Document:

deepdown_10ksb-ex0402.htm

    EXHIBIT
4.1

     

     

    FIRST
AMENDMENT

     

    TO

     

    CREDIT
AGREEMENT

     

     

    DATED
AS OF

    DECEMBER 21,
2007

     

    AMONG

     

     

    DEEP
DOWN, INC.,

    AS
BORROWER,

     

     

     

    PROSPECT
CAPITAL CORPORATION,

    AS
AGENT,

     

     

    AND

     

     

    PROSPECT
CAPITAL CORPORATION,

    AS
LENDER

     

    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

    

     

    FIRST
AMENDMENT TO CREDIT AGREEMENT

     

    This FIRST AMENDMENT to
Credit Agreement (this "First Amendment")
dated as of December 21, 2007 and effective as of the First Amendment Effective
Date (as defined below), is entered into by and among Deep Down, Inc., a Nevada
corporation, as borrower (the "Borrower"),
each of the lenders that is a signatory hereto (the "Lenders")
and Prospect Capital Corporation, a Maryland corporation, as agent for the
Lenders (the "Agent").

     

    RECITALS

     

    A.    The
Borrower, the Agent and the Lenders are parties to that certain Credit
Agreement
dated as of August 6, 2007 (the "Credit
Agreement"), pursuant to which the Lenders have made certain loans and
extensions of credit available to and on behalf of the Borrower under a
multi-year credit facility.

     

    B.    The
Borrower desires to enter into that certain Agreement and Plan of Merger (the
"Mako
Agreement and Plan of Merger") by and between Borrower, Mako
Technologies, LLC, a Nevada limited liability company and a wholly-owned
subsidiary of Borrower ("Merger
Sub"), Mako Technologies, Inc., a Louisiana corporation ("Mako"), and the
owners of 100% of the issued and outstanding shares of capital stock of Mako,
pursuant to which Mako will merge with and into the Merger Sub (the "Mako
Acquisition").

     

    C.    The Borrower
has requested and the Agent and the Lenders have agreed to amend the
Credit Agreement to, among other things, increase the Total Commitment (as
defined in the Credit Agreement) thereunder from $6,500,000 to $13,000,000,
provided that any Loans made to the Borrower from the increased Total Commitment
shall be made concurrently with and used solely for the Mako Acquisition
including paying legal costs and
expenses and costs and expenses under the Credit Agreement associated
therewith.

     

    AGREEMENT

     

    NOW
THEREFORE, in consideration of the mutual covenants and agreements contained
herein, the parties hereto amend the Credit Agreement and agree as
follows:

     

    1.             Defined
Terms. All
capitalized terms used in this First Amendment and not otherwise
defined
herein shall have the meanings ascribed to such terms in the Credit
Agreement. Unless otherwise indicated, all section references in this First
Amendment refer to sections of the Credit Agreement.

     

    2.             Amendments
to Credit Agreement. The
Credit Agreement is hereby amended as follows:

     

    a.    The following
terms, as defined in Section 1.01 of the Credit Agreement, are hereby
amended and restated in their entirety to read as follows:

     

    "Agreement"
means this Credit Agreement, as amended by the First Amendment, and includes all
amendments, modifications and supplements and any exhibits or schedules to any
of the foregoing, and shall refer to the Agreement as the same may be in effect
at the time such reference becomes operative.

     

    
      
        
        

      

      
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    "Loans"
means any loan made by a Lender to the Borrower pursuant to Article
II hereof.

     

    "Total
Commitment" means the sum of the amounts of the Lenders' Commitments,
which sum equals the Initial Commitments plus
the Mako Commitment plus
any additional Commitments as the same may be increased pursuant to Section
2.04(b).

     

    "Transactions"
means the transactions contemplated by the Transaction Documents to occur on the
Effective Date and the First Amendment Effective Date, including the making of
the Loans pursuant to this Agreement

     

    b.    Section
1.01 of the Credit Agreement is hereby further amended by adding thereto
the
following new definitions, in their appropriate alphabetical order, to read in
their entirety as follows:

     

    "First
Amendment" means that certain First Amendment to Credit Agreement dated
December 21, 2007, among the Borrower, the Agent and the
Lenders.

     

    "First
Amendment Effective Date" has the meaning assigned to such term in the
First Amendment.

     

    "Mako"
means Mako Technologies, Inc., a Louisiana corporation.

     

    "Mako
Acquisition" has the meaning assigned such term in the First
Amendment.

     

    "Mako
Acquisition  Documents" means, collectively, the Mako Agreement
and Plan of Merger and all schedules, exhibits and annexes thereto and all side
letters and agreements affecting the terms thereof or entered into in connection
therewith.

     

    "Mako
Agreement and Plan of Merger" has the meaning assigned such term in the
First Amendment.

     

    "Mako
Commitment" means as to any Lender, the obligation of such Lender, if
any, to make a Loan to the Borrower in a principal amount not to exceed the
amount set forth opposite such Lender's name in Schedule
1.01(A) hereto, as the same may be increased pursuant to Section
2.040) and terminated or reduced from time to time in accordance with the
terms of this Agreement. The aggregate amount of the Mako Commitment available
on the First Amendment Effective Date is $6,000,000.

     

    c.    Clause
(a) of Section 2.01 of the Credit Agreement is hereby amended and
restated
in its entirety to read as follows:

     

    "(a)
Subject to the terms and conditions and relying upon the representations
and warranties set forth herein and in the other Loan Documents,
each Lender severally agrees (i) to make a Loan to the Borrower
on the Eflective Date in an amount not to exceed the Commitment.
of such Lender, (ii) to make a Loan to the Borrower on the
First
Amendment Effective Date in an amount not to exceed the Mako Commitment of such
Lender and (iii) to permit the Borrower to issue PIK Notes to such lender based
on its Pro Rata Share of the Total Commitment (but in any case not to exceed the
PIK Note Cap)."

     

    
      
        
        

      

      
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    d.    Section 2.02
of the Credit Agreement is hereby amended and restated in its entirety
to read as follows:

     

    "(a) The
Borrower shall give the Agent prior telephonic notice of its intention to
receive the Loans to be made hereunder confirmed in writing not later than 12:00
noon (New York City time) at least one Business Day prior to each of (i) the
anticipated Effective Date and (ii) the First Amendment Effective Date (each, a
"Notice
of Borrowing"). The Notice of Borrowing given to the Agent prior to the
anticipated Effective Date shall specify (A) the aggregate principal amount of
the Loans to be made by the Lenders to the Borrower on the Effective Date, which
shall be $6,000,000, and (B) the proposed borrowing date. The Notice of
Borrowing given to the Agent prior to the anticipated First Amendment Effective
Date shall specify (1)
the aggregate principal amount of the Loans to be made by the Lenders to
the Borrower on the First Amendment Effective Date, which shall be $6,000,000,
and (2) the proposed borrowing date. The Agent and the Lenders may act without
liability upon the basis of written, telecopied or telephonic notice believed by
the Agent in good faith to be from the Borrower (or from any Authorized Officer
thereof designated in writing purportedly from the Borrower to the Agent). The
Borrower hereby waives the right to dispute the Agent's record of the tei ins of
any such telephonic Notice of Borrowing. The Agent and each Lender shall be
entitled to rely conclusively on any Authorized Officer's authority to request
the Loans on behalf of the Borrower until the Agent receives written notice to
the contrary. The Agent and the Lenders shall have no duty to verify the
authenticity of the signature appearing on any written Notice of
Borrowing.

     

    (b) Each
Notice of Borrowing pursuant to this Section
2.02 shall be irrevocable
and the Borrower shall be bound to make a borrowing in accordance
therewith.

     

    (c) Subject
to Section
2.02(d), all Loans under this Agreement shall be made by the
Lenders simultaneously and proportionately to their Pro Rata Shares of the Total
Commitment, it being understood that no Lender shall be responsible for any
default by any other Lender in that other Lender's obligations to make a Loan
requested hereunder, nor shall the Commitment of any Lender be increased
or decreased as a result of the default by any other Lender in that other
Lender's obligation to make a Loan requested hereunder, and each Lender shall be
obligated to make the Loan required to be made by it by the terms of this
Agreement regardless of the failure by any other Lender. 

     

    
      
        
        

      

      
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    (d)
$2,500,000 of the Loans made to the Borrower by the Lenders on the First
Amendment
Effective Date (such
amount, the "Second
Installment of the
Merger Consideration")
shall be funded directly into the Debt Service Reserve Account. The Second
Installment of the Merger Consideration shall remain in the Debt Service Reserve
Account from and after the First Amendment Effective Date until such time as the
Second Installment of the Merger Consideration is due and payable in accordance
with the terms of the Mako Agreement and Plan of Merger at which time the
Borrower may withdraw the Second Installment of the Merger Consideration from
the Debt Service Reserve Account provided that the Second Installment of the
Merger Consideration shall be used by the Borrower solely for the purpose of
making the final payment of the Merger Consideration (as such term is defined in
the Mako Agreement and Plan of Merger); provided, however, that (i) no Event of
Default has occurred and is continuing and no Event of Default is reasonably
foreseeable by the Agent in its sole judgment, (ii) the Agent has determined, in
its sole judgment, that, no event or development shall have occurred since
December 31, 2007 which could have a Material Adverse Effect and (iii) no Cash
Sweep Trigger has occurred."

     

    e.    Clause
(a) of Section 2.03 of the Credit Agreement is hereby amended by
replacing
the dollar amount "$75,000" in the second line thereof with the dollar amount
"$250,000".

     

    f.    Clause
(1) of Section 2.03 of the Credit Agreement is hereby amended and
restated
in its entirety to read as follows:

     

    "On each
Monthly Date after a Cash Sweep Trigger has occurred (each such date being a
"Disbursement
Date"), the Borrower shall repay principal (through Agent charging the
Operating Account) in an amount equal to 50% of Free Cash Flow, provided,
however, that in no case shall such prepayment reduce the cash and cash
equivalents (per GAAP) of Borrower on hand as of the date of such payment to
less than $300,000.00."

     

    g.    Clause
(b) of Section 2.03 of the Credit Agreement is hereby amended by deleting
the
dollar amount "$500,000" set forth in the proviso thereto and replacing it with
the dollar amount "$1,000,000".

     

    h.    Section
2.05(c) of the Credit Agreement is hereby amended by re-numbering
existing
clause (iii) as clause (iv) and by adding a new clause (iii) as
follows:

     

    "(iii) No
later than April 15, 2008, the Borrower shall prepay an amount equal
to
the
difference between (A) the Loans advanced on the First Amendment
Effective Date
minus (B)
the sum of the Merger Consideration (as such tem' is defined in the Mako
Agreement and Plan of Merger) paid by the Borrower pursuant to Section 2.02 of
the Mako Agreement and Plan of Merger."

     

    i.    Section 7M4 of
the Credit Agreement is hereby amended and restated in its entirety
to read as follows:

     

    
      
        
        

      

      
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    "Loans,
Advances, Investments, Etc. Make or commit or agree to make any loan,
advance guarantee of obligations, other extension of credit or capital
contributions to, or hold or
invest in or commit or agree to hold or invest in, or purchase or otherwise
acquire or commit or agree to purchase or otherwise acquire any shares of the
Capital Stock, bonds, notes, debentures or other securities of, or make or
commit or agree to make any other investment in, any other Person, purchase or
own any futures contract or otherwise become liable for the purchase or sale of
currency or other commodities at a future date in the nature of a futures
contract, or provide goods and services to any Person except for such goods and
services provided in the ordinary course of business and in accordance with
Section
7.13, or permit any of its Subsidiaries to do any of the foregoing,
except for: (a) investments existing on the date hereof, as set forth on Schedule
7.04 hereto, but not any increase in the amount thereof as set forth in
such Schedule or any other modification of the terms thereof, (b) Permitted
Investments, (c) advances to employees of up to $5,000 in the aggregate per
employee, (d) investments made by the Borrower in or to the Guarantors, (e)
investments made by any Subsidiary in or to the Borrower or any Guarantor, (f)
investments made by the Borrower or any Subsidiary in or to any foreign
Subsidiary in an aggregate amount at any one time outstanding not to exceed
$50,000, and (g) the investments, acquisitions and related transactions
contemplated by the Mako Agreement and Plan of Merger on the Effective Time (as
such term is defined in the Mako Agreement and Plan of Merger)."

     

    j.    A new Section
6.24 of the Credit Agreement is added to follow after Section
6.23 to read as follows:

     

    "Section
6.24. Within five (5) Business Days of the First Amendment Effective
Date, the Agent shall receive evidence satisfactory to it that any deposit or
operating accounts owned by Mako or any Affiliate have been closed or made
subject to a DACA in favor of the Agent. At all times thereafter, all deposits
or operating accounts of Mako or an Affiliate shall be subject to a DACA in
favor of Agent."

     

    k.    Section 8.01
of the Credit Agreement is hereby amended and restated in its
entirety to read as tbllows:

     

    "Debt/EBITDA.
The Borrower will not, at any time on or after December 31, 2007, permit the
ratio of outstanding Total Debt to Consolidated EB1TDA, as of the last day of
each fiscal quarter, to be greater than the ratio set forth below for the
applicable period:

     

    
      	
              Each
      fiscal quarter ending:

            	 	
              Ratio

            
	
              12/31/07
      until 6/30/08

            	 	
              3.50
      : 1.00

            
	
              09/30/08
      to 6/30/09

            	 	
              3.00
      : 1.00

            
	
              09/30/09
      and thereafter

            	 	
              2.50
      : 1.00

            

    

     

    Provided,
that (i) for the purposes of determining the ratio described above for the
fiscal quarters ending 12/31/07, 3/31/08 and 6/30/08, Consolidated EBITDA will
be annualized
by multiplying Consolidated EBITDA for the applicable period by 4 and (ii) for
the purposes of determining the ratio described above, amounts in the Debt
Service Reserve Account that are proceeds of any Loans made pursuant to this
Agreement will be excluded from the calculation of Total Debt."

     

    
      
        
        

      

      
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    1.    Each Schedule
to the Credit Agreement is hereby replaced in its entirety by the corresponding
Schedule to the Credit Agreement attached as Annex A hereto.
Each reference in the Credit Agreement to a Schedule replaced by this
Section 2(k) or its contents "as of the Effective Date", "in effect on the
Effective Date" or "as of the date of this Agreement" is hereby amended to be a
reference to such Schedule or its contents "as of the First Amendment Effective
Date".

     

    3.    Conditions.
The obligations of the Lenders to make the Loans under the Credit Agreement
with respect to the First Amendment shall not become effective until the date on
which
each of the following conditions is satisfied (the "First
Amendment Effective Date"):

     

    a.    The Agent
shall have received from the Lenders required by the Credit Agreement
and the Borrower executed counterparts (in such number as may be requested by
the Agent) of (i) this First Amendment and all schedules, exhibits and annexes
to the foregoing, (ii) that certain Reaffirmation of Security Instruments dated
December 21, 2007, executed by each Loan Party, (iii) Merger Sub and each of its
subsidiaries shall have executed a joinder to the Guaranty and Collateral
Agreement, in faun and substance satisfactory to the Agent, and (iv) the Agent
shall have received a mortgage with respect to all
real property acquired in connection with the Mako Acquisition, if
applicable.

     

    b.    The
following transactions shall have been consummated, in each case on terms
and
conditions satisfactory to the Lenders:

     

    (i)    the Mako
Acquisition;

     

    (ii)    the Agent
shall have received a certificate, executed by an Authorized Officer,
certifying that the Mako Acquisition is being consummated simultaneously with
the closing of the First Amendment in accordance with the terms and conditions
of the Mako Acquisition as set forth in the Mako Acquisition Documents, without
amendment modification or waiver
thereof without the prior written consent of the Lenders;

     

    (iii)   The Mako
Agreement and Plan of Merger shall have been filed and recorded with each of the
Secretary of State of Louisiana and the Secretary of State of Nevada
and the
Mako Agreement and Plan of Merger shall have an effective date concurrent with
the First
Amendment Effective Date; and

     

    (iv)   The Agent
shall have received the certificates representing the shares of
Capital
Stock pledged pursuant to the Guaranty and Collateral Agreement (including those
shares of Capital Stock received in connection with the Mako Acquisition and of
the Merger Sub), together with an undated stock power for each such certificate
executed in blank by a duly authorized officer of the pledgor
thereof.

     

    
      
        
        

      

      
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    c.    The Agent
and the applicable Lenders shall have received all fees and other
amounts
due and payable in connection with this First Amendment on or prior to the First
Amendment Effective Date.

     

    d.    The Agent
shall have received (i) a favorable written opinion (addressed to the
Agent and
the Lenders and dated the First Amendment Effective Date) of counsel for the
Borrower, in form and substance satisfactory to the Agent (ii) each legal
opinion delivered in connection with the Mako Acquisition, accompanied by a
reliance letter in favor of the Lenders and (iii) such legal opinions as Agent
requests regarding the effectiveness of the Mako Acquisition. Each such legal
opinion shall cover such other matters incident to the transactions contemplated
by this First Amendment as the Agent may require.

     

    e.    No
Default or Event of Default shall have occurred and be continuing, before and
after
giving effect to the terms of this First Amendment.

     

    f.    There
shall not exist any action, suit, investigation, litigation or proceeding or
other
legal or regulatory developments, pending or threatened in any court or before
any arbitrator or Governmental Authority that, in the reasonable opinion of the
Agent, singly or in the aggregate, materially impairs any of the transactions
contemplated by the Loan Documents, or that could have a Material Adverse
Effect.

     

    g.    Each Loan
Party shall have obtained all authorizations, approvals or other actions
by, and
submitted all notices to or filings with, any Governmental Authority and shall
have obtained all consents of other Persons, in each case that are necessary or
advisable in connection with the transactions contemplated by the Loan Documents
and the Mako Acquisition Documents and each of the foregoing shall be in full
force and effect and in form and substance reasonably satisfactory to the Agent.
All applicable waiting periods shall have expired without any action being taken
or threatened by any competent authority which would restrain, prevent or
otherwise impose adverse conditions on the transactions contemplated by the Loan
Documents or the Mako Acquisition Documents or the financing thereof and no
action, request for stay, petition for review or rehearing, reconsideration, or
appeal with respect to any of the foregoing shall be pending, and the time for
any applicable agency to take action to set aside its consent on its own motion
shall have expired.

     

    h.    The Agent
shall have completed its business, legal and collateral due diligence
with
respect to the Borrower, each Person that is a party to any Mako Acquisition
Document and each other Loan Party, the results of which shall be acceptable to
the Agent, in its sole and absolute discretion.

     

    i.    All
proceedings in connection with the making of the Loans and the other
transactions
contemplated by this First Amendment, the other Loan Documents and the Mako
Acquisition Documents, and all documents incidental hereto and thereto, shall be
satisfactory to the Agent and its counsel, in their sole discretion, and the
Agent and such counsel shall have received all such information and such
counterpart originals or certified or other copies of such documents as the
Agent or such counsel may reasonably request.

     

    
      
        
        

      

      
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    j.    The Agent
shall have received UCC lien searches, listing all effective financing
statements
which name as debtor any Loan Party or any Person that is a party to any Mako
Acquisition Document or any of their respective Subsidiaries and which arc filed
in the offices where any Loan Party or any such Person is organized, together
with copies of such financing statements, none of which, except as otherwise
agreed in writing by the Agent and except for Liens to be terminated on the
First Amendment Effective Date, shall cover any of the Collateral or any of the
property to be acquired in connection with the Mako Acquisition Documents and
the results of searches for any tax Lien and judgment Lien filed against such
Person or its property, which results, except as otherwise agreed to in writing
by the Agent, shall not show any such Liens.

     

    k.    The Agent
shall have received satisfactory written evidence that prior to or
concurrent
with the Effective Time (as defined in the Mako Agreement and Plan of Merger),
all Indebtedness of Mako and its subsidiaries shall be paid in fill and
extinguished.

     

    1.    The Agent
shall have received a copy of the resolutions of each Loan Party, certified
as of the First Amendment Effective Date by an Authorized Officer thereof,
authorizing (A) the borrowings hereunder and the transactions contemplated by
the Loan Documents to which such Loan Party is or will be a party and the other
Transactions, and (B) the execution, delivery and performance by such Loan Party
of each Loan Document and each Mako Acquisition Document to which such Loan
Party is or will be a party and the execution and delivery of the other
documents to be delivered by such Person in connection herewith and
therewith.

     

    m.    The Agent
shall have received a certificate of an Authorized Officer of each Loan
Party,
certifying the names and true signatures of the representatives of such Loan
Party authorized to sign each Loan Document to which such Loan Party is or will
be a party and the other documents to be executed and delivered by such Loan
Party in connection herewith and therewith, and authorized to provide the Notice
of Borrowing and all other notices under this First Amendment and the other Loan
Documents, together with evidence of the incumbency of such authorized
officers.

     

    n.    The Agent
shall have received a certificate of the appropriate official(s) of the
state of
organization and each state of foreign qualification of each Loan Party and of
each Person that is a party to any Mako Acquisition Document and each of their
subsidiaries, certifying as of a recent date as to the subsistence in good
standing of, and the payment of taxes by, such Loan Party in such
states.

     

    o.    The Agent shall have
received a copy of the articles of incorporation, charter and
by-laws,
limited liability company agreement, operating agreement, agreement of limited
partnership or other organizational document of each Loan Party, Mako and of
Merger Sub, together with all amendments thereto, certified as of the First
Amendment Effective Date by an Authorized Officer of such Loan
Party.

     

    p.    The Agent
shall have received a certificate of an Authorized Officer of the Borrower,
certifying as to the matters set forth in subsection (b) of this Section
3.

     

    
      
        
        

      

      
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    q.    The Agent
shall have received a copy of the unaudited pro form consolidated
balance
sheet of the Borrower and its consolidated Subsidiaries as at November 30, 2007
(including the notes thereto) (the "Pro
Forma Balance Sheet"), prepared giving effect (as if such events had
occurred on such date) to (i) the consummation of the Mako Acquisition and (ii)
the payment of fees and expenses in connection with the foregoing, and (ii)
unaudited interim consolidated financial statements of Borrower and its
consolidated subsidiaries for each fiscal month and quarter ended after the date
of the latest applicable fmancial statements delivered pursuant to the Credit
Agreement as to which such financial statements are available, and such
financial statements shall not, in the judgment of the Lenders, reflect any
material adverse change in the consolidated financial condition of the Borrower
and its consolidated subsidiaries, since the most recently delivered financial
statements.

     

    r.    The Agent
shall have received a certificate of an Authorized Officer of the
Borrower,
certifying that (i) the Borrower and each Loan Party, both before and after
giving effect to the Transactions, is Solvent and (ii) as of the First Amendment
Effective Date, all liabilities of the Loan Parties are current.

     

    s.    The Agent
shall have received evidence of the insurance coverage required by
Section
5.19, including, without limitation, insurance assigned to the Borrower
pursuant to the terms of the Guaranty and Collateral Agreement and such other
insurance coverage with respect to the business and operations of the Loan
Parties as the Agent may reasonably request, in each case, where requested by
the Agent, with such endorsements as to the named insureds or loss payees
thereunder as the Agent may request and providing that such policy may be
terminated or canceled (by the insurer or the insured thereunder) only upon 30
days' prior written notice to the Agent and each such named insured or loss
payee, together with evidence of the payment of all premiums due in respect
thereof for such period as the Agent may request.

     

    t.    The Agent
shall have received a landlord waiver, in form and substance satisfactory
to the Agent, executed by each landlord with respect to each of the Leases
acquired in connection with the Mako Acquisition, set forth on Annex B hereto;
provided that in the event the Borrower, despite its commercially reasonable
efforts to do so, is unable to deliver to the Agent on the First Amendment
Effective Date one or more of the landlord waivers required to be delivered
under this Section 4(u), the Borrower shall deliver such landlord waiver or
waivers to the Agent within twenty-one (21) days after the First Amendment
Effective Date.

     

    u.    The
Agent shall have received copies of the Material Contracts of each Loan
Party as
in effect on the First Amendment Effective Date (to the extent the same have not
previously been delivered to Agent), certified as true and correct copies
thereof by an Authorized Officer
of each Loan Party, together with a certificate of an Authorized Officer of each
Loan Party stating that such agreements have been duly assigned to such
Loan Party, as applicable, remain in full force and effect and that none of the
Loan Parties has breached or defaulted in any of its
obligations under such agreements.

     

    v.    The Agent
shall have received each document (including any Uniform
Commercial
Code financing statement) required by the Guaranty and Collateral Agreement or
any
Mortgage or under law or requested by the Agent to be filed, registered or
recorded in order to create
in favor of the Agent, for the benefit
of the Lenders, a perfected Lien on the Collateral described
therein (including any Collateral received in connection with the Mako
Acquisition), prior and superior in right to any other Person, shall be in
proper form for filing, registration or recordation.

     

    
      
        
        

      

      
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    w.    The Agent
shall have received a copy of a fully-executed payoff letter from
Regions
Bank to the Borrower evidencing (i) the payoff of all amounts due by the
Borrower or any other Loan Party in connection with the credit facility between.
Regions Bank and the Borrower, (ii) the termination of all commitments under
such credit facility and (iii) the releases of all liens in favor of Regions
Bank pursuant to such credit facility.

     

    x.    The Agent
shall have received such other agreements, instruments, approvals,
opinions
and other documents, each satisfactory to the Agent in tbiin and substance, as
the Agent may reasonably request.

     

    4.    Miscellaneous.

     

    a.             Use
of Proceeds. The proceeds of the Loans made by the Lenders to the
Borrower
on the First Amendment Effective Date shall be used for the purposes set forth
on Schedule 5.20 of Annex A attached hereto.

     

    b.             Confilination.
The provisions of the Credit Agreement, as amended by this First
Amendment,
shall remain in full force and effect in accordance with its terms following the
effectiveness of this First Amendment.

     

    c.             Ratification
and Affirmation; Representations and Warranties. Borrower
hereby (a)
ratifies and affirms its obligations under, and acknowledges, renews and extends
its continued liability under, each Loan Document to which it is a party and
agrees that each Loan Document to which it is a party remains in full force and
effect, except as expressly amended hereby, notwithstanding the amendments
contained herein and (b) represents andl warrants to the Lenders that as of the
date hereof, after giving effect to the terms of this First Amendment: (i) all
of the representations and warranties contained in each Loan Document to which
it is a party are true and correct, except to the extent any such
representations and warranties are expressly limited to an earlier date, in
which case, such representations and warranties shall continue to be true and
correct as of
such specified earlier date, (ii) no Default has occurred and is continuing
(iii) since the Effective Date, there has been no event, development or
circumstance that has had or could reasonably be expected to have a Material
Adverse Effect, (iv) the Pro Forma Balance Sheet has been prepared based on the
best information available to the Borrower as of the date of delivery thereof,
and presents fairly on a pro forma basis the estimated financial position of the
Borrower and its consolidated subsidiaries as at November 30, 2007 assuming that
the events specified in Section 3(r)(i) and (ii) had actually occurred at such
date and (v) each representation and warranty contained in each Mako Acquisition
Document is true and correct.

     

    d.             Loan
Document. This First Amendment and each agreement, instrument,
certificate
or document executed by the Borrower or any of its officers in connection
therewith are "Loan Documents" as defined and described in the Credit Agreement
and all of the terms and provisions of the Credit Agreement relating to Loan
Documents shall apply hereto and thereto.

     

    
      
        
        

      

      
        11

        
          

        

      

      
        
        

      

       

    

    e.    Loan
Party. In connection with the Mako Acquisition, any Person acquired by,
or that
consolidates into, any Loan Party in connection therewith shall itself be a
"Loan Party" as defined and described in the Credit Agreement and all of the
terms and provisions of the Credit Agreement relating to Loan Parties shall
apply hereto and thereto.

     

    f.    Counterparts.
This First Amendment may be executed by one or more of the parties
hereto in any number of separate counterparts, and all of such counterparts
taken together shall be deemed to constitute one and the same instrument.
Delivery of this First Amendment by facsimile transmission shall be effective as
delivery of a manually executed counterpart hereof.

     

    g.             NO
ORAL AGREENUNT. This First Amendment, the Credit Agreement and the
other
Loan Documents executed in connection herewith and therewith represent the final
agreement among the parties and may not be contradicted by evidence of prior,
contemporaneous, or unwritten oral agreements of the parties. There arc no
subsequent oral agreements between the parties.

     

    h.             GOVERNING
LAW. THIS FIRST AMENDMENT AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES
HEREUNDER SHALL BE GOVERNED BY, AND SHALL BE CONSTRUED AND ENFORCED IN
ACCORDANCE WITIL TIHE LAWS OF THE STATE OF NEW YORK.

     

    [SIGNATURES
BEGIN ON NEXT PAGE]

     

    
      
        
        

      

      
        12

        
          

        

      

      
        
        

      

    

     

    The
parties hereto have caused this First Amendment to be duly executed as of the
day and year first above written.

    
    

     

    
      	BORROWOR:  	DEEP DOWN, INC., a Nevada
      corporation 
	 	 
	 	By:          
      /s/ Ronald E.
      Smith            
      
	 	
              Name:      Ronald
      E. Smith              
      

            
	 	Title:       
      President                              
       
	 	 

    

     

     

     

     

     

    Signature Page to First Amendment to Credit Agreement

    
      
        
        

      

      
        13

        
          

        

      

      
        
        

      

    

     

    
       

      
        	LENDER: 	PROSPECT
      CAPITAL CORPORATION
	 	 
	 	By:                                                         
      
	 	
                Name:                                 
                    
      

              
	 	Title:                                   
                          
	 	 

      

    

     

     

     

     

     

     

     

     

    Signature
Page to First Amendment to Credit Agreement

    14deepdown_10ksb-ex0403.htm

    EXHIBIT
4.2

     

    THIS
WARRANT AND THE SHARES OF COMMON STOCK WHICH MAY BE PURCHASED UPON THE EXERCISE
OF THIS WARRANT HAVE BEEN ACQUIRED SOLELY FOR INVESTMENT AND HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933. AS AMENDED (THE "ACT"), OR ANY
STATE SECURITIES LAWS. SUCH SECURITIES MAY NOT BE SOLD, OFFERED FOR SALE,
PLEDGED OR HYPOTHECATED IN THE ABSENCE OF SUCH REGISTRATION OR AN OPINION OF
COUNSEL SATISFACTORY TO THE COMPANY AND ITS COUNSEL THAT SUCH SALE, OFFER,
PLEDGE OR HYPOTHECATION IS EXEMPT FROM THE REGISTRATION AND PROSPECTUS DELIVERY
REQUIREMENTS OF THE ACT.

     

    DEEP
DOWN, INC.

    COMMON
STOCK PURCHASE WARRANT

     

    No.
2 Void after August 6, 2012

     

    THIS
CERTIFIES THAT, for value received, Dragonfly Capital Partners, LLC (the "Holder") is entitled at any time, during the 36 month period
commencing on August 6, 2009 ("Initial Warrant Exercise Date") and ending on
August 6, 2012, to
subscribe for and purchase Three Hundred and Twenty Thousand (320,000)
shares of the fully paid and nonassessable Common Stock, $.001 par value (the
"Shares"), of DEEP DOWN, INC., a Nevada corporation (the "Company") at the per
share exercise price of $0.75, subject to the provisions and upon the terms and
conditions hereinafter set forth.

     

    1.      Method
of Exercise; Payment.

     

    
      	
              a.        

            	
              Cash
      Exercise. The purchase rights represented by this Warrant may be
      exercised by the Holder, in whole or in part, by the surrender of this
      Warrant (with the notice of exercise form attached hereto as Exhibit A
      duly executed) at the principal office of the Company. and by the payment
      to the Company, by certified, cashier's or other check acceptable to the
      Company or by wire transfer to an account designated by the Company, of an
      amount equal to the aggregate Exercise Price of the Shares being
      purchased.

            

    

     

    
      	
              b.        

            	
              Relinquishment
      of Options. (i) The Holder in lieu of purchasing the entire number of
      shares subject to purchase hereunder, shall have the right to relinquish
      all or any part of the then unexercised portion of this Warrant (to the
      extent then
      exercisable) for a number of shares of Common Stock to be
      determined in accordance with the following provisions of this clause
      (b):

            

    

     

    (A)  The
number of shares of Common Stock, if any, issuable pursuant to such
relinquishment shall be the number of such shares, rounded to the next greater
number of full shares, as shall be equal to the quotient obtained by dividing
(A) the Appreciated Value by (B) the purchase price per
share of Common Stock specified in this Warrant;

     

    (B)  For
the purpose of this clause (b), "Appreciated Value" means the excess of (x) the aggregate current
market value of the shares of Common Stock covered by the option or the portion
thereof to be relinquished over (y) the aggregate purchase price for such shares
specified in this Warrant;

     

    (ii)  Such right of
relinquishment may be exercised only upon receipt by the Company of a written
notice of such relinquishment which shall be dated the date of election to make
such relinquishment; and that, for the purposes of this Warrant, such date of
election shall be deemed to be the date when such notice is sent by registered
or certified mail, or when receipt is acknowledged by the Company, if mailed by
other than registered or certified mail or if delivered by hand or by any telegraphic
communications equipment of the sender or otherwise delivered; provided, that,
in the event the method just described for determining such date of election
shall not be or remain consistent with the provisions of Section 16(b) of the
Exchange Act or the rules and regulations adopted by the Commission thereunder,
as presently existing or
as may be hereafter
amended. which regulations exempt from the operation of Section 16(b) of the
Exchange Act in whole or in part any such relinquishment transaction, then such
date of election shall be determined by such other method consistent with
Section 16(b) of the Exchange Act or the rules and regulations thereunder as the
Company shall in its discretion select and apply;

     

    
      
        
        

      

      
        Page 1 of
7

        
          

        

      

      
        
        

      

       

    

    (iii)  The "current market
value" of a share of Common Stock on a particular date shall be deemed to be its
fair market value on that date determined as follows:

     

    (A)  If the
Common Stock is listed on a national securities exchange or admitted to unlisted
trading privileges on such exchange, the current value shall be the last
reported sales price of the Common Stock on such exchange on the last business
day prior to the date of exercise of this Option or if no such sale is made on
such day, the average of the closing bid and asked prices for such day on such
exchange; or

     

    (B)  If the
Common Stock is not so listed or admitted to unlisted trading privileges, the
current value shall be the mean of the last reported bid and asked prices
reported by the National Association of Securities Dealers Automated Quotation
System ("NASDAQ"), or if not so quoted on NASDAQ then by the National Quotation
Bureau, LLC, New York, New York, on the last business day prior to the date of
the exercise of this Warrant; or

     

    (C)  If the Common Stock is
not so listed or admitted to unlisted trading privileges and bid and asked
prices are not so reported, the current value shall be an amount, not less than
book value, determined in such reasonable manner as may be prescribed by the
Company's board of directors, and supported by the written fairness opinion of
an independent, nationally-recognized stock valuation expert.

     

    (iv)  The
Warrant, or any portion thereof. may he relinquished only to the extent that (A)
it is exercisable on the date written notice of relinquishment is received by
the Company. (B) the Holder pays, or makes provision satisfactory to the Company
for the payment of, any taxes which the Company is obligated to collect with
respect to such relinquishment.

     

    (v)       
If a
Warrant is relinquished, such Warrant shall be deemed to have been exercised to
the extent of the number of shares of Common Stock covered by the Warrant or
part thereof which is
relinquished. and no further Warrants will be isssued covering such shares of
Common Stock.

     

    
      
        	
                c.        

              	
                
                  Stock
      Certificates. In the event of any exercise of the rights
      represented by this Warrant, certificates for the Shares so purchased
      shall be delivered to the Holder within a reasonable time and, unless this
      Warrant has been fully exercised or has expired, a new Warrant
      representing the shares with respect to which this Warrant shall not have
      been exercised shall also be issued to the Holder within such
      time.

                

              

      

       

    

    
    

    
      	
                  2.              
            

            	
              Stock
      Fully Paid; Reservation of Shares. All of the Shares issuable upon
      the exercise of the rights represented by this Warrant will, upon issuance
      and receipt of the Exercise Price therefor, be fully paid and
      nonassessable, and free from all taxes, liens and charges with respect to
      the issue thereof. During the period within
      which the rights represented by this Warrant may be exercised, the
      Company shall at all times have authorized and reserved for issuance
      sufficient shares of its Common Stock to provide for the exercise of the
      rights represented by this Warrant.

            

    

     

    
      
      

      
        	
                    3.              
            

              	
                
                  Adjustments.
      The number and kind of securities purchasable upon the exercise of this
      Warrant and the Exercise Price therefor shall be subject to adjustment
      from time to time upon the occurrence of certain events,
      as follows:

                

              

      

       

      
      

      
        
          
          

        

        
          Page 2 of
7

          
            

          

        

        
          
          

        

      

    

     

    
      
        
          	
                  a.        

                	
                  
                    
                      Reclassification.
      In the case of any reclassification or change of securities of the class
      issuable upon exercise of this Warrant (other than a change in par value,
      or from par value to no par value, or from no par value to par value, or
      as a result of a subdivision or combination), or in case of any merger of
      the Company with or into another corporation (other than a merger with
      another corporation in which the Company is the acquiring and the
      surviving corporation and which does not result in any reclassification or
      change of outstanding securities issuable upon exercise of this Warrant),
      or in case of any sale of all or substantially all of the assets of the
      Company, the Company, or such successor or purchasing corporation, as the
      case may be, shall duly execute and deliver to the holder of this
      Warrant a new Warrant (in form and substance reasonably
      satisfactory to the holder of this Warrant), or the Company shall
      make appropriate provision without the issuance of a new Warrant, so that
      the holder of this Warrant shall have the right to receive, at a total
      purchase price not to exceed that payable upon the exercise of the
      unexercised portion of this Warrant, and in lieu of the shares of Common
      Stock theretofore issuable upon exercise of this Warrant, (i) the kind and
      amount of shares of stock, other securities, money and property receivable
      upon such reclassification, change, merger or sale by a holder of the
      number of shares of Common Stock then purchasable under this Warrant,
      or (ii) in the case
      of such a merger or sale in which the consideration paid consists all or
      in part of assets other than securities of the successor or purchasing
      corporation, at the option of the Holder of this Warrant, the securities
      of the successor or purchasing corporation having a value at the time of
      the transaction equivalent to the fair market value of the Common Stock at
      the time of the transaction. The provisions of this subparagraph (a) shall
      similarly apply to successive reclassifications, changes, mergers and
      transfers.

                    

                  

                

        

      

    

     

    
      
        
          
            	
                    b.        

                  	
                    
                      
                        
                          Stock
      Splits, Dividends and Combinations. In the event that the Company
      shall at any time subdivide the outstanding shares of Common Stock or
      shall issue a stock dividend on its outstanding shares of Common Stock the
      number of Shares issuable upon exercise of this Warrant immediately prior
      to such subdivision or to the issuance of such stock dividend shall be
      proportionately increased, and the Exercise Price shall be proportionately
      decreased, and in the event that the Company shall at any time combine the
      outstanding shares of Common Stock the number of Shares issuable upon
      exercise of this Warrant immediately prior to such combination shall be
      proportionately decreased, and the Exercise Price shall be proportionately
      increased, effective at the close of business on the date of such
      subdivision, stock dividend or combination, as the case may
      be.

                        

                      

                    

                  

          

        

      

       

      
        
          
          

          
            	
                        4.              
            

                  	
                    
                      
                        Notice
      of Adjustments. Whenever the number of Shares purchasable hereunder
      or
      the Exercise Price thereof shall be adjusted pursuant to Section 3
      hereof, the Company shall provide notice to the Holder setting forth, in
      reasonable detail, the event requiring the adjustment, the amount of the
      adjustment, the method by which such adjustment was calculated, and the
      number and class of shares which may be purchased thereafter and the
      Exercise Price therefor after giving effect to such
      adjustment.

                      

                    

                  

          

           

        

      

    

    
      	
                   5.             
             

            	
              Fractional
      Shares. Whether or not the number of shares purchasable upon the
      exercise of a Warrant is adjusted pursuant to Section 3 of this Agreement,
      this Warrant may not be exercised for fractional shares and the Company
      shall not be required to issue fractions of Shares upon exercise of the
      Warrants or to distribute Shares certificates that evidence fractional
      Shares. In lieu of fractional Shares, there shall be returned to
      exercising Registered Holders of the Warrants upon such exercise an amount
      in cash, in United States dollars, equal to the amount in excess of that
      required to purchase the largest number of full
  Shares.

            

    

     

    
      	
                    6.            
      

            	
              Representations
      of
      the
      Company. The Company represents that all corporate actions on the
      part of the Company, its officers, directors and shareholders necessary
      for the sale and issuance of the Shares pursuant hereto and the
      performance of the Company's obligations hereunder were taken prior to and
      are effective as of the effective date of this
  Warrant.

            

    

     

    
      
        
        

      

      
        Page 3 of
7

        
          

        

      

      
        
        

      

    

     

    
      	
                    7.            

            	
              Representations
      and Warranties by the Holder. The Holder represents and warrants to
      the Company as follows:

            

    

     

    
      
        
          
            	
                    a.        

                  	
                    
                      
                        
                          This
      Warrant and the Shares issuable upon exercise thereof are being acquired
      for its own account, for investment and not with a view to. or for resale
      in connection with, any distribution or public offering thereof within the
      meaning of the Securities Act of 1933, as amended (the "Act"). Upon
      exercise of this Warrant, the Holder shall, if so requested by the
      Company, confirm in writing, in a form satisfactory to the Company, that
      the securities issuable upon exercise of this Warrant are being acquired
      for investment and not with a view toward distribution or
      resale.

                        

                      

                    

                  
	 	 
	b.       	
                    The
      Holder understands that the Warrant and the Shares have not been
      registered under the Act by reason of their issuance in a transaction
      exempt from the registration and prospectus delivery requirements of the
      Act pursuant to Section 4(2) thereof, and that they must be held by the
      Holder indefinitely, and that the Holder must therefore hear the economic
      risk of such investment indefinitely, unless a subsequent disposition
      thereof is registered tinder the Act or is exempted from such
      registration. 

                  
	 	 
	c.      
       	
                    The
      Holder has such knowledge and experience in financial and business matters
      that it is capable of evaluating the merits and risks of the purchase of
      this Warrant and the Shares purchasable pursuant to the terms of this
      Warrant and of protecting its interests in connection
      therewith. 

                  
	 	 
	d.      
       	
                    The
      Holder is able to bear the economic risk of the purchase of the Shares
      pursuant to the terms of this
Warrant. 

                  

          

        

      

    

     

    
      	
                    8.            
        

            	
              Restrictive
      Legend. The Shares (unless registered under the Act) shall be
      stamped or imprinted with a legend in substantially the following form:
      THE SHARES REPRESENTED BY THIS CERTIFICATE
      HAVE BEEN ACQUIRED FOR INVESTMENT AND NOT WITH A VIEW TO, OR IN
      CONNECTION WITH, THE SALE OR DISTRIBUTION THEREOF, AND HAVE NOT BEEN
      REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED. SUCH SHARES MAY
      NOT BE SOLD OR TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION OR UNLESS
      THE COMPANY RECEIVES AN OPINION OF COUNSEL REASONABLY ACCEPTABLE TO IT
      STATING THAT SUCH SALE OR TRANSFER IS EXEMPT FROM THE REGISTRATION AND
      PROSPECTUS DELIVERY REQUIREMENTS OF THE ACT. UPON THE FULFILLMENT OF
      CERTAIN OF SUCH CONDITIONS DEEP DOWN, INC. HAS AGREED TO DELIVER TO THE
      HOLDER HEREOF A NEW CERTIFICATE NOT BEARING THIS LEGEND FOR THE SECURITIES
      REPRESENTED HEREBY REGISTERED IN THE NAME OF THE HOLDER HEREOF. A COPY OF
      THE AGREEMENT MAY BE OBTAINED AT NO COST BY WRITTEN REQUEST MADE BY THE
      HOLDER OF RECORD OF THIS CERTIFICATE TO THE SECRETARY OF DEEP DOWN,
      INC.

            

    

     

         
9.           
Restrictions
Upon Transfer and Removal of
Legend.

    
       

      
        
          
            
              	
                      a.        

                    	
                      
                        
                          
                            
                              The
      Company need not register a transfer of this Warrant
      or Shares bearing the restrictive legend set forth in Section 8
      hereof, unless the conditions specified in such legend are satisfied. The
      Company may also instruct its transfer agent not to register the transfer
      of the Shares, unless one of the conditions specified in the legend
      referred to in Section 8 hereof is
      satisfied.

                            

                          

                        

                      

                    
	 	 
	b.       	
                      
                        Notwithstanding
      the provisions of paragraph (a) above, no opinion of counsel shall be
      necessary for a transfer without consideration by any holder (i) if such
      holder is a partnership, to a partner or retired partner of such
      partnership who retires after the date hereof or to the estate of any such
      partner or retired partner, or (ii) if such holder is a corporation, to a
      shareholder of such corporation, or to any other corporation under common
      control, direct or indirect, with such
  holder.

                      

                    

            

          

        

      

       

      
        
          
          

        

        
          Page 4 of
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                      10.          

              	
                Rights
      of Shareholders. No holder of this Warrant shall be entitled, as a
      Warrant holder, to vote or receive dividends or be deemed the holder of
      any Shares or any other securities of the Company which may at any time be
      issuable on the exercise hereof for any purpose, nor shall anything
      contained herein be construed to confer upon the holder of this Warrant,
      as such, any of the rights of a stockholder of the Company or any right to
      vote for the election of directors or upon any matter submitted to
      shareholders at any meeting thereof. or to give or withhold consent to any
      corporate action (whether upon any recapitalization, issuance of stock,
      reclassification of stock, change of par value. consolidation, merger,
      conveyance,
      or otherwise) or to receive notice of meetings, or to receive
      dividends or subscription rights or otherwise until the Warrant shall have
      been exercised and the Shares purchasable upon the exercise hereof shall
      have become deliverable. as provided
herein.

              

      

       

      
        
          
            	
                          11.          

                  	
                    Registration
      Rights.

                  

          

           

        

      

      
        
          
            
              	
                      a.        

                    	
                      
                        
                          
                            Definitions.
      As used
herein:

                          

                        

                      

                    

            

          

        

      

    

     

    
      	
                         i.  

            	
              The
      terms "register," "registered" and "registration" refer to a registration
      effected by preparing
      and filing with the Securities and Exchange Commission (the
      "SEC") a registration statement pursuant to the Securities Act of
      1933, as amended (the "Act"). and the declaration or order of
      effectiveness of such registration
statement.

            

    

     

    
      	
                         ii.     
      

            	
              For
      the purposes hereof the term "Registerable Securities" means shares of (i)
      common stock,
      preferred stock or debt securities of the Company (the "Securities"), (ii)
      stock or debt securities issued in lieu of the Securities in any
      reorganization which have not been sold to the public and (iii) stock
      issued in respect of the stock referred in (i) and (ii) as a result of a
      stock split, stock dividend, recapitalization or combination, which have
      not been sold to the public.

            

    

     

    
      
        
          
            
              	
                      b.        

                    	
                      
                        
                          Incidental
      Registration.

                        

                      

                    

            

          

        

      

       

    

    
      	
                         i.  

            	
              If
      the Company at any time
      proposes to register any of its securities under the Act,
      whether
      of its own accord or at the demand of any holder of such securities
      pursuant to an agreement with respect to the registration thereof
      (provided such agreement does not prohibit third parties from including
      additional securities in such registration), and if the form of
      registration statement proposed to be used may be used for the
      registration of Registerable Securities, the Company will give notice to I
      folder not less than 10 days nor more than 30 days prior to the filing of
      such registration statement of its intention to proceed with the proposed
      registration (the "Incidental Registration"), and, upon written request of
      the Holder made within ten (10) days after the receipt of any such notice
      (which request will specify the Registerable Securities intended to be
      disposed of by the Holder and state the intended method of disposition
      thereof), the Company will use its best efforts to cause all Registerable
      Securities of Holder as to which registration has been requested to
      be registered under the Act, provided that if such registration is
      in connection with an underwritten public offering, Holder's Registerable
      Securities to be included in such registration shall be offered upon the
      same terms and conditions as apply to any other securities included in
      such registration. Notwithstanding anything contained in this Section
      1.2
      to the contrary, the Company shall have no obligation to cause
      Registerable Securities to be registered with respect to any Registerable
      Securities which shall be
      eligible for resale under Rule 144(k) of the Securities
      Act.

            

    

     

    
      	
                         ii.     
      

            	
              If
      an Incidental Registration is a primary registration on behalf of the
      Company and is in connection
      with an underwritten public offering, and if the managing underwriters
      advise the Company in writing that in their opinion the amount of
      securities requested to be included in such registration (whether by the
      Company, the Holder, or other holders of the Company's securities pursuant
      to any other rights granted by the Company to demand inclusion of any such
      securities in such registration) exceeds the amount of such securities
      which can be successfully sold in such offering, the Company will include
      in such registration the amount of securities requested to be included
      which in the opinion of such underwriters can be sold, in the following
      order (A) first, all
      of the securities the Company proposes to sell, and (B) second, any other
      securities requested to be included in such registration. pro rata among
      the holders thereof on the basis of the amount of such securities then
      owned by such holders.

            

    

     

    
      
        
        

      

      
        Page 5 of
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                         iii.   

            	
              If
      an Incidental Registration is a secondary registration on behalf of
      holders of securities of
      the Company and is in connection with an underwritten public offering, and
      if the managing underwriters advise the Company in writing that in their
      opinion the amount of securities requested to be included in such
      registration (whether by such holders, by the Holder, or by holders of the
      Company's securities pursuant to any other rights granted by the Company
      to demand inclusion of securities in such registration) exceeds the amount
      of such securities which can be sold in such offering, the Company will
      include in, such registration the amount of securities requested to be
      included which in the opinion of such underwriters can be sold, in the
      following order (A) first, all of the securities requested to be included
      by holders demanding or requesting such registration, and (B) second, any
      other securities requested to be included in such registration, pro rata
      among the holders thereof on the basis of the amount of such securities
      then owned by such holders.

            

    

     

    
      
        
          
            
              
                	
                        c.        

                      	
                        
                          
                            Registration
      Procedures. The Company will advise the Holder in writing as to the
      effective date of the registration and as to the completion thereof. At
      its expense the Company
will:

                          

                        

                      

              

            

          

        

         

      

      
        	
                            i.  

              	
                keep
      the registration effective for a period of days or until the Holder has
      completed the distribution
      described in the registration statement relating thereto, whichever first
      occurs; and 

              

      

    

     

    
      	
                          ii.     
      

            	
              furnish such number
      of prospectuses and any other documents incident thereto as the Holder
      from time to time may reasonably
request.

            

    

     

    
      	
                     12.         

            	
              Notices.
      All notices and other communications required or permitted hereunder shall
      be in writing, shall be effective when given, and shall in any event be
      deemed to be given upon receipt or, if earlier, (a) five (5) days after
      deposit with the U.S. Postal Service or other applicable postal service,
      if delivered by first class mail, postage prepaid, (b) upon delivery, if
      delivered by hand, (c) one business day after the business day of deposit
      with Federal Express or similar overnight courier, freight prepaid or (d)
      one business day after the business day of facsimile transmission, if
      delivered by facsimile transmission with copy by first class mail, postage
      prepaid, and shall be addressed (i) if to the Holder, at
      the Holder's address as set forth on the books of the Company, and (ii) if
      to the Company, at the address of its principal corporate offices
      (attention: President) or at such other address as a party may designate
      by ten days advance written notice to the other party pursuant to the
      provisions above.

            

    

     

    
      	
                      13.        

            	
              Governing
      Law. This Warrant and all actions arising out of or in
      connection with this Agreement shall he governed by and construed in
      accordance with the laws of the State of Nevada, without regard to the
      conflicts of law provisions of the State of Nevada or of any other
      state.

            

    

     

    
      	
                      14.        
      

            	
              Entire
      Agreement;
      Modification; Waivers. This Agreement contains the entire
      agreement of the parties, and supersedes any prior agreements with respect
      to its subject matter. Except for the provisions of subsection 4.2. the
      Warrant Agent and the Company, by supplemental agreement, may make any
      changes in this Agreement (i) that they shall deem appropriate to cure any
      ambiguity or to correct any defective or inconsistent provision or
      manifest mistake or error herein contained; or (ii) that they may deem
      necessary or desirable and that shall not adversely affect the interests
      of the Registered Holders of Warrant Certificates (this provision, for
      instance, shall permit the Exercise Price to be decreased at the Company's
      option).

            

    

     

    
      
        
        

      

      
        Page 6 of
7

        
          

        

      

      
        
        

      

    

     

    
      	
                       15.        
      

            	
              Assignment.
      This Warrant may be assigned or transferred, in whole or in part, by due
      execution of the assignment form attached hereto as Exhibit B and the
      delivery of a true and correct copy thereof to the principal office of the
      Company along with a certification by the Holder that the assignee is, or
      was at the time this Warrant was issued. a registered representative with
      Dragonfly Capital Partners, LLC. Any assignment shall he null, void and of
      no force or effect unless the assignee is, or was at the time this Warrant
      was issued, a registered representative with Dragonfly Capital Partners,
      LLC and the assignment is accompanied by a certification to such
      effect.

            

    

     

    
      	
                        16.       

            	
              Jurisdiction
      and Venue. The courts of the State
      of Texas. sitting in the City of Houston.
      (the "Texas Courts") shall have exclusive jurisdiction to hear,
      adjudicate, decide, determine and enter final judgment in any action,
      suit, proceeding, case, controversy or dispute, whether at law or in
      equity or both, and whether in contract or tort or both, arising out of or
      related to this Agreement, or the construction
      or enforcement hereof or thereof (any such action, suit, proceeding, case,
      controversy or dispute, a "Related Action"). The Company and the
      Registered Holder hereby irrevocably consent and submit to the exclusive
      personal jurisdiction of the Texas Courts to hear, adjudicate, decide.
      determine and enter Final judgment in any Related Action. The Company and
      the Registered Holder hereby irrevocably waive and agree not to assert any
      right or claim that it is not personally subject to the jurisdiction of
      the Texas Courts in any Related Action, including any claim of
      forum nun conveniens or that the Texas. Courts are not the proper
      venue or form to adjudicate any Related Action. It' any Related Action is
      brought or maintained in any court other than the Texas Courts, then that
      court shall, at the request of the Company or the Registered Holder,
      dismiss that action.

            

    

     

    
      	
                        17.       

            	
              Specific
      Performance. The Company hereby acknowledges and agrees that it is
      difficult, if not impossible to measure in money the damages that will
      accrue to the Registered Holder by reason of a failure to issue the Shares
      under this Agreement, and that the Registered Holder may seek to
      specifically enforce the Company's obligation to issue the Shares.
      Therefore, if the Registered Holder shall institute any action or
      proceeding to enforce the provisions hereof, the Company hereby waives all
      claims or defenses therein that the Registered I !older has an adequate
      remedy at law, and hereby agrees not to assert or otherwise raise any such
      claim or defense.

            

    

     

    
      	
                        18.       

            	
              Waiver
      of Jury Trial.
      The Company and the
      Registered Holder hereby waive trial by jury in any Related
      Action.

            

    

     

    
      	
                        19.       

            	
              Attorney's
      Fees. The prevailing party in any Related Action shall be entitled
      to recover that party's costs of suit, including reasonable attorney's
      fees.

            

    

     

    
      	
                        20.       

            	
              Binding
      Effect. This Agreement shall be binding on, and shall
      inure to the benefit of the parties and their respective
      successors in interest.

            

    

        

    
      	
                        21.       
      

            	
              Construction,
      Counterparts.
      This Agreement shall be construed as a
      whole and in favor of the validity and enforceability of
      each of its provisions, so as to carry out the intent of the parties as
      expressed herein. Heading are for the convenience of reference. and the
      meaning and interpretation of the text of any provision shall take
      precedence over its heading. This Agreement may be signed in one or more
      counterparts, each of which shall constitute an original, but all of
      which, taken together shall constitute one agreement. A faxed copy or
      photocopy of a party's signature shall he deemed an original for all
      purposes.

            

    

     

    Issued as
of this fifth day of August, 2007.

     

    
      
        	 	DEEP
      DOWN, INC.	 
	 	 	 	 
	
                 

              	
                By:
      

              	/s/ Ronald
      E. Smith	 
	 	 	Name:
      Ronald E. Smith 	 
	 	 	Title:
      President & CEO 	 
	 	 	 	 

      

    

     

    
      
        
        

      

      
        Page 7 of
7

        
          

        

      

      
        
        

      

    

     

    EXHIBIT
A

    NOTICE OF
EXERCISE

     

    TO:     
DEEP DOWN. INC.

               
15473 East Freeway

               
Channelview, TX 77530

               
Attention: Eugene L.
Butler

     

    
      
        	
                    1.     

              	
                The
      undersigned hereby elects to purchase _______ Shares of DEEP DOWN, INC.
      pursuant to the terms of the attached
Warrant.

              

      

    

     

    
      
        	
                    2.     

              	
                Method
      of Exercise (Please initial the applicable blank);
  

              

      

       

      [  ]
in lawful money of the United States; or

       

    

    [ ] [if
permitted] the cancellation of such number of Warrant Shares as is necessary. in
accordance with the formula set forth in subsection 2(c), to exercise this
Warrant with respect to the maximum number of Warrant Shares purchasable
pursuant to the cashless exercise procedure set forth in subsection
1(b)).

     

    
      
        	
                    3.     

              	
                Please
      issue a certificate or certificates representing said Shares in the name
      of the undersigned or in such other name as is specified
      below;

              
	 	 
	 	______________________________________ 
	 	           (Name) 
	 	 
	 	______________________________________  
	 	 
	 	______________________________________  
	 	          
      (Address) 

      

    

     

    
      
        	
                    4.     

              	
                The
      undersigned hereby represents and warrants that the aforesaid Shares are
      being acquired for the account of the undersigned for investment and not
      with a view to. or for resale, in connection with the distribution
      thereof, and that the undersigned has no present intention of distributing
      or reselling such shares and all representations and warranties of the
      undersigned set forth in Section 7 of the attached Warrant are true and
      correct as of the date
hereof.

              

      

    

     

     

    
    

     

    
      	 	_______________________________ 
	 	(Signature) 
	 	Title:___________________________ 

    

     

     

    _____________________________

    (Date)

     

    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

    

     

    EXHIBIT
B

    ASSIGNMENT

     

    FOR VALUE
RECEIVED the undersigned hereby sells, assigns and transfers unto

     

     

    PLEASE
INSERT SOCIAL SECURITY OR OTHER IDENTIFYING NUMBER OF ASSIGNEE

     

     

     

    
      

    

    (Please
print or typewrite name and address, including postal zip code, of
assignee)

     

     

    
      
        

      

    

    The right
to purchase _______  shares of common stock in accordance with the
terms of the within Common Stock
Purchase Warrant, and said rights thereto, hereby irrevocably constituting and
appointing

     

     

    
      

    

    Attorney
to transfer said Certificate on the books of the Certificate Registrar, with
hill power of substitution in the premises.

     

    Dated:_____________________

     

    
    

     

    
      	 	___________________________________________________ 
	 	
              Signature
      Guaranteed: 

               

            
	 	___________________________________________________ 

    

     

     

    NOTICE:
The signature to this assignment must correspond with the name as it appears
upon the face of the within Certificate in every particular. without alteration,
enlargement or any change whatever. Such signature must be guaranteed by a
member firm of the New York Stock Exchange or a commercial bank or trust
company.

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