Q1 2022 Deep Down Inc Earnings Call
There has also been an update in drilling rig day rates, an early indicator of our customer's future aspirations.
The first quarter continued the trend of being heavily reliant on service projects, leaving our manufacturing infrastructure largely underutilized.
We recognize that meaningful growth will only be realized from increased product sales, and we are keenly focused on growing this aspect of our business.
Trevor will provide further details on our financials in a moment, but first, I would like to provide a few updates.
Since 2012, we have been reporting an ongoing legal dispute with one of our customers.
We are pleased to finally report that both parties have accepted a mutual release of all claims and we can finally put this legal issue behind us.
We are especially pleased not to have to carry this issue forward as we launch our new brand. Unfortunately, this issue has not impacted our ability to work with this company.
Speaking of the rebranding, our customers have continued to receive it positively and we have not encountered any operational issues from it. If anything, it has led to increased engagement with existing former and potential new customers, providing us with lots of opportunities to discuss our future offerings. However, we're still awaiting approval of our name and ticker symbol change from the Financial Industry Regulatory Authority, better known as FINRA, which is why our filings continue to bear the name Deep Down. We anticipate approval prior
Another major strategic initiative we have been working on is the relocation of our business.
These plans are picking up steam now that we have taken possession of the main office building at the new facility.
We have a 90-day build-out period and expect to be substantially moved in by the beginning of August . We do anticipate beginning limited operations at the new facility by July and already have customer furnished components scheduled to be delivered there in July for value-addition activities by our team.
Good morning, ladies and gentlemen, thank you for standing by welcome to Deep Downs first quarter 2022 conference call.
Aside from my increased ability to serve different customer segments, the new facility will also enhance our productivity.
given that it is a fully climate control environment and lends itself well to compartmentalized production.
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.
This will enable us to reduce the environmental impact of operations while providing a vastly improved work environment for our personnel.
As a reminder, this call is being recorded today Wednesday may 11 2022.
A detailed disclaimer related to deep downs forward looking statements is included in the press release issued Monday afternoon, and filed with the SEC and is also available on the company's website deep down Inc. Dotcom or upon request a reconciliation of non-GAAP financial measures used in the press release and on today's call.
And speaking of future plans to facilitate our growth intentions, we have been evaluating our internal structure and incrementally restructuring the organization with our future goals in mind.
We expect this exercise to continue through our move and have different internal working groups focused on various initiatives.
These changes will also enable us to operate in alignment with our three-pronged growth strategy revolving around systems, technology, and partnership.
Call is included in the press release and on the website.
Listeners are cautioned not to place undue reliance on these forward looking statements, which speak only as of the date meet deep down also undertakes no obligation to revise any of its forward looking statements to reflect events or circumstances. After the date made.
As a reminder, our systems pillar primarily relates to our legacy offerings in the oil and gas segments but represents the shift in our approach to becoming a provider of integrated systems rather than just providing individual components.
At this time I'd like to turn the call over to CEO Charles Sterling. Thank you. Please go ahead.
We are however seeing some opportunities beyond oil and gas, which we will be revealing in due course.
Thank you Melisa.
Good morning, and thank you for joining us today.
We have previously realized access from this strategy, and we are actively engaged in discussions with some customers on integrated solutions.
Our first quarter results highlight continued softness in the offshore recovery, even though we have seen an increase in bidding activity since the beginning of the year.
Our technology pillar revolves around the development of new equipments and associated services that straddle both traditional oil and gas as well as renewable energy sources.
There has also been an uptick in drilling rig day rates, an early indicator of our customers' future aspirations.
Our product development team is already hard at work and in just a short amount of time has already identified a potentially pretendable offering.
So the first quarter continued the trend of being heavily reliant on service projects, leaving our manufacturing infrastructure largely underutilized.
However, further validation of these efforts is required before we can publicly disclose the product.
We recognize that meaningful growth will only be realized from increased product sales and we are keenly focused on growing this aspect of our business.
This pillar will also include our ongoing efforts to further improve the environmental friendliness of our existing equipment.
Trevor will provide further details on our financials in a moment, but first I would like to provide a few updates.
And lastly, partnerships, which will involve collaboration with like-minded organizations, where we seek to leverage our core competencies to jointly capitalize on future opportunities.
Since 2012, we had been reporting an ongoing legal dispute with one of our customers. We are pleased to finally to parch that both parties have accepted a mutual release of all claims and we can finally put this legal issue behind us, we're especially pleased North Dakota to carry this issue for us as we launch our new Bryan. Unfortunately.
This will likely be a longer-term strategy and could take different forms such as project specific and social, strategic alliances, or operational joint ventures.
We look forward to future announcements about these pillars and especially how they will contribute to the growth of our business.
This issue has not impacted our ability to work with this customer.
Speaking of the rebranding our customers have continued to receive it positively and we have not encountered any operational issues for me. Its if anything it has led to increased engagement with existing pharma and potential new customers, providing us with lots of opportunities to discuss our future offerings. However, we're still awaiting approval.
And with that overview, I will now turn the call over to our Vice President of Finance, Trevor Arshaust. Trevor.
Thank you, Charles, for the three months ending March 31, 2020.
deep down generated revenues of $3.6 million, which represents an 8% decrease when compared to revenues of $3.9 million.
All of our name and ticker symbol change from the financial industry regulatory authority better known as FINRA, which is why our filings continue to bear the name deep down we anticipate approval prior to the next filing.
shortfall and revenues during the quarter was driven by project mix and and reflected the current demand for short-durables.
Another major strategic initiatives, we have been watching one is a relocation of our business.
Gross profit was $1.4 million or 34% of revenues for the first quarter of 2022. This represents a 5% decrease in gross margin compared to the $1.7 million.
These plans are picking up steam now that we have taken possession of the main office building of a new facility.
We have a 90 day build out period and expect to be substantially moved in by the beginning of August we do anticipate beginning limited operations at the new facility by July and already have customer furnished components scheduled to be delivered in July . So value addition activities by our team.
of low margin pass-through third-party costs incurred on select projects and a slight increase in the cost of labor.
Aside from our increased ability to solve different customer segments. The new facility will also enhance our productivity.
Selling general and administrative expenses were $1.7 million in Q1 2022.
Given that you did a fully climate control environments and lends itself well to compartmentalize production.
The 9% increase in SG&A was mainly due to increased branding and marketing expenses related to our recent
This will enable us to reduce the environmental impact of operations, while providing a vastly improved work environment for our personnel.
Turning to the bottom line, the company reported a net loss of $264,000 for Q1 2022, which translates to a two-cent loss per diluted share. This compared to generating net income of $148,000 or one cent per share for Q1 2021. The comparative decline in net income was mainly driven by the aforementioned decline in revenues and increase in administrative costs associated with our rebranding efforts. Shifting to the balance sheet, our capital structure is at the top of the list.
And speaking of future plans.
Facilitate our growth intentions, we have been evaluating our internal structure and incrementally restructuring the organization with our future goals in mind.
We expect these exercises continue through our move and a different internal walking groups focused on various initiatives.
These changes will also enable us to operate in alignment with our three pronged growth strategy revolving around systems technology and partnerships.
A reminder, our systems pillar, primarily relates to our legacy offerings in the oil and gas segments, but represents a shift in our approach to becoming a provider of integrated systems, rather than just providing individual components.
We are however, seeing some opportunities beyond oil and gas, which we will be revealing in due course.
We have previously realized success from this strategy and we are actively engaged in discussions with some customers on integrated solutions.
includes $3.7 million in cash and $6 million in trading.
Our technology pillar revolves around the development of new equipment and associated services that struggle with both traditional oil and gas as well as renewable energy sources.
receivable related to employee retention credits claimed under the provisions of the CARES Act. We expect to see these funds at some point.
Our product development team is already hard at work and in just a short amount of time has already identified a potentially preventable offering.
of integrated solutions to support the full life cycle of a project from design and engineering and project management.
However, further validation of these efforts is required before we can publicly disclose the products.
This pillar will also include our ongoing efforts to further improve the environmental friendliness of our existing equipments and lastly, partnerships, which will involve collaboration with like minded organizations, where we will seek to leverage our core competencies to jointly capitalize on future opportunities.
We have the most experienced and dependable personnel in the industry, which gives me confidence we'll achieve our ongoing pursuit for growth as the year progresses. Thank you for your time. I will now turn it off.
This concludes our prepared remarks today. So I'll turn the call back to the operator to take investor questions. Melissa?
This will likely be a longer term strategy and could take different forms such as project specific consortia strategic alliances are operational joint ventures.
Thank you. If you'd like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question key.
We look forward to future announcements about these pillows and especially how that how they will contribute to the growth of our business and.
You may press star followed by 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment please, we'll be pulled for questions.
And with that overview I will now turn the call over to our Vice President of Finance Trevor Trevor. Thank.
Thank you Charles for the three months ending March 31, 2022, deep down generated revenues of $3 $6 million, which represents an 8% decrease when compared to revenues of $3 $9 million for three months ended March 31, 2021, the shortfall in revenues during the quarter was driven by.
Project mix and and reflected the current demand for short duration projects utilizing our support services and rental solutions.
Once again, ladies and gentlemen, if you'd like to ask a question, please press star 1 on your telephone.
Gross profit was $1 4 million or 34% of revenues for the first quarter of 2022, which represents 5% decrease in gross margin compared to the $1 7 million or 38% of revenues, we generate in the first quarter 2021.
Thank you. Our first question comes from line of Frank Wineski with Private Investor.
Margin compression came in the form of.
Of low margin pass through third party costs incurred on select projects and a slight increase in the cost of labor during the most recent quarter.
it tells uh... couple questions and noticed you bought some of the smith shares uh... back during the quarter uh... what what is his current ownership uh... remaining ownership do you know that
Selling general and administrative expenses were $1 $7 million in Q1, 2022 compared to $1 $5 million in Q1 2021.
Hi Frank, thanks for the question. Yes, he's currently at about 22% between him and his wife.
The 9% increase in SG&A was mainly due to increased branding and marketing expenses related to our recent rebranding efforts Charles touched on earlier.
Okay. Is there any indication that he'd want to sell more at these prices?
Turning to the bottom line the company reported a net loss of $264000 for Q1, 2022, which translates to a two cent loss per diluted share this compared to generating net income of $148000 or one seven per share for Q1, 2021.
I haven't spoken to him, I know he's on the call as well, so at this point I'm not sure what his future intentions are.
okay uh... second question do you have you move into the uh... integrated systems uh... or attempted to move into that uh... area what uh... one of the dynamics here uh... what what's the average project size uh... you know uh... uh... what uh...
Third a decline in net income was mainly driven by the aforementioned decline in revenues and an increase in administrative costs associated with our rebranding efforts.
Shifting to the balance sheet, our capital structure is composed of $6 $5 million in working capital, which includes $2 $7 million in cash and $6 $3 million of trade receivables as of March 31 2022.
talents do you need to be able to will be successful in that uh... could you flesh out a little bit and uh... and maybe your timing but when the first order might come in okay i think
As compared to having $7 $1 million of working capital as of March 31, 2021, which includes $3 $7 million in cash and $6 million in trade receivables.
And here's the time to commit on when the first order may come in, but we do have some opportunities that we are.
hopefully for within the next couple of quarters or thereabouts.
We also have an outstanding $650000 receivable related to employee retention credits claimed under the provisions of the cares Act.
What it does in terms of magnitude, what we found in the past is we've had clients come to us.
We expect to see these funds at some point over the next few quarters.
where we would offer some products, individual products on related scopes for a project. And so we've had family user case in point in the past where we had a couple of
In summary, we remain focused on providing our customers with it.
Suite of integrated solutions to support the full lifecycle of a project from design and engineering and project management, It's a manufacturing installation maintenance and asset life extension.
a few million dollars each for different scopes, and then about 15 to 18 months later, there was an installation scope that we would then, the client would go out to different vendors to bid on, and then down the road, they would have other services. When we offer it as one package, we ended up having more than
The most experienced and dependable personnel in the industry, which gives me confidence we will achieve our ongoing pursuit for growth as the year progresses. Thank you for your time I will now turn the call back over to Charles.
Thank you Trevor.
We announced a $13 million purchase order, where we had multiple scopes of about a $13 million.
This concludes our prepared remarks today, so it sounds the cold box and the operator to take investor questions Melissa.
36 months period, which ultimately ended up being over $20 million, which is managed by one senior project manager and a special project team. What that does, it reduces the risk profile for the clients. They were able to work together to project their cash flows.
Thank you if you'd like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate your line is into question. Kim You May Press Star followed by two if you would like to remove your question from they can for participants using speaker equipment. It may be necessary to pick up your handset before pressing the star Keith.
that it also enabled us to be continuously in the discussion and to help them with their planning. As far as additional skillsets, if we're successful, we may need to increase our project management team and potentially our engineering team.
One moment, please while we poll for questions.
but not as much as the increase in the value of the contracts we would have, because it would also enable us to plan better and project better what's happening.
Once again, ladies and gentlemen, if you'd like to ask a question. Please press star one.
that would that would you have to uh... add those skill sets before you actually finalize the order of the committee come in afterwards
I guess telephone keypad.
I think it depends. It depends on the depth of the visibility. In some cases, like in the case I spoke about, we were able to add someone when we knew we were on the verge of signing the contract because we had the visibility. And so we would do it when we have a good indication of the direction.
Thank you. Our first question comes from the line of Frank <unk>.
With private Investor. Please proceed with your question.
Hey, Charles a couple of questions I noticed you brought some of the Smith shares.
Back during the quarter.
And to provide a little more color, last week we had a good discussion with one of our key target customers on that, and they immediately asked for a follow-up meeting. So a few of us will be having a discussion in the next few days, and so over the next four to six weeks, hopefully we'll get an indication of the direction they're going. For some projects, they're hoping to execute towards the end of this year or into next year. And therefore, that would drive our personnel decision.
What what is his current ownership our remaining ownership do you know that.
Hi, Brian Thanks for the question, Yes. He is.
He is currently at about 22% between him and his wife.
Okay is there any indication that.
He wanted to sell more at these prices.
I haven't spoken to him.
Great, one final thing. You mentioned a little bit in your prepared remarks, I didn't quite catch everything you were saying, but in the past, you've talked about utilizing your skill sets and technology in.
No. He is on the call as well so at this point I'm not I'm not sure what his future intentions are.
Okay.
Second question here, you are moving into the integrated systems.
Or attempting to move into that area.
uh... areas uh... other than uh... offshore drilling
Yeah, what what are the dynamics there are what's the average project size.
could you uh... could you uh... flesh out that a little bit uh... and uh...
You know.
Whatever.
say what you're thinking about their as far as areas that you might uh... the uh... the uh... uh... might might might be uh... possible for that uh... uh... you just pressure a little bit if you would tell
Talents do you need to be able to be successful in that could you flesh out a little bit and and maybe your timing for Wyndham first or what it might come in.
Okay to answer the last question.
Okay, thanks. Good question. The low-hanging fruit we've spoken of in the past is offshore wind, and primarily around offshore wind cable.
Is it time to commit on when the first auto may coming but we do have some opportunities that we have.
Hopefully for within the next couple of quarters or thereabouts.
Offshore wind cables are just long cables, similar to the cables we work on or manufacture in some cases for offshore oil and gas. And therefore we've spoken previously about the
What it does in terms of magnitude what we found in the past is we've had clients come to us where we would offer some product individual products.
Related to Cogs for our projects and so we've had.
spooling and transpooling, which is essentially coiling them up and uncoiling them using our existing equipment.
We use a case in point in the past, where we had.
A couple of projects, which while wharf a.
However, these offshore cables also have certain accessories where they connect the platforms that are similar to...
A few million dollars each for defense Cogs and then about 15 to 18 months later that was an installation scope that we would then the client would go out to different vendors to beat on them.
that we build right now for the oil and gas industry and we're seeing some opportunities around that and our R&D team are working on some products that we're hopeful to provide around that area. Another area we're seeing some opportunities is on hydrogen.
Then down the road they would have other services when we offer it as one package, we ended up having more than.
We announced a 13 million dollar purchase order, while we had multiple scopes of about <unk> 30.
and especially the certain tubing, certain components that we are seeing that are going to be used in the hydrogen space that we believe are fairly similar to what we've been using in oil and gas. And we have core competencies around the integration of those systems, working with the alloys and the alloy welding for those kinds of systems and working with some of the.
36 month period, which ultimately ended up being about $20 million, which is managed by one senior project monogenic or special projects team and what that does it reduces the risk profile for the clients that we're able to we're able to work together to projected cash flows and.
But it also enabled us to be continuously in the discussion and to help them with their planning as far as additional skill sets. We if we're successful we may need to increase our project management team and potentially our engineering team.
in some cases for subsea but also for onshore there's commissioning that's needed that we perceive is relatively similar to commissioning we perform right now on the oil and gas side. And then finally around subsea storage, subsea battery storage is a major issue for offshore renewables and we're talking to some companies where they would build the technology and then we provide the hardware and the installation capability to get it subsea.
Right.
But not too.
Not as much as the increase in the value of the contracts, we would have because it would also enable us to plan better than projected backdrop, what's happening.
Now would you have to add those skill sets before you actually finalize the order of a can they come in afterwards.
So this is just a few of the opportunities we are pursuing right now.
just just one when went to follow on their uh... on the offshore wind at the end spooling how is it done currently and and what does what does uh... uh... deep down uh... bring to that uh... flowers improving it
I think it depends it depends on the on the <unk>.
Depth of the visibility in some cases like in the case I spoke about.
We were able to.
Did someone when we knew we had were on the verge of signing a contract because you had the visibility and so we would do it win win.
a lot of the incumbent suppliers have been European suppliers and so if I may speak to a specific case that we spoke about last year where we were going they wanted to develop a U.S. supply chain there's because it's a nascent industry in the U.S. there have not been many companies doing
When we have a good indication of the direction we're heading.
So.
Covid a little more color last week, we had a good discussion with one of our key target customers on that and they immediately ask for a follow up meetings off a few of us will be having a discussion in the next few days and so over the next four to six weeks hopefully, we'll get an indication of the direction they're going.
And so what we were bringing to the table was a U.S. alternative, and ultimately we lost that project to European incumbents.
For some projects that hoping to execute towards the end of this the arlington or into next year, and therefore that would drive our personnel decisions.
The export lines, which are larger cables that would be installed by the installation contractors with the larger vessels, and then they have inter-array cables. In this particular case, they wanted a supplier who would manage the shorter lengths, provide certain installation equipment, and manage them quayside, which is what we were bringing to the table as a local supplier who's used to managing long cables.
Great Alright, well when one final thing you.
You mentioned it a little bit in your prepared remarks, I didn't quite catch everything you were saying but in the.
In the past you've talked about utilizing.
Utilizing your skill sets and technology in.
Areas.
Other than our offshore drilling could.
Could you could you flesh out that a little bit and say what you were thinking about there as far as areas that you might be.
Thank you. Our next question comes from the line of Mike Travolos with Private Investor. Please proceed with your question. Hi, Charles. The question is...
Yeah bank might be a possible for that.
told me that WTI was going to be at $100 a share or $100 a barrel. I would have thought that.
Could you just flesh that out a little bit if you would just.
Okay.
Good question.
The low hanging fruit spoken off in the past as offshore wind and primarily around offshore wind cables offshore.
Is there a factor that's kind of holding us back or holding the industry back from getting back to the operational levels that we were at, you know, pre-
Offshore wind cables.
Just long cable was similar to the cables, we provide we walk on our manufacturing and cases for offshore oil and gas and therefore, we've spoken previously about the <unk>.
Calling in transporting which is essentially calling them up and I'm, calling them using our existing equipment.
I share your sentiment around the expectations in WTI. What we are finding from the operators is that while the prices have now ramped up, there's still been a little gun shy to pull the trigger. Because what we provide is the production side. So there's a bit of a lag by the time it flows down to where we are. When the prices initially spike,
Offshore cables also have certain accessories, where they connect the platforms that are similar to.
Accessories that we build right now for the oil and gas industry, and we're seeing some opportunities around that and our R&D team I watch them on some products.
Hopefully you can provide around that area.
we all were hopeful that they would immediately pull the trigger, but they were hesitant. However, we're now seeing an increase in bidding activity and increase in conversations. And the scope of projects like Trevor alluded to has been very small so far, but we're now seeing larger projects, some confidence around larger projects, which is what enabled us back in 2014, 2015 to have...
The area, we are seeing some opportunities.
On hydrogen.
And especially the southern two being set and components that we are seeing that I used in are going to be used in the hydrogen space that we believe are fairly similar to what we've been using oil and gas and we have core competencies around the integration of those systems walking with the alloys and the allo welding for this kind of systems.
the revenue levels that we had. And that goes back to my earlier comment about products versus services. Operators have been very focused on short-term service projects, more on the maintenance side, but they now seem ready to execute new, what I call greenfield projects, and to go into development.
In Washington, selling destructions that need to.
In some cases for subsea, but also for onshore based commissioning that's needed that we perceive is relatively similar to commissioning we performed right now on the oil and gas side and then finally around subsea storage subsea battery storage is a major <unk>.
Issue for offshore renewables, and we're talking to some companies where they would build the technology and then we will provide the hardware and the installation capability to get it subsea.
Thank you. Ladies and gentlemen, this concludes our question and answer session. I'll turn the floor back to Mr. DiGugno for any
So these are just a few of the opportunities we are pursuing right now.
I guess just when when when for follow on they are on the offshore wind the Unspooling how is it done correctly and and what does what does.
Thank you, Melissa, and thanks to all of you who joined our call today. We very much appreciate your interest and support of Deepdown, and we look forward to speaking with you about our progress on the next earning calls. And that concludes our call.
Deep down bring to that as far as improving it.
Thank you, this concludes today's conference call. You may disconnect your lines at this time. Thank you for your-
So right now the.
A lot of the incumbent suppliers had been European suppliers and say that.
If I may speak to a specific case that we spoke about last year, where we were they wanted to develop a U S supply chain.
Of course, it's a nascent industry in the U S. They have not been many companies doing it.
And so what we were bringing to the table as a U S alternative and ultimately we lost that project G European incumbents.
They'd be.
The export lines, which are larger cable is that would be installed by the installation contract is with the larger vessels and then to have each of our eight cables. In this particular case. They wanted a supplier who would manage the shorter lengths provides certain installation equipment and manage them key side, which is what we're bringing to the table as a local supplier who's used to.
Managing long cables.
Okay.
Great. Thank you very much.
Thanks, Brian .
Thank you. Our next question comes from the line of Mike Traveller Smith, a private Investor. Please proceed with your question.
Yeah, Hi, Charles question is a bit of.
Shareholder for a few years and gone through the downturn and if you told me that W. T. I was going to be at $100 a share $1 a barrel.
I would've thought that.
Our revenue would have been a lot further along.
Is there a factor that's kind of holding us back are holding the industry back from getting back to the.
Operational levels that we were at.
Pre 2014.
Yeah.
Hi, Mike Thanks for the question Yeah.
I share your sentiment around the expectation that W. T I, what we're finding from the operators is that while the prices are now.
Now ramped up they are still being a little gun shy to pull the trigger because we are what we provided in the production side. So there's a bit of a lag by the time it flows down to where we are.
The prices initially spikes we are hopeful that.
They would immediately pull the trigger but they were hesitant. However, we are announcing an increase in <unk>.
Bidding activity and an increase in conversations and the scope of projects like Trevor alluded to has been very small so far but we're now seeing larger projects some confidence around larger projects, which is what's enabled us back in 2014 2015 to have.
That revenue levels that we had and we know that.
It goes back to my earlier comment about product versus services.
As I've been very focused on short term service projects more on the maintenance side, but they know they now seem ready to execute new what I call Greenfield projects and you go into development.
Okay. That's all I got thanks.
Thanks, Mike.
Thank you ladies and gentlemen. This concludes our question and answer session I will turn the floor back to Mr. Jacobs for any final comments.
Thank you Melissa and thanks to all of you who joined our call today.
Much appreciate your interest and support of deep down and we look forward to speaking to you about our progress on the next earning calls.
And that concludes our call today. Thank you.
Yeah.
Thank you. This concludes today's conference call you may disconnect. Your lines at this time. Thank you for your participation.