NOTE 8: INVESTMENT IN JOINT VENTURE

6 Months Ended

Jun. 30, 2011

Equity Method Investments Disclosure [Text Block]

NOTE 8: INVESTMENT IN JOINT VENTURE

On December 31, 2010, the Company and its wholly-owned subsidiary Flotation entered into a Contribution Agreement by and among us, Flotation, Cuming Flotation Technologies, LLC, a Delaware limited liability company (“CFT”), and Flotation Investor, LLC, a Delaware limited liability company (“Holdings”), pursuant to which Flotation contributed all of its operating assets to CFT in exchange for common units of CFT and the assumption by CFT of all liabilities of Flotation (other than an intercompany corporate overhead payable from Flotation to Deep Down).  Pursuant to the Contribution Agreement, we also contributed to CFT $1,400 in cash and all of our rights and obligations under that certain Stock Purchase Agreement, dated May 3, 2010, as amended (the “Cuming SPA”), by and among the Company, Cuming Corporation, a Massachusetts corporation (“Cuming”), and the stockholders of Cuming, in exchange for common units of CFT.  Concurrently with the closing of the transactions described above, CFT contributed the assets and liabilities it acquired from Flotation to Flotation Tech, LLC, a Delaware limited liability company and a wholly-owned subsidiary of CFT.

On December 31, 2010, we entered into a Contract Assignment and Amendment Agreement by and among us, CFT and Cuming, pursuant to which we assigned all of our rights and obligations under the Cuming SPA to CFT.  Concurrent with our entry into such Contract Assignment and Amendment Agreement, we entered into a Securities Purchase Agreement, by and among the Company and Holdings (the “Securities Purchase Agreement”), pursuant to which we sold and issued to Holdings 20,000 shares of our common stock for an aggregate purchase price of $1,400.  The Securities Purchase Agreement provides Holdings with registration rights for such 20,000 shares only in the event we fail to maintain current public filings.

In connection with the consummation of the foregoing described transaction, on December 31, 2010, the Company and Flotation entered into an Amended and Restated Limited Liability Company Agreement (the “JV LLC Agreement”) of CFT by and among us, Flotation and Holdings, each as a member of CFT, to provide for the respective rights and obligations of the members of CFT.  We and Flotation collectively hold 20 percent of the common units of CFT.  Holdings holds 80 percent of the common units and 100 percent of the preferred units, which are entitled to a preferred return until the holder thereof receives a full return of its initial capital contribution.  The preferred units have no voting rights.  Pursuant to the terms of the JV LLC Agreement, we and Flotation collectively have the right to appoint, and we have appointed, one director to CFT’s board of directors and Holdings has the right to appoint the other 4 directors.  The JV LLC Agreement provides that, without the prior approval of Deep Down and Flotation, certain actions cannot be taken by CFT, including:  increasing the number of members of CFT’s board of directors; amending the JV LLC Agreement or the certificate of formation of CFT in a manner that disproportionately adversely affects Deep Down or Flotation; engaging in activities other than the business of CFT; declaring or paying dividends or distributions not in accordance with the JV LLC Agreement; repurchasing or redeeming CFT units; causing a material change in the nature of CFT’s business; engaging in activity that disproportionately affects Deep Down or Flotation as holders of units of CFT; liquidating, dissolving or effecting a recapitalization or reorganization of CFT; prior to November 2, 2012, authorizing or issuing any equity securities or other securities with equity features or convertible into equity securities except with regard to incentive plans for management; making loans, advances, guarantees or investments except under certain circumstances; granting an exclusive license in all or substantially all of the intellectual property rights of CFT; amending any provision of, or entering into a resolution of any dispute with the parties under the Cuming SPA; entering into a transaction with an officer, director or other person who is an affiliate of CFT; incurring any funded indebtedness other than for the purpose of retiring CFT’s indebtedness to Holdings until such time as such indebtedness is fully repaid; or agreeing or committing or causing any subsidiary to agree to or commit to any of the above.

In accordance with the Contribution Agreement, Flotation contributed its rights and obligations under an intercompany fabrication contract with Deep Down Delaware to CFT’s operating subsidiary, Flotation Tech, LLC.  As a result, for the six months ended June 30, 2011, Deep Down Delaware recognized sub-contract expense to Flotation Tech, LLC of $4,691.

Concurrent with the closing of the joint venture transaction on December 31, 2010, we entered into a Management Services Agreement (the “MSA”) with CFT, to be effective January 1, 2011, pursuant to which we provide CFT the services of certain officers and management personnel at a fixed price equal to the cost of services to the Company.  The structure of the MSA pricing protects the equity partners from economic variability resulting in CFT being a variable interest entity.  The Company does not have the power to direct the activities of CFT that most significantly impact CFT’s economic performance and is not the primary beneficiary of CFT.  The MSA was amended effective March 1, 2011 to, among other things, alter the minimum monthly fee we are paid by CFT (due partly to a change in the staffing levels for services and personnel we provide to CFT).  During the six months ended June 30, 2011, we earned $389 in fees under the MSA.

Also concurrent with the closing of the joint venture transaction on December 31, 2010, we entered into a Sales and Services Agreement (the “SSA”) with CFT, to be effective January 1, 2011, pursuant to which we have been given first right to provide goods and services being procured by CFT.  During the six months ended June 30, 2011, we provided $0 in goods and services under the SSA.

The components of our Investment in joint venture are summarized below:

Contribution to CFT	$	3,400
Equity in net loss of CFT for the year ended December 31, 2010		(254	)
Investment in joint venture, December 31, 2010		3,146
Equity in net loss of CFT for the six months ended June 30, 2011		(316	)
Investment in joint venture, June 30, 2011	$	2,830

Summary joint venture financial data is as follows:

	For the Three Months Ended				For the Six Months Ended
	June 30,				June 30,
	2011		2010		2011		2010
Revenues	$	25,995	$	-	$	57,523	$	-
Gross profit	$	6,829	$	-	$	14,029	$	-
Net loss	$	1,011	$	-	$	1,580	$	-