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

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to Deep Down's Fourth Quarter and Full Year 2020 Conference Call. [Operator Instructions] As a reminder, this call is being recorded today, Wednesday, March 31, 2021. A detailed disclaimer related to Deep Down's forward-looking statements is included in the press release issued Tuesday 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'll turn the call over to CEO, Charles Njuguna.

Thank you, Joelle. Good morning, everyone. While the oil and gas industry continues to be impacted by the global pandemic, the recent increase in the price of oil has provided some cautious optimism for our customers, coupled with a gradual reopening of various jurisdictions and increased availability of vaccines. Discussions about a slow resurgence are gaining prominence, though the timing of a full rebound is still uncertain. As a company whose products and services are primarily tied to the offshore industry, the oil price crash and the global pandemic had a significant impact on our business in 2020, resulting in a 31% reduction in revenue from 2019 to 2020. In response to this sharp decline, we took the opportunity to critically analyze our cost structure and in the process, reduced our selling, general and administrative expenses by 30% from the year 2019 to the year 2020. Another outcome of the economic disruption resulting from these blackstone events was our decision to adjust the value of some of our equipment. During the second quarter of last year, we impaired the value of our carousels, but at the time mentioned that we did not expect this accounting adjustment to have an impact on future opportunities. We are therefore pleased to recently announce the receipt of an order for the rental of one of our carousels and associated services. Incidentally, this adjustment enabled us to get creative with our contracting strategy, in order to help our customer lower their project costs and still have a profitable outcome for our company. When we held our third quarter investor call back in November, we also discussed increase in travel to perform service work during the fourth quarter. These projects, combined with other engineering and manufacturing projects we had in-house enabled us to generate net income in the fourth quarter. Our ability to generate a profit despite the prevailing economic conditions is a testament to the efforts of our team. Heading into 2021, we have now been able to execute some more of the offshore campaigns, which were put on hold at the outset of the pandemic. A case in point is a project I mentioned during our full year 2019 call held a year ago today. At the time, we mentioned a team of our service personnel, who were originally scheduled to travel to Trinidad during the first half of March 2020. This team finally traveled this month, almost a year to the day since the originally scheduled date. As we look towards the rest of this year, we expect to execute more delayed projects. In addition to other opportunities we are pursuing, there are few jurisdictions yet to fully reopen. And with the reports of new waves in some parts of the world, timing of these campaigns remains uncertain. Another area we discussed during our call last year was personnel changes within the industry. In light of the turmoil in our industry, many organizations were forced to make tough personnel decisions in order to manage their finances, which resulted in organizations having to lay off many of their top performers. While Trevor will discuss the financial particulars of the small business administrations, Paycheck Protection Program loans, better known as PPP loans, the practical benefit of these loans has been our ability to attract talent we may not have been able to afford. While we also had to make some personnel adjustments of our own, we have recently been able to create and fill some critical roles, which has significantly increased the standard of our product and service offerings. While I would be happy to highlight what they each bring to the team, in the interest of time, I will only introduce one of them. We recently hired an industry veteran, by the name of Jeff Gunn, as our new engineering manager. Jeff's long track record in the industry includes experience with our much larger competitors as well as experience at Shell, ExxonMobil and Hess, all of which provides us with much needed customer perspectives as we face different project situations and evaluate different strategic options. It was only after he joined us that I realized how many companies, including some of our competitors, who are seriously considering having him enjoin their teams. In addition to his wide-ranging industry experience, Jeff most recently was in the solar industry, which is very helpful as we evaluate different options to support what is widely referred to as the energy transition. That is the effort being undertaken to increase the use of non-oil and gas sources of energy. While the timing of cash flows from such projects is uncertain, we are actively engaged in discussions with various parties, while at the same time, working on different internal initiatives to reduce emissions from our current operations such as by developing cleanup binding equipment. We also previously discussed our efforts to shift our focus from core products and services to core competencies, efforts which have begun to bear some fruits as we are having very detailed discussions with potential partners and customers in the renewable power generation segment. These discussions include opportunities for the use of our carousels, and other installation services and equipment for different types of power cables, evaluation of collaborative prospects with technology providers of unconventional subsea power sources and most recently, an unsolicited request to potentially design, engineer, manufacture and install an innovative geothermal solution. Again, I would like to emphasize we are not yet able to predict the outcome of these discussions. But we intend to diligently pursue these opportunities without losing sight on our existing business. With a team we now have in place, I am confident we can maintain the right balance between the two. Speaking of prospects, let me now turn the call over briefly to our Vice President of Finance, Trevor Ashurst, for a review of our 2020 financial results and our financial ability to capitalize on future prospects. Trevor?

Thank you, Charles. For 12 months ending December 31, 2020, Deep Down generated revenue of $13 million, which represents a 31% decrease in revenues when compared to revenues of $18.9 million for the 12 months in December 31, 2019. This decrease is primarily due to having a lower volume of projects in process in 2020 versus 2019, which is primarily due to the combined decline in oil prices and the impact of travel restrictions stemming from the coronavirus pandemic. However, revenues for the fourth quarter of 2020 increased to $3.5 million, which represents a 19% increase when compared to the $2.9 million of revenue for Q4 2019. Gross margin increased to 39% in Q4 of this year, which represents a 14% increase in gross margin compared to the 25% generated in Q4 of last year. On a full year basis, gross margin in 2020 was 38%, which represents a 2% increase compared to gross margin of 36% in 2019. The collective increase in gross margin was primarily driven by receiving rental payments and having a larger proportion of higher-margin service work and equipment rental in 2020. Q4 2020 operating expenses were $1.2 million or 35% of revenues. This is compared to Q4 2019 operating expenses of $3.2 million or 110% of revenues. However, the Q4 2019 figure includes a $396,000 charge to related equipment -- related to equipment identified as nonstrategic to the core operations of the business and an $850,000 charge related to an accrual for certain legal matters. So excluding these legal and impairment charges, operating expenses for Q4 2019 on an adjusted basis were $2 million or approximately 68% of revenues. So the $783,000 or 39% decrease in operating expenses was driven by lower payroll costs, lower legal costs and ongoing efforts to reduce operating expenses during Q4 when compared to Q4 of '19. Switching to full year. Our 2020 operating expenses of $11 million or 84% of revenues included an asset impairment charge of $4.5 million related to our carousels, whose future cash flows cannot be objectively projected at the time the charge was made as well as a onetime charge of $245,000 related to the elimination of the COO position at the company. Excluding these charges, Deep Down's full year 2020 operating expenses on a normalized basis were $6.2 million or 48% of revenues. This is compared to full year 2019 operating expenses of $9.6 million. After excluding the legal and asset impairment charges previously mentioned, in addition to a onetime charge of $349,000 related to the resignation of the company's founder, the company's full year 2019 operating expenses were $7.9 million or 42% of revenues. So the $1.7 million or 21% decrease in normalized operating expense was primarily due to the company's ongoing efforts to remove excess costs. Our focus will be to continue to pursue opportunistic cost containment measures to improve profitability while being mindful of supporting the growth and operations of our business. As for the bottom line, the company reported a 2020 net loss of $6.1 million or a $0.48 loss per diluted share as compared to a net loss of $2.8 million or $0.21 loss per diluted share in 2019. The net loss in 2020 was principally due to lower revenues from the global economic disruption caused by the coronavirus pandemic in addition to incurring the aforementioned nonrecurring operating and impairment expenses. On a positive note, I'm happy to report that Deep Down generated net profit of $120,000 or $0.01 per diluted share in Q4 of 2020 compared to a net loss of $2.5 million or a $0.19 loss per diluted share in Q4 '19. We remain focused on sustaining a disciplined capital structure that includes $3.7 million in cash and $4.1 million in working capital as of December 31, 2020, and our current cash balance sits at over $4.5 million. In April of last year, the company obtained a $1.1 million PPP loan, which was used to finance payroll in the following months. In addition, we applied for and received a second $1.1 million PPP loan earlier this month, which allows us to fund gross working capital as we strengthen our workforce. We have submitted our application for forgiveness of the entire balance of our first PPP loan. However, we've yet to receive guidance from the SBA regarding the timing or ultimate outcome of this forgiveness application. We also expect to apply for full forgiveness of our second PPP loan once the covered period has been satisfied. In summary, as 2020 came to the close, we started to see encouraging signs of increased market activity as commodity prices gradually recovered to healthier levels, and this macro trend translated to increased orders in the fourth quarter of 2020. Looking forward, our balance sheet positions us well for continued growth and allows us to make strategic investments when appropriate. We'll devote our efforts to providing our customers with superior products and unmatched services, all while operating with as much capital efficiency as possible. That said, thank you for your time, and I will now turn the call back over to Charles.

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

[Operator Instructions] Our first question comes from Walter Schenker with MAZ Partners.

I'd say congratulations on breaking even and making money in the fourth quarter, which is a good thing. Could you walk me through the economics of a rental of a carousel, where the asset has already been written off. Does that mean that the costs associated with that rental are reduced versus if it had not been written off?

Walter, nice to hear from you. And thanks for the kind comments. So yes, essentially, because we have very -- essentially no cost on the book for the carousels as far as depreciation goes, we are able to offer the carousel piece at a very low price to our customer and generate revenue from the associated services, which in this case will be spooling on or rather putting the large umbilicals on the carousel, and therefore, we have quite a bit of personnel costs. And because of the unique nature of these projects, we will incur some costs to strengthen the carousel itself to put it on the barge. However, we do expect to make some money on the project.

To make some money means this would be similar to the profitability of the overall business or possibly somewhat less. And I don't know what the normal profitability of your business anymore is anyway.

Yes, I think it will be similar to establish projects where we provide installation services and installation equipment. I hope the margins...

Okay. So you didn't give it away.

Not at all, not at all.

Okay. So now that you...

But we are able to operate lower than we would have if we hadn't taken that adjustment.

So now that you have one contract, why don't you give us just a brief thought on how we get a second or a third one, referring somebody who really has to have a carousel?

I was expecting that question. We -- as I touched on briefly, we're talking to multiple people about umbilicals in the oil and gas space. However, we are also seeing some opportunities in markets such as offshore wins, but I do want to throw in the caveat that many of those are fairly far down their own strategies. Potentially late 2022 or 2023 projects. While I'm cautiously optimistic that the timing that it took for me to make the past call to you will be shorter for the second one. I don't know yet exactly when that will happen.

And just as a general comment, with somewhat higher energy prices with the balance sheet being in good shape, especially benefiting from the second PPP loan, are there opportunities beyond? I mean, do we just sort of roll along it -- I mean, we'll pick up something from the carousel, but is the base business largely, as you look forward, breakeven? Or are there big enough opportunities to really move the needle and get this company back to a meaningfully higher level?

There are opportunities to really make positive contribution of the stockholders that we see down the road. Scale, obviously, is a factor because of our size, but we do see opportunities.

Okay. And with this point, since we finished years of these charges and writeoffs, litigation, except for one thing going back about 8 or 9 years, is largely all done with?

Yes. We do have cash flows from this -- from the other settlements, which will continue through the rest of this year. But knock on wood, our goal is not to have any more pop up.

[Operator Instructions] I am not showing any further questions at this time. I would now like to turn the call back over to Charles Njuguna for closing remarks.

Thank you, Joelle, and our thanks to all of you who joined our call today. Before we go, I'd like to take a final moment to recognize our team. As I mentioned earlier, it was a year ago today that we had this call to discuss our 2019 financials. At the time, I knew that the next day, we would be pulling the trigger on a number of key decisions, which we felt were necessary for us to navigate the economic disruption before us. While I always knew that we had a good team in place, I was pleasantly surprised by how supportive everyone was, even when the decisions severely impacted them personally. I cannot adequately express how gratifying it has been to see our team step up during the past 12 months. We really do have the best team in the industry. And with that, let's conclude today's call. Thank you, everyone.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.