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spk06: Ladies and gentlemen, today's conference is scheduled to begin shortly. Please continue to stand by. Thank you for your patience. Thank you. Thank you. Thank you. Good morning, ladies and gentlemen. Thank you for standing by. Welcome to Deep Down's third quarter 2020 conference call. During the presentation, all participants will be in a listen-only mode. After the speaker's remarks, you will be invited to participate in a question and answer session. As a reminder, this call is being recorded today, Tuesday, November 10, 2020. 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 the press release on the website. Listeners are cautioned not to place undue reliance on the forward-looking statements, which speak only as the date made. Deep Down also undertakes no obligation to revise any of its forward-looking statements to reflect events or circumstances after the date made. At this time, I would like to turn the call over to CEO Charles Naguna. You may begin.
spk01: Thank you, Sonia. Good morning, and thank you for joining us today. The effects of the coronavirus pandemic and the oil price crash continue to be felt across the oil and gas industry. With the price of oil continuing to hover around $40 per barrel Many of our customers are evaluating their projects with the expectation of prices remaining close to this level for the foreseeable future. Our lower revenues during the third quarter reflect the current market environment with travel restrictions continuing to hamper our ability to execute offshore campaigns across the world. We currently expect to begin seeing increased international travel after the first of the year. However, we are seeing signs of increasing activity in our back-end here in the U.S. Gulf of Mexico. We are in the middle of a number of short-cycle projects, several of which were awarded to us since the end of the third quarter and will be completed before the end of the year. While the scope of these projects are smaller, they do lend credence to our projections from earlier in the year that there will be an increased need for maintenance-related service work towards the end of the year. Our customers have also engaged our service professionals to perform repair work on their offshore assets damaged during this year's record-breaking hurricane season. Another area of opportunity for us is the consolidation that we are seeing across the industry. In particular, our customers are seeing longer lead times as our bigger competitors grow larger and more bureaucratic. We, however, are able to pursue these same opportunities with the same customers because they value our quick response times and unmatched speed of service. or without compromising quality and safety. This can be attributed to several factors, including our size, flexibility, our depth of knowledge, and our extensive experience. Our goal is to continue to grow the business without losing the competitive advantage we provide by being nimble. Looking beyond our traditional products and services, there has recently been an increased focus on the energy transition across the industry. Our largest customers have announced their intentions to diversify their portfolios include new forms of energy, and have started making plans to reorganize their operations to meet these goals. We have also seen similar announcements from the largest oilfield service companies. As we evaluate these developments, we are seeing increasing opportunities to apply our capabilities and expertise towards various non-oil and gas applications. We are encouraged by the promising discussion that we have already been a part of, and we plan on continuing these types of discussions by leveraging existing relationships as some of our customers transition into these new business segments. In order to adequately serve our current and future customers, as well as enhance the value for our shareholders, our primary focus remains on appropriately managing our assets, the most critical of which is cash. Despite the challenging business environment we continue to find ourselves in, we are still able to generate free cash flow, which is undoubtedly a testament to the collective efforts of our team. Trevor will provide more color about this in a few moments. Speaking of cash, we also applied for forgiveness for the Paycheck Protection Program loan we received earlier this year, but we have yet to receive any confirmation from our lender on the Small Business Administration's decision. With that overview, let me now turn the call over briefly to our Vice President of Finance, Trevor Ashurst, for a quick review of our financials. Trevor?
spk00: Thank you, Charles. Revenues for the third quarter of 2020 were $3.1 million, compared to revenues of $4.4 million for the third quarter of 2019. This decline in revenue was a combination of having a lower volume of projects in process this year compared to the same period last year, as well as the impact of travel restrictions and the decline in oil prices resulting from the COVID-19 pandemic. Gross margin decreased to 37%. in the third quarter this year, which represents a 5% drop compared to gross margin in the third quarter last year. Shortfall in gross margin was mainly driven by a lower mix of service revenues resulting from COVID-19 disruptions and delays, as well as the expiration of rent abatements received during the second quarter. Selling general and administrative expenses were $1.4 million for the third quarter of 2020. as compared to $2.1 million of SG&A expenses for the same quarter in 2019. But please note that SG&A expenses for the third quarter last year include a $349,000 charge related to the resignation of our company's founder. Excluding this one-time charge, SG&A moves from approximately $2.1 million down to approximately $1.8 million. So on a normalized basis, this translates to a 24 percent decline in SG&A expenses for the third quarter this year as compared to the same quarter in the prior. This decrease in SG&A expense exemplifies the company's continued efforts to remove excess costs on a go-forward basis. We will continue to pursue opportunistic cost containment measures to improve profitability while supporting the growth and operations of our business. Looking at net income, we reported a third quarter net loss this year of $250,000 or a loss of 2 cents per share. As compared to a net loss of $373,000 or a loss of 3 cents per share for the third quarter of 2019, our net loss this quarter is primarily due to reporting lower revenue. We remain focused on sustaining a disciplined capital structure that includes $4 million in cash, $4.5 million in working capital, and no long-term debt apart from the $1.1 million PPP loan as of September 30th. As Charles touched on earlier, we have submitted our application for forgiveness of the entire balance of our PPP loan. However, we have not received guidance from our lender regarding the timing or ultimate outcome of our application by the SBA. We were able to generate $379,000 in free cash flow during the quarter in part by limiting capital expenditures to just $16,000 on certain critical items. This is compared to having negative free cash flow of $1.2 million in the third quarter of 2019. This improvement in free cash flow was primarily due to our cost containment efforts as well as remaining persistent with our collection efforts during the quarter. In summary, it is no surprise that the COVID-19 pandemic continues to disrupt global demand for oil and apply pressure on commodity prices. Our near-term goal must be to remain laser-focused on the preservation of cash to mitigate the economic disruption caused by these macroeconomic events. This approach will not only allow us to endure through these uncertain times, but it will also put us in a more advantageous position to invest in the growth of our business when the time is right. So in the meantime, as the demand for oil continues to recover at a gradual pace, we will devote our efforts to providing our customers with the highest quality products and unmatched services, all while operating with as much capital efficiency as possible. That said, thank you for your time, and that will now turn the call back over to Charles.
spk01: Thank you, Trevor. That concludes our prepared remarks today. So we'll now turn the call back to the operator to take investor questions. Sonia?
spk06: Thank you. Ladies and gentlemen, if you would like to ask a question at this time, please press star then 1 on your touch-tone telephone. If you would like to withdraw your question, please press the pound key. Our first question comes from Walter Schenker of Mays Partners. Your line is now open.
spk04: Maybe the only question we'll see. First question is, In looking at your expense structure and your SG&A in this quarter, at this point, you've largely paired it to what you're comfortable with, and going forward, we should expect it to remain roughly at that level unless things get materially better?
spk01: Hi, Walter. Yes, at this point, we expect it to remain roughly at this level. We did have certain areas Well, we've cut where as things start opening up, we may increase slightly, but at this point, we do not envision going back to the levels we were at in the past.
spk04: Okay. Secondly, if I think back a number of years, the company had a strong relationship with Shell, and there were some big projects in theory out there. Those have largely been A, completed, be postponed, C, given to somebody else?
spk01: Some of the ones that were out there, we worked on them. There are others that we are involved in right now. Obviously, there are some which they themselves are going through certain internal evaluations based on everything going on, which for obvious reasons we can't talk too much about. And C, They've pared down some of their aspirations. One thing I can talk about that's public knowledge is the Appomattox project, which we worked on. It was a very large development. They had a couple of other projects which were falling on, which were going to be similar, but they've scaled those down based on efficiencies they've been able to find. They've publicly talked about a scaled-down version of a project called Vito, which we put out some press releases about, and their whale development, which we've we also put out a press release about. So we do continue to maintain a strong relationship with them. Shell, like other oil companies, has talked about rethinking what their strategies will be going forward. So we'll continue to work with them.
spk04: Okay. Can you give me or us any general sense in the aggregate as to, it's sort of a backlog question, the type of maintenance, repair, work that you believe you have once travel opens up fully. It's millions of dollars, hundreds of thousands of dollars, five to ten million dollars, just some sense as to what's sitting out there that you likely will get if there is a full freedom to travel, which may not be for some time. I understand that.
spk01: Yes. I think right now we know we have in-house about just shy of $9 million worth of work we have in-house, which, again, the timing is very dependent on a number of factors. We have $2 or $3 million worth of other work which is imminent, but, again, a lot of things are moving around, and there's probably more that's out there that could pop at any time. On the service side of the business especially, we often will not have a very good sense in advance, Sometimes we'll just get a call that there's a need, and it turns into a $60,000 purchase order or short notice. So that's on a continuous basis.
spk04: Okay. And lastly, our usual question, which I won't even ask, we still are optimistic. We're still talking to people. We're always talking to people.
spk01: Yes. We are and yes. I would say the word just so we can get on the record that we didn't use that word on the call. But yes, we are.
spk04: Okay. So if we can go to Harry Potter, he who could not be named, like Lord Voldemort, although whoever his name was. But there is still reason to believe that there are things sitting out there who will need them.
spk01: Yes, sir.
spk04: Okay. I guess we sit and wait. The good news is we're in solid financial condition.
spk01: Yes, we are in that, and our goal is to continue to maintain that discipline, as Trevor said.
spk04: Okay. Stay safe, everybody. Thank you.
spk01: We will do, and you do the same.
spk06: Thank you. And again, ladies and gentlemen, if you would like to ask a question at this time, please press star then one on your telephone. Again, if you would like to ask a question at this time, please press star then one. And I am showing no further questions at this time. I would now like to turn the call back over to Charles for any closing remarks. Actually, we do have a question from Charles Hale of Polar Capital. Your line is now open.
spk05: Yes, I just have one question regarding the balance sheet. What can you tell us what is incorporated into other non-current assets which sit on the balance sheet at about $3.8 million?
spk00: Yes, that is basically primarily our operating lease assets. So according to some recent accounting figures, Pronouncements have required us to include the value of our leases, both as an asset and a liability on the balance sheet. And so other than the property plant equipment on the long-term assets, the other significant portion would be our operating lease assets. All right. Thank you.
spk06: Thank you. And our next question comes from Chris Joget of Joget Capital. Your line is now open.
spk02: Hey, Charles. Hey, Trevor. This is Chris Doucette from Doucette Capital. Just a couple of quick questions. First of all, congratulations on progress in the quarter and maintaining at least being positive cash flow. Could you go through a little bit more detail in your backlog? How much of it is outside of the Gulf of Mexico and how much is in the Gulf of Mexico? And obviously, I know that the pieces outside of the Gulf of Mexico are going to be challenged with travel restrictions.
spk01: Hey, Chris. Good to hear from you, and thanks for calling in. Yes, so on the backlog, I'd say, let me just quickly pull that up just so I can have a better sense of it. Probably about 60% of it is going to be tied to the Gulf of Mexico. About 40% is international, and so that's obviously international piece is heavily dependent on our ability to travel.
spk02: Okay, but the Gulf of Mexico piece you can actually transact and do business with and are not subject to travel restrictions, is that correct?
spk01: For the most part, yes. We are seeing some quarantine restrictions that are being applied before folks can go offshore. And it also ties to, just to clarify, it also ties to equipment that we're building that will ultimately be in the Gulf. But that's also subject to our customers wanting us to progress, and in some cases, them saying, hey, slow down for now while they manage their own cash flows.
spk02: Okay. My next question is, and I don't know what you were getting at, but you said that you're actually seeing various opportunities in non-oil and gas sectors of the market. Can you elaborate a little bit more on that?
spk01: Yes. So I'll give an example of a project that we were heavily involved in discussions. We're finding in the offshore space there's a lot of discussion around offshore wind or offshore solar, but we recently were involved in some deep discussions on a hydrogen fuel cell application. There seems to be a big push around hydrogen being used in the energy space, and they needed to have some subsea assets installed, and they came to us just for some very basic framework, and we ended up talking about a very deep engineering piece where they had not thought through what kind of wave conditions or what the subsea conditions are. So we have Our team has a lot of knowledge on the ocean floor environment, and so those are the kind of discussions we're being engaged in. I do want to clarify, a lot of these are very early stage. For instance, these subsea cable products and installation that we're discussing, that's for the Pacific Northwest region that a number of companies are involved in, but it's got some government entities in it, and every week there seems to be an extension of the time frame, right? So this is something that Tatted off that they may want it late next year. At the rate they're going, it could be 2023 when you're dealing with state governments and academia. But it seems to be the way the industry is moving. Shell, BP, Total, they've all made major announcements in the last few weeks about their aspirations to move in that direction going forward. And so we will see where the industry goes. So we're just positioning ourselves to be ready and to be part of the conversation when that transition happens.
spk02: Okay, and last question, I'll step back in the queue. Is your stock buyback program still in place, and are you guys currently buying back stock, or have you stepped out of the market?
spk01: We exhausted it. At this point, we have not started any new programs, so it's not something that we're planning to do. However, in the event that we are able to sell any of the large assets Walter was touching on earlier, and we are able to, we would absolutely revisit that.
spk02: Okay. I mean, you mentioned something in the last conference call that you were making progress with the C word and that it was put off because it was obviously offshore somewhere in a foreign country. Are those discussions still ongoing or is that kind of falling through?
spk01: They are ongoing. Actually, a different one, I really am very hesitant to say, but I'll just say that they are ongoing. There are times they seem to get really hot, and then they go cold again. So it's a bit of a roller coaster.
spk02: Okay. All right, I'll step back in the queue. Good luck with the rest of the quarter. Thank you. Thanks, Chris.
spk06: Thank you. And again, ladies and gentlemen, if you would like to ask a question at this time, please press star then 1 on your touch-tone telephone. Again, please press star then 1. And I'm showing no further questions at this time. I would now like to turn the call back over to Charles Chagana for any further remarks.
spk01: Thank you, Sonia, and thanks to all of you who joined our call today. Before we go, I would like to take a moment to recognize all of the heroes in our call. So for any Marines who are on the call, we would like to wish you a happy 245th Marine Birthday. And to all the veterans on the call, happy Veterans Day tomorrow. We do appreciate your service. And finally, to everyone on the call, we appreciate your interest and your support of Deep Down, and we look forward to speaking with you about our progress in the next earnings call. And so let's conclude today's call. Thank you.
spk06: Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect. Thank you. you Thank you. Thank you. you
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