EX-99.3 4 deepdown_8k-ex9903.htm PRO FORMAS deepdown_8k-ex9903.htm
Exhibit 99.3

Deep Down, Inc.
Unaudited Pro Forma Combined Condensed Financial Statements of
Deep Down, Inc. and Flotation Technologies, Inc.



The following unaudited pro forma combined condensed financial statements are based on the historical financial statements of Flotation Technologies, Inc. and Deep Down, Inc. after giving effect to the acquisition of Flotation Technologies, Inc.  The unaudited pro forma combined condensed balance sheets as of March 31, 2008 are presented to give effect to the acquisition as if it occurred on March 31, 2008.

The unaudited pro forma combined condensed statements of operations for the three months ended March 31, 2008, the twelve months ended December 31, 2007 and December 31, 2006, respectively, are presented as if the acquisition had taken place on January 1, 2006 by combining the historical results of Flotation Technologies, Inc. and Deep Down, Inc.

The pro forma combined condensed financial statements are presented for informational purposes only and are not necessarily indicative of the results of operations that actually would have been achieved had the acquisition been consummated as of that time, or is it intended to be a projection of future results.  The unaudited pro forma results were as follows:

 
 
 
Deep Down, Inc.
Unaudited Pro Forma Combined Condensed Financial Statements of
Deep Down, Inc. and Flotation Technologies, Inc.


Unaudited Pro Forma Combined Condensed Balance Sheets
  
As of March 31, 2008
 
  
                                   
         
Historical
                        
   
Historical
    
Flotation
    
Purchase
                  
   
Deep
    
Technologies,
    
Accounting
      
Pro Forma
          
   
Down, Inc.
    
Inc.
    
Entries
      
Entries
      
Combined
  
Assets
                                  
Cash and equivalents
   $ 3,678,318     $ 852,444     $ (22,100,000 )
(b)
   $ 37,125,000  
(c)
   $ 19,555,762  
Accounts receivable
     7,469,386       2,704,565                           10,173,951  
Prepaid expenses and other current assets
     1,335,237       829,776       -                   2,165,013  
Work in progress
     1,106,891       -                           1,106,891  
Total current assets
     13,589,832       4,386,785       (22,100,000 )       37,125,000         33,001,616  
Property and equipment, net
     5,058,557       3,652,974       986,288  
(a)
               9,697,819  
Other assets, net of accumulated amortization
     1,122,050       21,050       -         -         1,143,100  
Intangibles
     4,284,588       -       14,796,609  
(a)
               19,081,197  
Goodwill
     10,660,669       -       1,977,389  
(a)
               12,638,058  
Total assets
   $ 34,715,696     $ 8,060,809     $ (4,339,715 )     $ 37,125,000       $ 75,561,790  
                                             
Liabilities and Stockholders' Equity
                                            
Accounts payable and accrued liabilities
   $ 2,966,215     $ 1,451,654     $ 181,227  
(a)
   $ -         4,599,095  
Deferred revenue
     135,000       63,593       -         -         198,593  
Other current liabilities
     -       684,419       -  
 
     -         684,419  
Payable to Mako shareholders
     1,243,571       -       -         -         1,243,571  
Current portion of long-term debt
     330,399       -       -  
 
     -         330,399  
Total current liabilities
     4,675,185       2,199,666       181,227         -         7,056,078  
Long-term debt, net of accumulated discount
     11,054,959       1,697,763       -  
 
     -         12,752,722  
Total liabilities
   $  15,730,144     $  3,897,429     $  181,227       $  -       $  19,808,799  
                                             
Stockholders' equity:
                                            
Common stock, $0.001 par value, 490,000,000 shares
                                      
authorized, 115,846,019 and 174,703,162
                                            
issued and outstanding, respectively
     115,846       200       1,514  
(b)
     57,143  
(c)
     174,703  
Paid in capital
     21,306,461       -       1,542,936  
(b)
     37,067,857  
(c)
     59,917,254  
Retained earnings
     (2,436,755 )     4,163,180       (6,065,392 )
(a)
     -         (4,338,967 )
Total stockholders' equity
     18,985,552       4,163,380       (4,520,941 )       37,125,000         55,752,990  
Total liabilities and stockholders' equity
   $ 34,715,696     $ 8,060,809     $ (4,339,715 )     $ 37,125,000       $ 75,561,790  
                                             
                                             
See accompanying notes to pro forma combined condensed financial statements.
 
 
2
 
Deep Down, Inc.
Unaudited Pro Forma Combined Condensed Financial Statements of
Deep Down, Inc. and Flotation Technologies, Inc.

Unaudited Pro Forma Combined Condensed Statements of Operations
  
For the Three Months Ended March 31, 2008
  
                           
                           
         
Historical
                
   
Historical
    
Flotation
            
Combined
  
   
Deep Down, Inc.
    
Technologies, Inc.
    
Pro Forma
      
Pro Forma
  
   
March 31, 2008
    
March 31, 2008
    
Entries
      
Results
  
                           
                           
Revenues
   $ 6,279,465     $ 4,877,108   $ 
 -
       $ 11,156,573  
Cost of sales
     3,876,371       3,377,955    
 -
         7,254,326  
                                 
Gross profit
     2,403,094       1,499,153       -         3,902,247  
                                   
Operating expenses:
                                  
Selling, general & administrative
     1,762,247       552,015       22,028  
(f)
     2,336,290  
Depreciation and amortization
     298,149       110,944       204,784  
(e)
     613,877  
                                   
Total operating expenses
     2,060,396       662,959       226,812         2,950,167  
                                   
Operating income (loss)
     342,698       836,194       (226,812 )       952,080  
                                   
Total other expense
     (701,511 )     (34,868 )     -         (736,379 )
Income (loss) from continuing operations
     (358,813 )     801,326       (226,812 )       215,701  
Income tax benefit (expense)
     269,366       -       (296,491 )
(d)
     (27,125 )
Net income (loss)
   $ (89,447 )   $ 801,326     $ (523,303 )     $ 188,576  
                                   
Basic earnings per share
   $ (0.00 )                     $ 0.00  
Shares used in computing basic per share amounts
     87,185,242                         146,042,385  
                                   
Diluted earnings per share
   $ (0.00 )                     $ 0.00  
Shares used in computing diluted per share amounts
     87,185,242                         151,943,027  
                                   
 
See accompanying notes to pro forma combined condensed financial statements.
  

 
3
 
Deep Down, Inc.
Unaudited Pro Forma Combined Condensed Financial Statements of
Deep Down, Inc. and Flotation Technologies, Inc.

Unaudited Pro Forma Combined Condensed Statements of Operations
  
For the Year Ended December 31, 2007
 
  
                           
         
Historical
                
   
Historical
    
Flotation
            
Combined
  
   
Deep Down, Inc.
    
Technologies, Inc.
    
Pro Forma
      
Pro Forma
  
   
December 31, 2007
    
December 31, 2007
    
Entries
      
Results
  
                           
                           
Revenues
   $ 19,389,730     $ 13,410,002   $ 
 -
       $ 32,799,732  
Cost of sales
     13,020,369       8,117,600    
-
         21,137,969  
                                 
Gross profit
     6,369,361       5,292,402       -         11,661,763  
                                   
Operating expenses:
                                  
Selling, general & administrative
     4,284,553       1,678,917       88,112  
(f)
     6,051,582  
Depreciation and amortization
     426,964       322,130       819,135  
(e)
     1,568,229  
                                   
Total operating expenses
     4,711,517       2,001,047       907,247         7,619,811  
                                   
Operating income (loss)
     1,657,844       3,291,355       (907,247 )       4,041,952  
                                   
Total other income (expense)
     (335,662 )     766,477       -         430,815  
Income (loss) from continuing operations
     1,322,182       4,057,832       (907,247 )       4,472,767  
                                   
Income tax expense
     (369,673 )     -       (1,501,398 )
(d)
     (1,871,071 )
Net income (loss)
   $ 952,509     $ 4,057,832     $ (2,408,645 )     $ 2,601,696  
                                   
Basic earnings per share
   $ 0.01                       $ 0.02  
Shares used in computing basic per share amounts
     73,917,190                         132,774,333  
                                   
Diluted earnings per share
   $ 0.01                       $ 0.02  
Shares used in computing diluted per share amounts
     104,349,455                         163,206,598  
                                   
 
See accompanying notes to pro forma combined condensed financial statements.
  

 
4
 
Deep Down, Inc.
Unaudited Pro Forma Combined Condensed Financial Statements of
Deep Down, Inc. and Flotation Technologies, Inc.
 
Unaudited Pro Forma Combined Condensed Statements of Operations
  
For the Year Ended December 31, 2006
  
                           
                         
   
Historical
Deep Down, Inc.
    
Historical
Flotation
                
   
From Inception
    
Technologies, Inc.
            
Combined
  
   
June 29, 2006 to
    
Year Ended
    
Pro Forma
      
Pro Forma
  
   
December 31, 2006
    
December 31, 2006
    
Entries
      
Results
  
                           
                           
Revenues
   $ 978,047     $ 6,379,574   $ 
 -
       $ 7,357,621  
Cost of sales
     565,700       3,699,075    
 -
         4,264,775  
                                 
Gross profit
     412,347       2,680,499       -         3,092,846  
                                   
Operating expenses:
                                  
Selling, general & administrative
     3,600,627       1,563,387       88,112  
(f)
     5,252,126  
Depreciation and amortization
     27,161       72,365       819,135  
(e)
     918,661  
                                   
Total operating expenses
     3,627,788       1,635,752       907,247         6,170,787  
                                   
Operating income (loss)
     (3,215,441 )     1,044,747       (907,247 )       (3,077,941 )
                                   
Total other expense
     (62,126 )     (7,024 )     -         (69,150 )
Income (loss) from continuing operations
     (3,277,567 )     1,037,723       (907,247 )       (3,147,091 )
                                   
Income tax expense
     (22,250 )     -       (383,958 )
(d)
     (406,208 )
Net income (loss)
   $ (3,299,817 )   $ 1,037,723     $ (1,291,205 )     $ (3,553,298 )
                                   
Basic earnings per share
   $ (0.04 )                     $ (0.03 )
Shares used in computing basic per share amounts
     76,701,569                         135,558,712  
                                   
Diluted earnings per share
   $ (0.04 )                     $ (0.03 )
Shares used in computing diluted per share amounts
     76,701,569                         135,558,712  
                                   
 
See accompanying notes to proforma combined condensed financial statements.
  

 
5
 
Deep Down, Inc.
Unaudited Pro Forma Combined Condensed Financial Statements of
Deep Down, Inc. and Flotation Technologies, Inc.


The Unaudited Pro Forma Combined Condensed Statements include the following pro forma assumptions and entries:
 
 (a)
Purchase accounting related to assets acquired and liabilities assumed as part of the transaction: 
   
 
Deep Down obtained an independent valuation of the assets and liabilities as of the purchase date of May 1, 2008.  The fair value of the property, plant and equipment will be depreciated over estimated useful lives of 3 to 39 years using the straight-line method.  Deep Down has estimated the fair value of Flotation’s identifiable intangible assets as follows:


   
Estimated
    
Average Remaining
  
   
Fair Value
    
Useful Life
  
 Trademarks
   $ 2,039,000      
40
  
 Technology
     11,209,000      
25
  
 Non-compete covenant
     879,000      
3
  
 Customer relationship
     670,000      
25
 
    $ 14,797,000          

(b)  
Amounts reflect the total purchase price of $23.8 million including approximately $181,227 of transaction expenses and $121,793 Black Scholes fair market valuation of the warrants issued:


Cash
   $ 22,100,000  
Certain transaction costs
     181,227  
Fair market value of common stock
     1,422,857  
Fair market value of warrants issued
     121,793  
Total purchase price
   $ 23,825,877  

(c)  
Represents par value and additional paid-in capital related to shares of common stock issued in the private placement to outside third party investors.  Deep Down sold 57,142,857 shares to institutional investors on June 5, 2008, for approximately $37.1 million in net proceeds, or $0.70 per share. Deep Down used $22.1 million for the purchase of Flotation. The remaining $15 million in proceeds was used to pay off debt and working capital puposes, and are not reflected in these pro forma amounts.

(d)  
Represents estimated income tax accruals 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.

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

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

The table below reflects the assumptions used for warrant and option grants in the three months ended March 31, 2008:

Expected life (in years)
2-3 years
Risk-free interest rate
2.52 % - 2.84%
Volatility
51.7% - 53.3%
Dividend yield
0%
 
 
6