Koil Energy Solutions, Inc. (KLNG) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to Deep Down's First Quarter 2020 Conference Call. [Operator Instructions] As a reminder, this call is being recorded today, Tuesday, May 12, 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 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'd like to turn the call over to CEO, Charles Njuguna.

Thank you, Teresa. Good morning, and thank you for joining us this morning. The energy industry continues to face an unprecedented level of stress and uncertainty that creates limited visibility for future plans. But despite these challenges, billions of dollars' worth of offshore production infrastructure remains in place and its continued functioning and safety is critical to its operators, owners and the global economy. We make this point to demonstrate that substantial opportunities exist in the offshore services market that are not tied to development of new production infrastructure. It is on these maintenance and expansion opportunities for our products and services that we will primarily focus our efforts as the industry recovers from the current environment. However, the timing of this recovery is uncertain. As the likely impact of the coronavirus pandemic and the energy industry challenges became clear towards the end of the first quarter, we as the company moved quickly to adjust our business focus and trim our cost structure to better align with the new realities. In addition to temporarily reducing compensation levels across the organization, we eliminated certain overhead roles accounting for 32% of our SG&A payroll in order to reduce our fixed costs and further streamline our organization while retaining our ability to continue serving our customers. We also successfully negotiated a rent abatement from our landlord and have received pricing concessions from some of our suppliers. While there are still many variables and unknowns at this time, we believe there remains a significant amount of required maintenance work and emergency repairs that are ideally suited to our skills and expertise. We are actively pursuing these opportunities, and we remain committed to delivering the high levels of service and problem-solving that our customers have come to expect from us. At the same time, we will continue to fine-tune our expense footprint to match foreseeable demand. We expect some offshore customers to implement modest project delays as they evaluate the changing environment. However, we do not expect them to abandon required maintenance or other priority initiatives required to keep their production system safe and running efficiently. And based on ongoing discussions with our customers, we expect some of these service activities to occur as soon as travel restrictions are lifted. Of course, the calculus of new investment decisions is more challenging in the current environment. And therefore, it's difficult to gauge the pace at which new projects could return to consideration. While new project sanctions are likely to be delayed, we continue to engage in promising conversations with various customers on projects which had previously been sanctioned, and we are cautiously optimistic about being able to make some announcements in the not-too-distant future. As we made clear on prior investor calls, one of our main objectives is managing our cash flow and maintaining financial strength. To this end, and despite recent headwinds that came on very quickly, we were able to achieve modestly positive net cash flow from operations in the first quarter of 2020. Trevor will expand further on our first quarter performance in a few minutes. Heading into the second quarter, as our customers started reacting to the macroeconomic factors, including adjusting the operations to remote working arrangements, we have seen some delays in the processing of our invoices, and we are concerned that such delays could continue. This is in addition to the likely delays in the sanctioning of new projects, which would further impact our cash flows for the foreseeable future. In light of these circumstances, and given the challenges we have faced in getting a line of credits, we determined that it would be the best interest of the company to apply for a loan through the Small Business Administration's Paycheck Protection Program. As a small publicly traded company, raising capital can be a challenge in a good economy. The current circumstances have made this even more challenging for companies like ours. So we are grateful that the government was able to provide assistance in the form of the PPP loan to help with our payroll, rents and utilities during this crisis. Our forecast throughout the balance of the year will be on identifying and pursuing select opportunities with high likelihoods of being funded, while at the same time, keeping a very tight leash on spending and managing our operations to deliver the best possible bottom line results. With that overview, let me now turn the call over briefly to our Vice President of Finance, Trevor Ashurst, for a quick view of our financials.

Thank you, Charles. Revenue for the first quarter of 2020 was $3.6 million compared to revenue of $6.3 million for the first quarter of 2019. This decline in revenue was a combination of having a lower volume of fixed price projects in process this year compared to the same period last year and the impact of the travel restrictions and the decline in oil prices resulting from the COVID-19 pandemic. Lower revenue was also the primary driver for the decrease in gross margin to 31% in Q1 of this year as compared to 36% in Q1 of last year. However, selling, general and administrative expenses declined 15% to approximately $1.7 million for the first quarter of 2020 compared to approximately $2 million in the first quarter of 2019. This decrease in SG&A expense is a positive indicator that the cost reduction initiatives implemented by the company last year are starting to take effect. As Charles mentioned earlier, we are actively pursuing additional cost containment measures to improve our profitability and support our renewed focus on the company's core business. Looking at net income, we reported a first quarter net loss of $637,000 or a loss of $0.05 per share this year, compared to a net income of $212,000 or $0.02 per share for the first quarter of 2019. This drop in net income is, again, primarily due to reporting lower revenue in Q1 of this year compared to the same period last year. We continue to maintain a disciplined capital structure that includes $3 million in cash, $4 million in working capital and 0 long-term debt as of March 31, 2020. That being said, preservation of cash has been and continues to be a priority. As such, we limited CapEx during the quarter, spending approximately $60,000 on critical items. As a result of our continued focus on cash, we are able to generate positive free cash flow of $30,000 during the quarter. This is compared to reporting negative free cash flow of $583,000 in Q1 of 2019 despite having higher revenue for that period. So in summary, the COVID-19 pandemic has created disruptions in the global supply and demand, pressure on commodity prices and uncertainty for global energy producers. Looking ahead, we are actively taking steps to mitigate the impact of these macroeconomic events on our business by continuing to execute for our customers while operating as efficiently as possible. That said, thank you for your time. And I will now turn the call back over to Charles.

Thank you, Trevor. The Board and management have open eyes regarding the challenges and opportunities we face. But we believe we are taking the right steps to ensure that Deep Down is positioned to emerge as a strong organization. We remain fueled by the immense talent and commitment of our team, a commitment, which has been a shining light as we navigate the current unprecedented circumstances. And we are also fueled by the continued support of our customers who recognize our unique capabilities, our experience and our proven problem-solving abilities in a very challenging world of offshore services. That concludes our prepared remarks today. So I'll turn the call back to the operator to take investor questions. Teresa?

[Operator Instructions]. Your first question comes from Walter Schenker.

Charles, a couple of questions. Someone has to ask them. When you are done with this round, including some recent higher-level letting people go, about how much in total do you think your cost structure has come down?

Charles, I'll take that real quick. So as a result of our kind of corporate overhead cost reductions, we're estimating that to end up around to be about $650,000, $700,000 lower going forward on an annualized basis, and that's representing roughly, I think Charles said, around 32% or so of our corporate SG&A overhead.

Second. You have received your PPP loan? Or you've just applied?

We have received it, Walter.

Okay. And it will be disclosed in your filings, obviously.

We filed an 8-K, yes. We received $1.1 million.

Okay. And thinking about the business, since we are on the production end and not the exploration end, there are -- because you talked about hopefully getting orders. There are a number of projects around the world where you, making up a name shell but -- where major companies still need to do additional work, not repair, but development work to get into production that you're hoping to get some business from on things like umbilicals and flying leads?

Yes. We have some projects which -- because we're on the production side, there are some projects which had been previously sanctioned which the -- we were already deep in the negotiations with the clients by the time everything went south, and the customers are continuing to move forward with those projects. So we do have some projects which we are working through just the contract negotiations and finalizing some different details, which we are, like I said, cautiously optimistic we'll be making announcements soon.

I mean say...

Go ahead.

That being said...

That being said, because we're on the production side, as we look at where we are today and as we look at where -- how things will continue to unfold, there's often a lag time. We're going to work through the projects that have already been sanctioned. We are keeping our eyes open to the challenges that could be faced in terms of things that get delayed now, which would have been coming our way later this year or early next year.

Okay. And on the repair side, at this moment to the -- you have projects, you haven't -- or jobs you haven't been able to get to? Or at this point, the travel side has been -- is not preventing you from doing business?

Yes. We do have some projects we have not been able to get to. We actually have a couple of projects where our equipment went overseas, one set to South America, one set to West Africa. But then because of the travel restrictions our personnel are not able to travel. So once the travel restrictions are lifted, we expect to be able to go and complete those 2 projects and others, both in the gulf and in other parts of the world.

Okay. And since you didn't answer, and I have to ask at every call, if people are not doing big projects, whatever might have been, both laughing, close or possible for the carousels seems further down the road? Or there's still some stuff going on that might -- going on currently, that has not been deferred, which might if we're lucky to acquire a carousel?

We do have stuff going on, which requires a carousel. So we are optimistic about the progress on that front.

Okay. So it is still possible you're going to make me happy this year even with the current energy environment.

Yes, it is quite possible that I'll be making you very happy this year.

[Operator Instructions]. And there appears to be no further questions. I'll turn the call back to Mr. Njuguna.

Thank you, Teresa, 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 on the next earnings call. So let's conclude today's call. Thank you all.

Thank you, ladies and gentlemen, for participating. You may now disconnect.