Deep Down, Inc. (OTCQB:DPDW) Q1 2019 Earnings Conference Call May 14, 2019 10:00 AM ET
Ron Smith - President & CEO
Charles Njuguna - CFO
Conference Call Participants
Walter Schenker - MAZ Partners
George Sutton - Craig-Hallum Capital
Good morning, ladies and gentlemen. Thank you for standing by. Welcome to Deep Down's First Quarter 2019 Conference Call. [Operator Instructions]. As a reminder, this call is being recorded today, Tuesday, May 14, 2019.
A detailed disclaimer related to Deep Down's forward-looking statements is included in the press release published last night 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 and on today's call is included in our press release 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 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'd like to turn the call over to Chief Executive Officer, Ron Smith. Please begin.
Good morning and welcome to our first-quarter 2019 call. Deep Down turned in a solid quarter, but, as our last investor call was just one month ago, I'll keep my prepared remarks brief so we can jump right to the all-important Q&A. The press release published last night announcing our first-quarter 2019 results highlighted some of the key reasons for our top- and bottom-line success in Q1 which, by the way, saw the highest quarterly revenue over the last three years. Granted, some Q1 revenue included business that was pushed forward from 2018. By and large the quarter was a signal of additional optimism across the offshore oil and gas industry.
The level of drilling and production activity continues to be impacted by the volatility in oil and gas prices. In response to price fluctuations, many oil and gas operators have adopted their operations to achieve lower breakeven prices on new projects and continue to seek ways to further lower their costs on existing projects. Despite these situations we are cautiously optimistic about the balance of 2019 given the actual dialogue we're having with large domestic and international customers. These industry spending patterns have provided us with opportunities for our high-margin specialized service work which supports exploration, development and production activities.
With the rise of fewer but larger oilfield service organizations, Deep Down is able to capitalize on our nimble and cost efficient capabilities relative to bigger competitors. We are continuously developing our revenue pipeline in client meetings where we pitch our value proposition which is rooted in our ability to move fast and solve complex deepwater challenges. Geographically we are optimistic about the breadth of business potential for Deep Down, especially across Africa, Asia and Latin America. There seems to be a high potential for deepwater exploration in these regions driven in part by political reforms aimed at incentivizing foreign direct investments in key countries. We view this, as well as renewed investments from both independent and national oil companies in these regions, as a leading indicator for future production activity.
Finally, we are confident in our ability to achieve our backlog of $10 million in the remainder of 2019 and we are engaged in discussions on multiple fronts, but this is subject to customer schedules. Deep Down is off to a great start with our newly configured Board of Directors and our unified commitment to our core business. We are looking forward to a brighter future with David and Neil on board. And with that I will turn the call over to Charles. Charles?
Thank you, Ron. Good morning and thank you for joining today's call. Our first-quarter 2019 revenues improved 70% to $6.3 million compared to $3.7 million in the first quarter of 2018. As Ron mentioned, our Q1 2019 results benefited from offshore service projects, some of which were originally expected to commence in the second half of 2018, but had their schedules shifted to Q1 of 2019. We are bullish on 2019, but we don't expect the pace of growth for the balance of the year to mirror what we just experienced in the first quarter. Gross margins improved to 36% in the first quarter of 2019 compared to 31% in the first quarter of 2018. This increase was primarily due to improved revenues which included a large proportion of higher margin service work.
Turning to our operating expenses and overhead, our first-quarter operating expenses increased slightly due to increased selling, general and administrative expenses of $2 million compared to $1.9 million in the first quarter of 2018. SG&A as a percentage of revenues, however, improved significantly from 52% in Q1 of 2018 to 32% in Q1 of 2019 due to the benefit of higher revenues and our continued efforts to manage our cost structure. As we announced in last night's press release, our bottom line improved from a net loss of $850,000 during Q1 of 2018 to a net income of $212,000 for Q1 of 2019. This resulted in a modified EBITDA of $659,000 compared to an EBITDA loss of $419,000 during Q1 of 2018.
Now turning to our balance sheet and capital structure, Deep Down remains in a strong financial position with working capital of $6.3 million, including cash and short-term investments of $2.8 million and total shareholder's equity of $17.3 million. Our working capital number was impacted by a new accounting standard which now requires us to present right of use, operating assets and corresponding current and long-term liabilities for all of our operating leases. This resulted in an increase of $5.4 million in both our total assets and liabilities. Excluding the impact of this new standard, our working capital would have been $7.6 million.
Our increased working capital includes a $2.6 million increase in accounts receivable as of the end of the first quarter of 2019 compared to the year-end 2018. This is principally a reflection of our increased business activity during the first quarter. We believe our balance sheet is more than sufficient to meet our working capital needs and to enable us to execute on future business opportunities. Our cost structure is mostly optimized at this point to execute on our 2019 business plan, but we will continue to evaluate opportunities for further improvements and we will continue to pursue opportunities to sell our non-core assets in an effort to enhance our liquidity.
And that concludes our prepared remarks today. So I'll turn the call back to the operator to take investor questions.
[Operator Instructions]. Our first question comes from Walter Schenker of MAZ Partners. Your line is open.
Good to return to profitability; good to see the revenue growth. The big uptick in receivables, how should those get paid? Are those regular terms or extended terms?
The uptick in receivables is really just a function of all the offshore work we had in the first quarter and we are getting paid very regularly. A heavy proportion of it is actually some of our key customers, so none of it is questionable.
I wasn't worried about you losing money and not getting paid; although we have had that happen historically. I am smiling; hopefully you are too. It's not funny. But it was just a question of increasing liquidity on the balance sheet as that pickup in receivables returns to a slightly reduced, what I would think, more normal level with that level of revenues. That's sort of a question.
Yes, even the uptick in receivables, we expect that as the year normalizes in terms of revenues our receivables will also normalize to our typical range.
Okay, and I apologize and I will see the transcript, but I'm at a conference and dialed in late. And so if this is redundant I'll just get it on the transcript. What if any comments did you make -- I saw your final comment -- about liquidating hopefully or trying to sell non-base assets. I know we just had a call shortly ago talking about both carousels and the assets that were written off. Did you provide any update on those two asset groups?
No, we didn't talk about the carousels or any of the other assets--
That's the question.
At this point we don't have any new developments from the carousels yet. We are continuing to pursue the opportunities we talked about a month ago, but nothing concrete has developed yet.
Last week was OTC and we had a full litany of visitors here from international clients that always come out and visit us and talk to us. And we had several meetings on the carousels last week. And so, now they have to return home, recover and we are hoping some success in that direction. And as far as some of the items that we've written off, we are in discussions with a couple of companies about the purchase of those items right now, but we haven't finalized anything on that either. But we're hopeful that we'll be moving in that direction.
[Operator Instructions]. Our next question comes from George Sutton of Craig Hallum. Your line is open.
There was no discussion about the strategic alternatives process that you've been undergoing for quite some time. Could you give us any potential updates there? Is that still an active process?
The strategic review process is -- it's ongoing. One of the -- we touched on last month, one of the outcomes was the change in the leadership of the organization. And now that we've hired -- we recently just had our first meeting with the full Board. We are evaluating a lot of the feedback we received. There is a renewed focus, as will happen when you have a new Board, just in terms of our strategic plan and a review of where we are. There are ongoing discussions, but at this point nothing tangible has been -- we're not yet at a point to have anything tangible to report on that. But we can report that it is ongoing and the changes in the leadership of the organization were part of that strategic review.
And I am currently not showing any further questions. I'd like to turn the call back to Mr. Ron for closing remarks.
Thank you, Norma. And our thanks to all of you who joined our call today. We appreciate your interest and support of Deep Down and look forward to speaking with you about our progress in the next earnings call. And with that let's conclude today's call. Thank you.
Ladies and gentlemen, thank you for your participation in today's conference. You may disconnect. Everyone have a wonderful day.