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

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the Deep Down's First Quarter 2021 Conference Call. [Operator Instructions] As a reminder, this call is being recorded today, Tuesday, May 11, 2020 (sic) [ 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'd like to turn the call over to CEO, Charles Njuguna. Please go ahead.

Thank you, Rain. Good morning, and thank you for joining us today. With oil prices holding steady above $60 per barrel, optimism is increasing for a modest recovery of the oil and gas industry. However, many industry projections still caused by stronger recovery possibly in 2022. Despite the macro events of the past 15 months, we were able to generate positive net income during the first quarter of this year for our second consecutive quarter of positive profitability, the first time we've been able to do so since the first and second quarters of 2017. I would like to note that at the time, our revenues were 48% higher. This positive trend is evidence of our team's efforts to better utilize our limited resources. As we mentioned during our investor call a few weeks ago, our service teams are now able to travel to most international jurisdictions, which enabled us to successfully perform different offshore scopes of work during the first quarter. With the increasing prevalence of vaccines, we are cautiously optimistic that travel restrictions will continue to be lifted. Looking towards the rest of 2021 and beyond, we are seeing a marked increase in bidding activity especially for smaller scopes of work. As we previously discussed, there is an increase need for maintenance work as our customers work to extend the life of their assets. We have also seen increased interest in our carousels and other rental equipments. However, given the prevailing uncertainties in the industry, many of our customers are still holding off on committing to larger new projects. Another challenge we are facing is significant increases in the prices of raw materials. For example, we have seen more than a 50% increase in the price of certain steel components just since July of 2020, which unfortunately were not able to pass on to our customers. While this is not isolated to us, our hope is that prices will normalize sooner rather than later, otherwise, this could further delay the full recovery of our industry, due to increased project costs. As we look at the broader energy industry, we are continuing to evaluate opportunities around the transition to a higher proportion of non-traditional energy sources. While some of these sources appear to provide a lot of promise for the future, the timing of cash flows continues to be uncertain. Speaking of cash, we continue to await a response from the Small Business Administration on our application for forgiveness for the initial Paycheck Protection Program loan, better known as PPP which we received back in April of 2020. At this time, we still expect to get most, if not all of it forgiven. We have not yet begun the forgiveness application process for the second loan, which we received in March, but we expect to do so as soon as our covered period for the loan is satisfied. This loans provided us the much needed buffer, especially as some of our customers have prolonged their payment terms to us. Trevor will discuss our financial position further in a moment. Our consecutive quarters of profitability also moves us 1 step closer to be able to secure our credit facility with our bank, as the bank needed to see consistent evidence of our improved financial stewardship. Finally, we recognized under the past -- that in past periods, we often published the backlog of in-house projects we are working through. Given the heavy proportion of service what we currently have and foresee for the remainder of this year, we are hesitant to set any expectations based on this number. While we currently have close to $10 million of committed work on the books, most of which is currently slated for this year. We are also aware that some of this projects could easily be pushed to next year. On the flip side, our track record of being extremely nimble and responsive to our customer's needs continues to bear fruits when our customers are faced with emergencies. A case in points with an oil company that had a situation developed at an offshore facility in the Gulf of Mexico, early this past Saturday morning. By Saturday afternoon, we have developed a plan of action, had some of our personnel come in to our shop late Saturday to evaluate materials on hand, and we were waiting on the customer to pursue 1 final option offshore before we started on our recommended solution. Early Sunday morning, our customers offshore team determined that their efforts in the field would not resolve their issue and they would need our proposed solution. We then had some of our personnel coming to work that morning, and by 10:00 p.m. on Sunday nights, we had a unit built and ready for testing yesterday morning. As we speak, the unit is headed towards the dock along the Gulf Coast, followed closely by members of our team, who will be providing further services to the customer. Such projects cannot be included in our backlog, since we are not able to foresee them. But they happen frequently and are a key parts of our financial results, and we expect this trend to continue for the rest of the year. Our focus will therefore remain on the levels within our control, which are strategically managing our customers and our cost structure, as we relentlessly pursue opportunities to further grow our business. 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. For the 3 months ending March 31, 2021, Deep Down generated revenues of $3.9 million, which represents 9% increase when compared to revenues of $3.6 million for the 3 months ended March 31, 2020. This increase is a result of having a more consistent level of project activity throughout the first quarter of 2021 versus 2020, which is mainly due to our customers working through their backlog of projects that were previously delayed in 2020 due to the pandemic. Gross profit as a percentage of revenues increased to 44% in the first quarter this year, which represents a 13% increase in gross margin compared to the 31% we generated in Q1 last year. This increase in gross margin was primarily driven by having a larger proportion of higher margin, service work and equipment rental this quarter. Selling, general and administrative expenses decreased 9% to approximately $1.6 million for the first quarter 2021, compared to approximately $1.7 million in Q1 of 2020. This decrease in SG&A expenses was primarily due to the cost reduction initiatives implemented by the company last year. We remain motivated to pursue opportunistic cost containment measures to improve profitability while being mindful of supporting the growth and operations of our business. Turning to net income, the company reported net income of $148,000 or $0.01 per diluted share for the first quarter this year. This is compared to a net loss of $637,000 or a loss of $0.05 per share for the quarter -- first quarter of 2020. The improvement in net income was mainly driven by higher revenue and improved gross margin in Q1 of this year compared to the same period last year. Our capital structure includes total $4.7 million in cash and $5.2 million in working capital as of March 31, 2021. In early March, we received the second $1.1 million PPP loan, which has allowed us to strengthen our workforce as we fund working capital. As Charles mentioned before, we continue to await guidance from the SBA, regarding its decision on the forgiveness of the entire balance of our first PPP loan. We expect to receive the SBA's decision at some point during the second quarter of this year. We also expect to apply for forgiveness of our second PPP loan once the cover -- excuse me, the covered period has been satisfied. So in summary, we began to see positive signs of increased market activity in the fourth quarter of last year, as commodity prices gradually recovered to healthier levels. This translated to increased orders in the fourth quarter of 2020 and that trend continued in the first quarter of this year and we're encouraged this recovery will carry on throughout the rest of the year. Looking forward, 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. With 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 turn the call back to the operator to take investor questions. Rain?

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

Actually, there'll be 2 questions. First, as a substantial portion of your revenues at least at this point are service related, I'm trying to get a little more color on your cost increases on materials and how significant that really is given the mix of -- the current mix of business?

We -- while we do have a fair amount of service work, the service work includes us building equipment which we then install or which we then use for service. And so, in that case in point, we have our projects with the certain oil company that we need to build certain units, we're going to use for offshore installation. The units themselves are probably about $300,000 worth, and the overall project will be $1 million and we have and we had close to $100,000 increase in the cost of materials on that project, which was already committed and we tried to -- we talk to the customer, but there is need across their project right, so there is no opportunity for a variation order. So we are fortunate that we have more service work, a high proportion of service work right now, but that is still a significant hit to their -- to the company.

And given that trend, and I realized revenue is a very important -- it's a competitive environment, is there an ability going forward to price a contract for materials at time of, when you use it or some sort of protection going forward?

We are having discussions internally about that. One of the things that was with a perfect storm because we had certain projects where the pricing was committed last year, but then as things are opening up nice and we're executing and so it's been harder. As we look towards the future, we are putting in -- widening in our contracts to protect us down to an extent. However, we're also in an environment where bigger customers who are not willing to participate in smaller projects are doing so for the sake of keeping their people active, so there is some price pressure as well. So it's a fine -- the fine line we are balancing, but yes, we are looking to do everything we can to protect ourselves.

And the second question, the rental lease, whatever the right semantics is on the carousel, that -- those revenues were minimal in the more first quarter and will mostly be in the next couple of quarters, is that a correct statement?

Yes.

But that will be completed this year?

Yes, there is significant -- the biggest -- we currently expect the biggest proportion of revenues will be in the third quarter, but there will be some of it in the second quarter as well.

And while there were expenses relating to that, it should be good margin business given we've written off the carousels?

Yes, sir.

And what have you done to get the other carousel employed?

We actually -- interestingly, we actually have quite a bit of interest, but I am not going to make any promises, but I do hope to give you a call again at some points.

And just lastly, I understand it's been -- flight has been very difficult, but we are building cash, and I realized a little of it came from the second PPP loan. But do you have any sense -- does the Board have any sense on, at some point returning some of that cash, I realize not immediately and will be surely happen if we got a carousel but how much cash do you really feel you need to just run the business?

So, to answer the first part of your question, I think, obviously, at this point, we haven't been forgiven on any of them, so we can't say too much. One thing we do want to -- we touched on it in our comments is that, we are also seeing our customers begin to push to really prolong out of their payments. So some of the bigger customers are pushing us heavy towards net 90, and therefore, we need the cash to fund that. As far as when the time would be, I'm not ready to make any commitments on timing on buyback or any of that, but we -- as we are able to, we'll have that discussion with the Board. But if we do sell a carousel, yes, that would be definitely on the table.

[Operator Instructions] Your next question comes from Christie Doucet from Doucet Capital.

It's Christie Doucet. So, I just wanted to touch a little -- the bit the previous caller asked a couple of questions I had, but the only question I had was on your backlog. How big is your backlog, what percentage of that can you actually execute given COVID? And how does that backlog compared to historical backlogs?

Hey, Chris, thanks for the question. Yes, we touched on earlier that our backlog right now is close to $10 million. If everything was -- it's heavily depend on the customers determining when we can do it. For instance, we do have $1.5 million that would entail some international travel, which as jurisdictions open up, customers also have their own decisions to make around that. Again, this could easily move into next year, so like we said earlier, we are not able to commit to a definite timeline on it, but all funds has been constant, we are optimistic that we'll be able to execute on all of it as of today.

[Operator Instructions] There is no further question at this time. You may continue.

Thank you, Rain, and our thanks to all of you who joined our call today. We appreciate your interest and support at Deep Down and look forward to speaking you -- to speaking with you about our progress on the next earnings calls, and so let's conclude today's call. Thank you all.

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