Posted by: littlefish
In reply to: None Date:4/19/2008 11:42:33 PM
Post #of 100027
DPDW reality check (there are probably some other VMCers biting their fingers not to type negative stuff but I will since I seem to be the doom dweller on bringing up negative stuff rightly or wrongly on some companies and one of my favorite aspects of VMC is the ability to bring up the negatives without too much hassle and with lots of others knowing lots about the companies to bring me some clarity to the positive if it is there)-
I looked over it a bit (after doing this once before when I bought a small chunk at 50+ cents level). When I looked over it the first time, I did some rough calcs in my head what I thought the acquistions MIGHT be worth (after all, it is a guessing game at this point) and came up with a value less than what I paid so I turned around and sold the next day for a few cents profit. I haven't touched it since even though it is now higher.
With the increased optimism seeming to show up on it, I decided to glance at it again and once again don't find it appealing.
BUT that is because I am a low risk kind of guy in this market IMO. And I think DPDW.OB is more of a high risk high reward proposition.
They haven't announced how the deal will be financed so evidently don't have the financing even put together yet (that's a bit of a negative IMO).
The prior acquisitions included dilution and debt. Some of the debt (a major protion of it) was against their credit facility and I believe the interest rate on that per the annual was 15.5%:
On August 6, 2007, Deep Down entered into a $6.5 million secured Credit Agreement with Prospect and received an advance of $6.0 million on that date. The Credit Agreement provides for a 4-year term, an annual interest rate of 15.5%, with the ability to defer up to 3.0% of interest through a PIK (paid-in-kind) feature and principal payments of $250,000 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. Interest paid through December 31, 2007 was $377,167. Deep Down paid the full 15.5% and did not exercise the PIK feature for the monthly periods through December 2007.
What's worse, they upped the borrowed amount to $13 million at (to me a whopping) 15.5% rate:
On December 21, 2007, Deep Down entered into an amendment to the 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 to $13.0 million, and the quarterly principal payments increased to $250,000, with the dates of all payments remaining the same.
Plus there are at least on a glance some other potential problems (cut and paste from annual):
. As of December 31, 2007, we did not maintain effective controls over the control environment. Specifically, we have not formally adopted a written code of business conduct and ethics that governs to the Company’s employees, officers and directors. Additionally, we have not developed and effectively communicated to our employees its accounting policies and procedures. This has resulted in inconsistent practices particularly at its ElectroWave division. Further, the Board of Directors does not currently have any independent members and no director qualifies as an audit committee financial expert as defined in Item 407(d)(5)(ii) of Regulation S-B. Since these entity level programs have a pervasive effect across the organization, management has determined that these circumstances constitute a material weakness.
2. As of December 31, 2007, at the ElectroWave subsidiary, we did not maintain effective controls over revenue recognition. Specifically, controls were not designed and in place to ensure that billing activities were conducted in a timely manner resulting in contract services revenues being recognized in an incorrect reporting period. Additionally, the lack of consistency applied procedures also resulted in the double billing of a customer. This control deficiency resulted in an adjustment to the consolidated financial statements. Accordingly, management has determined that this control deficiency constitutes a material weakness.
3. As of December 31, 2007, we did not maintain effective controls over payables processing. Specifically, controls were not designed and in place to ensure that vender-related and employee-related cash disbursements were appropriately authorized and adequately supported by receiving reports and other supporting documentation. A budget process is not currently in place to monitor spending levels. This material weakness could result in errors in the accounting for accounts payable and expenses. Accordingly, management has determined that this control deficiency constitutes a material weakness.
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Because of these material weaknesses, management has concluded that the Company did not maintain effective internal control over financial reporting as of December 31, 2007, based on the criteria established in "Internal Control-Integrated Framework" issued by the COSO.
Changes in Internal Control Over Financial Reporting.
In our efforts to continuously improve our internal controls, management has taken steps to enhance the following controls and procedures subsequent to the end of fiscal 2007 as part of our remediation efforts:
The ElectroWave division was re-structured and re-organized in the fourth quarter of 2007. A majority of the accounting activities have been transferred to Deep Down Delaware’s accounting department to streamline and centralize accounting.
In response to the further growth of the business, management hired a corporate controller in January 2008. He is responsible for the coordination and integration of the accounting activities of each of our current and future subsidiary operations. With his relevant experience with the policies and procedures for compliance with regulations promulgated by Sarbanes-Oxley, our goal is to reach full compliance during 2008.
Management hired a corporate human resource and safety manager in March 2008 who will be responsible for designing, planning and implementing human resource programs and policies including benefits, staffing, compensation, employee relations, training, and health and safety programs. She will oversee the human resource functions for our current and future subsidiary operations.
Management has prepared an Employee Handbook and Code of Conduct and plans to circulate these documents throughout the organization and obtain signed acknowledgements from employees.
Management plans to document its accounting policies and procedures to increase consistency among divisions. This includes the creation or expansion of checklists which serve to manage close processes.
Management has increased documentation around certain authorization and review controls.
This annual report does not include an attestation report of the Company’s registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit the Company to provide only management’s report in this annual report.
There are some other IMO warts that I won't worry about since these couple things already would have me grade this as high risk (OK one is that they didn't have these internal controls in place before the acquisitions so how do they know what they're getting necessarily? The private company buyout doesn't give any prospective investors a chance to figure out what the specific financials look like for the private entity, just some superficial #s).
BUT there is potential reward if all these mergers turn fruitful and they can integrate the difft arms together into a smooth operating business. Just that IMO there's potential for ruin too. IMO only.
This is not the kind of company I invest big in (don't think I've ever invested big in a company paying 15.5% on thier debt for one). BUT good luck to all the longs. It could work out well. I'll pass.
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