Koil Energy Solutions Inc

OTC:KLNG

Earnings Call Transcript

[Operator]

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to Deep Down Second Quarter 2021 Conference Call. [Operator Instructions] As a reminder, this call is being recorded today, Tuesday, August 17, 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 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 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 made. Deep Down also undertakes no obligation to revise any of these forward-looking statements to reflect events or circumstances after the date made.

At this time, I would now like to turn the call over to your CEO, Charles Njuguna. You may go ahead.

[Charles Njuguna, executive]

Thank you, Justin. Good morning, and thank you for joining us today. With oil prices continuing to hold above $60 per barrel, the industry has largely adapted to managing projects at this price point with cautious optimism that these price levels will hold for the longer term. This positive sentiment has been a catalyst for increased activity within the industry, which we were able to capitalize on, resulting in increased revenues in the second quarter.

While we're encouraged by this higher level of revenues, this progress was hampered by lower margins on some fixed-price projects, which were impacted by increased labor costs and material prices. And as we mentioned on the last call, we cannot pass this increases on to the customers. We are continuously adjusting our operations to better manage such situations and do not currently envision this situation being the norm going forward.

Talking of projects, our previously announced carousel project is now successfully complete. We are especially glad that there are no injuries to personnel, no damage to the customer's products and no impact to the environment. In addition to the high level of safety and overall performance by our team, such success would not have been possible without close collaboration within our company and the other companies we work with on the project.

Our team's expertise and creativity was put on full display when they are able to modify our equipment while in the field in order to accommodate a need for an expedited vessel sail date. By eliminating several days from the schedule, we were able to potentially serve our customers hundreds of thousands of dollars in project costs. For perspective, vessel [ garage ] for a vessel like we are using could range anywhere from $260,000 to $300,000 a day, not counting additional equipment rentals and other labor costs. And those prices are at today's depressed price levels. During the boom times, those prices were even higher.

So every day sales on a project of this magnitude, provides immediate benefits to the customer. This project has also sponged new discussions with this customer as well as other customers about future carousel rental opportunities, though many of them are further down the road. We're engaged in discussions for projects that are slated for late 2022 or 2023, and even as far as 2024. But I would like to point out that our customers' level of interest is inhibited by the depth of discussions we are having with them about future carousel designs. These future designs would also be applicable for our non-oil and gas prospects as we are engaged in fairly advanced discussions regarding cable management for the offshore wind industry.

We are not yet at liberty to provide details of these discussions, but suffice it to say, we are presently involved in very detailed discussions on actual sanctioned projects within the U.S. While we acknowledge they are incumbent international providers of these services, we have been able to leverage our expertise to show the presence of a U.S.-based supplier base and hope that our efforts would be fruitful.

Our endeavors to expand beyond oil and gas have dovetailed well with our internal efforts to increase the sustainability of our own operations, efforts which we plan to further detail in future periods. One example of these efforts is further electrification of our equipment. While our current equipment fleet is very environmentally friendly, we are challenging our engineering team to come up with improvements to further reduce our environmental impact.

Beyond wind energy opportunities, we are also engaged in discussions with a company that has developed a technology for subsea storage that could be complementary to what we offer as well as an oil company looking intently at the hydrogen sector. These are just 2 examples of opportunities we are actively pursuing as we have [ alluded ] different avenues to leverage our core competencies without losing sites of our base business. We do want to caution that outside of the wind opportunity I touched on earlier, many of these opportunities would materialize further down the road.

While growth remains a key focus, we'll continue to keep a close eye on our cost structure and our cash flows. As Trevor will detail shortly, our cash position was recently enhanced by the forgiveness received for the first of our 2 PPP loans, which we received back in April 2020. On the flip side, some of our customers continued to struggle with their own cash flows, which led us to provide a reserve for some large receivables, which in turn negatively impacted our operational income and our cash flows from operations for the quarter. While these customers continue to pledge to make payment, we felt it was prudent to make this reserve as we wait to see what the future of these receivables will entail.

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?

[Trevor Ashurst, executive]

Thank you, Charles. For the 3 months ending June 30, 2021, Deep Down generated revenues of $4.5 million, which represents a 66% increase when compared to revenues of $2.7 million for the 3 months ended June 30, 2020.

Gross profit as a percentage of revenues was 31% in the second quarter of this year, which represents a 15% decrease in gross margin compared to the 46% we generated in Q2 of last year. The decline in gross margin was driven by lower margin fixed-price projects, which were further impacted by increased labor costs and material prices. Additionally, we received rent abatements during the second quarter last year that were not received this year.

Selling, general and administrative expenses decreased 13% to $1.8 million for the second quarter of 2021 compared to $2 million in Q2 of 2020. SG&A for the second quarter of this year includes a $534,000 reserve for doubtful accounts receivable that Charles touched on earlier. This is compared to Q2 of last year where SG&A included a $448,000 reserve for doubtful accounts receivable, and there was also a $245,000 severance charge related to the elimination of the company's COO position. If these aforementioned charges were to be excluded in their respective periods, SG&A for Q2 of this year would be $1.2 million or 7% lower than the $1.3 million incurred during Q2 of last year.

Turning to net income. The company reported net income of $724,000 or $0.06 per diluted share for the second quarter this year compared to a net loss of $5.2 million or a loss of $0.42 per share for the second quarter of 2020. The improvement in net income was mainly driven by maintaining a disciplined cost structure and recording the full forgiveness of the PPP loan we obtained in April 2020. And the magnitude of the net loss recorded for the second quarter last year is primarily due to recording a $4.5 million impairment charge related to certain long-lived assets.

Shifting to the balance sheet. Our capital structure includes $4.1 million in cash and $6.1 million in working capital as of June 30th. As previously mentioned, we just recently received full forgiveness of the entire balance of the PPP loan we obtained last year. And just as a reminder, in early March of this year, we received a second $1.1 million PPP loan, which has allowed us to strengthen our workforce as we fund working capital. We recently submitted our application for full forgiveness of this second PPP loan and it is pending -- is currently pending the SBA's review.

In summary, our dedicated team of highly-skilled professionals have continued to perform at the highest level. This has allowed the company to participate in the increased project activity we have witnessed throughout the first half of the year. We are encouraged this trend will continue throughout the rest of the year. Our balance sheet positions us well to capitalize on this trajectory of measured growth and allows us to make strategic investments when appropriate to increase our capital efficiency.

That said, thank you for your time. And now I'll turn the call back over to Charles.

[Charles Njuguna, executive]

Thank you, Trevor. That concludes our prepared remarks today. So I'll turn the call back to the operator to take investor questions. Justin?

[Operator]

[Operator Instructions] And our first question comes from Walter Schenker from MAZ Partners.

[Walter Schenker, analyst]

Hopefully, everyone's healthy down there.

[Charles Njuguna, executive]

Everyone is healthy here. Thanks. Hope the same for you and your family.

[Walter Schenker, analyst]

My family doing well at this point. Well, the revenues were good. A couple of questions. The project with the carousel, which you announced today, was completed. Can you -- how significant was that to revenues in the June quarter?

[Charles Njuguna, executive]

In the June quarter, it was -- it was less than -- so when we -- we provided a range for the projects of $1.5 million to $2 million for the overall projects, will probably be about half of this within the past -- within this past quarter. So it was -- so we had a lot of other projects that contributed to that. So it's probably about 20%.

[Walter Schenker, analyst]

Okay. So most of it will show up in the September quarter?

[Charles Njuguna, executive]

A significant amount will be in the September quarter as well. Yes. And we did have a little bit in the first quarter as well.

[Walter Schenker, analyst]

Okay. That was not the fixed-price contract that you had a problem with?

[Charles Njuguna, executive]

No. So we had some -- we had taken on some lower-margin fixed-price projects for strategic reasons, which were to rekindle an old relationship and to win some service work, which we are able to win, which will show up in the third quarter as well. And so we took on those projects, probably, late last year and then material prices, just get a pushing the door with this customer, a big oil company and then material prices went south on us.

[Walter Schenker, analyst]

Okay. And in regard to the receivable, $0.5 million is a lot of money, not for big boy companies, but for us. The client has financial distress or the client just is not paying you because of some issues -- I'm just thinking back of the history of the company -- because of issues as to the work that was done?

[Charles Njuguna, executive]

The client from -- so these clients, this is the first part of a bigger project. The client is picking and choosing who to pay and from talking to the clients and other companies involved in the projects. We're just a smaller supplier compared to other -- actually, let me clarify. There are 2 customers involved in this. One of them is just shy of $100,000 and the other is about $400,000. The $400,000 one is a client who owes us and NOV and Baker Hughes, and other big companies. And they're just picking and choosing who to pay, they are international customer.

[Walter Schenker, analyst]

And you have also -- I'm sorry, you have additional work on that project or not?

[Charles Njuguna, executive]

We do have additional scope of work on that project that is -- that we will not be executing until we get paid.

[Walter Schenker, analyst]

And are you hopefully at least mildly critical [ that project or you ] have to do?

[Charles Njuguna, executive]

They need us to do the work, but envisage with an -- if I started and promised, they'll absolutely do it. They claim they still need to do it because they have a leak, but I'm sure we get paid. I'm not going to make firm commitments.

[Walter Schenker, analyst]

So as there is a possibility to maybe not an insignificant probability, eventually you could recover this receivable. So it's not like they were bankrupt and they're gone.

[Charles Njuguna, executive]

Yes. From talking to them, they fully intend to pay us. However, given the prolonged period, as you get beyond 90 and 100 days, I've been talking to our auditors, it's prudent to resolve large receivables that are long outstanding. But at this point, they still -- they're still pledging to make payments.

[Walter Schenker, analyst]

Okay. And it's a non-cash charge that you spent the money a while ago and I just -- so at least the charge for the quarter was not a cash-related item. We always have to review the opportunities in the carousels because that's -- the increment is a significant thing, we have to get that. You mentioned multiple opportunities, hopefully, maybe possibly whatever the right term is, both in the energy area and outside the traditional oil and gas area. As you look at it, the best nearest-term opportunity is in what area?

[Charles Njuguna, executive]

In wind energy -- offshore wind energy side.

[Walter Schenker, analyst]

And if that were to come to fruition, you would expect it in the next 6 months? Or this is sort of you are in sufficient negotiations, that if something happens, that happens this year? We never know. I understand it's the future.

[Charles Njuguna, executive]

Yes. As of now, the planned contract award date is in October. So, start some activities possibly this year, but into next year. But again, that's at 9:19 AM central time on August 17, things change so much.

[Walter Schenker, analyst]

Well, wind is a pretty strong area, so they may well go ahead. How have they laid cable historically? Have they not used a carousel or they just pull it out of ships? I mean, they also need large power cables run.

[Charles Njuguna, executive]

Yes. So wind -- offshore winds, especially this kind of projects are falling in the U.S. So I think there's only one, and they're all in your neck of the woods right now. The incumbents in previous projects have been European-based suppliers. There is a push within the wind energy to grow our U.S. supplier base, and there have been discussions about a lack of U.S. suppliers who can perform this work. And so we've been working hard to disprove that notion. And we believe they are -- we will take full credit, there are other people also trying to do the same, but we think we've done a fairly decent job of convincing them that the work can be performed by U.S. suppliers.

[Walter Schenker, analyst]

Okay. And on other areas, oil and gas, there's nothing really hot at the moment?

[Charles Njuguna, executive]

There are other opportunities. However, these are always tied to the manufacture of umbilicals, which takes a long time. And so there are some opportunities for umbilicals that are currently in production, but those would be projects for next year or -- and the year after. So they take a long time to come to fruition.

[Walter Schenker, analyst]

Okay. And from a receivable standpoint, and I've been on audit committee, so it's sort of an unfair question because if there was something to worry about, you should have done it. But hopefully, the receivables left on the balance sheet should be your -- how confident are your remaining receivables are money good and these charge is behind us? We have to say you are, otherwise you would have done it.

[Charles Njuguna, executive]

Exactly, we are actually fairly confident. We collected quite a bit in July. I think we're well above $1 million in July collection. So we have a fairly high level of confidence in our receivables on the balance sheet.

[Walter Schenker, analyst]

Okay. And then just lastly, given the rest of the contract on the carousel and service, the third quarter, absent unusual items, should be a pretty good quarter?

[Charles Njuguna, executive]

Yes. I have to be careful not to make any promises, but, yes, we're encouraged by the traction we've seen so far in the quarter.

[Operator]

[Operator Instructions] And I'm showing no further questions. I would now like to turn the call back over to Charles for closing remarks.

[Charles Njuguna, executive]

Thank you, Justin. And once again, thanks to all of you who joined our call today. We do appreciate your interest in and 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.

[Operator]

Thank you. This concludes today's call. Thank you for participating. You may now disconnect.