Q3 2021 Deep Down Inc Earnings Call

Today's conference is scheduled to begin momentarily. Please continue to standby and thank you for your patience.

[music].

Good morning, ladies and gentlemen, thank you for standing by welcome to beat down third quarter 2021 conference call. During the presentation, all participants will be in a listen only mode.

After the Speakers' remarks, you'll be invited to participate in a question and answer session.

A reminder, this call is being recorded today Friday November 12 2021.

A detailed disclaimer related to be forward looking statements is included in the press release issued this Friday morning, and filed with the S. E C.

It is also available on the company's website deep down incorporated dot com or upon request and reconciliation of non-GAAP financial measures used in the press release and on today's call is included in the press release on the website lift.

Listeners are cautioned to not.

Not place undue reliance on these forward looking statements, which speak only as of.

To date my deep down also undertakes no obligation to revise any of its forward looking statements to reflect events or circumstances. After the date me at this time I'd like to turn the call over to your Chief Executive Officer Charles.

Please begin.

Thank you Omar.

Good morning, and thank you for joining us today.

When we last got together, we mentioned that $60 per barrel oil price is a positive sign for the industry and the industry, having largely adapted to managing projects about price points.

At the time, there was a cautious optimism, but that price level to hold for the longer term.

But not too many people were making plans with $80 per barrel in mind.

Three months later.

We are and then increasing projections about prices getting to levels not seen since the early to mid part of the last decade. However, the last 18 to 24 months have taught us all to be cautious in light of the inherent uncertainties of the future.

It is against this backdrop that we view our increased revenues for the first nine months of this year compared to the same period last year as a positive sign.

Our margins are depressed by unfavorable factors.

In addition to pricing pressure from increased raw material costs are customers are still exhibiting some signs of hesitancy on some of their projects leading to limits on their budgets and likewise limits to what we are able to charge for our products and services.

To help them streamline their projects. We have also been willing to subcontract certain aspects of the project's opening us up to a higher proportion of third party pass through costs at minimal margin on a number of our projects, which in turn has led to lower than ideal margins.

Despite this lower margins. This strategy is beginning to bear fruit as we have received invitations to bid on projects.

This would not have participated on and even recently received a contract for a new product for us from a customer who would appreciate being able to procure different products through us.

What began as a $46000 scope of work has now turned into hundreds of thousands of dollars walk up work from an oil company, who hadn't walked in several years.

Speaking about with chemo customer relationships, we recently announced another character of projects, where we are utilizing the second of our two large car cells after using their fast one earlier this year.

These projects are continuing to support new conversations around the use of our car cells further validating our assertion that the market will continue to require this kind of equipment offering.

Often providing a rental option rather than a purchase.

Excuse me.

Ironically, taking an impairment on the car sells at the height of the COVID-19 pandemic has been a blessing in disguise for US as this has enabled us to offer the car sells for relatively low prices and benefit from the additional services, we're able to perform.

With Couldnt speak of the car cells without mentioning our foray into the offshore wind markets.

During our last call. We mentioned a decision that was scheduled to be made in October on our projects will be done.

Unfortunately, we aligned in the sense of urgency where Houston in the oil and gas industry does not directly translate to the margin with the markets.

A few weeks ago when form that the customer would make a decision about Friday November 12.

But earlier this morning, we will inform the decision has been further delayed.

Based on our engagements to date, a further delay was not a surprise.

While we wait for that decision.

Suddenly approach to discuss the possibility of providing equipment and personnel for a totally different wind projects beginning in 2023.

While this is still some time in the future. We view. The fact that we were approached as further validation of our efforts to raise our hand and be identified as a viable option for the developing offshore wind industry.

We will provide further updates as and when they do come available.

So I'll go to our efforts to participate in the offshore wind industry.

This past Wednesday, we hosted a team from a subsea power company.

Excuse me.

Who have provided prototype products and services to customers in other parts of the world and they're now looking to do the same here in the U S.

Our discussions with them have revolved around complementing their technology with our offshore environment expertise, particularly around strengthening their products for the subsidy environment, then providing the installation equipment and personnel for the final products.

This is a different company from the one we described during our last call, which is another indication of our expansionary efforts are beginning to bear fruits and once again further validation of our previously disclosed strategy of expanding our focus beyond just our core products and services to focus on our core competencies, which are transferable to renewable energy applications.

Again at this point, we have no clear indication of when we begin generating cash flows from these initiatives.

Speaking of the future business growth remains a key focus for us so much so yes.

We are enhancing our business development efforts, while Washington, and a number of initiatives to reposition the company, but a net recovery we foresee.

Our optimism for a recovery is influenced by a significant increase in bidding activity. During the last several months, which can be partially attributed to some organizational changes we've made in the way we engage our customers.

We expect to make further announcements in coming months about this repositioning initiatives.

And speaking of announcements we do appreciate those of you who have reached out to discuss the possibility of a stock buyback program.

While we continue to view this as a good way to return value to our shareholders. We have discussed it at the board level and determined that at this point and in light of some operational cash needs. We foresee in the not too distant future. We will hold off on instituting a buyback product for now buyback program for now sorry.

We will revisit this topic during future meetings and communicate accordingly.

With that overview, let me now turn the call over briefly to our Vice President of Finance Trevor just for a quick review of our financials Trevor Thank.

Thank you Charles.

For the three months ending September 32021, deep down generated revenues of $3.6 million. This represents a 13% increase when compared to revenues of $3 $1 million for the three months ended September 32020, the growth in revenues can be attributed to the progressive increase in demand for our subsea.

Support services and rental solutions.

Gross profit as a percentage of revenues was 24% in the third quarter. This year, which represents a 14% decrease in gross margin compared to 37%. We generated in Q3 of last year, a declining gross margin was mainly driven by increases in labor and service costs in conjunction with the pricing pressure for them.

With pricing pressure from customers.

Additionally, we received rent abatements during the third quarter last year that were not repeated this year.

Selling general and administrative expenses of $1 $3 million for the third quarter of 2021 remained relatively consistent with last year's $1 4 million for Q3 of 2020.

Turning to net income.

The company recorded net income of $332000 or <unk> <unk> per diluted share for the third quarter. This year.

Compared to a net loss of $250000 or a loss of <unk> <unk> per share for the third quarter of 2020.

The improvement in net income was mainly driven by recording the full forgiveness of the second P. P. P. One we obtained in March 2021, as well as maintaining discipline operating cost structure.

Moving to the balance sheet, our capital structure includes $3 $7 million in cash and $5 8 million and working capital as of September 32021.

This is compared to having $3 $7 million in cash and $4 $1 million in working capital at the same time last year.

Also.

We received full forgiveness of the entire balance sheet.

Of the second P P loans obtained.

Obtained earlier this year and as a result, we no longer have any outstanding PPP loan balances on our balance sheet.

In summary, we have witnessed increased levels of project activity throughout the first nine months of this year when compared to the same periods last year. Our top line success can be directly linked to the dedicated efforts of our highly skilled team I am certain that this level of devotion remains unmatched in our industry, which provides me with confidence that this trend will continue.

Throughout the rest of the year.

Finally, our balance sheet positions us well to pursue strategic growth opportunities and make investments that will increase.

Our capital efficiency that said, thank you for your time and I will now turn the call back over to Charles.

Thank you Trevor.

That concludes our prepared remarks today. So we'll now turn the call back to the operator to take investor questions Noma.

Thank you as a reminder to ask a question you will need to press star one on your telephone to withdraw your question. Please press the pound key.

These standby, while we compile the Q&A roster.

Our first question comes from Walter Schenker with MAZ Partners. Your line is open.

Uh huh.

In looking at the Hello Charles.

In looking at the quarter.

Obviously, the real issue is margin compression revenues were sort of consistently roughly where they've been.

Was that an issue that you took on business, which you knew was going to be.

Marginal at best was there overruns on the forest.

Carousel project was it a single program I'm trying to understand why margins, whereas poor as they were in the quarter.

Hopefully you know the answer.

[laughter] Walter good morning, Thanks for the questions.

The margins we took on.

It's a combination of factors.

To go on some of the projects we've recently taken on.

Touched on it briefly where we've had customers ask us to.

Pass through southern cost for them cost, which were not able to attach lots of margin, where we essentially help them manage some of their contracts.

This year alone.

Different from other years, we probably had about 600 over $600000 waffles pass through costs some of it at no margin and somewhat very little margin.

If you took that in fact.

Frankly, the team that's irregular our target margins of 40% as we've previously disclosed that would be an additional 300 to $400000 worth of top line.

Additionally.

To your question about the <unk>, we did not have cost overruns like we've had in the past projects. However, we are limited in what we could charge.

On certain activities, which in a normal business environment, we could easily have charges at least another three to $400000 Walsh.

That was a business that we took on EBITDA.

At a lower price than we would have on not getting it at all and so strategically we felt it was work because you've taken at lower margins get to work and that has actually opened the door to a lot of other business in the future, which we are.

Cautiously optimistic about.

And those that business.

Which was at low or no margin.

Is largely completed in the third quarter will continue into the fourth quarter.

That's largely completed in the third quarter.

The aspect of pass through costs would.

We do have a couple of customers who are continuing.

Continuing to especially.

International customers, we are continuing to ask us to take on certain sub contracts.

Low margin, but we do not at this point expect to take it on to the extent we've done it.

So we'll get some small amounts.

Going back a few years, maybe more than a few years.

They were.

Substantial potential contracts.

Which the company was buying four we had a substantial backlog.

Those type of projects are not just not being done or you are not participating in them.

We that's a very good question. So we go back to probably around the 2014 2015 2016 timeframe, we had a fairly large proportion of products projects as opposed to service work.

A lot of that had to do with Greenfield projects, which is basically new new fields or new developments essentially over the past couple of years. There has not been much of that so a lot of our revenue. This year has been very heavily service. However, we still maintain our cost structure a facility.

Towards those kind of projects, where there is lots of products and those who do come with good margins on the products as we look towards 2022 and beyond.

In discussions about those kind of projects again there is some.

<unk> are opening up of Greenfield projects coming up and so we are actively discussing with our customers about growing our product portfolio.

As we look towards the future. So we do see signs of that.

Positive signs.

Your types of projects are in the.

We're not in the exploration phase they are in the development phase where people are drilling for.

For production and need to interconnect.

Production.

Product equip.

The equipment at the sea floor and run it up to a platform or something.

So.

It should have a pretty good lead time I realize you don't have to proceed.

To see whether or not I mean again this isn't just finding a new field in.

Starting to two exploratory drilling you will later in the cycle.

So.

I'm, just trying to get a better feel for whether or not people are announcing.

Building out production in some of these fields.

So yes. Good point, we are the equipment. We provide is used on the production side.

Number of previously announced projects previously announced discoveries while we are talking to customers about the equipment, which is like you rightfully say long lead item projects and products.

There are a number of them, where we are discussing with them where they in some cases have not yet publicly announced the final investment decisions and they're trying to work through their budgets. So we are walking with them on that.

But short answer is.

Previously approved projects beginning to move forward.

With oil down to $80 a barrel.

And so there is a lot of ongoing discussion again Unfortunately today's.

Pricing pressures because of raw materials, we are now getting into a situation where there are some labor constraints.

Talent competition and so.

We are walking through all of that and engaging our customers differently.

And are cautiously optimistic that that will bear fruit.

Lastly, before we see a significant step up in financial.

Actual performance.

I will have to see some announcements of meaningful contracts.

I'm just trying to understand if if given the nature of what you've been doing for the last for 2021.

It was the whole year.

You know you can get somewhat better, but we need big contracts really.

Troy by revenues and margins.

Yes that would yes, because a lot of the contracts we have.

Executed the CAGR on projects.

I've not been they've been smaller ones 101000 $200000 of yes, we are.

Looking to make some announcements.

We are hoping would be able to make some announcements next year, but we're also looking well.

Turning to look at just efficiency in other ways, we can.

We improved our bottom line and optimize further optimize operations.

Okay. Thank you.

Thank you Walter.

Thank you and as a reminder to ask a question Thats Star one.

And Sir I'm showing no further questions at this time I will turn the call back over for any closing comments.

Thank you Norma and once again, thanks to all of you who joined our call today. We appreciate your interest and support of deep down and we look forward to speaking with you about our progress on the next earning calls in the meantime, we hope everyone has a happy Thanksgiving numeric Christmas and a happy new year and.

So let's conclude today's call. Thank you.

Thank you. This concludes today's conference call. Thank you for your participation you may now disconnect everyone have a wonderful day.

Okay.

Sure.

Yes.

[music].

Yes.

Yes.

Okay.

Okay.

Yes.

[music].

Yes.

Okay.

Yeah.

Okay.

Yes.

[music].

[music].

[music].