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Edited Transcript of DPDW earnings conference call or presentation 16-Apr-19 2:00pm GMT

Q4 2018 Deep Down Inc Earnings Call

Channelview Apr 16, 2019 (Thomson StreetEvents) -- Edited Transcript of Deep Down Inc earnings conference call or presentation Tuesday, April 16, 2019 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Ron Smith

Deep Down, Inc. - President, CEO & Director

* Charles Njuguna

Deep Down, Inc. - CFO

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Conference Call Participants

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* Walter Schenker

MAZ Partners - Analyst

* Chris Doucet

Doucet Asset Management - Analyst

* Gene Riley

- Private Investor

* Richard Deutsche

National Securities Corporation - Analyst

* Scott Barbie

AG Financial - Analyst

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Presentation

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Operator [1]

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Good morning, ladies and gentlemen. Thank you for standing by. Welcome to Deep Down's full-year 2018 conference call. (Operator Instructions). As a reminder, this call is being recorded today, Tuesday, April 16, 2018.

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 measures used in the press release and 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 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 Ron Smith.

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Ron Smith, Deep Down, Inc. - President, CEO & Director [2]

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Thank you. Good morning, everyone, and welcome to our fourth-quarter and full-year 2018 conference call. Our 2018 results reflect the prevailing caution of our industry. The demand for our subsea equipment and offshore services is directly related to the capital expenditure of our customers and, despite the rebound in offshore activity and inquiry, there was slower initiation of new projects by our customers in 2018.

These pauses, coupled with changing government regulations in some of the regions where we operate, affected our results for the year. Notwithstanding this volatility and factors largely outside of our control, we closed out 2018 with a strong backlog of $15 million in orders, most of which we expect to complete in 2019. We also made significant progress advancing new business opportunities internationally, while containing operational costs.

Despite lower oil prices at the end of 2018, the strengthening of prices for much of 2018 and the rebound so far in 2019, has given rise to higher exploration activity and spending by our customers, primarily along the US Gulf of Mexico where there has been a recent surge in oil production.

In March, we announced $4.4 million in new orders for our flying leads and associated equipment and offshore installation services for the Gulf of Mexico. The bulk of this work is slated for support of deepwater operations in the US side of the Gulf of Mexico, while the remainder of the project was for installation services with a new international customer.

Globally, large integrated oil and gas companies, including independent and foreign national operators, are increasingly investing and signing off on deepwater exploration projects, notably in Africa, Asia and Latin America. Substantial capital investments and government policies aimed at incentivizing and supporting deepwater production have been initiated.

These initiatives have renewed appetite for exploration activity in both regions, and we are positive that this renewed confidence will subsequently increase demand for specialized equipment and installation services that solve complex deepwater production challenges.

The Deep Down advantage over the competition is our ability to move quickly, think creatively, and offer engineering expertise and solutions at competitive prices. Our strategy is to communicate our differential offerings to key players in these markets, and take advantage of the anticipated heightened level of offshore activity. As an example, we expect to be fully operational in one new international location this year, subject to final local regulatory approvals.

Turning to corporate governance, our review of strategic alternatives to maximize shareholder value remains in progress, and while we are unable to comment on the duration or possible outcomes of this process, we can confirm that the review did play a role in recent changes to our Board of Directors.

First of all, I would like to thank former Board members Mary Budrunas and Randy Warner for their years of service to Deep Down. Effective this morning, we are also pleased to announce the addition of two new Independent Directors, David Douglas and Neal Goldman. David and Neal are long-time large shareholders of the Company, and bring valuable corporate and financial experience, in particular expertise with small companies in special situations such as ours.

David is the Founder and Portfolio Manager of Jamaka Capital, which he runs from Dallas; while Neal is the Founder and Portfolio Manager of Goldman Capital Management, a New York-based asset-management firm. Both David and Neal have been long-term supporters of Deep Down, and we look forward to benefiting greatly from their vast experiences.

In closing, while it's difficult to predict our performance on a quarterly basis, we firmly believe Deep Down is well positioned for strong top and bottom performance in 2019 as major operators seek to deploy cash flow on additional exploration projects aided by the support of stronger balance sheets. For these reasons, as well as those mentioned above, we remain confident in delivering improved net income and modified EBITDA for the balance of 2019. And with that, I'll now turn the call over to Charles. Charles?

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Charles Njuguna, Deep Down, Inc. - CFO [3]

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Thank you, Ron. Good morning, and thank you for joining today's call. I will focus my remarks on providing perspective on highlights from our 2018 financial results, and then we will open it up for specific questions.

Revenues in 2018 decreased to $16.2 million compared with $19.5 million in 2017. As Ron mentioned, our full-year 2018 results were impacted by a slower-than-expected rebound in the commencement of new projects as compared to 2017, as well as some disruptions in procurement activity related to the market and the energy pricing volatility experienced in the final months of 2018.

Gross margin decreased to 30% in 2018, compared to 44% in 2017, primarily due to a larger proportion of higher margin service and equipment-rental revenues in 2017 compared to 2018, as well as lower overhead absorption resulting from the lower revenues in 2018.

With regards to our operating expenses and overhead, our full-year 2018 operating expenses were impacted by a nonrecurring asset impairment charge of $2.3 million, of which $1.9 million was recorded as an asset-impairment expense, and the balance of $400,000 was recorded within depreciation expense. Excluding depreciation charge, gross margin would have been 32%.

The asset-impairment was performed to adjust the carrying amount of certain long-lived assets to their current fair value in light of our operating results over the past few years, recent volatility in commodity prices, and a strategic focus on our core business going forward.

Reflecting the impairment, Deep Down's operating expenses rose to $9.9 million in 2018 compared with $9.4 million in 2017. Excluding the effects of the impairment charge our operating expenses declined (technical difficulty) 13% to $8.1 million in 2018 when compared to 2017.

Selling, general and administrative expenses for 2018 were $7.8 million or 48% of total revenues, compared with $9.1 million or 47% of total revenues in 2017. The decrease in SG&A was primarily due to the benefits of cost-containment measures we enacted in 2018, including rightsizing our workforce to match the projects we had in-house. We also fully consolidated our operations by shutting down our corporate headquarters and relocating all corporate and administrative functions into a primary operating facility.

Modified EBITDA, which is a non-GAAP measures, for 2018 was negative $1.4 million compared to a positive modified EBITDA of $739,000 in 2017. The difference in modified EBITDA in 2018 is again due to the impact of lower revenues and gross margins compared to 2017.

Deep Down reported a 2018 net loss of $4.7 million or $0.35 per share, compared to a net loss of $0.1 million or $0.01 per share in 2017. The increase in the net loss was again due to our lower revenues and the asset impairment discussed earlier.

Now turning to our balance sheet and our capital structure, Deep Down remains in a strong financial position with working capital of $7 million, including cash and short-term investments of $3 million and receivables of $4.4 million. Total shareholder's equity as of December 31, stands at $17.1 million or approximately $1.26 per common share.

Our balance sheet is more than sufficient to meet our working capital expenses and execute on future business opportunities. As of today, our accounts receivables have actually increased to $6.1 million.

Deep Down repurchased 24,800 shares of our common stock in the fourth quarter of 2018, and for the full year of 2018 pursuant to the $1 million repurchase program authorized on March 26, 2018. We repurchased an additional 228,000 shares in 2019, prior to the expiration of the program on March 31 of 2019. We believe our cost structure is mostly optimized at this point to execute on our 2019 business plan and we are continuously studying the sale of non-core assets in an effort to enhance our liquidity.

That concludes our prepared remarks today. I will now turn the call back over to the operator to begin the Q&A. Joelle?

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Questions and Answers

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Operator [1]

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(Operator Instructions). Walter Schenker, MAZ Partners.

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Walter Schenker, MAZ Partners - Analyst [2]

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Good morning. Actually I had multiple questions, so you can cut me off at some point if it seems like I'm taking too much time.

To start with, because I always have to start with this, and we all smile, what if any prospects do we have on the Carousels? And as also sort of a related part of that, could you give us some more color on what assets in fact were written down and if part of that was the Carousels with the current carrying value of the Carousels, and what other types of equipment were written down?

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Ron Smith, Deep Down, Inc. - President, CEO & Director [3]

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Walter, it's good to hear from you, my friend, and I don't know how it is that you always get to be the first caller. You must be quick on the dial. All right. So I think that your questions are fantastic, so let's get into it. Charles, answer Walter's questions.

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Charles Njuguna, Deep Down, Inc. - CFO [4]

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Good morning, Walter (laughter). So, on the carousels, we hate to sound like a broken record -- the opportunities we have, we have our sales guy right now, I think we can say in Brazil, discussing the sale of one of our Carousels. We do have a couple other opportunities, one in Far East Asia and another one right here in the Gulf, but until something is signed on the dotted line we're going to temper our expectations.

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Ron Smith, Deep Down, Inc. - President, CEO & Director [5]

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How did you like that, Walter?

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Walter Schenker, MAZ Partners - Analyst [6]

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Actually coming even if they sign, until you get the money -- given history (laughter).

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Charles Njuguna, Deep Down, Inc. - CFO [7]

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That is true.

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Ron Smith, Deep Down, Inc. - President, CEO & Director [8]

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What is interesting, too, on this particular case is, to answer your other question, the Carousels have not been written down. I was actually hoping if they're going to do this, I'd just assume they write the Carousel down so when we sell it, we get to recognize even more. But this is a client that we've been talking to for a few years, and this guy -- these guys have been here and now we are down there at their facility as we speak.

The one opportunity -- and that's for one Carousel. And the other Carousel, if this goes well, would be quite -- it's not a sale, it's a long-term usage for a job going from here to there, and that will be some great revenue. And that Carousel has not been written down either. So, why don't you answer his other question about what has been written down?

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Charles Njuguna, Deep Down, Inc. - CFO [9]

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Yes. The assets that have been written down have been assets which we built over the last few years. During the downturn we had started to looking to expand beyond our core oil and gas expertise or our track record, and we started looking into more of the automated assets.

So some of assets, for instance, we had started working on drones which were going to be an expansion of our ROV business. There are some assets which we had built in sponsorship of the Texas A&M students, and at the time we thought that we'd be able to expand into those areas. But as part of the strategic review and our recent performance, we needed to do the impairment analysis, and I'll just expound on that a little bit.

The impairment analysis was looking at our carrying value, but we also had to project our cash flows going forward and our performance going forward. And there are certain assets that at this point we are not able to objectively provide cash flows or projections that can be objectively verified and auditable. And therefore at this point, we are not able to assign any carrying value to those assets. So we wrote down the assets.

As far as our Carousels are driving it, our pumps -- any of the assets that generate our revenue on an ongoing basis, we did not write down any of those.

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Walter Schenker, MAZ Partners - Analyst [10]

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And the assets you did write down may have value at some point in the future? Or basically they are gone?

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Ron Smith, Deep Down, Inc. - President, CEO & Director [11]

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I didn't want to chuckle when I was watching Charles pain through this whole process, the whole thing, because I've actually got the assets that they are looking at, that they've impaired, actually close to being sold by some people that are really wanting to expand in that side of the business and absolutely need what we built.

So, I'm looking at potentially receiving a maximum return on that equipment that has been impaired to zero value. So, one half of me is excited about that, just to prove that they never should have been impaired. But those are the items. So they are not gone.

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Walter Schenker, MAZ Partners - Analyst [12]

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One of the series of questions and I'll see who else is on call -- given not just through December 31, but given through the middle of April, could you just give us some general sense, without making a projection, of over the last 15-16 months, how much your cost structure has been adjusted and reduced going forward?

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Ron Smith, Deep Down, Inc. - President, CEO & Director [13]

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That's a very good question, Walter. And I'm going to let Charles answer most of that.

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Charles Njuguna, Deep Down, Inc. - CFO [14]

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We see our cost structure (multiple speakers).

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Walter Schenker, MAZ Partners - Analyst [15]

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You've right sized people (multiple speakers) -- okay, well, yes, the more you want to answer is fine, Charles. But you, quote, right sized the workforce, you've cut back on some overhead costs, you've made some changes even from a governance standpoint. So it would seem as if going forward on your revenues, you ought to be more profitable without making, again, a forecast.

I'm just trying to get some sense as -- on an ongoing basis, how much -- however you want to answer it, you've indicated you've cut costs. I would like some sense, if you can enumerate, or a general sense of how much costs have been taken out of the business.

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Ron Smith, Deep Down, Inc. - President, CEO & Director [16]

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I'm kind of chewing. I know you want to talk and you've been warming up, but I kind of want to chew -- chewing at the bit on this one.

We had a chance to see how our rightsizing has worked in this first quarter. I wanted to watch our performance with the teams that we have in place. And I'm excited to report that I think we've got the team that we need even to double in revenue with the team that we already have. Because this team has been out in the field for the first quarter; I've had managers in the field, I have assisted managers behind, vice versa, and this last round and this last few months has worked out really well.

So I'm thinking with the right-sizing has been real accurate and appropriate and -- going forward. So I think Charles will answer you whether that will be more profitable going forward, but the simple math is, it has to be.

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Charles Njuguna, Deep Down, Inc. - CFO [17]

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Yes, and just to clarify, when Ron says we could double, it means we could do a lot more with the workforce (multiple speakers).

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Ron Smith, Deep Down, Inc. - President, CEO & Director [18]

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That's what I said; we could do a lot more.

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Charles Njuguna, Deep Down, Inc. - CFO [19]

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But that does not mean we are projecting doubling our revenues in 2019 (laughter). However, that being said, as of where we sit today on April 16, our fact has been constant, we expect to do significantly better in 2019. We expect to do better in 2019 than 2018.

And here in a few weeks we will be reporting on the first quarter where our revenues will be fairly high, will be higher than they were last year and the year before in Q1, and probably the year before that. So we are looking at a fair improvement in our performance and upon Ron and I to maintain our discipline and keep all our people on the right tracks as we go forward.

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Walter Schenker, MAZ Partners - Analyst [20]

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Okay, thank you and, Charles, I'm disappointed you are still commuting. But thank you.

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Ron Smith, Deep Down, Inc. - President, CEO & Director [21]

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I'll take that as a compliment.

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Walter Schenker, MAZ Partners - Analyst [22]

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Well, actually if the Company had been sold then Charles wouldn't be commuting anymore. Possibly.

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Operator [23]

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Chris Doucet, Doucet Asset Management.

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Chris Doucet, Doucet Asset Management - Analyst [24]

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Thanks for the call -- thanks for taking my call. I have a few basic questions. The first question is, do you guys expect the Company to be EPS-positive in 2019?

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Charles Njuguna, Deep Down, Inc. - CFO [25]

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Good morning, Chris. As of where we sit today, we are currently expecting that, all factors being constant.

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Chris Doucet, Doucet Asset Management - Analyst [26]

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The reason I asked the question is, the last six years in a row -- and I haven't gone back before 2013 -- we've been EPS-negative every year since 2013. And in your comments -- and I've listened to calls for at least a couple years, and I never seem to see or hear anything in your comments about how you plan to be EPS-positive in any particular year, other than, we hope the market turns around and we hope we get orders. Can you tell me how exactly how you plan to be EPS-positive in 2019?

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Charles Njuguna, Deep Down, Inc. - CFO [27]

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Yes. One of the things we announced back in July, that we are evaluating our strategic alternatives. While, for various reasons, we can't go into too many details, we can say that the folks who've worked at GulfStar Group have -- we've been able to get very positive feedback by working with the market.

We did say on one of the previous calls that the initiation of that was based on a few people who had approached us. And through that, by running a formal process, it helped us take a strategic look at where we are, where we've gone off the tracks and how we can get more disciplined.

I think the recent changes we announced last Thursday and this morning, about changes in our corporate governance, will provide an additional level of discipline for us in terms of finding ways while we operate in a very highly profitable space and yet, to your point, we end up being EPS-negative.

For context, in 2017 we were just shy of being breakeven on an EPS perspective. We did have some fairly good top-line numbers relative to the market, and then it was more on our SG&A side, our cost structures, how could we look at that and where were we spending our money. So we will be spending quite a bit of effort looking at that and working towards being EPS positive.

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Ron Smith, Deep Down, Inc. - President, CEO & Director [28]

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I'd like to touch on that too, if you don't mind. In my talk here just a minute ago where I touch on my side of this is also where I stated our strategy is to communicate our differential offerings to key players in these markets, and take advantage of the anticipated heightened level of offshore activity.

When I stated that, our revenues need to go up. We have a machine here that is built about supporting higher revenues. And we are focusing on these key players in these markets, and it's these -- this is starting to turn for us, where we are starting to get work from people that we haven't worked for for a long time.

We have to get them giving us work so that we can produce for them like we do for our leading clients. And when we get that revenue up with the same amount of people that we've got, then that's going to be a big part. So while we're doing these other things, we've got to do more for more people, and we are really concentrating on that. Thanks for that question, Chris.

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Chris Doucet, Doucet Asset Management - Analyst [29]

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Well, and I believe that you've built a better mousetrap. However, when I look at the revenue numbers, even going back to 2013, I mean it's $29 million, $28 million, $25 million, $25 million, $19 million, $16 million. So, that's --

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Ron Smith, Deep Down, Inc. - President, CEO & Director [30]

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Exactly.

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Chris Doucet, Doucet Asset Management - Analyst [31]

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-- not a growth business, that's just the opposite. I'd like to see more filler as far as how you guys plan to be profitable instead of talking about the Carousel and things that are kind of fairytale-type issues. Another question, so --.

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Ron Smith, Deep Down, Inc. - President, CEO & Director [32]

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Well, actually I'm glad you said that. But, Chris, on the Carousel, like our investors have been asking over the years, ones that Carousel sells, boom, there's $5 million, $10 million of cash in the bank, and it's absolutely real. We built these things several years ago for projects that got zapped by Macondo, and now we -- hopefully to pay for those -- for that past. So, it is a fairytale that (multiple speakers).

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Chris Doucet, Doucet Asset Management - Analyst [33]

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And obviously, I think the Company needs it. I mean obviously, cash went down $2 million last year, so I think something needs to kind plug that hole. And another question, I mean in lieu of at least six years of negative EPS, Ron, do you think it's appropriate in a publicly traded company for a husband and a spouse to receive $783,000 in compensation, especially since one of those spouses is working part-time?

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Ron Smith, Deep Down, Inc. - President, CEO & Director [34]

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I think it is appropriate for what (multiple speakers) -- what we are doing and what we are earning is not over and beyond what we would do if I was working somewhere else.

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Chris Doucet, Doucet Asset Management - Analyst [35]

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Who is on the -- I [commend] the Company on putting two real Board members on the Board, by the way. And the fact that the Company was able to attract two high-quality Board members like you did is a testament to the Company. But who is left on the Board? I guess you are, you have Mr. Goldman, Mr. Douglas now and you have one other outside member or -- who is left on the Board?

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Ron Smith, Deep Down, Inc. - President, CEO & Director [36]

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We've got Mark Carden, who is our Chairman of the Board and Chairman of our Audit Committee. So with him and David and Neal, that's three out of four that are completely independent. So now we have a completely independent Board for the first time.

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Chris Doucet, Doucet Asset Management - Analyst [37]

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Okay. I'll step back in the queue. Thank you.

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Operator [38]

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[Gene Riley], an investor.

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Gene Riley, - Private Investor [39]

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Could you tell me -- we're looking at the write-offs here for the construction in progress and I'm just curious what's going on with the dock. I know we put a lot of effort into that in the past, and what's going on there?

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Ron Smith, Deep Down, Inc. - President, CEO & Director [40]

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Did you say dock? The dock?

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Gene Riley, - Private Investor [41]

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Correct.

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Ron Smith, Deep Down, Inc. - President, CEO & Director [42]

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The dock. Nothing is going on with the dock. Do you want to build on that, Charles?

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Charles Njuguna, Deep Down, Inc. - CFO [43]

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Gene, just to clarify, the discussions about the dock and the facility, the onus was actually on our landlords to put in the dock, so we have not spent any money on getting the dock developed. We were banking on the landlord of the facility we moved into to get that put in place, and they never did. So when Ron says nothing, we just want to clarify that it's not we -- that's not part of the write-off or it's not any of this. We didn't spend any funds on that, so that's not part of the write-off.

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Gene Riley, - Private Investor [44]

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Okay, then now this is just a general question -- when I look at the operating lease payments going forward, roughly $1.4 million a year, where do I see that? Do I see them in cost of sales or do I see that in SG&A?

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Charles Njuguna, Deep Down, Inc. - CFO [45]

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For the facility?

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Gene Riley, - Private Investor [46]

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Well, when I look at operating leases -- future, minimum, contractual lease obligations going forward, roughly $1.3 million, $1.4 million a year. So those are pretty much fixed. So if I want to figure out what's variable, I subtract that from either SG&A or cost of sales, then I want to know which bucket do I find them in.

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Charles Njuguna, Deep Down, Inc. - CFO [47]

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About $1.1 million of that is in cost of sales, because that relates to our production facility.

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Gene Riley, - Private Investor [48]

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Okay, and then the other in SG&A?

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Charles Njuguna, Deep Down, Inc. - CFO [49]

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Yes.

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Gene Riley, - Private Investor [50]

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Okay, and then I have another thing. We were talking about, what, the ASC, the 802 (technical difficulty) the operating lease rights of new assets. And when that comes into being, where will that -- because that's going to be amortized at some point, right? You're going to write that up, but then you're going to start amortizing them. And is that the same thing, it's going to be -- some of it will be in cost of sales, some of it will be in SG&A? Or am I wrong there?

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Charles Njuguna, Deep Down, Inc. - CFO [51]

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Yes. No, you are correct. We expect to have a right of use asset and liability of somewhere in the range of $4.7 million to $5.1 million, heavily weighted towards cost of sales, because the operating lease is a major component of that. We have about four more years to go on the lease, through June of 2023. So that's going to heavily weight that right of use asset towards our cost of sales.

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Gene Riley, - Private Investor [52]

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Right, okay, so that's what it is. When I look at that $1.37 million operating lease next year, that's going to actually be amortization of this right of use?

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Charles Njuguna, Deep Down, Inc. - CFO [53]

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Yes.

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Gene Riley, - Private Investor [54]

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Okay, good. I'm glad I understand that now. I'm all set; thank you very much.

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Operator [55]

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Richard Deutsche, National Securities.

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Richard Deutsche, National Securities Corporation - Analyst [56]

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Thank you for taking my call. I'm glad you guys are having so much to laugh about, but the shareholders aren't laughing. So, to get on to my first question, if you do sell one of the Carousels, what do you intend to do with the cash?

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Charles Njuguna, Deep Down, Inc. - CFO [57]

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One of the uses of cash that we've talked about is obviously going back into an additional -- doing more buybacks. But we also have some growth expansion efforts that we've looked at, especially when we talk about international and being able to develop our footprint in some of the markets requiring local content. We envision being able spend some of the cash to do that.

One of the things that we found in the last 18 to 24 months, as we've been traveling to different places, is the need to establish in some of these places, but on the flip side of that is just the effort and the continuous personal attention that's required in order to develop some of these markets. So if we did have that large inflow of cash, those are two areas we would spend it.

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Richard Deutsche, National Securities Corporation - Analyst [58]

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Okay, and one other question. Apparently being mostly a service company with a couple of pieces of valuable equipment, why would you -- what's the rationale for being public anymore? Can you kind of explain any advantages or disadvantages or a strategy for maintaining as a public company?

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Charles Njuguna, Deep Down, Inc. - CFO [59]

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Ron and I are looking at each other, sorry for the silence. We are trying to debate who would take the call, and he pointed at me and he's the boss.

We -- as a small company, yes, we do struggle with being public from the costs and the effort it takes since it's still necessary to do everything like a big company. However, as we are bidding on bigger projects, our being public has helped us mitigate some of the risk management questions that have come up. When we, a couple years ago, announced a $20 million purchase order --.

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Ron Smith, Deep Down, Inc. - President, CEO & Director [60]

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That's exactly what I was thinking.

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Charles Njuguna, Deep Down, Inc. - CFO [61]

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When we -- and that was roughly just slightly more than we ended up doing in revenues for that year, the risk management folks at our customer really wanted to understand why the project folks were willing to give us such a purchase order.

And a big part of our defense was because we public, we are able to assure them that we will use their money wisely, we're not a fly-by-night -- or we're not going to misuse their funds. There's additional discipline we have to maintain, because we have additional regulatory oversight.

Through this strategic review process, that's one of the questions that's frequently come up. It's one of the things that's frequently being reviewed. But that's not an easy answer to get to at the end. So as we go forward and with the new Board stepping in, that will be a discussion point that will be had quite a bit.

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Richard Deutsche, National Securities Corporation - Analyst [62]

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Okay, thank you, I appreciate your answers.

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Operator [63]

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[Scott Barbie], AG Financial.

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Scott Barbie, AG Financial - Analyst [64]

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I've got a couple of questions. I guess to back up for a minute, it looks like you've got a backlog of $15 million, you put on $4 million and you've -- I'm kind of curious about the slide in gross margin that came from 44% previously down to 20%. I'm wondering about this backlog and what kind of gross margin do you have in backlog. Is it this higher margin service work, or is it a bunch of -- is that closer to the lower gross margin kind of backlog?

And I guess I'm just trying to get a sense for your -- kind of your net loss that you've had on $16 million of revenues from the previous year and kind of the thoughts on how much additional revenue need to come in in order to really get that eradicated.

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Ron Smith, Deep Down, Inc. - President, CEO & Director [65]

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Well, you know, the big hit on the gross margin was really due to the asset impairment. You take $2 million off right off the bat, boom, that drops that gross margin down. Do you want to go ahead and elaborate, Charles?

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Charles Njuguna, Deep Down, Inc. - CFO [66]

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Yes, so as far as the backlog, we do have quite a bit of the higher margin (inaudible) in the backlog. We also have products that we'll be building which is not service work, but it does have fairly decent margins on it.

Just backing up, a few minutes ago, the question about the -- when we talk about the accounting technical part of the new -- the ASC 842 he mentioned, what that is, it's a new standard of how we will be presenting our leases in our financial statements.

But going back to that question, we talked about the lease for our facility, about $1.1 million a year and you add some for some of the prefabricated buildings we have on here. That's in cost of sales, so that impacts our gross margin, and that's relatively fixed so we have it. And therefore, when we have lower revenues, we have revenues in the $4 million range, right off the bat $1.2 million or so is eaten up before we add anything else.

So, as we increase our revenues, because that number is relatively fixed, the absorption is going to be on a wider range of revenues. So, as we look forward towards, for instance, Q1 of 2019, we expect that number will look better just because there is more to spread it out.

To touch on the backlog as well, it's $15 million in orders that we have, but historically we've ended up doing better than our backlog, because a lot of what we do is service work which we are not able to project going forward. And therefore with higher revenues and a larger absorption, and with us maintaining discipline especially on our SG&A side, that gives us some comfort or some confidence towards increased margins.

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Ron Smith, Deep Down, Inc. - President, CEO & Director [67]

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But, heavy service quarters are -- will drive margins up, and lump sum is always a little less. But service is where the margins are the greatest.

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Scott Barbie, AG Financial - Analyst [68]

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Okay, all right. Well, I wanted also to note that we were very pleased over here to see that you had brought on Mr. Douglas and Mr. Goldman, and have made the changes, several changes over the last little bit here. These are never easy for a small company to do, but I think bringing in somebody of Mr. Douglas' and Mr. Goldman's background is a real testament to open-mindedness and moving forward.

And I know that they are going to be bringing in a different set of viewpoints and perhaps some things that might be a little bit difficult for an entrepreneurial manager type to swallow, but I think it's the right move for the shareholders and the Company. So I just wanted to give you guys some kudos for having taken the medicine to go ahead and bring guys in and get their advice.

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Ron Smith, Deep Down, Inc. - President, CEO & Director [69]

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Thank you.

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Operator [70]

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(Operator Instructions). Gene Riley, a private investor.

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Gene Riley, - Private Investor [71]

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This is a follow-up actually from two callers ago. How much a year do you spend being a public company? And the reason I'm asking is because if someone was to buy you, that's how much money they're going to save right off the bat, right?

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Charles Njuguna, Deep Down, Inc. - CFO [72]

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Yes, we spend about $300,000 or $350,000 a year in the different public-company expenses.

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Gene Riley, - Private Investor [73]

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Thank you very much.

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Operator [74]

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Thank you. I'm not showing any further questions at this time. I would now like to turn the call back over to Ron Smith for any closing remarks.

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Ron Smith, Deep Down, Inc. - President, CEO & Director [75]

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I want to thank you all for joining us on this call. And I want to pledge to you all that we are working very hard to make sure that 2019 is the best year we've ever had. So I want to thank you all and we will see you here in just a couple weeks for reporting of our first quarter. Bye.

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Operator [76]

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Ladies and gentlemen, thank you for participating in today's conference. This does conclude today's program, and you may all disconnect. Everyone have a wonderful day.