Koil Energy Solutions Inc. (KLNG)

[10 bagger]

DPDW Update...

My initial projection's on DPDW are stated below.. After tweaking for Flotation and the unbelivable control that PBR has taken over the Harsh Water Deep Drillers by contracting over 80% of ALL avilable and newbuild deep drilling rigs through 2010 I am firming 08 at $0.19 and raising my 09 moving target to $0.36 to $0.40 for EBTIDA... This based upon new build construction of SUB.ol,, SIOFF.ol and FPSO storage facility builder SEVAN.ol.. All are O&G Service Ship Suppliers to PBR and will provide services under exisiting new build contracts supply and product processing to PBR..

As PBR with it's new contracts for Deep Rigs has ineffect cornered the market on Deep Drilling ships and platforms,,, orders and contracts for New and Newbuild Deep Drill supply ships and FPSO's can't be too far behind.. DPDW is the suppplier of first choice to the newbuild handling and docking systems to SUB.ol,, SIOFF.ol and FPSO builder and operator SEVAN.ol.. In addition with it's pending purchase of Flotation,, DPDW will be in a commanding position to provide drill pipe floatation for the deep water drilling services of those mentioned companies..

My former Projections were:

The projection of per/share earnings by an analysts for 09 may seem a little high but I think that they are doable because the FSPO market will ramp up and if they secure more new build ships providing contracts for thier products.. The 08 numbers should start to ramp up with the next quarter giving guidance as to the magnitude of DPDW's inclusion in the new build market.. 08 could be a bit of a stretch if indications are not present in the upcoming qtr..

As of now I look for EBTIDA to come in at $0.16 to $0.19 in 08 and $0.31 to $0.38 in 09...These numbers are wide for 09 because there is a possibility of shipbuilding contracts either being delayed or CXL. due to the O&G market outlook 2 years from now.. FPSO's will be immune from any downturn in oil prices as they are storage and processing facilities for oil already in the ground/sea bottom that has been discovered and that need processing.. hank

http://seekingalpha.com/article/77511-petrobras-is-hoarding-the-world-s-deep-sea-drillers?source=yahoo


DPDW....Cut and paste..

Three months Ended March 31, 2008 Compared to Three Months Ended March 31, 2007..

Revenues...
Revenue generated in the three months ended March 31, 2008 was $6,279,465 compared to $2,098,394 for the three months ended March 31, 2007, an increase of $4,181,071 or 199%. Increased activity from Deep Down's offshore subsea business, including service activity related to installation of recoveries of subsea equipment, the delivery of launch and recovery systems, loose tube steel flying leads, winch system refurbishments, and an active heave compensated in-line winch system accounted for $4,293,820 of this revenue, an increase of $2,195,426, or 105% over the same prior year period. The Mako and ElectroWave acquisitions accounted for $1,985,645 of this revenue, an increase of 94% over the same prior year period.

Gross Profits,, Gross margins

For the three months ended March 31, 2008 was $2,403,094 compared to $846,305 in the same prior year period, an increase of $1,556,789 or 184%. Gross margin as a percentage of revenue was 38% in the current period as compared to 40% in the prior period.

Selling, General and Administrative Expenses. SG&A for the three months ended March 31, 2008 was $1,762,247 compared to $659,651 for the same prior-year period. The increase was primarily due to costs related to our acquisitions of Mako and Electrowave. However, SG&A as a percent of net revenue was lower for the three months ended March 31, 2008 at approximately 28% compared to 31% for the same prior period.

Interest Expense. Interest expense for the three months ended March 31, 2008 was $769,030 compared to $231,887 for the same prior year period. This increase is the result of the interest of debt related to the Credit Agreement in the three months ended March 31, 2008 which did not exist for the same prior period (See below “Capital Resources and Liquidity”).

Net loss. Net loss for the three months ended March 31, 2008 was $89,447, compared to a net loss of $109,258 for the same prior year period.

EBITDA. EBITDA is a non-GAAP financial measure. Deep Down defines EBITDA as net income plus interest expense, income taxes, depreciation, amortization and other non-cash, non-operating expense. Deep Down uses EBITDA as an unaudited supplemental financial measure to assess (1) the financial performance of its assets without regard to financing methods, capital structures, taxes or historical cost basis; (2) its liquidity and operating performance over time in relation to other companies that own similar assets and that the Company believes calculate EBITDA in a similar manner; and (3) the ability of Deep Down assets to generate cash sufficient for Deep Down to pay potential interest costs. Deep Down also understands that such data are used by investors to assess the Company's performance. However, the term EBITDA is not defined under generally accepted accounting principles, and EBITDA is not a measure of operating income, operating performance or liquidity presented in accordance with generally accepted accounting principles. When assessing Deep Down’s operating performance or liquidity, investors and others should not consider this data in isolation or as a substitute for net income, cash flow from operating activities, or other cash flow data calculated in accordance with generally accepted accounting principles. Excluding the one-time gain and non-cash interest and stock based compensation charges, earnings before depreciation, interest, amortization, taxes and other non-cash charges (“EBITDA”) for the three months ended March 31, 2008 was $749,958 compared to $186,654, an increase of $563,304, or 302% over the same prior year period.

ElectroWave USA, Inc., and Mako Technologies, LLC.
acquisitions accounted for $1,985,645 of revenue In the first Qtr.. This was an increase of 94% over the same prior year period.

ElectroWave USA - Overview ElectroWave USA has tackled some of the toughest CCTV security and monitoring systems out there. Post-9/11 New York DOT wanted camera's to watch every available compartment of the three new ferries. ElectroWave USA stepped up to the challange and provided NYDOT one of the most sophisticated CCTV systems available on passenger transportation ferries. A system of camera's, coupled with digital video recording, allow post-event tracing and security on one of the most used transportation devices in New York.

****"Mako Technologies is the perfect complement to our current operations," commented Robert E. Chamberlain, Jr., Deep Down's chairman. "Preliminary due-diligence on Mako indicates 2006 revenues of approximately $6.46 million with adjusted EBITDA of approximately $2.5 million, subject to final review by our auditing team. We expect total consideration for the acquisition to be $5.0 million in cash, $4.5 million in non-convertible notes, and 7,936,508 shares of common stock of Deep Down."
"We are excited to become a part of the Deep Down family of energy service companies," commented Jacob Marcell, Mako Technologies' chief executive officer. "With the strength of Deep Down's infrastructure and access to capital, we foresee the ability to take advantage of the need for both planned and "emergency" offshore rental equipment in support of the growing level of oil and gas exploration occurring in the Gulf of Mexico. We also plan to expand our operations internationally."

****Effective December 1, 2007, Deep Down purchased 100% of the common stock of Mako Technologies, Inc. Pursuant to the agreement and plan of merger, two installments were paid to the Mako shareholders. The first installment of $2,916,667 in cash and 6,574,074 restricted shares of common stock of Deep Down, valued at $0.76 per share, was paid on January 4, 2008. The second installment of 2,802,969 restricted shares of common stock of Deep Down valued at $0.70 was issued on March 28, 2008. The final cash payment of $1,243,571 which was paid on April 11, 2008...

Friday, April 18, 2008... Ocean buoy technology firm Flotation Technologies Inc. has been acquired by Deep Down Inc. in a $23.3 million stock purchase agreement, according to officials at Texas-based Deep Down.

On April 11, 2008, the shareholders of Mako received the final cash installment of $1,243,571 under the terms of the securities redemption and shareholder payable agreement.

Headquartered in Biddeford, Maine , Flotation Technologies is a recognized leader in the design and manufacture of deepwater buoyancy systems, specializing in Flotec(TM) syntactic foam and polyurethane elastomer products. With extensive engineering, design, fabrication, and analysis capabilities, Flotation Technologies provides quick turnaround, cost-effective buoyancy and elastomer products to the worldwide oceanographic, offshore energy, seismic, and military markets. Within the past few years, Flotation Technologies has received its approved vendor status for the supply of engineered products such as distributed buoyancy, installation buoyancy and bend limiting products from numerous customers including Aker Kvaerner, Cooper Cameron , Chevron , Devon Energy , Exxon Mobil , Oceaneering Multiflex, Petrobras, Shell, Statoil, Technip, and Wellstream International. More information can be obtained at http://www.flotec.com .

Un-audited financial information provided by Flotation Technologies indicates that revenue for the last 12 months, ending March 31, 2008, was approximately $17.27 million, with a pretax of $4.84 million and EBITDA of $5.26 million, adjusted for certain nonrecurring expenses and a gain on sale of real estate assets. Financial results of operations for the years ended December 31, 2007 and 2006 will be presented when audits are finalized. The total price for the acquisition is expected to be approximately $23.3 million.

Last May 2007, Flotation Technologies won a $4 million contract from an unnamed source for flotation devices, and opened a 45,000-square-foot manufacturing plant in Biddeford. In 2006, the company worked with the Maine Manufacturing Extension Partnership, a business development program supported by the U.S. Department of Commerce, to plan the company's business strategy and work force development.

Friday, May 9, 2008.. Officials at Flotation Technologies Inc., a developer and manufacturer of deepwater buoyancy systems, has landed a $5.5 million contract for a custom-designed buoyancy system from an unnamed international energy company.

According to Biddeford, Maine-based Flotation Technologies, the name of the client and any more detailed description of the product are confidential due to the nature of the project. The system should be delivered in the third and fourth quarters of 2008, officials said.

The following unaudited pro-forma combined condensed financial statements are based on the historical financial statements of Mako and Deep Down after giving effect to the acquisition of Mako. The unaudited pro-forma condensed combined statements of operations for the three months ended March 31, 2007 is presented as if the acquisition had taken place on January 1, 2007 by combining the historical results of Mako and Deep Down.

DEEP DOWN, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)

Three Months Ended March 31, 2008 2007
Revenues:
Contract revenue $ 5,337,529 $ 1,602,281
Rental revenue 941,936 496,113
Total revenues 6,279,465 2,098,394
Cost of sales 3,876,371 1,252,089
Gross Profit 2,403,094 846,305

Operating expenses:
Selling, general & administrative 1,762,247 659,651
Depreciation and amortization 298,149 64,025
Total operating expenses 2,060,396 723,676
Operating income 342,698 122,629
Other income (expense):
Gain on sale of assets 28,355 -
Interest income 39,164 -
Interest expense (769,030 ) (231,887 )
Total other expense (701,511 ) (231,887 )
Loss before income taxes (358,813 ) (109,258 )
Income tax benefit 269,366 -
Net loss $ (89,477 ) $ (109,258 )
Earnings per share:
Basic and diluted $ (0.00 ) $ (0.00 )

Weighted-average common shares outstanding 87,185,242 81,036,838
CONSOLIDATED STATEMENTS OF CASH FLOW
(Unaudited)
Three Months Ended March 31, 2008 2007

Cash Flow from Operations

As of March 31, 2008, our cash and cash equivalents were $3,115,818 plus restricted cash of $562,500. Cash and cash equivalents were $2,206,220 plus restricted cash of $375,000 as of December 31, 2007. Management believes that the Company has adequate capital resources when combined with its cash position and cash flow from operations to meet current operating requirements.

On April 11, 2008, the shareholders of Mako received the final cash installment of $1,243,571 under the terms of the securities redemption and shareholder payable agreement.

For the three months ended March 31, 2008, cash used in operating activities was $543,444 as compared to cash provided by operating activities for the same prior year period of 2007 of $144,083. Our working capital balances vary due to delivery terms and payments on key contracts, work in progress, and outstanding receivables and payables.

Payments of long-term debt (926,808 ) (113,129 )

Net cash provided by financing activities 1,864,025 336,871
Change in cash and equivalents 909,598 85,515
Cash and equivalents, beginning of period 2,206,220 12,462
Cash and equivalents, end of period $ 3,115,818 $ 97,977

PROPERTY AND EQUIPMENT

Property and equipment include the following:

March 31, 2008 December 31, 2007
Building $ 231,055 $ 195,305
Furniture and fixtures 63,777 63,777
Vehicles and trailers 112,162 112,162
Leasehold improvements 113,614 75,149
Equipment 2,021,054 2,004,167
Rental Equipment 3,144,560 3,144,559
Total 5,686,222 5,595,118
Less: Accumulated depreciation (627,665 ) (422,314 )
Property and equipment, net $ 5,058,557 $ 5,172,804

Total secured credit agreement and bank debt 10,414,912 11,212,786

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

Secured Credit Agreement

On December 21, 2007, Deep Down entered into an amendment to our Credit Agreement (the “Amendment”) to provide the funding for the cash portion of the purchase of Mako. The total commitment available under the Amendment was increased from $6.5 million to $13.0 million. Quarterly principal payments increased to $250,000 beginning September 30, 2008, with the remaining balance outstanding due August 6, 2011. Interest paid through March 31, 2008 was $480,356. Under the Credit Agreement, we are required to meet certain covenants and restrictions. We must also maintain a debt service reserve account of $750,000. As of March 31, 2008, $562,500 is separately classified as “Restricted cash” on the accompanying balance sheet. At March 31, 2008, Deep Down is not in compliance with certain financial covenants or the requirement to have life insurance on the CEO in the amount of $3,000,000. Deep Down has obtained waivers from the lender for all the covenants that are not in compliance.

In connection with the second advance under the Credit Agreement on January 4, 2008, Deep Down capitalized an additional $261,941 in deferred financing costs. Of this amount, $216,000 was paid in cash to various third parties related to the financing, and the remainder of $45,946 represents the Black Scholes valuation of warrants issued to one of these third party vendors. The warrant was granted to purchase up to 118,812 shares of common stock at an exercise price of $1.01 per share. The warrant has a five-year term and is immediately exercisable. The fair value of the warrant was estimated to be $45,946 based on the Black Scholes pricing model. The assumptions used in the model included (1) expected volatility of 61.3%, (2) expected term of 2.5 years, (3) discount rate of 3.2% and (4) zero expected dividends. Provisions in the warrant agreement allow for a cashless exercise provision, not to exceed 2% of outstanding common stock at the time of exercise.

The following table summarizes interest expense for the three months ended March 31, 2008 and March 31, 2007:

Three Months Ended
March 31,
2008 2007
Interest Expense $ 480,356 $ 52,300
Accretion 113,589 179,587
Amortization of debt discount 118,171 -
Amortization of deferred financing 56,914 -
$ 769,030 $ 231,887

During the quarter ended March 31, 2008 and in accordance with the terms of the purchase of Mako, Deep Down paid $916,044 of notes payable.

The unaudited pro-forma results were as follows:
Deep Down, Inc.
Unaudited Pro forma Statements of Operations

Historical Historical
Deep Down Mako Pro-Forma
Quarter Ended Quarter Ended Quarter Ended
March 31, March 31, Pro-Forma March 31,
2007 2007 Adjustments 2007

Revenues $ 2,098,394 $ 849,929 $ - $ 2,948,323
Cost of sales 1,252,089 561,116 1,813,205

Gross profit 846,305 288,813 - 1,135,118
Operating expenses 723,676 406,933 93,039 (a) 1,223,648
Total other income (expense) (231,887 ) (17,974 ) (266,123 ) (b) (515,984 )

Net loss $ (109,258 ) $ (136,094 ) $ (359,162 ) $ (604,514 )

Earnings per share:
Basic and diluted $ - $ (0.01 )
Weighted-average common shares outstanding 85,976,526 (c) 95,353,569

(a) Amortization of the intangible assets at a rate of $28,353 per month for three months; plus $7,980 adjustment to historical depreciation expense to adjust to purchase accounting asset values.
(b) Represents cash interest plus amortization of deferred financing costs and debt discounts. Interest is payable at 15.5% on the outstanding principal, and the related fees are amortized using the effective interest method over the 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

COMMITMENTS AND CONTINGENCIES

We are from time to time involved in legal proceedings arising in the normal course of business. As of the date of this Quarterly Report on Form 10-Q, there are no pending or threatened material legal proceedings.