10-Q: Koil Energy Reports Q3 Loss Amid Rising Costs, Flat Revenue

Koil Energy Solutions, Inc. reported a net loss for the third quarter and first nine months of 2025, driven by increased costs, lower margins, and a significant bad debt expense, despite a slight revenue increase in Q3.

Summary

• Koil Energy Solutions, Inc. reported a net loss of $413K for the three months ended September 30, 2025, a significant decline from a net income of $523K in the prior year period.
• For the nine months ended September 30, 2025, the company posted a net loss of $381K, compared to a net income of $2,083K in the same period of 2024.
• Revenues for the three months ended September 30, 2025, increased by 22% to $6,367K from $5,223K in the prior year, primarily due to growth in fixed price contracts and service work.
• Nine-month revenues remained flat at $16,799K in 2025 compared to $16,793K in 2024, with an uptick in Q3 offsetting a slow start to the first half of the year.
• Gross profit percentage declined to 32% for both the three and nine months ended September 30, 2025, down from 40% and 38% respectively in 2024, attributed to a lower-margin product mix and increased direct overhead costs.
• Selling, general and administrative (SG&A) expenses surged by 59% to $2,514K in Q3 2025 and by 44% to $6,220K for the nine months, largely due to a $569K bad debt expense from the OMSi receivable, higher administrative payroll, and increased legal and consulting fees.
• Adjusted EBITDA decreased significantly, reporting a loss of $251K for Q3 2025 (vs. $675K profit in Q3 2024) and a profit of $249K for the nine months (vs. $2,576K profit in 2024).
• The company used $1,038K in net cash from operating activities for the nine months ended September 30, 2025, a reversal from $1,174K provided in the prior year period.
• Cash on hand decreased to $1,948K as of September 30, 2025, from $3,422K at December 31, 2024.
• Working capital also declined to $4,885K as of September 30, 2025, from $5,682K at December 31, 2024.
• The company had $703K in factored invoices outstanding with Amegy Bank recorded as short-term borrowings as of September 30, 2025, compared to none at December 31, 2024.
• A material weakness in internal control over financial reporting was identified, rendering disclosure controls and procedures ineffective as of September 30, 2025.

Sentiment

Score: 3

Explanation: The sentiment is negative due to significant declines in net income, operating income, and Adjusted EBITDA, coupled with negative cash flow from operations and a disclosed material weakness in internal controls. While Q3 revenue showed growth and the industry outlook is positive, the company's current financial performance and internal control issues are concerning.

Positives

• Revenues for the three months ended September 30, 2025, increased by 22% to $6,367K compared to $5,223K in the prior year period.
• The company successfully settled a lawsuit with former landlord WW Champion Developments, Inc. for $590K, recognizing a gain of $333K.
• Received $365K for the remaining employee retention credit balance, including $42K of interest earned, in January 2025.
• Order intake for subsea tie-back and maintenance projects has increased significantly since the beginning of the year.
• Management is making deliberate investments in expanding the team to support long-term growth strategy and is focused on becoming a leading provider of integrated subsea distribution systems.

Negatives

• Reported a net loss of $413K for the three months ended September 30, 2025, and $381K for the nine months, a significant deterioration from net income in the prior year periods.
• Gross profit percentage declined to 32% for both the three and nine months ended September 30, 2025, due to a lower-margin product mix and increased direct overhead costs.
• Selling, general and administrative expenses increased substantially by 59% in Q3 and 44% for the nine months, driven by a $569K bad debt expense and higher administrative costs.
• Adjusted EBITDA saw a significant decrease, turning into a loss of $251K in Q3 2025 and a substantial reduction to $249K for the nine months.
• Net cash used in operating activities was $1,038K for the nine months ended September 30, 2025, a negative shift from cash provided by operations in the prior year.
• Cash on hand decreased by $1,474K during the nine months ended September 30, 2025.
• Working capital decreased from $5,682K at December 31, 2024, to $4,885K at September 30, 2025.
• The company had $703K in factored invoices outstanding as short-term borrowings as of September 30, 2025, indicating reliance on this financing method.

Risks

• Economic uncertainty and financial market conditions may impact the customer base, suppliers, and backlog.
• Volatility of oil and natural gas prices can adversely affect operations.
• Use of percentage-of-completion accounting could result in volatility in results of operations.
• A portion of contracts may contain terms with penalty provisions.
• Fluctuations in the price and supply of raw materials may reduce profits and impact ability to meet customer commitments.
• Operations could be adversely impacted by continuing effects of government regulations, including new tariffs and retaliatory measures.
• International and political events may adversely affect operations.
• Operating results may vary significantly from quarter to quarter.
• May be unsuccessful at generating profitable internal growth.
• The departure of key personnel could disrupt the business.
• Inability to attract and retain qualified skilled labor.
• More sophisticated and targeted cyber-attacks and other security incidents pose risks to systems, data, and business.
• Unfavorable legal outcomes could have a negative impact on the business.
• The impact of global health crises, including epidemics and pandemics.

Future Outlook

Management anticipates continued global energy demand growth, driving a resurgence in subsea activity, particularly in deepwater and ultra-deepwater developments in regions like Brazil, the U.S., and West Africa. The company is strategically focused on subsea tie-back projects, which offer shorter payback periods, and is expanding its team to support long-term growth and its objective of becoming a leading provider of integrated subsea distribution systems. They aim to balance profitability with investment in these growth areas.

Management Comments

• "Global energy demand continues to rise. Meeting this demand requires incremental oil and natural gas production alongside growth in renewable energy sources."
• "Years of underinvestment in offshore exploration and development are now fueling a resurgence in subsea activity."
• "From our perspective, we are seeing global operators allocate more capital toward deepwater and ultra-deepwater developments, particularly in Brazil, the US. and West Africa."
• "Subsea tie-back development continues to gain momentum as a preferred approach among offshore operators."
• "Order intake for subsea tie-back and maintenance projects has increased significantly since the beginning of the year."
• "During this period, we have made a deliberate investment in expanding our team to support our long-term growth strategy."
• "We remain disciplined in balancing profitability with investment and are confident that our expanded capabilities position us well to execute on our growing backlog."
• "We remain focused on our strategic objective of becoming the leading provider of integrated subsea distribution systems."

Industry Context

The company operates within the energy services industry, which is heavily influenced by capital and operating expenditures of upstream energy companies and global commodity prices. Management notes a rising global energy demand and a resurgence in subsea activity, particularly in deepwater and ultra-deepwater projects in key regions like Brazil, the U.S., and West Africa, driven by the natural decline rates of existing deepwater fields. The company's focus on subsea tie-back projects aligns with an industry trend towards leveraging existing infrastructure for quicker returns, positioning it within a growing segment of the offshore market.

Comparison to Industry Standards

• The filing mentions IHS data indicating deepwater fields naturally decline at an average rate of 7% per year, underscoring the urgency for new development to maintain current output. This highlights the market need that Koil Energy's services address.
• The company's focus on subsea tie-back projects is noted as a preferred approach among offshore operators, with potential for shorter payback periods (within two years of final investment decision) compared to traditional greenfield projects. This suggests alignment with industry best practices for efficiency and return on investment.

Corporate Governance

Legal Proceedings

• The company settled a legal dispute with its former landlord, WW Champion Developments, Inc., in June 2025 for $590K, resulting in a gain of $333K. WW Champion had alleged breach of contract and sought $1,229K.
• On September 29, 2025, the company filed a civil action against OMS International Limited in the United States District Court for the Southern District of Texas to recover $569K in unpaid invoices for work completed in March 2025. A reserve of $569K has been recorded in Allowance for Credit Losses.

Stakeholder Impact

• **Shareholders**: Negative impact due to significant net losses, declining profitability, and negative cash flow from operations. The material weakness in internal controls also raises concerns about financial reporting reliability.
• **Employees**: Potential impact from cost containment initiatives, including workforce alignment, though the company is also expanding its team for long-term growth.
• **Customers**: The company's focus on subsea tie-back projects and increased order intake suggests continued service delivery, but financial challenges could impact long-term stability.
• **Suppliers/Creditors**: Increased short-term borrowings through factoring agreements and declining liquidity may indicate higher risk for creditors. The bad debt expense highlights risks in customer payments.
• **Management**: Under pressure to remediate internal control weaknesses and improve financial performance amidst a challenging operating environment.

Next Steps

• Continue implementing the remediation plan to address the material weakness in internal control over financial reporting.
• Pursue full recovery of the $569K in unpaid invoices from OMS International Limited through civil action.
• Exercise discipline in capital investments and pursue opportunistic cost containment initiatives, including workforce alignment, limiting overhead, and focusing R&D on critical items.
• Continue expanding the team to support long-term growth strategy and execute on the growing backlog of subsea tie-back and maintenance projects.

Key Dates

Recommendation

The company's financial performance for the nine months ended September 30, 2025, shows a significant deterioration, moving from net income to a net loss and experiencing a substantial decline in Adjusted EBITDA. Cash flow from operations turned negative, and overall liquidity (cash and working capital) decreased. A material weakness in internal controls over financial reporting further compounds these concerns, indicating fundamental issues with financial reliability. While the industry outlook is positive, the company's current operational and financial challenges, including a significant bad debt expense and lower gross margins, suggest a high level of risk. A seasoned investor would likely view these results as a strong indicator of underlying problems that outweigh any positive industry trends or management's growth initiatives, warranting a 'sell' recommendation.

Keywords

Energy Services, Offshore Industry, Subsea, Oil and Gas, 10-Q, Financial Results, Net Loss, Adjusted EBITDA, Working Capital, Accounts Receivable Factoring, Internal Controls, Legal Proceedings, Fixed Price Contracts, Service Contracts