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KOIL ENERGY SOLUTIONS, INC.

(DPDW)
Delayed OTC Markets  -  03:39 2022-10-06 pm EDT
0.5100 USD   +4.08%
08/09Transcript : Koil Energy Solutions, Inc., Q2 2022 Earnings Call, Aug 09, 2022
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08/08Koil Energy : Deep Down, Inc. (now Koil Energy Solutions, Inc.) Announces Second Quarter 2022 Results - Form 8-K
PU
08/08DEEP DOWN, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (form 10-Q)
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DEEP DOWN, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (form 10-Q)

08/08/2022 | 04:20pm EDT

(Amounts in thousands except per share amounts)

The following discussion and analysis provides information that management
believes is relevant for an assessment and understanding of Deep Down's results
of operations and financial condition. This information should be read in
conjunction with the Company's audited historical consolidated financial
statements, which are included in the Company's Annual Report on Form 10-K for
the fiscal year ended December 31, 2021 and which is available on the SEC's
website, and the Company's unaudited condensed consolidated financial
statements, and notes thereto, included with this Quarterly Report on Form 10-Q
("Report") in Part I. Item 1. "Financial Statements."



General


Deep Down is an energy services company that provides equipment and support
services to the world's energy and offshore industries. Deep Down offers
innovative solutions to complex customer challenges presented between the
production facility and the energy source. Deep Down's core services and
technological solutions include distribution system installation support and
engineering services, umbilical terminations, loose-tube steel flying leads, and
related services. Additionally, Deep Down's highly experienced professionals can
support subsea engineering, manufacturing, installation, commissioning, and
maintenance projects located anywhere in the world.



Industry and Executive Outlook




The energy services industry is dependent on the capital and operating
expenditure programs of energy companies. The decision for operators to cut back
or accelerate their exploration, drilling, and production operations is
substantially driven by the overall condition of the energy industry.
Particularly, the oil and gas industry has historically been characterized by
fluctuations in commodity prices, which are driven by a variety of market
forces.



Deep Down's second quarter results reflect the ongoing challenges that face the
offshore industry. Our revenues continue to be impacted by reduced global demand
and delays in customer drilling schedules. Inflation, certain geopolitical
events, and the lingering effects of the pandemic continue to weigh on our
customers' abilities to commit to long-term deepwater projects. While these
factors are systemic, we remain focused on the levers within our control as
we
work to grow the business.


To further enhance our growth prospects, we made two significant announcements this year: a relocation of the business and a rebranding of the company.

We now have full possession of our newly leased premises and are currently
progressing with relocating equipment and inventory to our new headquarters. We
expect to complete this relocation in the third quarter of 2022. Despite this
timeline, we have already received positive feedback from our customers
regarding the move as evidenced by the receipt of our first purchase order to
provide hydrogen energy services. This order will initially focus on storage,
management and enhancement of customer furnished materials utilizing Deep Down's
alloy welding and other fabrication capabilities. Following validation of these
early-stage activities, future phases could lead to systems integration
activities potentially including the commissioning of systems being developed
for the retail consumer market.



Rebranding the company from Deep Down, Inc. to Koil Energy Solutions, Inc. was
the next step in promoting our core competencies to expand our product and
service offerings into new markets. We are still awaiting approval from the
Financial Industry Regulatory Authority (FINRA) for our name and ticker symbol
change, but we have moved forward with this change operationally and are
currently working with our customers under the new brand.







  15





As we look towards the future, our growth efforts will revolve around three pillars: (i) Systems, (ii) Technology and (iii) Partnerships. These three pillars will be energy source agnostic.




Systems primarily relates to our legacy offerings in the oil and gas segment but
represents the shift in our approach to becoming a provider of integrated
systems instead of just providing the individual components. We have previously
realized success with this strategy and have identified some opportunities
to
pursue on a systematic basis.


Technology entails the development of new equipment and associated services that
straddle 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. This pillar will
also include our ongoing efforts to further enhance the environmental
friendliness of our equipment.



Partnerships involve the 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 develop in a
variety of ways, such as project specific consortia, strategic alliances, or
operational joint ventures.



We will continue to provide additional details in due course as we work with our
team to accomplish our vision of having the most experienced, professional and
dependable team, who seek to develop the most innovative solutions, including
the most efficient and reliable equipment, with the ultimate goal of providing
best-in-class returns for our stockholders.



Results of Operations




Three Months Ended June 30, 2022 Compared to Three Months Ended June 30, 2021



Revenues

              Three Months Ended June 30,          Increase (Decrease)
               2022                2021               $               %
Revenues   $       3,499       $       4,528     $     (1,029 )       (23 )%




The 23 percent decrease in revenues was primarily driven by a decline in product
oriented, fixed price contracts offset by an increase in short duration projects
utilizing our support services and rental solutions.



Cost of Sales

                    Three Months Ended June 30,          Increase (Decrease)
                     2022                2021               $               %
Cost of sales    $       2,018       $       3,122     $     (1,104 )       (35 )%
Gross profit     $       1,481       $       1,406     $         75          5%
Gross profit %             42%                 31%                -         11%








  16





The increase in gross profit and gross profit as a percentage of sales was due to incurring less materials costs and decreases in lower margin passthrough service costs for the three months ended June 30, 2022.




The Company records depreciation expense related to revenue-generating property,
plant and equipment as cost of sales, which totaled $117 and $184 for the three
months ended June 30, 2022 and 2021, respectively.  The comparative decrease in
depreciation was primarily due to sale of several long-lived assets that were
non-strategic to the core operations of the business.



Selling, general and administrative expenses

                                      Three Months Ended June 30,             Increase (Decrease)
                                       2022                2021               $                 %
Selling, general &
administrative                     $       1,419       $       1,752     $      (333 )             (19 )%
Selling, general &
administrative as a % of revenue             41%                 39%       
       -                2%



The decrease in selling, general and administrative expenses ("SG&A") was primarily due to recording a $534 reserve for doubtful accounts receivable related to prolonged customer payment terms and uncertainty around certain customers' liquidity for the three months ended June 30, 2021.



Interest expense, net



Net interest expense for the three months ended June 30, 2022 was $3 compared to
net interest expense of $8 for the three months ended June 30, 2021. The
decrease of $5 is related to the forgiveness of the Company's PPP loan balances
in 2021.



Gain on sale of assets



Gain on sales of assets was approximately $134 and $6 during the three months
ended June 30, 2022 and June 30, 2021, respectively, and primarily related to
equipment sold by the Company.



Modified EBITDA



Deep Down management evaluates Company performance based on a non-US GAAP
measure which consists of earnings (net income or loss) available to common
stockholders before net interest income, income taxes, depreciation and
amortization, non-cash share-based compensation expense, non-cash gains or
losses on the sale of property, plant and equipment ("PP&E"), other non-cash
items and one-time charges ("Modified EBITDA"). This measure may not be
comparable to similarly titled measures employed by other companies. The measure
should not be considered in isolation or as a substitute for operating income or
loss, net income or loss, cash flows provided by operating, investing, or
financing activities, or other cash flow data prepared in accordance with US
GAAP. The amounts included in the Modified EBITDA calculation, however, are
derived from amounts included in the accompanying consolidated statements of
operations.







  17






We believe Modified EBITDA is a useful measure of a company's operating
performance, which can vary substantially from company to company depending upon
accounting methods and book value of assets, financing methods, capital
structure and the method by which assets were acquired. It helps investors more
meaningfully evaluate and compare the results of our operations from period to
period by removing the impact of our capital structure (primarily interest),
asset base (primarily depreciation and amortization), and actions that do not
affect liquidity (share-based compensation expense) from our operating results.
Additionally, it helps investors identify items that are within our operational
control. Depreciation and amortization charges, while a component of operating
income, are fixed at the time of the asset purchase or acquisition in accordance
with the depreciable lives of the related asset and as such are not a directly
controllable period operating charge.



The following is a reconciliation of net income to Modified EBITDA for the three months ended June 30, 2022 and 2021:



                                           Three Months Ended
                                                June 30,
                                           2022           2021
Net income                               $     177      $    724

Add: Interest expense, net                       3             8
Add: Income tax expense                         10             6
Add: Depreciation and amortization             173           262
Add: Share-based compensation                   14            17
Add: Relocation costs                           29             -
Deduct: Gain on sale of asset                 (134 )          (6 )
Deduct: Forgiveness of PPP loan                  -        (1,124 )
Deduct: Reversal of litigation accrual        (100 )           -

Modified EBITDA                          $     172      $   (113 )




The $285 increase in Modified EBITDA was due primarily to the improved gross
margins during the three months ended June 30, 2022 as compared to the three
months ended June 30, 2021. Modified EBITDA (loss) for the three months ended
June 30, 2021 was also impacted by recording a $534 reserve for doubtful
accounts receivable during that period. This is compared to recording a $55
reversal to the reserve for doubtful accounts receivable for the collection of
previously reserved amounts during the three months ended June 30, 2022.



Six Months Ended June 30, 2022 Compared to Six Months Ended June 30, 2021



Revenues

              Six Months Ended June 30,          Increase (Decrease)
               2022               2021              $               %
Revenues   $      7,100       $      8,450     $     (1,350 )       (16 )%




The 16 percent decrease in revenues was primarily driven by a decline in product
oriented, fixed price contracts offset by an increase in short duration projects
utilizing our support services and rental solutions.







  18






Cost of Sales

                    Six Months Ended June 30,          Increase (Decrease)
                     2022               2021              $               %
Cost of sales    $      4,204       $      5,316     $     (1,112 )       (21 )%
Gross profit     $      2,896       $      3,134     $       (238 )        (8 )%
Gross profit %            41%                37%                -          4%



The decrease in gross profit was due to lower revenues from short duration
project activity for the six months ended June 30, 2022. The increase in gross
profit as a percentage of sales was due to incurring less materials costs and
decreases in lower margin passthrough service costs for the six months ended
June 30, 2022.



The Company records depreciation expense related to revenue-generating property,
plant and equipment as cost of sales, which totaled $253 and $367 for the six
months ended June 30, 2022 and 2021, respectively.  The comparative decrease in
depreciation was primarily due to sale of several long-lived assets that were
non-strategic to the core operations of the business.



Selling, general and administrative expenses

                                      Six Months Ended June 30,             Increase (Decrease)
                                       2022               2021              $                 %
Selling, general &
administrative                     $      3,087       $      3,287     $      (200 )              (6 )%
Selling, general &
administrative as a % of revenue            43%                39%         
     -                4%




The decrease in SG&A was primarily due to recording a $534 reserve for doubtful
accounts receivable related to prolonged customer payment terms and uncertainty
around certain customers' liquidity for the six months ended June 30, 2021.


Interest expense, net


Net interest expense for the six months ended June 30, 2022 was $5 compared to
net interest expense of $21 for the six months ended June 30, 2021. The decrease
of $16 is related to the forgiveness of the Company's PPP loan balances in
2021.



Gain on sale of assets



Gain on sales of assets was approximately $188 and $55 during the six months
ended June 30, 2022 and June 30, 2021, respectively, and primarily related to
equipment sold by the Company.







  19






Modified EBITDA


The following is a reconciliation of net income (loss) to Modified EBITDA for the six months ended June 30, 2022 and 2021:



                                           Six Months Ended
                                               June 30,
                                           2022         2021
Net income (loss)                        $    (87 )   $    872

Add: Interest expense, net                      5           21
Add: Income tax expense                        15           10
Add: Depreciation and amortization            369          522
Add: Share-based compensation                  71           37
Add: Relocation costs                          29            -
Deduct: Gain on sale of asset                (188 )        (55 )
Deduct: Forgiveness of PPP loan                 -       (1,124 )

Deduct: Reversal of litigation accrual (100 ) -

Modified EBITDA                          $    114     $    283




The $169 decrease in Modified EBITDA was mainly driven by the decrease in
revenues during the six months ended June 30, 2022 as compared to the six months
ended June 30, 2021. Modified EBITDA for the six months ended June 30, 2021 was
also impacted by recording a $534 reserve for doubtful accounts receivable
during that period. This is compared to recording a $133 reversal to the reserve
for doubtful accounts receivable for the collection of previously reserved
amounts during the six months ended June 30, 2022.



Liquidity and Capital Resources




The Company believes it will have adequate liquidity to meet its future
operating requirements through a combination of cash on hand, cash expected to
be generated from operations, and potential sales of PP&E. Given the volatility
in oil prices and the impact on global economic activity caused by the COVID-19
pandemic, as well as recent increases in raw materials costs and ongoing supply
chain constraints, the Company cannot predict this with certainty. To mitigate
this uncertainty and preserve liquidity, the Company will continue to exercise
discipline when making capital investments and practice opportunistic cost
containment initiatives, which can include workforce alignment and limiting
overhead spending and research and development efforts to only critical items.



During the six months ended June 30, 2022, the Company generated $780 of net
cash from operating activities primarily driven by a decrease in accounts
receivable and several other components of working capital. The Company used
$767 of net cash in investing activities, primarily to fund capital
expenditures. The Company also used $250 of net cash in financing activities for
the repurchase of common stock, which resulted in a $237 decrease in cash for
the period.



During the six months ended June 30, 2021, the Company used $643 of net cash in
operating activities primarily to fund working capital. The Company also used
$140 of net cash in investing activities, primarily to fund capital
expenditures. The Company generated $1,111 of net cash provided by financing
activities from PPP loan proceeds, which resulted in a $328 increase in cash for
the period.







  20






Inflation and Seasonality


The Company does not believe that its operations have been significantly impacted by inflation, and its business is not significantly seasonal in nature.

Off-Balance Sheet Arrangements




The Company has no off-balance sheet arrangements that have or are reasonably
likely to have a current or future effect on its financial condition, changes in
financial condition, revenues or expenses, results of operations, liquidity,
capital expenditures or capital resources that are material to investors.



Critical Accounting Estimates


The preparation of financial statements in conformity with US GAAP requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and reported amounts of revenues and
expenses during the reporting period. The most significant estimates used in the
financial statements relate to revenue recognition where the Company measures
progress towards completion on a cost-to-cost basis for fixed-price contracts,
the allowance for doubtful accounts, and the valuation allowance for deferred
income tax assets. Significant estimates are also used in management's
assessment of conditions or events that raise substantial doubt about the
Company's ability to continue as a going concern. These estimates require
judgments, which are based on historical experience and on various other
assumptions, as well as specific circumstances. Estimates may change as new
events occur, additional information becomes available or operating environments
change.



Refer to Part II. Item 7. "Management's Discussion and Analysis of Financial
Condition and Results of Operations," in our Annual Report on Form 10-K for the
year ended December 31, 2021 for a discussion of our critical accounting
policies and estimates.



Allowance for Doubtful Accounts and Bad Debt Expense

The Company provides an allowance on trade receivables based on a specific
review of each customer's accounts receivable balance with respect to its
ability to make payments. When specific accounts are determined to require an
allowance, they are expensed by a provision for bad debts in that period. At
June 30, 2022 and December 31, 2021, the Company estimated the allowance for
doubtful accounts requirement to be $0 and $525, respectively. The Company
recorded a credit to bad debt expense totaling $55 and $133 during the three and
six months ended June 30, 2022, respectively, due to payments received on
certain previously reserved balances. The Company recorded a $534 charge to bad
debt expense during the three and six months ended June 30, 2021.



Recently Issued Accounting Standards

Refer to Note 1 in Part II. Item 8. "Financial Statements and Supplemental Data," in our Annual Report on Form 10-K for the year ended December 31, 2021 for a discussion of recently issued accounting standards.







  21

© Edgar Online, source Glimpses

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Financials (USD)
Sales 2021 17,2 M - -
Net income 2021 2,33 M - -
Net cash 2021 1,78 M - -
P/E ratio 2021 3,30x
Yield 2021 -
Capitalization 6,06 M 6,06 M -
EV / Sales 2020 0,44x
EV / Sales 2021 0,34x
Nbr of Employees 46
Free-Float 51,7%
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Managers and Directors
Charles K. Njuguna President, CEO, Chief Financial Officer & Director
Mark Carden Chairman
David J. Douglas Independent Director
Neal Ira Goldman Independent Director
Trevor Ashurst Vice President-Finance
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