Deep Down, Inc. (OTCQB:DPDW) Q4 2021 Earnings Conference Call March 28, 2022 10:00 AM ET
Company Participants
Charles Njuguna – CEO, CFO, President & Director
Trevor Ashurst – VP, Finance
Conference Call Participants
Walter Schenker – MAZ Capital Advisors
Ron Smith – JUMA
Operator
Good morning, ladies and gentlemen. Thank you for standing by. Welcome to Deep Down’s Fourth Quarter and Full Year 2021 Conference Call. [Operator Instructions]. As a reminder, this call is being recorded today, Tuesday, March 29, 2021.
A detailed disclaimer related to Deep Down’s forward-looking statements is included in the press release issued Monday afternoon and filed with the SEC. It is also available on the company’s website, deepdowninc.com or upon request.
A reconciliation of non-GAAP financial measures used in the press release on today’s call is included in our press release and on our website. Listeners are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date made.
Deep Down’s also undertakes no obligation to revise any of its forward-looking statements to reflect events or circumstances after the team made. At this time,
I’d like to turn the call over to CEO, Charles Njuguna.
Charles Njuguna
Thank you, Gigi. Good morning, and thank you for joining us today. While our 2021 revenues did not rebounced to the pre-pandemic level of 2019, we are pleased we were able to increase our revenues by about 30% from 2020. However, cashflow challenges from some of our customers, which are they attributed to the pandemic, resulted in bad debt expenses, which impacted our ability to generate operational income.
Our gross margins were also impacted by cost inflations and various pricing pressures as well as lower margin activities on some of our projects. Trevor will provide further details about our financial results shortly. But before he does so, I’d like to take a few minutes to further explain a couple of strategic initiatives we recently announced.
Shortly after our last investor call, we announced our intention to relocate the business to a new facility better suited for our diverse product and service offerings. This announcement was followed by another one at the beginning of this month about our rebranding of the company to better position us for the future of energy services.
When we initially moved to our current facility, our landlord made several commitments about enhancements to the property, not least of which was improved access to waterways by installing a dock. While we understood the dock was contingent on various factors, we had a basic expectation of reliable utilities. Unfortunately, this turned out not to be the case. It is, therefore, imperative for us to begin evaluating options as we near the end of our lease.
And with the Houston and general Texas industrial real estate markets hitting up, we did not want to wait until the very end and be forced to scramble and likely settle for another subpar facility. The facility will be moving to is barely 10 minutes from George Bush International Airports, about 15 minutes from ExxonMobil and [indiscernible] and about 20 minutes from Downtown Houston.
Aside from moving closer to our customers, the facility is also about 20 minutes from a residential area in Houston with a high concentration of industry personnel opening up a large talent pool for us, which has historically been a challenge.
Our planned move is already eliciting positive reaction from customers in areas outside our traditional business, given the nature of the facility, and the optionality it provides for us to manufacture, store and service different components in different areas with significant expansion capabilities. All factors being constant, once we have fully moved in and not having to pay for 2 facilities, we will see a positive impacts to the bottom line of about $0.05 per share.
We currently expect to begin realizing this benefit sometime in 2023. Our current lease expires in July of 2023, but we’re watching on a negotiated exits given various challenges we have faced. The second major announcement we made was the rebranding of the company.
As we prepare to celebrate our 25th anniversary in a few weeks, we took stock of our current product and service offerings and our core competencies relative to the future of energy and becoming that our shareholders’ best interest to position the company differently from the past. We have been known throughout our history as a provider of superior products and services traditionally offered as individual components or as complementary offerings in response to customer requests.
The fast aspect of our repositioning will be a shift towards becoming more of a systems provider further supporting our customers’ preference for what are commonly refer to as EPIC contracts. This is where engineering, procurement, construction and installation activities are all provided by one supplier.
We envision this strategy will provide value to our customers by further streamlining the interaction with us and other project participants ultimately lowering their projects execution costs. Internally, this strategy is already influencing our personnel decisions.
Another aspect of the rebranding revolves around our previous discussions about leveraging our core competencies for growth beyond our traditional offerings. One area we repeatedly spoke about last year was a growing offshore wind industry and specifically mentioned a project we were bidding on. Unfortunately, we are ultimately and successful on that project losing out to an incumbent European supplier. Despite being unsuccessful, we did learn a lot about that industry and the general renewables industry.
Various discussions we were engaged in further that validated our decision to rebrand the company to avoid continuing to be pigeonholed as purely a deepwater oil and gas service provider. The vast majority of our core products and services revolve around subsea and vehicles, which are generally multifunction hoses or cables, which transfer hydraulic and electric power and fiber optic connectivity from surface structures to sea-flow facilities.
Over time, we have developed a unique skill sets around the handling of these cables and hoses such as on a reason projects where we safely transported 60 miles of umbilicals, fast from a manufacturing facility to one of our carousels installed in a barge then from our carousel to an installation vessel.
Our ability to safely coil up such long lengths with injury to personnel or damage to the product, led us to the name Koil, but it’s parallel to the K to denote the power transmitted by the cables we coil and uncoil. We are still awaiting approval from the SEC on our name and ticker symbol changes, which is why our filings still have the name Deep Down.
As we view the future as Koil Energy, we envision growth taking 3 primary forms. The fast path to value generation is from traditional energy sources. While the current regulatory environment does not engender confidence in large-scale deepwater developments, this is giving rise to increased opportunities for our customers to extend the lives of their existing infrastructure either through adding new components to existing facilities, which is commonly known in the industry as Tire Box, or through repairs and maintenance of installed equipment.
Consolidation in the industry coupled with the shift I mentioned a few minutes ago towards EPIC contracts is also providing opportunities for nimble companies like ours. Similar to our traditional offerings, we are also seeing opportunities to provide services to customers for renewable energy applications and are actively pursuing some shorts to medium-term opportunities in areas such as hydrogen and subsea storage.
We would like to caution, however, that at this time, we cannot guarantee any imminent project awards in these areas. The second pillar for growth is through partnerships both within traditional oil and gas as well as in renewable energy industries.
Such partnerships could take the form of strategic alliances where we jointly market our products and services, operational joint ventures where we partner during the execution of our projects or in one situation we are valuating a consortium arrangement where we will broaden the scale of what we could offer the markets.
This strategy would enable us to leverage our partners’ international footprints to offer our traditional products and services in different locations. While in the case of renewable energy, we would capitalize on our systems integration expertise and offshore installation know-how to enable the installation of new technologies subsea.
The third avenue for growth is developments of new offshore technologies either organically or inorganically. This is likely a longer-term strategy as we identify gaps in current offerings, especially in newer industries.
However, we are beginning to see renewable energy participants face challenges that were previously faced by the oil and gas industry, and we are working on some solutions to meet these challenges.
Our focus on technology is also driven by the push towards electrification of subsea operations, which is also driving us to evaluate the electrification of our own equipment. The breadth of our offerings is unique for our size from design, to engineering, to manufacturing and installation with installation, including both personnel and equipment.
Given the transferability of our expertise beyond our traditional markets, we are cautiously optimistic about our prospects across all 3 avenues, prospects which could span more than one path at any given time. With that overview, let me now turn the call over briefly to our Vice President of Finance, Trevor Ashurst, for a review of our 2021 financial results. Trevor?
Trevor Ashurst
Thank you, Charles. For the 12 months ending December 31, 2021, Deep Down generated revenues of $17.2 million, which represents a 33% increase when compared to revenues of $13 million for the 12 months ended December 30, 2020.
The growth in revenues can be attributed to a rise in demand for subsea equipment, support services and rental solutions as operators mobilized to work through a backlog of projects during the year, some of which were projects previously put on hold in 2020 as the world figured out how to navigate the pandemic.
Gross profit as a percentage of revenues was 34% for 2021, which represents a 4% decrease in gross margin compared to the 38% we generated in 2020. The compression in margins came in the form of low-margin pass-through third-party costs incurred on just as select projects and general increases in the price of materials due to the inflationary environment in which we all currently operate when compared to the prior year.
Additionally, we received rental payments in 2020 during the onset of the pandemic that were not repeated in 2021. Selling, general and administrative expenses $5.9 million for the year into 2021 remained relatively consistent with the $6 million for 2020 after you exclude a onetime charge of $245,000 in 2020 related to the elimination of the COO position at the company. Turning to the bottom line. The company reported net income of $2.3 million or $0.19 per diluted share for the year ended 2021 compared to a net loss of $6.1 million or a loss of $0.48 per share for 2020.
But note that 2020 included an asset impairment charge of $4.5 million related to our carousels, who’s future cash flows cannot be objectively projected at that time the charge was made as well as the onetime severance charge for the COO I mentioned earlier.
Excluding these aforementioned charges, the improvement in net income was mainly driven by the uplift in revenues, continuing focus on our administrative cost structure, receiving the full forgiveness of both PPP loans during the year, and recognizing a refundable employee retention credit claim under the provisions of the CARES Act, which we expect to receive at some point this year.
Shifting to the balance sheet. Our capital structure includes $3.7 million in cash and $7.1 million in working capital as of December 31, 2021. This is compared to having $3.7 million in cash and $4.1 million in working capital at the same time last year. As I just mentioned, we received full forgiveness of the entire balance of both PPP loans obtained, which means we no longer have any outstanding loan balances on the balance sheet.
In summary, we witnessed strong levels of project activity throughout 2021, especially when compared to 2020. This positive trend is no doubt the tailwind but our top line success would not be achieved without the hard work, determination and collaborative effort of every member of our team.
This level of commitment and enthusiasm provides me with confidence that this trend will continue throughout this year. With that said, thank you for your time. And I will now turn the call back over to Charles.
Charles Njuguna
Thank you, Trevor. That concludes our prepared remarks today. So I’ll now turn the call back to the operator to take investor questions. Gigi?
Question-and-Answer Session
Operator
[Operator Instructions]. Our first question comes from the line of Walter Schenker from MAZ Partners.
Walter Schenker
It’s fairly — or it’s clear to me, it’s clear, I think, to you, too. that it is a significant positive to the profitability of the company if we can employ one or more of the carousels. Could you just give me some sense if there are, as you look at 2022, additional opportunities to either rent or crossing our finger sell a carousel? Can’t have a call without a carousel question.
Charles Njuguna
Yes, Walter, thanks for the question. And you are correct. The providing the carousels does provide profitability to the business. To your question, yes, we are seeing increased opportunities for them.
We had a number of customers we have been talking to before, but it was a bit of a chicken and egg where different customers wanted to fast see us actually employ them on some projects. And now that we’ve we successfully did it twice last year, we are actively discussing with a couple of customers on renting them out to them.
But as always, I will not — until we have our actual signed contracts in hand, that’s all I would say for now. But we do have some active opportunities we project for the future.
Walter Schenker
And just as a general question, historically at the current facility, which you are leaving which was in the middle of nowhere and near the water, given that some of the things you do are fairly large, it seemed as if transportation should be a plus, how do you transport large equipment out of your new location?
Charles Njuguna
Yes. So the new location is actually — is in an area where there are other industries, Baker Hughes is down the street from us — we’ll be sharing a compass with Schlumberger for some of their large components. One of the things we were very particular about was literally taking measurements of the ingress and the egress at the facility the power lines around the facility and those kind of operational items for that very reason. And so we — for large items, we will be able to move them out. We do continue to rent out space in Mobile, Alabama, right on the water at a place where the core industries where large vessels can pull in.
So if we have a project which absolutely has to be on the water core base where we rent out — where our carousels are currently located enables us to do that.
Walter Schenker
Okay. Again, hopefully — we have to start each year this way. Hopefully, this is the year we can actually monetize even beyond renting a carousel that would be meaningfully positive to everyone. But good luck.
Operator
Our next question comes from the line of Ron from Smith from JUMA.
Ron Smith
I just wanted to wish you, Charles and the whole Koil Energy team and tell you well done. I’m very proud of you. And as now I’m a large investor in Koil Energy. I hope for all of you and all of us, only the greatest success in these changes as I’m counting on you.
Charles Njuguna
Thank you, sir. We appreciate that, and we wouldn’t be doing this without the foundation you set. So we appreciate that encouragement very much.
Operator
[Operator Instructions]. At this time, I’m showing no further questions. I would like to turn the call back over to Charles Njuguna for closing remarks.
Charles Njuguna
Thank you, Gigi, and thanks to all of you who joined our call today. While the broader energy industry continues to be impacted by factors beyond our control, as we said, we continue to be laser focused on the levers we can control while we are actively pursuing different growth opportunities.
We very much appreciate all of your support, and we look forward to speaking with you again in about 1.5 months. And with that, let’s conclude today’s call. Thank you.
Operator
This concludes today’s conference call. Thank you for participating. You may now disconnect.
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