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 2022 Conference Call. [Operator Instructions] As a reminder, this call is being recorded today, Wednesday, May 11, 2022. 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. Thank you. Please go ahead.

Thank you, Melissa. Good morning, and thank you for joining us today. Our first quarter results highlight continued softness in the offshore recovery, even though we have seen an increase in bidding activity since the beginning of the year. There has also been an uptick in drilling rig day rates, an early indicator of our customers' future aspirations. The first quarter continued the trend of being heavily reliant on service projects, leaving our manufacturing infrastructure, largely underutilized. We recognize that meaningful growth will only be realized from increased product sales, and we are keenly focused on growing this aspect of our business. . Trevor will provide further details on our financials in a moment, but first, I would like to provide a few updates. Since 2012, we have been reporting an ongoing legal dispute with one of our customers. We are pleased to finally report that both parties have accepted a mutual release of all claims and we can finally put this legal issue behind us. We are especially pleased not to have to carry this issue forward as we launch our new brand. Unfortunately, this issue has not impacted our ability to work with this customer. Speaking of the rebranding, customers have continued to receive it positively, and we have not encountered any operational issues from it. If anything, it has led to increased engagement with existing, former and potential new customers, providing us with lots of opportunities to discuss our future offerings. However, we are still awaiting approval of our name and ticker symbol change from the financial industry regulatory authority, better known as FINRA, which is why our filings continue to bear the name Deep Down. We anticipate approval prior to the next filing. Another major strategic initiative we have been working on is the relocation of our business. These plans are picking up steam now that we have taken possession of the main office building at the new facility. We have a 90-day build-out period and expect to be substantially moved in by the beginning of August. We do anticipate beginning limited operations at the new facility by July and already have customer finance components scheduled to be delivered there in July for value addition activities by our team. Aside from our increased ability to solve different customer segments, the new facility will also enhance our productivity, given that it is a fully climate control environment, and lends itself well to compartmentalize production. This will enable us to reduce the environmental impact of operations while providing a vastly improved work environment for our personnel. And speaking of future plans, to facilitate our growth intentions we have been evaluating our internal structure and incrementally restructuring the organization with our future goals in mind. We expect this exercise to continue through our move and have different internal working groups focused on various initiatives. These changes will also enable us to operate in alignment with our 3-pronged growth strategy, revolving around systems, technology and partnerships As a reminder, our systems pillar primarily relates to our legacy offerings in the oil and gas segment, but represents a shift in our approach to becoming a provider of integrated systems rather than just providing individual components. We are, however, seeing some opportunities beyond oil and gas, which we will be revealing in due course. We have previously realized success from this strategy, and we are actively engaged in discussions with some customers on integrated solutions. Our technology pillar revolves around the development of new equipment and associated services that struggle both traditional oil and gas as well as renewable energy sources. Our product development team is already hard at work and in just a short amount of time has already identified a potentially patentable offering. However, further validation of these efforts is required before we can publicly disclose the products. This pillar will also include our ongoing efforts to further improve the environmental friendliness of our existing equipment. And lastly, partnerships, which will involve collaboration with like-minded organizations, where we will seek to leverage our core competencies to jointly capitalize on future opportunities. This will likely be a longer-term strategy and could take different forms, such as project specific consortia, strategic alliances or operational joint ventures. We look forward to future announcements about these pillars and especially how they will contribute to the growth of our business. And with that overview, I will now turn the call over to our Vice President of Finance, Trevor Ashurst. Trevor?

Thank you, Charles. For the 3 months ending March 31, 2022, Deep Down generated revenues of $3.6 million, which represents an 8% decrease when compared to revenues of $3.9 million for the 3 months ended March 31, 2021. This shortfall in revenues during the quarter was driven by project mix and reflected the current demand for short duration projects, utilizing our support services and rental solutions. Gross profit was $1.4 million or 34% of revenues for the first quarter of 2022. This represents 5% decrease in gross margin compared to the $1.7 million or 38% of revenues we generated in the first quarter of 2021. Margin compression came in the form of low-margin pass-through third-party costs incurred on slight projects and a slight increase in the cost of labor during the most recent quarter. Selling, general and administrative expenses were $1.7 million in Q1 2022 compared to $1.5 million in Q1 2021. The 9% increase in SG&A was mainly due to increased branding and marketing expenses related to our recent rebranding efforts Charles touched on earlier. Turning to the bottom line. The company reported a net loss of $264,000 for Q1 2022, which translates to a $0.02 loss per diluted share. This compared to generating net income of $148,000 or $0.01 per share for Q1 2021. The comparative decline in net income was mainly driven by the aforementioned decline in revenues and increase in administrative costs associated with our rebranding efforts. Shifting to the balance sheet. Our capital structure is composed of $6.5 million in working capital, which includes $2.7 million in cash and $6.3 million in trade receivables as of March 31, 2022. This is compared to having $7.1 million of working capital as of March 31, 2021, which includes $3.7 million in cash and $6 million in trade receivables. We also have an outstanding $650,000 receivable related to employee retention credits claimed under the provisions of the Cares Act. We expect to achieve these funds at some point over the next few quarters. In summary, we remain focused on providing our customers with a suite of integrated solutions to support the full life cycle of the project from design and engineering and project management to manufacturing, installation, maintenance and asset life extension. We have the most experienced and dependable personnel in the industry, which gives me confidence we will achieve our ongoing pursuit for growth as the year progresses. Thank you for your time. I will now turn the call back over to Charles.

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

[Operator Instructions] Our first question comes from the line of [ Frank Veneski ], a private investor.

Charles, a couple of questions. I noticed you bought some of the Smith's shares back during the quarter. What is his current ownership -- remaining ownership? Do you know that?

Frank, thanks for the question. Yes, he is currently at about 22% between him and his wife.

Okay. Is there any indication that he would want to sell more at these prices?

I haven't spoken to him. I know he's on the call as well. So -- at this point, I'm not sure what his future intentions are.

Okay. Second question, you're moving into the integrated systems or attempting to move into that area. What are the dynamics there? What's the average project size? Or what other talents do you need to be able to be successful in that? Could you flesh that a little bit and maybe your timing for when the first order might come in?

Okay. To answer the last question, I'm hesitate to comment on when the first order may come in, but we do have some opportunities that we are hopeful for within the next couple of quarters or thereabouts. What it does in terms of magnitude, what we found in the past is we've had clients come to us where we would offer some products, individual products on related scopes for our projects. And so we've had a case in point in the past where we had a couple of projects, which were worth a few million dollars each for different scopes and then about 15 to 18 months later, there was an installation scope that we would then -- the client would go out to different vendors to bid on. And then down the road, they would have other services. When we offer it as 1 package, we ended up having more than -- we announced a $13 million purchase order, where we had multiple scopes of about a 36-month period, which ultimately ended up being about $20 million, which is managed by one senior project manager, and a special projects team. And what that does, it reduces the risk profile for the clients. They were able to -- we're able to work together to project their cash flows and that has also enabled us to be continuously in the discussion and to help them with their planning. As far as additional skill sets, if we're successful, we may need to increase our project management team and potentially our engineering team, but not as much as the increase in the value of the contracts we would have because it would also enable us to plan better and project better of what's happening.

Now would you have to add those skill sets before you actually finalize the order? Or can they come in afterwards?

I think it depends. It depends on the depth of the visibility. In some cases, like in the case I spoke about, we were able to add someone when we knew we had -- we are on the verge of signing the contract because you have the visibility. And so we would do it when we have a good indication of the direction we are heading. So -- And to provide a little more color. Last week, we had a good discussion with one of our key target customers on that, and they immediately ask for a follow-up meeting. So a few of us will be having a discussion in the next few days. And so as over the next 4 to 6 weeks, hopefully, we'll get an indication of the direction they're going for some projects they are hoping to execute towards the end of this year or into next year, and therefore, that would drive our personnel decisions.

Great. One final thing. You mentioned a little bit in your prepared remarks, I didn't quite catch everything you were saying. But in the past, you've talked about utilizing your skill sets and technology in areas other than offshore drilling. Could you flesh out that a little bit and say what you're thinking about there as far as areas that you might be -- may be possible for that? Could you just flesh out a little bit, if you would, Charles?

Okay. Thanks. Good question. The low-hanging fruit we've spoken of in the past is offshore wind and primarily around offshore wind cables. Offshore wind cables are just long cable similar to the cables we provide -- we work on our manufacturing and cases for offshore oil and gas. And therefore, we've spoken previously about the spooling and transpooling, which is essentially coiling them up and uncoiling them using our existing equipment. However, offshore cables also have certain accessories where they connect the platforms that are similar to accessories that we build right now for the oil and gas industry. And we are seeing some opportunities around that. And our R&D team are watching on some products that we're hopeful to provide around that area. Another area we are seeing some opportunities is on hydrogen and especially the certain tubing, certain components that we are seeing that are used and are going to be used in the hydrogen space that we believe are fairly similar to what we've been using in oil and gas. And we have core competencies around the integration of those systems, working with the alloys and the alloy welding for those kind of systems and watching with some of the structures that need to -- in some cases, for subsea, but also for onshore, there's commissioning that's needed that we perceive is relatively similar to commissioning we perform right now on the oil and gas side. And then finally, around subsea storage, subsea battery storage is a major issue for offshore renewables and we're talking to some companies where they would build the technology, and then we will provide the hardware and the installation capability to get it subsea. So those are just a few of the opportunities we are pursuing right now.

Just one follow-on there. On the offshore wind, the unspooling, how is it done currently? And what does -- what does Deep Down bring to that as far as improving it?

So right now, the -- a lot of the incumbent suppliers have been European suppliers. And so if I may speak to a specific case that we spoke about last year, where we were going -- they wanted to develop a U.S. supply chain, because it's a nascent industry in the U.S., there have not been many companies doing it. And so what we were bringing to the table was a U.S. alternative and ultimately, we lost that project to a European incumbent. There are -- the export lines, which are larger cables that would be installed by the installation contractors with the larger vessels, and then they have inter-array cables. In this particular case, they wanted a supplier, who would manage the shorter lengths, provide certain installation equipment and manage them key side, which is what we are bringing to the table as a local supplier who is used to managing long cables.

Our next question comes from the line of [ Mike Travis ], a with Private Investor.

Charles, question has been a shareholder for a few years and gone through the downturn. And if you told me that WTI was going to be at $100 a share or $100 a barrel, I would have thought that our revenue would have been a lot further along. Is there a factor that's kind of holding us back or holding the industry back from getting back to the operational levels that we were at pre-2014?

Mike, thanks for the question. I share your sentiment around the expectation in WTI. What we are finding from the operators is that while the prices are now -- have now ramped up, they've still been a little gun shy to pull the trigger because we are -- what we provide is the production side. So there's a bit of a lag by the time it flows down to where we are. When the prices initially spiked, we were hopeful that they would immediately pull the trigger, but they were hesitant. However, we are now seeing an increase in bidding activity and increasing conversations. And the scope of projects, like Trevor alluded to, has been very small so far, but we're now seeing larger projects, some confidence around larger projects, which is what's enabled us back in 2014, 2015 to have the revenue levels that we had. And we're now -- and that goes back to my earlier comment about products versus services. Operators have been very focused on short term service projects more on the maintenance side, but they now seem ready to execute new -- what I call greenfield projects and to go into development.

Thank you. Ladies and gentlemen, this concludes our question-and-answer session. I'll turn the floor back to Mr. Njuguna for any final comments.

Thank you, Melissa, and thanks to all of you who joined our call today. We very much appreciate your interest and support of Deep Down, and we look forward to speaking with you about our progress on the next earnings calls. And that concludes our call today. Thank you.

Thank you. This concludes today's conference call. You may disconnect your lines at this time. Thank you for your participation.