NOTE 8: SHARE-BASED COMPENSATION

12 Months Ended

Dec. 31, 2011

Disclosure of Compensation Related Costs, Share-based Payments [Text Block]

NOTE 8:SHARE-BASED COMPENSATION

We have a share-based compensation plan, the “2003 Directors, Officers and Consultants Stock Option, Stock Warrant and Stock Award Plan” (the “Plan”). Share-based compensation, and the corresponding income tax benefit related to the expense, is recognized as provided under the applicable authoritative guidance which requires all share-based payments to employees, including grants of employee stock options, to be recognized as compensation expense over the requisite vesting periods based on their fair values. The impact of forfeitures that may occur prior to vesting is also estimated and considered in the amount of share-based compensation recognized. In addition, the realization of tax benefits in excess of amounts recognized for financial reporting purposes will be recognized as a financing activity. The options granted under the Plan have vesting periods that range from immediate vesting to vesting over five years, and the contract terms of the options granted are up to ten years. We expense all stock options on a straight-line basis, net of estimated forfeitures, over the requisite service periods.  Under the Plan, the total number of options permitted is 15 percent of issued and outstanding common shares.

Summary of Shares of Nonvested Stock (also commonly referred to as restricted stock)

During the year ended December 31, 2011, we granted 8,000 shares of nonvested stock to management and certain key employees, par value $0.001 per share.  These nonvested shares were granted on June 8, 2011, and had a fair value grant price of $0.09 per share, based on the closing price of Deep Down’s common stock on that day (the “2011 Stock Grant”).

The vesting of the 2011 Stock Grant was based upon two conditions. The first condition was performance-based, as the Company must achieve certain earnings before interest, taxes, depreciation and amortization (“EBITDA”) targets in order for these granted shares to vest. The second condition was service-based. The restrictions on the 2011 Stock Grant will lapse in equal one-third increments on each anniversary of the grant date, subject to achievement of both the performance-based and service-based conditions.

Management determined that a 50 percent estimated forfeiture rate was appropriate for the service-based condition of the 2011 Stock Grant. Management has also determined that it is probable that the first EBITDA target will be achieved by the Company. The share-based compensation associated with the 2011 Stock Grant is $120, after a 50 percent reduction for estimated forfeitures. Based on management’s assumptions, a total of $70 of share-based compensation related to the 2011 Stock Grant has been amortized in the year ended December 31, 2011.

We are amortizing the share-based compensation expense of all other prior year grants of nonvested stock using a 0 percent estimated forfeiture rate.  A total of $15 of share-based compensation related to all other previous grants has been amortized in the year ended December 31, 2011.

During the year ended December 31, 2011, 1,000 shares of nonvested stock, previously granted to an executive in May 2010, par value $0.001 per share, were forfeited due to the resignation of the executive.  Additionally, 667 shares of nonvested stock, previously granted to a nonemployee director in May 2010, par value $0.001 per share, were forfeited due to the resignation of the nonemployee director in November 2011.

For the year ended December 31, 2011 and 2010, we recognized a total of $85 and $182, respectively, of share-based compensation expense related to all outstanding shares of nonvested stock, which is included in Selling, general and administrative expenses on the consolidated statements of operations.  The unrecognized compensation cost for nonvested stock was $52 at December 31, 2011.

The following table summarizes our stock activity of nonvested shares for the years ended December 31, 2011 and 2010. The aggregate intrinsic value is based upon the closing price of $0.05 of our common stock on December 30, 2011.

	Nonvested Shares			Weighted- Average Fair Value Grant Price		Aggregate Intrinsic Value
Outstanding at December 31, 2009		3,100		$	0.20	$	37
Vested		(1,600	)		0.27
Granted		2,000			0.09
Outstanding at December 31, 2010		3,500			0.23	$	-
Forfeited		(1,667	)		0.09
Vested		(1,833	)		0.12
Granted		8,000			0.09
Outstanding at December 31, 2011		8,000			0.09	$	720

Shares Withheld for Taxes

During the fourth quarter of 2011, we withheld 509 shares of our common stock from the vesting of nonvested shares granted to employees to satisfy tax withholding obligations of $50.  Once withheld, the shares were canceled and removed from the number of outstanding shares.  Accordingly, we reduced common stock and additional paid in capital on the consolidated balance sheet by an amount which equaled the fair market value of the withheld shares on the date of withholding and cancellation.  We subsequently remitted the amount withheld to the tax authority.

Summary of Stock Options

During the years ended December 31, 2011 and 2010, we granted 8,000 and 2,250 options, respectively. Based on the shares of common stock outstanding at December 31, 2011, there were approximately 30,731 options available for grant under the Plan as of that date. We expense all stock options on a straight-line basis, net of forfeitures, over the requisite expected service periods. The total share-based compensation expense recognized for stock options for the years ended December 31, 2011 and 2010 was $339 and $545, respectively.  As of December 31, 2011, the unrecognized compensation cost for outstanding stock options was $376.

The following table summarizes our stock option activity for the years ended December 31, 2011 and 2010. The aggregate intrinsic value is based on the closing price of $0.05 on December 30, 2011.

	Shares Underlying Options			Weighted- Average Exercise Price		Weighted- Average Remaining Contractual Term (in years)		Aggregate Intrinsic Value (In-The-Money)
Outstanding at December 31, 2009		20,025		$	0.35		2.5	$	323
Grants		2,250			0.10
Cancellations & Forfeitures		(6,133	)		0.83
Outstanding at December 31, 2010		16,142			0.13		2.9	$	-
Grants		8,000			0.09
Cancellations & Forfeitures		(2,884	)		0.26
Outstanding at December 31, 2011		21,258			0.10		2.4	$	-
Exercisable at December 31, 2011		4,817			0.11		1.2	$	-

The following summarizes our outstanding options and their respective exercise prices at December 30, 2011:

Exercise Price		Shares Underlying Options
$	0.09		8,333
$	0.10		10,000
$	0.12		2,900
$	0.65		25
			21,258

The fair value of each stock option grant is estimated on the date of the grant using the Black-Scholes model and is based on the following key assumptions for the year ended December 31, 2011:

	December 31, 2011
Dividend yield	0%
Risk free interest rate	1.52%
Expected life of options	3.5 years
Expected volatility	98.2%