NOTE 3: INVESTMENT IN JOINT VENTURE

12 Months Ended

Dec. 31, 2011

Equity Method Investments Disclosure [Text Block]

NOTE 3:INVESTMENT IN JOINT VENTURE

On December 31, 2010, we and our 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, we and Flotation entered into an Amended and Restated Limited Liability Company Agreement of CFT by and among us, Flotation and Holdings, each as a member of the 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.  Concurrent with the closing of the joint venture transaction on December 31, 2010, we entered into a Management Services Agreement to be effective as of January 1, 2011, with CFT, pursuant to which we agreed to provide CFT the services of certain officers and management personnel.  We amended this Management Services Agreement effective March 1, 2011 to, among other things, alter the minimum monthly fee we were paid by CFT (due partly to a change in the staffing levels for services and personnel we provide to CFT).

On October 7, 2011, CFT consummated a transaction pursuant to that certain Stock Purchase Agreement (the “Purchase Agreement”), by and between CFT and a Houston-based company (“Buyer”)  pursuant to which Buyer purchased from CFT (i) all of the issued and outstanding shares of capital stock of Cuming, (ii) the shares of 230 Bodwell Corporation, a Massachusetts corporation and subsidiary of Cuming, and (iii) certain assets that, immediately prior to closing, were acquired by Cuming, for a purchase price of $60,000 (less certain debt and subject to purchase price adjustment for working capital and potential earn-out payments).  Deep Down is entitled to 20 percent of the common equity proceeds (including earn-out payments) from the sale and will be subject to 20 percent of any indemnity obligations over the indemnity escrow amount (5 percent) pursuant to the Purchase Agreement.  Such indemnity obligation will be capped at the amount of proceeds Deep Down receives pursuant to that certain Indemnification and Contribution Agreement dated October 7, 2011 (the “Indemnification Agreement”).  Deep Down’s proceeds received from the sale were approximately $6,375, which does not include any potential earn-out payments.  The proceeds of approximately $6,375 are comprised of a $3,400 return of capital to Deep Down and Flotation and an estimated $2,975 distribution of Deep Down and Flotation’s share of the estimated profit on the sale.  These sums do not include incremental proceeds anticipated from the return of escrow or future earn-out payments.

Below is a summary of the net assets contributed to CFT as of December 31, 2010:

	December 31, 2010
Cash and cash equivalents	$	1
Accounts receivable		403
Inventory		594
Prepaid expenses and other current assets		25
Property, plant and equipment, net		8,405
Intangibles, net		8,035
Other assets		23
Total assets contributed	$	17,486
Accounts payable and accrued expenses		277
Billings in excess of costs on uncompleted contracts		2,972
Deferred revenue		1
Long term debt		2,117
Total liabilities contributed	$	5,367
Net assets contributed	$	12,119

The fair value of our investment in CFT as of December 31, 2010 was the $3,400 value assigned to our common units of CFT.  A gain or loss is recognized on the difference between the determined fair value of our investment in CFT and the book value of the net assets contributed. Below is a calculation of the loss we recognized on the contribution of net assets to CFT:

	December 31, 2010
Book value of Flotation net assets	$	12,119
Cash contribution by Deep Down to CFT		1,400
Total book value of contributions to CFT		13,519
Less: Fair value of Investment in CFT		(3,400	)
Loss on contribution of Flotation	$	10,119

Below are unaudited condensed consolidated balance sheets of CFT as of December 31, 2011 and December 31, 2010:

	December 31, 2011		December 31, 2010
Current assets	$	6,903	$	53,784
Property, plant and equipment, net		2,065		17,896
Intangible assets		-		14,719
Other assets		2		60
Total assets	$	8,970	$	86,459
Current liabilities	$	3,155	$	59,962
Long-term debt		-		2,019
Equity		5,815		24,478
Total liabilities and equity	$	8,970	$	86,459

Below are unaudited condensed consolidated statements of operations of CFT for the years ended December 31, 2011 and 2010:

	For the Year Ended December 31,
	2011			2010
Sales	$	88,533		$	-
Cost of production		(70,500	)		-
Gross profit		18,033			-
Operating expenses		(11,660	)		(2,550	)
Income (loss) from operations		6,373			(2,550	)
Gain on sale of investment		30,133			-
Other (expense) income, net		(11,753	)		1,278
Income (loss) before income taxes		24,753			(1,272	)
Provision for income taxes		(2,175	)		-
Net income (loss)	$	22,578		$	(1,272	)

The components of our Investment in joint venture as of December 31, 2011 and December 31, 2010 are as follows:

Contribution to CFT for the year ended December 31, 2010	$	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 income of CFT for the year ended December 31, 2011		4,392
Cash distribution from CFT for the year ended December 31, 2011		(6,375	)
Investment in joint venture, December 31, 2011	$	1,163