in breach of the Purchase Agreement.  In the event of a termination of the Purchase Agreement as a result of a breach of our obligations under the Purchase Agreement or inability to obtain funds to pay the Cash Price, the escrow agent will release the Escrowed Stock to the Selling Stockholders.  If the Purchase Agreement is terminated by either Deep Down or Cuming under certain circumstances the parties will be obligated to reimburse the other’s expenses incurred in connection with the transactions contemplated by the Purchase Agreement in an aggregate amount not to exce edexceed $275.

On April 28, 2010, we obtained a waiver from Whitney from a covenant provision in the New Agreement that prohibits us from committing to make an investment in or purchase any equity interest in another entity.

The following discussion and analysis provides information that management believes is relevant for an assessment and understanding of our results of operations and financial condition. This information should be read in conjunction with our audited historical consolidated financial statements which are included in our Form 10-K for the fiscal year ended December 31, 2009 filed with the Commission on April 15, 2010 and our unaudited consolidated financial statements and notes thereto included with this Quarterly Report on Form 10-Q10-Q/A in Part I. Item 1.

We are an oilfield services company specializing in complex deepwater and ultra-deepwater oil production distribution system support services, serving the worldwide offshore exploration and production industry. Our services and technological solutions include distribution system installation support and engineering services, umbilical terminations, loose-tube steel flying leads, flotation and drill riser buoyancy, remotely operated vehicles (“ROVs”) and related services.toolings. We support subsea engineering, installation, commissioning, and maintenance projects through specialized, highly experienced service teams and engineered technological solutions. Our primary focus is on more complex deepwater and ultra-deepwater oil production distribution system support services and technologies, used between the platfor mplatform and the wellhead.

Business conditions in our industry begancontinued to improve globallyimpact our customers operations worldwide during the second quarterfirst three months of 2010. The financial markets, which are critical to the funding of the major offshore and deepwater projects, continued to showhave not stabilized yet.  Although some signs of stabilizationnew projects are being delayed and recovery and we continue to see an increase in our bidding activity.  Somesome existing projects slowed down generally, some of our customers began accelerating their projects that they had previously delayed. This, together within the work we performedfourth quarter of 2009 to meet their internal deadlines, which thereby reduced our revenue in supportthe first quarter of the oil spill relief efforts discussed below, resulted in a 55 percent increase in our revenues during the second quarterfiscal 2010 compared to the secondfirst quarter last year.of 2009.

We believe that the economy is showing signs of stabiliziation and recovery. The deepwater market remains oneprice of oil has increased in the best frontiersfirst three months of 2010; the financial markets show signs of improving, and our bidding activity is increasing. We believe the longer term outlook is still very positive for adding large hydrocarbon reserves with high production flow rates. We are well positioned to supply services and products required to support safethe offshore and deepwater projects of our customers. Therefore, we anticipate demand for our deepwater services and products will continue to growdrilling and we will continue to focus on this sector of the industry worldwide.

During the sixthree months ended June 30,March 31, 2010 and 2009, the operations of Deep Down’s operating segments, Deep Down Delaware, ElectroWave, Mako and Flotation, have been aggregated into a single reporting segment. Additionally, we have aggregated ElectroWave’s operations into Deep Down Delaware as a single operating segment due to similar production processes and cost savings related to office and administrative support. While the operating segments have different product lines,lines; they are very similar. They are all service-based operations revolving around our personnel’s expertise in the deepwaterdeep water industry, and any equipment is produced to customer-specified designsa customer specified design and engineered using Deep Down personnelpersonnel’s expertise, with installation and project management beingas part of our service revenue to the customer. Additionally, the segments have similar customers and distribution methods, and their economic characteristics are similar with regard to their gross margin percentages. Our operations are basedlocated in the United States althoughthough we al so generate revenues fromoccasionally make sales to international customers.

On May 3, 2010, we announced the execution of a Stock Purchase Agreement, effective as of May 3, 2010 (the “Purchase Agreement”), by and among Deep Down, Cuming Corporation, a Massachusetts corporation (“Cuming”), and the stockholders of Cuming (the “Selling Stockholders”), pursuant to which we have agreed to purchase all of the issued and outstanding shares of Cuming’s common stock (the “Acquisition”) for a purchase price of approximately $47,000 (less an amount of certain liabilities to be assumed, estimated to be an approximate amount of $13,000 based upon Cuming’s balance sheet as of December 31, 2009 and further subject to a purchase price adjustment for working capital) (“Cash Price”), plus 25,000 shares of common stock of Deep Down to be d elivereddelivered to the Selling Stockholders at the closing.  Upon the signing of the Purchase Agreement, Deep Down and the Selling Stockholders entered into an Escrow Agreement (the “Escrow Agreement”) pursuant to which Deep Down has deposited with an escrow agent approximately 8,333 shares of its common stock (“Escrowed Stock”) to be (i) delivered to the Selling Stockholders if Deep Down does not meet certain conditions and the Purchase Agreement is terminated or (ii) applied against Deep Down’s obligation to deliver 25,000 shares of common stock at closing.

Consummation of the Acquisition is subject to certain conditions, including the following (among other customary conditions for a transaction of this type):

The Purchase Agreement contains customary representations and warranties that the parties have made to each other.  The Purchase Agreement also contains standard indemnification provisions that require the indemnifying party to pay for any losses in excess of $500 that result from the failure of any representation or warranty to be true and correct.  The indemnification is subject to a cap of $25,000 other than for certain fundamental representations and warranties (for which case there is no capped limitation).  At closing a portion of the Cash Price will be deposited in an escrow account for purposes of the purchase price adjustment and for potential indemnity claims.

 

As discussed in Note 9 , Long-Term Debt, we have entered into the New Agreement to address covenant violations we had under our Credit Agreement with Whitney that we originally entered into on April 14, 2010.November 11, 2008.  Under the terms of the New Agreement, our noncompliance with the prior terms of the financial covenants and certain other covenants under the Credit Agreement werehave been waived (the effect of such noncompliance would have entitled the holders of all debt under the Credit Agreement and payment terms were restructured.under a loan agreement between Flotation and TD Bank, N.A. (“TD Bank”) to call such debt immediately due and payable and would have required us to classify all debt outstanding under these facilities as current in our audited consolidated balance sheet at December 31, 2009).  We continue to remain current on payments of our principal, interest and fee obligations with Whitney and TD Bank.  However, under the terms of the New Agreement, all of the indebtedness outstanding under such agreement, which is an aggregate principal amount of $3,391$3,583 as of June 30,March 31, 2010, will all be due on April 15, 2011 and has been reclassified as current on our balance sheet on June 30, 2010. We2010, unless we are able to refinance all or a portion of such indebtedness, and we no longer have any further capacity to draw upon a revolving line of credit un derunder the New Agreement. Our ability to meet the debt covenants required by the New Agreement is primarily dependent on the adequacy of earnings before interest, taxes, depreciation and amortization. Our inability to satisfy the covenants contained in the New Agreement would constitute an event of default. An uncured default could result in our outstanding debt becoming immediately due and payable. If this were to occur, we may not be able to obtain waivers or secure alternative financing to satisfy our obligations, which would have a material adverse impact on our business.

Furthermore, as of December 31, 2009, Flotation was not in compliance with its covenant obligations under the TD Bank loan.  The noncompliance with such covenants under either of the Credit Agreement with Whitney and the loan agreement with TD Bank would constitute cross defaults for purposes of the other debt facility.  Flotation also obtained a waiver of its noncompliance so that such cross default has not occurred with respect to our fiscal quarter ended December 31, 2009. Compliance testing is required only at year end so no compliance test was performed at June 30,March 31, 2010. Indebtedness outstanding under the TD bank loan was $2,094$2,110 at June 30,March 31, 2010.

Between April 25 and April 30, 2010, we sold 5,150 shares of our common stock in a private placement to accredited investors at a per-share price of $0.10 resulting in total proceeds of $501, net of $14 applied to an outstanding vendor invoice for services provided,$515, which we have usedwill use for working capital purposes.

During the six months ended June 30,first quarter 2010, cash provided from operating activities was $1,565$720 as compared to $2,734$3,936 during the same prior year period.  Cash flow from operating activities declined primarily due to an increase in our net loss and a decrease in cash provided by changes in working capital.  Working capital declined primarily in an effort to manage short term liquidity and as a result of the decline in net billings in excess of costs and estimated earnings on uncompleted contracts, which relates to several large projects that are expected to be completed in fiscal year 2010 and one that is expected to be completed during the first quarter of 2011.

During the six months ended June 30,first quarter 2010, cash used in investing activities was $1,470$779 compared to $4,911$1,898 during the same periodquarter last year. During the six months ended June 30,first quarter 2010, we used $1,145$563 to purchase property and equipment and $201$91 for capitalized software.  We also incurred a note of $100 related to a vendor receivable, which is a related party (see further discussion in Note 12 - Related Party Transactions in this Form 10-Q/A ).  For the six months ended June 30,first quarter 2009, we used $4,558$1,898 to purchase property and equipment, which included $2,600$470 in deposits for the purchase of land and buildings, plus $277 for capitalized software.which transaction was completed in May 2009.

During the six months ended June 30,first quarter 2010, cash provided byused in financing activities was $112$150 which represented proceeds from the sale of stock of $501, offset by $389 in principal payments on long term debt.  During the six months ended June 30,first quarter 2009, cash provided by financing activities was $1,583$1,728 which consisted of borrowings of $1,830$1,840 and principle payments of $247.$112.

The discussion and analysis of our financial condition and results of operations is based on our unaudited consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements in accordance with US GAAP requires us to make estimates and judgments that may affect assets and liabilities. On an on-going basis, we evaluate our estimates, including those related to revenue recognition and related allowances, costs and estimated earnings incurred in excess of billings on uncompleted contracts, inventory, impairments of long-lived assets, including intangible assets, impairments of goodwill, income taxes including the valuation allowance for deferred tax assets, billings in excess of costs and estimated ear ningsearnings on uncompleted contracts; contingencies and litigation, and share-based payments. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable, the results of which form the basis for making judgments about the carrying values of assets and liabilities. Actual results may differ from these estimates under different assumptions or conditions.

Refer to Part II. Item 72 “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” in our Annual Report on Form 10-K for the year ended December 31, 2009 for a discussion of our Critical Accounting Policies.

We do not believe that our operations are significantly impacted by inflation.  Our business is not significantly seasonal in nature.

We have no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors.