Koil Energy Solutions, Inc.
Q2 2021 Earnings Call Transcript

Published: 17 Aug 2021

[Operator:]

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the Deep Down’s Second Quarter 2021 Conference Call. During the presentation, all participants will be in a listen-only mode. After the speakers’ remarks, you will be invited to participate in a question-and-answer session. 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 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 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 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 your CEO, Charles Njuguna. You may go ahead.

[Charles Njuguna:]

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’re 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 these 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’re especially glad that there are no injuries to personnel, no damage to the customers’ 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 worked 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 sale date. By eliminating several days from the schedule, we were able to potentially save our customer hundreds of thousands of dollars in project costs. For perspective, vessel day rates, for a vessel like we are using could range anywhere from $250,000 to $300,000 a day, not counting additional equipment rental and other labor costs. And those prices are at today’s depressed price levels. During the boom time, those prices were even higher. So, every day saved on a project of this magnitude provides immediate benefit to the customer. This project has also spawned new discussions with this customer, as well as other customers about future carousel rental opportunities, though, many of them are farther down the road. We are engaged in discussions for projects that are slated for late 2022 or 2023, and even as far field as 2024. I would like to point out that our customers’ level of interest is exhibited by the depth of discussions we are having with them about future carousel designs. These future designs would also be applicable for non-oil and gas prospects, as we are engaged in fairly advanced discussions regarding cable management for the offshore drilling industry. We are not yet at liberty to provide details of these discussions, but sufficed to say we’re 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 will 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 this effort is further electrification of our equipment. While our current equipment fleet is very environmentally friendly, we’re challenging our engineering team to come up with improvements to further reduce our environmental impact. Beyond rig energy opportunities, we are also engaged in discussions, with a company that has developed a technology for subsea storage that could be complimentary to what we offer, as well as an oil company, who is looking intently at the hydrogen sector. These are just two examples of opportunities we are actively pursuing as we evaluate different avenues to leverage our core competencies without losing sight of our base business. We do want to caution that outside of the window opportunity I touched on earlier, many of these opportunities would materialize farther down the road. While growth remains a key focus, we are continuing 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 two PPP loans, which we received back in April 2020. On the flip side, some of our customers continue to struggle with their own cash flows, which led us to provide a resolve for some larger 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 without the prudence to make this resolve as we wait to see what the future of these receivables will entail. With that overview, let me now turn the call over briefing to our Vice President of Finance, Trevor Ashurst for a quick review of our financials. Trevor?

[Trevor Ashurst:]

Thank you, Charles. For the three 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 three 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 declining 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 the $245,000 severance charges 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 of 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 30. 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 is pending – is currently pending the SBAs 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 encourage this trend will continue throughout the rest of the year. Our balance sheet position 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. Now, I’ll turn the call back over to Charles.

[Charles Njuguna:]

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:]

Thank you. And our first question comes from Walter Schenker from MAZ Partners. Your line is now open.

[Walter Schenker:]

Hi Charles, hopefully everyone’s healthy down there.

[Charles Njuguna:]

Good morning, Walter. Everyone’s healthy here. Thanks. Hope the same for you and your family.

[Walter Schenker:]

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:]

In the June quarter, it was with less than so when we provided our range for the project of $1.5 million to $2 million for the overall project, we probably did about half of it within the past – within this past quarter. So it was…

[Walter Schenker:]

Okay.

[Charles Njuguna:]

So we had a lot of other projects that contributed to that. So it was probably about 20%.

[Walter Schenker:]

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

[Charles Njuguna:]

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

[Walter Schenker:]

Okay.

[Charles Njuguna:]

Yes.

[Walter Schenker:]

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

[Charles Njuguna:]

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 were 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 to get a foot in the door with this customer a big oil company. And then our material prices went south on us.

[Walter Schenker:]

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 to the history of the company, because of issues as to the work that was done.

[Charles Njuguna:]

The client from – so this client, this is the first part of our bigger project. The client is picking and choosing who to pay. And from talking to the client and other companies involved in the project, we’re just a smaller supplier compared to other – actually let me clarify, there are two customers involved in this. One of them is just shy of a $100,000 and the other is about $400,000. The $400,000 one is a client who was asked and NOV and Baker Hughes another big companies. And they’re just picking and choosing who to pay. They are international customer.

[Walter Schenker:]

And you have additional work – I’m sorry. You have additional work on that project or not?

[Charles Njuguna:]

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

[Walter Schenker:]

And are you hopefully at least mildly critical project for you have to do.

[Charles Njuguna:]

Its – they need us to do the work, but in this day and age, we – if I start here and probably start, they’ll absolutely do it, they claim they still need to do it, because they have a leak. But until we get paid, I’m not going to make firm commitments.

[Walter Schenker:]

So as there is a possibility to maybe not an insignificant probability, eventually you could recover this receivable. Something like that when bankrupt and they’re in and they’re gone.

[Charles Njuguna:]

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

[Walter Schenker:]

Okay. And it’s a non-cash charge that you spent the money a while ago and it 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, a significant thing, we have a guess 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 opportunities in what area.

[Charles Njuguna:]

In wind. The wind energies – offshore wind energy side.

[Walter Schenker:]

And if that were to come to fruition, you would expect it in the next six months or this is sort of your insufficient negotiations that if something happens, it happens this year. We’ll never knows, I understand it’s the future.

[Charles Njuguna:]

As of now, the plant contract award date is in October.

[Walter Schenker:]

Okay.

[Charles Njuguna:]

Start some activities possibly this year, but into next year. But again, that’s at 9

[Walter Schenker:]

When does a pretty strong area. So they may, well, go ahead. How have they laid table historically? Have they not used a carousel or did they just split out as ships? I mean, they also need large power cables run.

[Charles Njuguna:]

Yes. So wind – offshore winds, especially, these kind of projects are fairly new in the U.S., let’s say, 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 prove that notion. And we believe that we would take full credit 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:]

Okay. And on other areas oil and gas, there’s nothing really hard at the moment.

[Charles Njuguna:]

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

[Walter Schenker:]

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 – how confident are you remaining receivables are money good and where these charges behind us. You have to say you or otherwise you would have done it.

[Charles Njuguna:]

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

[Walter Schenker:]

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

[Charles Njuguna:]

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

[Walter Schenker:]

Okay. Stay healthy, Charles. Thank you.

[Charles Njuguna:]

Thank you, sir. You too.

[Operator:]

Thank you. And I am showing no further questions. I would now like to turn the call back over to Charles for closing remarks.

[Charles Njuguna:]

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.