Koil Energy Solutions, Inc. (OTCQB:DPDW) Q1 2022 Earnings Conference Call August 9, 2022 10:00 AM ET
Company Participants
Charles Njuguna – Chief Executive Officer
Trevor Ashurst – Vice President, Finance
Conference Call Participants
Walter Schenker – MAZ Partners
Frank Wisneski – Private Investor
Ron Smith – JUMA Properties
Operator
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, Tuesday, August 8, 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, koilenergy.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.
Charles Njuguna
Thanks, Gary. Good morning and thank you for joining us today. Our second quarter results reflect the ongoing challenges in the offshore oil and gas industry. Inflation, certain geopolitical events and the possibility of a prolonged recession continue to weigh on our customers’ willingness to come into long-term deepwater projects. This hesitation was best exemplified by a couple of oil and gas-related carousel opportunities, totaling more than $6.5 million which was supposed to have kicked off during the first half of this year, but were both delayed for various reasons.
We have gone through several rounds of clarification with the customers and in both cases, had commitment dates by which the customers expected to initiate the projects. Unfortunately this is a situation we have witnessed with other projects as well, but we remain cautiously optimistic that such situations will abate in coming months. While these occurrences are outside our control, we remain focused on the levers within our control as we work to grow the business.
Speaking of growth. During the second quarter, we reaped some benefits from our efforts to expand beyond our traditional lines of business. We successfully provided cable management services for our military projects in the northern half of the United States and received an order to provide ongoing hydrogen energy-related services on what is currently slated to be a long-term ongoing basis. These projects not only demonstrate the transferability of the expertise we have developed over the past 25 years, but it also validates our strategy to shift our focus from core products and services to core competencies. In addition to these projects, we are evaluating various opportunities in other areas of the energy spectrum, such as shallow water applications for offshore wind and even carbon capture utilization and storage. Aside from these non-traditional opportunities, we are seeing a marked increase in building activity within our traditional oil and gas business.
During the first half of the year, we primarily worked on service projects. This was a result of most of our customers not having budgeted for new developments in 2022. But as we look towards the future, we are engaged in active discussions about various solutions for new developments in 2023 and beyond with our customers displaying high levels of expectation for budget approvals for these new developments.
Concurrent with these discussions, we are capitalizing on the reduced utilization of our internal resources to engage in various research and development activities, with the intention of increasing our share of our customers’ wallets. These efforts have enabled us to identify opportunities for new products for both traditional oil and gas as well as renewable energy applications with even some early promise of potentially patentable offerings. We will provide further updates in due course as these efforts come to fruition. These growth efforts are in addition to the strategic initiatives we previously announced, mainly the rebranding and the relocation of the company.
As far as the rebranding goes, 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. And speaking of the relocation, we now have full possession of the new facility, which we will be moving into and we are targeting to complete the move within this third quarter, which will enrich our team’s ability to support the needs of our increasingly diverse customer base.
And with that overview, I will now turn the call over to our Vice President of Finance, Trevor Ashurst. Trevor?
Trevor Ashurst
Thank you, Charles. For the 3 months ending June 30, 2022, Deep Down generated revenues of $3.5 million, which represents a 23% decrease when compared to revenues of $4.5 million for the 3 months ended June 30, 2021. This year-over-year shortfall in revenues was driven by project mix that reflects current demand for shorter duration projects utilizing our support services and rental solutions.
Gross profit was $1.5 million or 42% of revenues for the second quarter of 2022. This represents an 11% increase in gross margin compared to the $1.4 million or 31% of revenues we generated in the second quarter 2021. The improvement in gross margin was the result of project mix. More service and rental work means we incurred less material costs. Additionally, several of the larger contracts we worked on last year included some low-margin pass-through third-party costs that were not repeated this most recent quarter.
Selling, general and administrative expenses were $1.4 million in Q2 2022 compared to $1.8 million in Q1 of last year. The 19% decrease in SG&A was mainly due to incurring a $534,000 charge to our reserve for doubtful accounts last year that was not repeated this year.
Turning to the bottom line. The company reported net income of $177,000 for Q2 of 2022, which translates to a $0.01 per diluted share. This is compared to generating net income of $724,000 or $0.06 per share for Q2 of 2021. The comparative decline in net income was mainly because we recorded the forgiveness of our first PPP loan in Q2 of last year, which, of course, is not repeated in this most recent quarter.
Now shifting to the balance sheet. Our capital structure is composed of $6.3 million of working capital, which includes $3.4 million in cash and $4.7 million in trade receivables as of June 30, 2022. This is compared to having $7.1 million of working capital as of December 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 the employee retention credits claimed under the provisions of the CARES Act. We still do not have visibility on when these credits will be paid, but we expect to receive these funds at some point over the next few quarters.
This concludes the financial summary for Q2. So thank you for your time. And I will now turn the call back over to Charles.
Charles Njuguna
Thank you, Trevor. That concludes our prepared remarks today. So I’ll now turn the call back to the operator to take investor questions. Gary?
Question-and-Answer Session
Operator
[Operator Instructions] Our first question comes from Walter Schenker with MAZ Partners. Please go ahead.
Walter Schenker
Hi, guys.
Charles Njuguna
Good morning, Walter.
Walter Schenker
A few unrelated questions, maybe they are related. Is the – does one expect to be so – and I have no problem buying it under book and whatever, expect to be selling some shares on a regular basis, and we intend to buy them? I’m not saying it’s rolling. I’m not complaining. I’m just trying to understand how this works.
Charles Njuguna
At this point, I’m not aware of Ron’s long-term intentions, but he is on the call, and I could – you could follow-up afterwards, I could put in him, and he can better answer that.
Walter Schenker
Okay. Well, I don’t know if I want to know that if I had, something I’m supposed to know only me and not others. Okay. But at this point, there is no – when something happens, it either does or doesn’t and that’s – there is no program in place, know it, which is the public information.
Charles Njuguna
Yes, we do not have a program in place, but we what we’ve done historically has been opportunistic sales as our cash situation unfolds and as the situation comes up with him.
Walter Schenker
Okay. Then I’ll just smile, and you can answer the question that’s got to be asked on every call.
Charles Njuguna
Yes. We do have – I think I mentioned that we have had some carousel opportunities, and we actually do have some prospects outside oil and gas, but we will see how this unfolds in the coming months.
Walter Schenker
And as of today, one or neither of the units are being – generating any revenue?
Charles Njuguna
As of today, that is correct, none of them are generating any revenue.
Walter Schenker
Okay. And I don’t appreciate where we are in the cycle in deepwater production, although it seems as if current oil prices, while we’re surely not in the boom, you hear about money being spent by large oil companies to continue to do deepwater drilling. Could you give a little more color as you look at the legacy or the business – large of the business, which supports deepwater drilling, not in maintenance, but in new projects, if there is much out there that you are currently competing for or not or early on in RFQs or something?
Charles Njuguna
Yes, that’s a good question. We – there is increased spending in drilling. There are lots of appraisal, a lot of exploration and appraisal going on. And concurrent with that, we are involved in probably more discussions than we’ve been involved in, in the past, at least 2, probably 3 years for new developments for products based on highly indicators at our customers – within our customers’ companies. So they are seeing some good prospects. There are fields identified whether they are already mapping out the equipment. And we are involved in a number of very active bids and conversations for products and services for those developments. So we do see – as we get into ‘23 and ‘24 and beyond, we do see an increase in products being required.
Walter Schenker
Okay. And just going back to the carousels, over the last 18 months – I could say the last 5 years, but over the last 18 months, there have been possible opportunities in the oil and gas business where one or other people might need a carousel beyond our rental – short-term rentals. You – those never came to pass or you lost them to somebody else where there were some bigger opportunities maybe if we were?
Charles Njuguna
Two of – the ones – the – what has happened is we’ve had lots of project delays. I mentioned earlier, we had two that we even had commitment dates on when they expected the projects to begin. And in both cases, there are push – one was pushed into Q1 of 2023. The other one, they have taken a step back to reevaluate if they’ll need to – for the products that they needed, whether or not they’ll be going forward. And so they – but we’re seeing those delays also on other aspects of the business, where lots of uncertainty about what does the future hold. And so you talk and talk with clients then they suddenly pull back while they evaluate the macro environment.
Walter Schenker
Okay. And as you look at your ability to generate business outside of your traditional market and possibly some recovery in the traditional energy markets, if I look over the last 18 months – I made up 18 months. Some quarters, you make a little money some quarters lose a little money. I’m not asking for a firm or an actual forecast. But as you look forward over – not quarter-to-quarter, but over the next 18 months, you believe it is possible for Deep Down to breakeven to make a little bit of money?
Charles Njuguna
Yes.
Walter Schenker
It sounds like a forecast, but it’s soft.
Charles Njuguna
Yes, we do. We believe we have very promising prospects to do better than we’ve done in the past.
Walter Schenker
Okay. So financially, given the cash on the balance sheet, at least from the standpoint of financial stability and we are not under any sort of as you look at the world going forward, financial pressure?
Charles Njuguna
No. We – we are not – we are remaining extremely disciplined with our cost structure as well. We’re continuing to evaluate it. And so we are working closely how our situation is. But at this point, we have no doubts about our going concern ability.
Walter Schenker
Okay, thank you very much. I’m still waiting for a call one day.
Charles Njuguna
I made two to you, yes, and I’m looking forward to the next one.
Walter Schenker
Okay, thank you.
Charles Njuguna
Thanks, Walter.
Operator
[Operator Instructions] The next question is from Frank Wisneski, a Private Investor. Please go ahead.
Frank Wisneski
Hey, good morning Charles.
Charles Njuguna
Good morning Frank.
Frank Wisneski
One short question and one broader question. I noticed in the last quarter, you had a pretty minimal relocation expenses. I think it was like $29,000. Do you expect more relocation expenses in the current quarter? And secondly, related to that, what does the change in facilities do for your lease payments? Are you spending more, or spending less, or what does it look like there?
Charles Njuguna
Yes. We do expect that this quarter, we – there will be quite a bit of an increase in our relocation expenses. We are doing some remodeling. And as you are aware, the inflationary pressures, material costs have gone way up, and labor costs have gone way up, so that’s having an impact on us. But as far as the longer term, our annual monthly spend is going to reduce by a little over $50,000 a month when we are fully settled into the new place. And so our annual expense, based on our current footprint, we are expecting to reduce it by over $600,000 a year. Now, I will throw in a caveat that some of the opportunities we are evaluating could require us to expand our footprint at a new facility, but that would be a good problem to have, which is why we chose the facility we have chosen because it lends itself out to expansion if we need to.
Frank Wisneski
Good. Yes. Obviously, it would be a high-class problem. The next question is more broad. As you move to marketing your core competencies, how have you changed your marketing? By the way, I mean by this deepwater drilling or offshore oil and gas? You were plugged into that area and the potential customers were probably plugged into you. As you move into other non-oil and gas offshore opportunities, how have you had to change your marketing or your strategy? How do you – just how do you approach as new markets?
Charles Njuguna
That’s a good question. Yes, traditional business, a lot of our customers were plugged into us. And at certain times, we are victims of our past success because a lot of people knew us. We are also fairly reactive, meaning people would call us when they had a need or people would call us when they have projects. But what we have done in the last couple of years has become more strategic in who we target. We have developed strong relationships within – at these contractors. That’s the big integrated contractors, given that the market is moving to an integrated contracts mindset. We are also capitalizing on a lot of relationships of people who moved from oil and gas to renewable energy. And so if we think about the big oil companies, they have – they are all creating venture arms or new energy farms. And so we have some solid relationships that are moved, so we are capitalizing on those. But the rebrand – part of the rebrand was also to get our name away from being pigeonhole a deepwater name because there are some opportunities also in shallow water that we are pursuing as well as in other areas. So, we have changed our mindset to become more strategic rather than reactive, which we were successful with that in the past, but we think it’s the time for a new mindset.
Frank Wisneski
One final question. The carousels, are they useable or applicable to the new business you are going after, or are they pretty much confined to oil and gas?
Charles Njuguna
Yes. They are very applicable for offshore winds in particular. And we do have some very promising opportunities in offshore wind. But it is a new business. There are incumbents who some of the developers have relationships with. And so in some cases, we have to – we are trying to break in, but we are gaining some traction.
Frank Wisneski
Thank you.
Charles Njuguna
Thanks Frank.
Operator
The next question is from Ron Smith with JUMA Properties. Please go ahead.
Ron Smith
So, to answer Frank’s question a little bit as well, I was in the ITF Show in Atlantic City, and it’s one of the largest renewable energy shows in the world. And what I saw there is a lot of the oil and gas springs [ph] are now starting to display in the new shows and the – for the renewable. So, it almost looked like a little mini work boat show from New Orleans, where a lot of companies like Oceaneering and Nexans Cables and a lot of people used to see in OTC and subsea buyback are actually at these new shows. Our Buoyancy, our past Buoyancy company we used to own. So, I would recommend Koil Energy to have a presence at some of these large renewable energy shows because I am seeing a shift from the oil and gas competencies towards them, like some of the small work boat show – work boat people, like the sharp boats. They are now advertising to be personnel transfer boats to the platforms. So, I think as the company is out about more and more of the renewable people will also see that even in between shows. And now the leases are looking at getting to the Gulf of Mexico where they are going to have a lease sale now in the first quarter of next year for wind in the Gulf of Mexico. So, a lot of the oil and gas people will have a chance to shift. And to Walter’s question, I am basically buying a little bit of Deep Down stuff that they don’t need there to move that kind of help them and help me. And while I have been waiting to get some of these renewable energy orders to give to my friends, I need a little bit of cash flow. So, this is sort of covering a little the cash flow gaps because I don’t want to draw any retirement until Mary’s 72 in a couple of years. So, good work, guys, and thank you for letting me voice.
Charles Njuguna
Thanks Ron. And I am glad you mentioned that, yes, to touch on that. Yes, we did display at one of the offshore wind conferences as well and got some traction. So, Ron, that’s a good point. We will continue to do that and make sure we are visible.
Operator
This concludes our question-and-answer session. I would like to turn the conference back over to Charles Njuguna for any closing remarks.
Charles Njuguna
Thank you, Gary. And once again, thanks to all of you who joined this morning. We appreciate your interest and your support for the company, and we look forward to speaking with you all about our progress on the next earnings call. Thank you all. This concludes today’s call.
Operator
The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.
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