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

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to Deep Down Second Quarter 2020 Conference Call. [Operator Instructions] As a reminder, this call is being recorded today, Tuesday, August 11, 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 the 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 to not place undue reliance on these forward-looking statements, which speak only of 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. Please go ahead.

Thank you, Elisa. Good morning and thank you for joining us this morning. The energy industry continues to be severely impacted by the dual challenges of the coronavirus pandemic and the oil price crash. Since the oil -- since the price of oil has greatly stabilized, around $40 per barrel, the industry is operating with the expectation of lower prices for a prolonged period. Our second quarter results reflect the realities of the current environment we are operating in. Travel restrictions have continued to impede our ability to send our teams around the world, which had an impact on our revenues for the second quarter. This is in addition to some project delays and deferrals as our customers adjusted their operations to manage through the downturn. The most consequential impact for us during the second quarter was the deferral of our projects which would have required the use of one of our carousels. We're in the final stages of discussions with the customer, walking through details around the required foundation, the footprint of the carousel and confirmation of any ancillary equipment we would provide only for the project to be deferred. At this time, we have no visibility on the timing and the prospects of any further discussions. On a related note, as part of our financial reporting obligations, we are required to periodically assess the carrying value of our long-lived assets, especially when there are events or extenuating circumstances that have negatively impacted our business. In light of the deferral of these projects due to the current macro environments and our inability to adequately project cash flows from our carousels, we determined that the carrying value on our balance sheet could not be supported, resulting in an impairment. Nevertheless, we do not expect these accounting adjustments to have any bearing on any carousel-related discussions with current or prospective customers. Speaking of cash flows, we are grateful to receive a loan under the Paycheck Protection Program from the Small Business Administration, which supplemented our cash from operations during the quarter as we dealt with delayed payments by some of our customers. Unfortunately, we have also had to read about bankruptcy filings by some of our customers. While we expect to receive full payments for our outstanding invoices, none of which have been contested by any of our customers. We decided to significantly increase our allowance for doubtful accounts as of June 30, 2020. As far as the forgiveness of our PPP loan is concerned, the SBA officially began accepting applications for forgiveness yesterday. However, financial institutions have adopted a wait-and-see attitude given the ongoing discussions in Congress. Based on our current understanding of the relief guidelines, we expect to receive forgiveness for a significant portion of the loan, if not all of it. As we look towards the future, our focus remains on improving our profitability as evidenced by the material decline in our SG&A expenses after excluding the noncash charges we took during the second quarter. When the pandemic hits, we took a hard look at our cost profile and made some structural adjustments to better serve our customers in the near term. These measures were driven by our philosophy of controlling the controllables through the downturn, which we believe will also serve us well as the industry begins to recover. While we have and continue to make progress with our cost structure, we are keenly focused on growing our business as we are beginning to see some positive signs in the industry. We are increasingly sending teams out for different offshore campaigns within the Gulf of Mexico and are in constant dialogue with our international customers on the potential timing for international mobilizations. While the pandemic has been our major focus over the past few months, we have not lost sight of the journey we embarked on a year ago this week when our company founder, Mr. Ron Smith, made the announcement that he had decided to move on. Over the past year, we've had a laser focus on our core business. This focus begins with our core products such as flying leads, umbilical accessories and other subsea oil and gas equipment as well as the associated services such as offshore installation, maintenance and repair. Taking a step back from these products and services, we are also focused on our core competencies as a whole, which include our superior stainless steel welding capabilities, our world-class carbon steel welding capabilities and our unmatched offshore installation expertise, all of which are a value to companies beyond just our traditional customer base. The slowdown has brought about -- the slowdown brought about by the pandemic has opened up some opportunities for us to further market these competencies. Many organizations are still restricting their personnel from visiting different facilities. So our efforts are somewhat limited by our inability to supplement most discussions with on-site visits for the time being. However, we are seeing some positive traction, and we'll continue to pursue such opportunities to the best of our ability. Even before the onset of the COVID-19 pandemic, we're involved in a number of these discussions, especially around offshore installation services for non-oil and gas applications. At the risk of sounding like a broken record, we have even had multiple discussions with different companies about the use of our carousels for non-oil and gas power cables. These discussions are ongoing with some projects slated for 2021 and 2022, subject to market conditions. Shifting back to our core products and services. Another consequence of the recent shocks in the industry has been the widespread layoffs across all sectors of the industry. This attrition of talent is providing opportunities for us on 2 fronts. On the one hand, many highly experienced personnel are retiring, providing opportunities for us to step in and be an additional resource for those left behind who are either capacity constrained or may not yet have the same level of experience as the departing personnel. On the other hand, there is a wide array of available talent which we intend to capitalize on to enhance our team as soon as we are able to. While considerable uncertainty remains for the immediate future, we are beginning to see early signs of increased service and bidding activity, and we are cautiously optimistic about what the future holds for us as we remain focused on creating significant value for our shareholders by expanding our revenue base, managing our cash flow and adjusting our cost structure as business needs dictate. 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?

Thank you, Charles. Revenues for the second quarter of 2020 were $2.7 million compared to revenues of $5.3 million for the second quarter of 2019. This decline in revenue was a combination of having a lower volume of projects in process this year compared to the same period last year as well as the impact of travel restrictions and the decline in oil prices resulting from the COVID-19 pandemic. Despite having lower revenue, gross margin increased to 46% in the second quarter of this year, which represents a 9% improvement over the second quarter of last year. The improvement in gross margin was mainly driven by a higher mix of rental revenue, rent abatements received during the quarter and ongoing cost-cutting measures. Selling, general and administrative expenses were $2 million for the second quarter of 2020, which is flat when compared to SG&A expenses for the same quarter in 2019. However, SG&A expenses for the second quarter of this year include a $245,000 severance charge related to the elimination of the company's Chief Operating Officer position as well as the $448,000 reserve for doubtful accounts receivable that Charles touched on earlier. Excluding these charges, SG&A moves from approximately $2 million down to approximately $1.3 million, which would represent a 35% decline from the same quarter in the prior year. This decrease in SG&A expense is further evidence that the cost-reduction measures initiated last year are having a positive impact on the company's financial performance. As Charles mentioned earlier, we will continue to pursue opportunistic cost containment measures to improve profitability while still being able to support the growth and operations of our business. Looking at net income, we reported a second quarter net loss this year of $5.3 million or a loss of $0.42 per share. This compared to a net loss of $112,000 or a loss of $0.01 per share for the second quarter of 2019. The magnitude of the net loss for the second quarter this year is primarily due to recording a $4.5 million impairment charge related to certain long-lived assets, as discussed earlier by Charles. As of June 30, 2020, we remain focused on sustaining a disciplined capital structure that includes $3.7 million in cash, $3.9 million in working capital and no long-term debt apart from the $1.1 million PPP loan we received during the second quarter, most of which we expect to be forgiven. That being said, we understand and want to emphasize that preservation of cash is essential for our business to endure through these uncertain times. Despite limiting CapEx during the quarter to roughly $40,000 related to critical items, free cash flow was negative $483,000 for the second quarter this year compared to generating positive free cash flow of $179,000 in the second quarter of 2019. This year-over-year decrease in free cash flow was primarily due to prolonged payments from our customers during the quarter. Predictably, we received a number of customer payments for outstanding invoices shortly after the quarter came to a close. As of this morning, we have a little over $4 million in cash. In summary, the COVID-19 pandemic continues to disrupt the global demand for oil and apply pressure on commodity prices for the foreseeable future. To mitigate the economic disruption on our business caused by these macroeconomic events, we remain committed to executing our work to the highest standards for our customers while operating with as much capital efficiency as possible. With that said, thank you for your time, and I'll now turn the call back over to Charles.

Thank you, Trevor. Before we open up the call for questions, I'd like to take a moment to recognize our workforce and the resilience they have exhibited as we have navigated this once-in-a-lifetime black swan event. Our team has been extremely adaptive as we have constantly had to adapt to such a fluid environment. While our financial results may not reflect it yet, they have been the unsung heroes of all of our efforts. That concludes our prepared remarks today. So I will now turn the call back to the operator to take investor questions. Elisa?

[Operator Instructions] The first question today comes from [ Jim Riley ], a private investor.

Both quarter 1 and this quarter, I noticed you didn't report the backlogs in either your press release or the 10-Qs. Could you update that?

[ Jim ], thanks for the question. Yes. As of right now, we have about $11 million in backlog, $8 million of which is -- we have all the paperwork. It's fully contracted out. We have about another $3 million, which is in advanced discussions. The timing on it, we expect to consume most of it this year. However, there is so much fluidity in the discussions that anything is subject to change at any time.

Okay. And then just one more question. Even though it appears to me, okay, we still own 2 carousels, but at this point, they're both fully depreciated. Is that correct?

Yes. They're fully impaired at this point.

Okay. Then you're not planning on getting rid of them. You're just -- they are the future of the company, right? And if you do sell one, it's going to be at hopefully market value, correct?

Yes. Absolutely. This is more of a -- from the U.S. GAAP perspective, we could no longer carry them at that value.

Okay. I mean, yes, I've been a stockholder since 2014. And it's like, yes, we hear about the carousels every quarter, and I just want to check in just in case the other fellow isn't online.

[Operator Instructions] The next question comes from Walter Schenker of MAZ Partners.

Yes. The other fellow is online. And I have to just put my little fan. So Charles, do we think we'd be discussing the good old days at this point? What can or has it largely all been done, the company do from a cost standpoint going forward? If anything, I know you've cut both at senior management level. You still have a lease on a building. You need a certain number of workers. You have to retain them for future needs pretty much at this point, both from an SG&A and a variable worker cost standpoint, what you see is what you get and hopefully, in the future won't have to add, but there's really not much more you can do in cutting?

Yes. We've cut flesh. We are very close to cutting the bone. We are actually in a couple of departments really balancing out some areas where we're beginning to be capacity constrained. And so at this point, it would probably be more increasing rather than cutting some more. However, we're constantly evaluating our cost structure for any opportunities. The land lease is one, it's a big-ticket item that we'll be looking at closely.

Okay. And looking both to your backlog and what's in discussions over the next 6 to 12 months, the major driver of demand and volume is going to be more services or more umbilicals, flying leads and actual manufactured products?

Services will be a big driver in the 6 to 12 months. Part of that is with the shutdowns, with the lockdowns, a lot of maintenance work had been put on hold, and we're beginning to get -- we're actually executing a number of quick short-term projects. They may not be material to put out a press release, but it's $50,000, $100,000 here and there or $200,000 that keeps the lights on.

Okay. And you almost made the call, right?

I was...

You two are close to this.

Last time we spoke, we were closer than we've ever been. That sounds like a broken record, doesn't it?

Right. And the issue there was at their end a deferral of immediate demand as opposed to some problem with what you were offering a price?

Yes. With the deferral of demand.

Okay. But they may still be there at some future date, hopefully?

Hopefully.

Okay. And I -- just to review what someone previously said, the carousels are now carried at effectively 0? Or there's still some small residual?

Essentially 0 from a...

Okay.

Yes.

Which also means, I don't know if there's any depreciation or amortization left when you carry them as an asset. We don't -- we -- they will have no P&L effect, except for some small maintenance costs, which you still may have to do. And the only actual effect will be if we ever get a contract, it will all be a gain.

Yes, sir.

Or a revenue stream or something.

Yes, sir.

Okay. And you may have said it, but I don't think you did. So you're now up to $4 million in cash. You -- there are lots of obviously uncertainties going forward. But the burn in the second half is a few hundred or hundreds of thousands of dollars as you look at it now, it's not like $1 million for the second half, correct?

There are some -- everything is obviously subject to change, especially with all the discussion on second wave and more lockdowns. There are some signs of the second half being better than the first half, but it's too early to tell for sure.

Okay. But the actual cash burn -- okay. So you won't answer the -- you've said there were too many uncertainties but you won't want to answer the question is the correct answer.

I don't want to promise you anything specific. It's hard to have absolute certainty.

In today's environment, no one's promising anything, obviously. There are so many uncertainties both as to energy prices, energy demand as well as the ability to actually operate in the pandemic world. Obviously, there are lots of uncertainties. But you would have -- you're very comfortable saying we have sufficient cash on the balance sheet as far as we look into the future that we should not run into any financial difficulties.

Yes.

That's not forever, but...

Not forever, yes. Subject to everything, yes.

Yes. Okay. Well, good luck on the carousel.

As there are no further questions, this concludes our question-and-answer session. I would like to turn the conference back over to Charles Njuguna for any closing remarks.

Thank you, Elisa. And once again, thanks to all of you who joined our call today. We appreciate you taking the time to join us, your interest and support of Deep Down, and we look forward to speaking with you about our progress on the next earning call. And so let's conclude today's call. Thank you all.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.