KLNG 10-Q
Koil Energy Solutions, Inc. (KLNG)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM
| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended
OR
| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission File No.
(Exact name of registrant as specified in its charter)
| (State or other jurisdiction of incorporation) | (I.R.S. Employer Identification No.) | |
| (Address of Principal Executive Offices) | (Zip Code) |
Registrant’s telephone number, including area
code: (
N/A
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act: None
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
| N/A | N/A | N/A |
Indicate by check mark whether the registrant (1) has
filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and
(2) has been subject to such filing requirements for the past 90 days. ☒
Indicate by check mark whether the registrant has
submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of
this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer ☐ | Accelerated filer ☐ |
| Smaller reporting company | |
| Emerging growth company |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a
shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No
At August 5, 2024, there were shares outstanding of Common Stock, par value $0.001 per share.
IMPORTANT INFORMATION REGARDING THIS FORM 10-Q
Unless otherwise indicated, references to “Koil Energy Solutions, Inc.,” “Koil Energy,” “Company,” “we,” “us,” and “our” in this Quarterly Report on Form 10-Q (“Report”) refer collectively to Koil Energy Solutions, Inc., a Nevada corporation, and its direct and indirect wholly owned subsidiaries.
Forward-Looking Statements
The statements contained or incorporated by reference in this Report that are not historical facts are “forward-looking statements” (as such term is defined in the Private Securities Litigation Reform Act of 1995), within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). All statements other than statements of historical fact are, or may be deemed to be, forward-looking statements. Forward-looking statements include any statement that may project, indicate or imply future results, events, performance or achievements. The forward-looking statements contained herein are based on current expectations that involve a number of risks and uncertainties. These statements can be identified by the use of forward-looking terminology such as “believes,” “expect,” “may,” “will,” “should,” “intend,” “plan,” “could,” “estimate,” or “anticipate,” or the negative thereof or other variations thereon or comparable terminology, or by discussions of strategy that involve risks and uncertainties.
Given the risks and uncertainties relating to forward-looking statements, investors should not place undue reliance on such statements. Forward-looking statements included in this Report speak only as of the date of this Report and are not guarantees of future performance. Although we believe that the expectations reflected in the forward-looking statements are reasonable, such expectations may prove to be incorrect. All subsequent written and oral forward-looking statements attributable to us, or persons acting on our behalf, are expressly qualified in their entirety by these cautionary statements. The risks and uncertainties mentioned previously relate to, among other matters, the following:
| · | Economic uncertainty and financial market conditions may impact our customer base, suppliers and backlog; | |
| · | The volatility of oil and natural gas prices; | |
| · | Our use of percentage-of-completion accounting could result in volatility in our results of operations; | |
| · | A portion of our contracts may contain terms with penalty provisions; | |
| · | Fluctuations in the price and supply of raw materials used to manufacture our products may reduce our profits and could materially impact our ability to meet commitments to our customers; | |
| · | Our operations could be adversely impacted by the continuing effects of government regulations; | |
| · | International and political events may adversely affect our operations; | |
| · | Our operating results may vary significantly from quarter to quarter; | |
| · | We may be unsuccessful at generating profitable internal growth; | |
| · | The departure of key personnel could disrupt our business; | |
| · | Our business requires skilled labor, and we may be unable to attract and retain qualified employees; | |
| · | Unfavorable legal outcomes could have a negative impact on our business; and | |
| · | The impact of global health crises, including epidemics and pandemics. |
| i |
Document Summaries
Descriptions of documents and agreements contained in this Report are provided in summary form only, and such summaries are qualified in their entirety by reference to the actual documents and agreements filed as exhibits to our Annual Report on Form 10-K for the year ended December 31, 2023, other periodic and current reports we have filed with the SEC, or this Report.
Access to Filings
Access to our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments thereto, filed with or furnished to the SEC pursuant to Section 13(a) of the Exchange Act, as well as reports filed by our executive officers and directors pursuant to Section 16(a) of the Exchange Act, may be obtained through our website (www.koilenergy.com) as soon as reasonably practicable after we, or our executive officers and directors, have filed or furnished such material with the SEC. The contents of our website are not, and shall not be deemed to be, incorporated into this Report.
| ii |
TABLE OF CONTENTS
| iii |
PART I – FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
KOIL ENERGY SOLUTIONS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
June 30, 2024 | December 31, 2023 | |||||||
(In thousands, except share and per share amounts) | ||||||||
| ASSETS | ||||||||
| Current assets: | ||||||||
| Cash | $ | $ | ||||||
| Accounts receivable, net | ||||||||
| Employee retention tax credit receivable | ||||||||
| Inventory | ||||||||
| Contract assets | ||||||||
| Prepaid expenses and other current assets | ||||||||
| Total current assets | ||||||||
| Property, plant and equipment, net | ||||||||
| Intangibles, net | ||||||||
| Right-of-use operating lease assets | ||||||||
| Right-of-use finance lease assets | ||||||||
| Other assets | ||||||||
| Total assets | $ | $ | ||||||
| LIABILITIES AND STOCKHOLDERS' EQUITY | ||||||||
| Current liabilities: | ||||||||
| Accounts payable and accrued expenses | $ | $ | ||||||
| Contract liabilities | ||||||||
| Short-term borrowings | ||||||||
| Current operating lease liabilities | ||||||||
| Current finance lease liabilities | ||||||||
| Total current liabilities | ||||||||
| Operating lease liability, long-term | ||||||||
| Finance lease liability, long-term | ||||||||
| Total liabilities | ||||||||
| Commitments and contingencies (Note 8) | ||||||||
| Stockholders' equity: | ||||||||
| Common stock, shares authorized at $ par value, issued at June 30, 2024 and December 31, 2023 | ||||||||
| Additional paid-in capital | ||||||||
| Treasury stock, and shares at June 30, 2024 and December 31, 2023, respectively, at cost | ( | ) | ( | ) | ||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| Total stockholders' equity | ||||||||
| Total liabilities and stockholders' equity | $ | $ | ||||||
The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.
| 1 |
KOIL ENERGY SOLUTIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
| (In thousands, except per share amounts) | 2024 | 2023 | 2024 | 2023 | ||||||||||||
| Revenues | $ | $ | $ | $ | ||||||||||||
| Costs and expenses | ||||||||||||||||
| Cost of sales | ||||||||||||||||
| Selling, general and administrative | ||||||||||||||||
| Total costs and expenses | ||||||||||||||||
| Operating income (loss) | ( | ) | ( | ) | ||||||||||||
| Interest (income) expense, net | ( | ) | ( | ) | ||||||||||||
| Other (income) expense, net | ( | ) | ( | ) | ||||||||||||
| (Gain) loss on sale of property, plant and equipment | ( | ) | ( | ) | ||||||||||||
| Income (loss) before income tax expense | ( | ) | ( | ) | ||||||||||||
| Income tax expense | ||||||||||||||||
| Net income (loss) | $ | $ | ( | ) | $ | $ | ( | ) | ||||||||
| Net income (loss) per share: | ||||||||||||||||
| Basic | $ | $ | ( | ) | $ | $ | ( | ) | ||||||||
| Fully diluted | $ | $ | ( | ) | $ | $ | ( | ) | ||||||||
| Weighted-average shares outstanding: | ||||||||||||||||
| Basic | ||||||||||||||||
| Fully diluted | ||||||||||||||||
The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.
| 2 |
KOIL ENERGY SOLUTIONS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(UNAUDITED)
| Additional | ||||||||||||||||||||||||
| Common Stock | Paid-in | Treasury | Accumulated | |||||||||||||||||||||
| (In thousands) | Shares (#) | Amount ($) | Capital | Stock | Deficit | Total | ||||||||||||||||||
| Balance at March 31, 2024 | $ | $ | $ | ( | ) | $ | ( | ) | $ | |||||||||||||||
| Net income | – | |||||||||||||||||||||||
| Share-based compensation | – | |||||||||||||||||||||||
| Balance at June 30, 2024 | $ | $ | $ | ( | ) | $ | ( | ) | $ | |||||||||||||||
| Balance at December 31, 2023 | $ | $ | $ | ( | ) | $ | ( | ) | $ | |||||||||||||||
| Net income | – | |||||||||||||||||||||||
| Restricted stock award | – | ( | ) | |||||||||||||||||||||
| Share-based compensation | – | |||||||||||||||||||||||
| Balance at June 30, 2024 | $ | $ | $ | ( | ) | $ | ( | ) | $ | |||||||||||||||
| Additional | ||||||||||||||||||||||||
| Common Stock | Paid-in | Treasury | Accumulated | |||||||||||||||||||||
| (In thousands) | Shares (#) | Amount ($) | Capital | Stock | Deficit | Total | ||||||||||||||||||
| Balance at March 31, 2023 | $ | $ | $ | ( | ) | $ | ( | ) | $ | |||||||||||||||
| Net loss | – | ( | ) | ( | ) | |||||||||||||||||||
| Share-based compensation | – | |||||||||||||||||||||||
| Balance at June 30, 2023 | $ | $ | $ | ( | ) | $ | ( | ) | $ | |||||||||||||||
| Balance at December 31, 2022 | $ | $ | $ | ( | ) | $ | ( | ) | $ | |||||||||||||||
| Net loss | – | ( | ) | ( | ) | |||||||||||||||||||
| Share-based compensation | – | |||||||||||||||||||||||
| Balance at June 30, 2023 | $ | $ | $ | ( | ) | $ | ( | ) | $ | |||||||||||||||
The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.
| 3 |
KOIL ENERGY SOLUTIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
| Six Months Ended | ||||||||
| June 30, | ||||||||
| 2024 | 2023 | |||||||
| (In thousands) | ||||||||
| Cash flows from operating activities: | ||||||||
| Net income (loss) | $ | $ | ( | ) | ||||
| Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: | ||||||||
| Share-based compensation | ||||||||
| Depreciation and amortization | ||||||||
| Loss (gain) on sale of property, plant and equipment | ( | ) | ||||||
| Bad debt expense | ||||||||
| Non-cash lease expense | ||||||||
| Changes in operating assets and liabilities: | ||||||||
| Accounts receivable, net | ( | ) | ( | ) | ||||
| Contract assets | ( | ) | ||||||
| Inventories | ( | ) | ||||||
| Prepaid expenses and other current assets | ( | ) | ||||||
| Other assets, net | ( | ) | ( | ) | ||||
| Accounts payable and accrued expenses | ( | ) | ||||||
| Contract liabilities | ||||||||
| Net cash provided by (used in) operating activities | ( | ) | ||||||
| Cash flows from investing activities: | ||||||||
| Proceeds from sale of property, plant and equipment | ||||||||
| Purchases of property, plant and equipment | ( | ) | ( | ) | ||||
| Net cash used in investing activities | ( | ) | ( | ) | ||||
| Cash flows from financing activities: | ||||||||
| Principal payments under finance lease obligations | ( | ) | ( | ) | ||||
| Proceeds from short-term borrowings | ||||||||
| Principal payments on short-term borrowings | ( | ) | ||||||
| Net cash provided by (used in) financing activities | ( | ) | ||||||
| Change in cash | ( | ) | ( | ) | ||||
| Cash, beginning of period | ||||||||
| Cash, end of period | $ | $ | ||||||
The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.
| 4 |
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except per share amounts)
| NOTE 1: | BASIS OF PRESENTATION |
Basis of Presentation
Unless otherwise indicated, the terms “Koil Energy Solutions, Inc.”, “Koil Energy”, “Company”, “we”, “our” and “us” are used in this Report to refer to Koil Energy Solutions, Inc., a Nevada corporation (“Koil Energy Nevada”), and its directly wholly owned subsidiary, Koil Energy Solutions, Inc., a Delaware corporation (“Koil Energy Delaware”). The accompanying unaudited condensed consolidated financial statements of Koil Energy Solutions, Inc. were prepared in accordance with the rules and regulations of the Securities and Exchange Commission (“SEC” or the “Commission”) pertaining to interim financial information and instructions to Form 10-Q. As permitted under those rules, certain notes or other financial information that are normally required by United States generally accepted accounting principles (“US GAAP”) can be condensed or omitted. Therefore, these statements should be read in conjunction with the audited consolidated financial statements, and notes thereto, included in our Annual Report on Form 10-K for the year ended December 31, 2023.
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, the disclosed amounts of contingent assets and liabilities, and the reported amounts of revenues and expenses. If the underlying estimates and assumptions upon which the financial statements are based change in future periods, then the actual amounts may differ from those included in the accompanying unaudited condensed consolidated financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included.
Liquidity
The Company’s cash on hand was $
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. However, given the inherent volatility in oil prices and global economic activity, the Company cannot predict this
with certainty. To mitigate this uncertainty, the Company exercises discipline when making capital investments and pursues opportunistic
cost containment initiatives, which can include workforce alignment, limiting overhead spending, and limiting research and development
efforts to only critical items. Additionally, on May 24, 2023, the Company entered into a Purchase and Sale Agreement/Security Agreement
(the “Factoring Agreement”) with Zions Bancorporation, N.A., d/b/a Amegy Bank Business Credit (“Amegy”), which
provides for Koil Energy from time to time to sell its accounts receivable and other rights to payment to Amegy, subject to Amegy’s
right to approve or reject future accounts receivable and other rights proposed for sale, in its sole discretion. Any receivables sold
shall bear an interest rate computed as the Wall Street Journal Prime Rate (“Prime Rate”) plus 2.00%. The Prime Rate has a
floor and at no time shall it be less than 8.00% for the purposes of this agreement. At June 30, 2024, the Company had four factored invoices
outstanding with Amegy recorded as short-term borrowings in the aggregate amount of $
| 5 |
Principles of Consolidation
The unaudited condensed consolidated financial statements presented herein include the accounts of Koil Energy for the three and six months ended June 30, 2024 and 2023. All intercompany transactions and balances have been eliminated.
Segments
For the three and six months ended June 30, 2024 and 2023, the Company’s operations were organized as one reportable segment and one operating segment.
| NOTE 2: | LEASES |
In February 2016, the FASB issued ASU 2016-02, Leases (“ASC Topic 842”). Under this guidance, lessees are required to recognize on the balance sheet a lease liability and a right-of-use (“ROU”) asset for all leases, except for short-term leases with terms of twelve months or less. The lease liability represents the lessee’s obligation to make lease payments arising from a lease and will initially be measured as the present value of the lease payments. The ROU asset represents the lessee’s right to use a specified asset for the lease term and will be measured at the lease liability amount, adjusted for lease prepayment, lease incentives received and the lessee’s initial direct costs.
ROU assets and lease liabilities are recognized at the commencement date based on the present value of lease payments over the lease term and include options to extend or terminate the lease when they are reasonably certain to be exercised. The present value of lease payments is determined primarily using the incremental borrowing rate based on the information available at the lease commencement date. Lease agreements with lease and non-lease components are generally accounted for as a single lease component. The Company’s operating lease expense is recognized on a straight-line basis over the lease term and a portion is recorded in cost of sales, and the remainder is recorded in selling, general and administrative expenses. The accounting for some leases may require significant judgment, which includes determining whether a contract contains a lease, determining the incremental borrowing rate to utilize in our net present value calculation of lease payments for lease agreements which do not provide an implicit rate, and assessing the likelihood of renewal or termination options and impairment.
At the inception of a lease, Koil Energy evaluates the agreement to determine whether the lease will be accounted for as an operating or finance lease. The term of the lease used for such an evaluation includes renewal option periods only in instances in which the exercise of the renewal option can be reasonably assured, and if the contract contains a substantial penalty for failure to renew or extend the lease, it could lead the Company to conclude it has a significant economic incentive to extend the lease beyond the base rental period.
The Company leases land, buildings, and certain equipment under non-cancellable operating leases. We lease office, indoor manufacturing, warehouse, and operating space in Houston, Texas and lease storage space in Mobile, Alabama to house our 3,400 metric ton and 3,500 metric ton carousel systems. We classify our leases related to certain office furniture and computer equipment as finance leases. The Company elects to apply the short-term lease exception; therefore, the Company will not record an ROU asset or corresponding lease liability for leases with an initial term of twelve months or less that are not reasonably certain of being renewed and instead will recognize a single lease cost allocated over the lease term, generally on a straight-line basis. The Company elects to apply the practical expedient to not separate lease components from non-lease components and instead account for both as a single lease component for all asset classes.
Most leases include one or more options to renew, with renewal terms that can extend the lease term on a monthly, annual or longer basis. The exercise of lease renewal options is at the Company’s sole discretion. Certain leases also include options to purchase the leased property. The depreciable life of assets and leasehold improvements is limited by the expected lease term unless there is a transfer of title or purchase option that is reasonably certain of being exercised.
| 6 |
The Company elects to not capitalize any lease in which the estimated value of the underlying asset at the commencement date is less than the Company’s capitalization threshold. A lease would need to qualify for the low value exception based on various criteria.
As of June 30, 2024, the Company does not have any subleases.
The following tables present information about our operating and finance leases:
| Classification | June 30, 2024 | December 31, 2023 | ||||||||
| Assets | ||||||||||
| Operating | Right-of-use operating lease assets | $ | $ | |||||||
| Finance | Right-of-use finance lease assets | |||||||||
| Total lease assets | $ | $ | ||||||||
| Liabilities | ||||||||||
| Current | ||||||||||
| Operating | Current operating lease liabilities | $ | $ | |||||||
| Finance | Current finance lease liabilities | |||||||||
| Non-current | ||||||||||
| Operating | Operating lease liability, long-term | |||||||||
| Finance | Finance lease liability, long-term | |||||||||
| Total lease liabilities | $ | $ | ||||||||
The components of our lease expense were as follows:
| Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||||
| Classification | 2024 | 2023 | 2024 | 2023 | ||||||||||||||
| Finance lease costs | ||||||||||||||||||
| Amortization of ROU assets | Selling, general and administrative | $ | $ | $ | $ | |||||||||||||
| Interest on lease liabilities | Other (income) expense, net | |||||||||||||||||
| Operating lease expense | Cost of sales | |||||||||||||||||
| Operating lease expense | Selling, general and administrative | |||||||||||||||||
| Short term lease expense | Cost of sales | |||||||||||||||||
| Total lease expense | $ | $ | $ | $ | ||||||||||||||
The lease term and discount rate for our operating and finance leases were as follows:
June 30, 2024 | December 31, 2023 | |||||||
| Weighted-average remaining lease terms (years) | ||||||||
| Operating leases | ||||||||
| Finance leases | ||||||||
| Weighted-average discount rates | ||||||||
| Operating leases | ||||||||
| Finance leases | ||||||||
| 7 |
Present value of lease liabilities:
| Operating Leases | Finance Leases | |||||||
| July 1, 2024 - June 30, 2025 | $ | $ | ||||||
| July 1, 2025 - June 30, 2026 | ||||||||
| July 1, 2026 - June 30, 2027 | ||||||||
| July 1, 2027 - June 30, 2028 | ||||||||
| Thereafter | ||||||||
| Total lease payments | $ | $ | ||||||
| Less: Interest | ( | ) | ( | ) | ||||
| Present value of lease liabilities | $ | $ | ||||||
| NOTE 3: | REVENUE FROM CONTRACTS WITH CUSTOMERS |
Revenues are recognized when control of the promised goods or services is transferred to our customers in an amount that reflects the consideration we expect to be entitled to in exchange for those goods or services. To determine the proper revenue recognition method for our customer contracts, we evaluate whether two or more contracts should be combined and accounted for as one single contract and whether the combined or single contract should be accounted for as more than one performance obligation. This evaluation requires significant judgment and the decision to combine a group of contracts or separate the combined or single contract into multiple performance obligations could change the amount of revenue and profit recorded in a given period.
For most of our fixed price contracts, the customer contracts with us to provide a significant service of integrating a complex set of tasks and components into a single project or capability even if that single project results in the delivery of multiple units. Hence, the entire contract is accounted for as one performance obligation. We account for a contract when it has approval and commitment from both parties, the rights of the parties are identified, payment terms are identified, the contract has commercial substance and collectability of consideration is probable.
Disaggregation of Revenue
The following table presents our revenues disaggregated by fixed price and service contracts. Sales taxes are excluded from revenues.
| Three Months Ended | Six Months Ended | |||||||||||||||
| June 30, | June 30, | |||||||||||||||
| 2024 | 2023 | 2024 | 2023 | |||||||||||||
| Fixed Price Contracts | $ | $ | $ | $ | ||||||||||||
| Service Contracts | ||||||||||||||||
| Total | $ | $ | $ | $ | ||||||||||||
Fixed price contracts
For fixed price contracts, we generally recognize revenue over time as we perform because of continuous transfer of control to the customer. This continuous transfer of control to the customer is supported by clauses in the contract that allow the customer to unilaterally terminate the contract for convenience, pay us for costs incurred plus a reasonable profit and take control of any work in process. In our fixed price contracts, the customer either controls the work in process or we deliver products with no alternative use to the Company and have rights to payment for work performed to date plus a reasonable profit as evidenced by contractual termination clauses.
| 8 |
Because of control transferring over time, revenue is recognized based on the extent of progress towards completion of the performance obligation. The selection of the method to measure progress towards completion requires judgment and is based on the nature of the products or services to be provided. We generally use the cost-to-cost measure of progress for our contracts because it best depicts the transfer of control to the customer which occurs as we incur costs on our contracts. Under the cost-to-cost measure of progress, the extent of progress towards completion is measured based on the ratio of costs incurred to date to the total estimated costs at completion of the performance obligation. Revenues, including estimated fees or profits, are recorded proportionally as costs are incurred.
Contracts are often modified to account for changes in contract specifications and requirements. We consider a contract modification to exist when the modification either creates new, or changes the existing, enforceable rights and obligations. Most of our contract modifications are for goods or services that are not distinct from the existing contract due to the significant integration service provided in the context of the contract and are accounted for as if they were part of that existing contract. The effect of a contract modification on the transaction price, and our measure of progress for the performance obligation to which it relates, is recognized as an adjustment to revenue (either as an increase in or a reduction of revenue) on a cumulative catch-up basis.
We have a company-wide standard and disciplined quarterly estimate at completion process in which management reviews the progress and execution of our performance obligations. As part of this process, management reviews information including, but not limited to, any outstanding key contract matters, progress towards completion and the related program schedule, identified risks and opportunities and the related changes in estimates of revenues and costs. Changes in estimates of net sales, cost of sales and the related impact to operating income are recognized quarterly on a cumulative catch-up basis, which recognizes in the current period the cumulative effect of the changes on current and prior periods based on a performance obligation’s percentage of completion. A significant change in one or more of these estimates could affect the profitability of one or more of our performance obligations. When estimates of total costs to be incurred exceed total estimates of revenue to be earned on a performance obligation related to fixed price contracts, a provision for the entire loss on the performance obligation is recognized in the period the loss is estimated.
Service Contracts
We recognize revenue for service contracts measuring progress toward satisfying the performance obligation in a manner that best depicts the transfer of goods or services to the customer. The control over services is transferred over time when the services are rendered to the customer on a daily basis. Specifically, we recognize revenue as the services are provided as we have the right to invoice the customer for the services performed. Services are billed on a monthly basis. Payment terms for services are usually 30 days from invoice receipt but can increase to 45, 60, or 90 days depending on the customer.
Contract balances
Costs and estimated earnings in excess of billings on uncompleted contracts arise when revenues are recorded based on the extent of progress towards completion but cannot be invoiced under the terms of the contract. Such amounts are invoiced upon completion of contractual milestones. Billings in excess of costs and estimated earnings on uncompleted contracts arise when milestone billings are permissible under the contract, but the related costs have not yet been incurred. All contract costs are recognized currently on jobs formally approved by the customer and contracts are not shown as complete until virtually all anticipated costs have been incurred and the risk of loss has passed to the customer.
Assets related to costs and estimated earnings in excess of billings on uncompleted contracts, as well as liabilities related to billings in excess of costs and estimated earnings on uncompleted contracts, have been classified as current. The contract cycle for certain long-term contracts may extend beyond one year; thus, complete collection of amounts related to these contracts may extend beyond one year though such long-term contracts include contractual milestone billings as discussed above. At June 30, 2024 and December 31, 2023, there were no contracts with terms that extended beyond one year.
| 9 |
The following table summarizes our contract assets, which are “Costs and estimated earnings in excess of billings on uncompleted contracts” and our contract liabilities, which are “Billings in excess of costs and estimated earnings on uncompleted contracts”.
| June 30, 2024 | December 31, 2023 | |||||||
| Costs incurred on uncompleted contracts | $ | $ | ||||||
| Estimated earnings on uncompleted contracts | ||||||||
| Estimated loss on uncompleted contracts | ( | ) | ||||||
| Gross costs and estimated earnings | ||||||||
| Less: Billings to date on uncompleted contracts | ( | ) | ( | ) | ||||
| Costs incurred plus estimated earning less billings on uncompleted contracts, net | $ | ( | ) | $ | ( | ) | ||
| Included in the accompanying unaudited condensed consolidated balance sheets under the following captions: | ||||||||
| Contract assets | $ | $ | ||||||
| Contract liabilities | ( | ) | ( | ) | ||||
| Costs incurred plus estimated earning less billing on uncompleted contracts | $ | ( | ) | $ | ( | ) | ||
The contract asset and liability balances at June 30 31, 2024 and December 31, 2023 consisted primarily of revenue related to fixed-price projects.
Remaining Performance Obligations
Remaining performance obligations represent the transaction price of firm orders for which work has not been performed and excludes unexercised contract options, potential orders, and any remaining performance obligations for any sales arrangements that had not fully satisfied the criteria to be considered a contract with a customer pursuant to the requirements of Accounting Standards Codification 606.
Practical Expedients and Exemptions
We generally expense sales commissions when incurred because the amortization period would have been one year or less. These costs are recorded within selling, general and administrative expenses.
Many of our services contracts are short-term in nature with a contract term of one year or less. For those contracts, we have utilized the practical expedient exempting the Company from disclosure of the transaction price allocated to remaining performance obligations if the performance obligation is part of a contract that has an original expected duration of one year or less.
Additionally, our payment terms are short-term in nature with settlements of one year or less. We have, therefore, utilized the practical expedient exempting the Company from adjusting the promised amount of consideration for the effects of a significant financing component given that the period between when the entity transfers a promised good or service to a customer and when the customer pays for that good or service will be one year or less.
Further, in many of our service contracts, we have a right to consideration from a customer in an amount that corresponds directly with the value to the customer of our performance completed to date (for example, a service contract in which we bill a fixed amount for each hour of service provided). For those contracts, we have utilized the practical expedient allowing us to recognize revenue in the amount for which we have the right to invoice.
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Accordingly, we do not disclose the value of unsatisfied performance obligations for (i) contracts with an original expected length of one year or less and (ii) contracts for which we recognize revenue at the amount to which we have the right to invoice for services performed.
| NOTE 4: | PROPERTY, PLANT AND EQUIPMENT |
Property, plant and equipment consisted of the following:
| Range of | ||||||||||
| June 30, 2024 | December 31, 2023 | Asset Lives | ||||||||
| Leasehold improvements | $ | $ | ||||||||
| Equipment | ||||||||||
| Furniture, computers and office equipment | ||||||||||
| Total property, plant and equipment | ||||||||||
| Less: Accumulated depreciation and amortization | ( | ) | ( | ) | ||||||
| Property, plant and equipment, net | $ | $ | ||||||||
Depreciation expense for the three and six months ended June 30, 2024 was
$
| NOTE 5: | SHARE-BASED COMPENSATION |
Share-based compensation is included in selling, general and administrative expenses in the accompanying unaudited condensed consolidated statements of operations and additional paid-in capital in the accompanying unaudited condensed consolidated balance sheets. During the three and six months ended June 30, 2024, the Company recognized a total of $ and $ of share-based compensation expense, respectively. During the three and six months ended June 30, 2023, the Company recognized a total of $ and $ of share-based compensation expense, respectively. The unamortized estimated fair value of nonvested stock options was $ and $ at June 30, 2024 and December 31, 2023, respectively. The unamortized estimated fair value of nonvested restricted stock was $ and $ at June 30, 2024 and December 31, 2023, respectively.
| NOTE 6: | TREASURY STOCK |
Treasury shares are accounted for using the cost method. During the six months ended June 30, 2024, shares of treasury stock were utilized for the restricted stock granted to our CEO.
| NOTE 7: | INCOME TAXES |
Income tax expense during interim periods is based on applying the estimated annual effective income tax rate to interim period operations. The estimated annual effective income tax rate may vary from the statutory rate due to the impact of permanent items relative to our pre-tax income, as well as by any valuation allowance recorded. We employ an asset and liability approach that results in the recognition of deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the financial basis and the tax basis of those assets and liabilities. A valuation allowance is established when it is more likely than not that some of the deferred tax assets will not be realized. At June 30, 2024 and December 31, 2023, management has recorded a full deferred tax asset valuation allowance.
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| NOTE 8: | COMMITMENTS AND CONTINGENCIES |
Employment Agreement
Our CEO is employed under an employment agreement containing severance provisions. In the event of termination of the CEO’s employment for any reason, the CEO will be entitled to receive all accrued, unpaid salary and vacation time through the date of termination and all benefits to which the CEO is entitled or vested under the terms of all employee benefit and compensation plans, agreements, and arrangements in which the CEO participates as of the date of termination.
In addition, subject to executing a general release in favor of the Company, the CEO will be entitled to receive certain severance payments in the event his employment is terminated by the Company “other than for cause” or by the CEO with “good reason.” These severance payments include: (i) a lump sum in cash equal to one time the CEO’s annual base salary; (ii) a lump sum in cash equal to a pro rata portion of the annual bonus payable for the period in which the date of termination occurs based on the actual performance under the Company’s annual incentive bonus arrangement; and (iii) if the CEO’s termination occurs prior to the date that is twelve months following a change of control, then each and every share option, restricted share award and other equity-based award that is outstanding and held by the CEO shall immediately vest and become exercisable.
Litigation
From time to time, the Company is party to various legal proceedings arising in the ordinary course of business. The Company expenses or accrues legal costs as incurred and is not involved in any material legal proceedings as of the date of these financial statements.
| NOTE 9: | EARNINGS PER COMMON SHARE |
Basic earnings per share (“EPS”) is calculated by dividing net income (loss) by the weighted-average number of common shares outstanding for the period. Diluted EPS is calculated by dividing net income (loss) by the weighted-average number of common shares and dilutive effect of common stock equivalents (warrants, nonvested stock awards and stock options) using the treasury method.
In each relevant period, the net income used in the basic and diluted EPS calculations is the same. The following table reconciles the weighted-average basic number of common shares outstanding and the weighted-average diluted number of common shares outstanding for the purpose of calculating basic and diluted EPS.
| Three Months Ended | Six Months Ended | |||||||||||||||
| June 30, | June 30, | |||||||||||||||
| 2024 | 2023 | 2024 | 2023 | |||||||||||||
| Weighted average common shares outstanding - basic | ||||||||||||||||
| Dilutive effect of common stock equivalents | ||||||||||||||||
| Weighted average common shares outstanding - diluted | ||||||||||||||||
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| NOTE 10: | EMPLOYEE RETENTION CREDIT |
Under the provisions of the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) signed into law on March 27, 2020 and the subsequent extension of the CARES Act, the Company was eligible for a refundable employee retention credit subject to certain criteria. Since there are no generally accepted accounting principles for for-profit business entities that receive government assistance that is not in the form of a loan, an income tax credit or revenue from a contract with a customer, we determined the appropriate accounting treatment by analogy to other guidance. The Company accounted for the employee retention credit by analogy to International Accounting Standards (IAS) 20, “Accounting for Government Grants and Disclosure of Government Assistance, of International Financial Reporting Standards (IFRS).”
Under an IAS 20 analogy, a business entity would recognize the employee retention credit on a systematic basis over the periods in which the entity recognizes the payroll expenses for which the grant (i.e., tax credit) is intended to compensate when there is reasonable assurance (i.e., it is probable) that the entity will comply with any conditions attached to the grant and the grant will be received.
The Company recognized a $
| NOTE 11: | FACTORING AGREEMENT |
On May 24, 2023, Koil Energy entered into the Factoring Agreement with Amegy, which provides for the Company from time to time to sell its accounts receivable and other rights to payment to Amegy. Amegy has the right to approve or reject future accounts receivable or other rights to payment proposed for sale under the Factoring Agreement in its sole discretion.
The purchase price for the receivables shall be the
gross amount of the invoice minus the discount. The “discount” means
Amegy has the right to charge back any receivable to Koil Energy, and Koil Energy has the obligation to repurchase such receivable, if (a) the receivable is not paid to Amegy within 90 days from the invoice date, at which time it will be deemed to be in dispute, (b) any dispute arises with respect to such receivable, (c) Koil Energy or Amegy discovers or determines that any representation or warranty made by Koil Energy in the Factoring Agreement or in any document executed in connection with the Factoring Agreement (the “Purchase Documents”) is false or misleading, or (d) Koil Energy breaches any covenant or agreement contained in the Factoring Agreement or in any Purchase Document or is otherwise in default thereof.
The receivables sold shall bear interest at a rate equal to the Prime Rate plus 2.00%. The Prime Rate has a floor and at no time shall it be less than 8.00% for the purposes of the Factoring Agreement.
| NOTE 12: | SUBSEQUENT EVENTS |
We have evaluated subsequent events through the date the condensed consolidated financial statements were filed with the SEC.
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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(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 Koil Energy’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, 2023 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
Koil Energy is an energy services company that provides equipment and support services to the world’s energy and offshore industries. The Company provides innovative solutions to complex customer challenges presented between the production facility and the energy source. Koil Energy'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, Koil Energy's experienced professionals can support subsea engineering, manufacturing, installation, commissioning, and maintenance projects located anywhere in the world. The Company’s solutions are engineered and manufactured primarily for major integrated, large independent, and foreign national energy companies in offshore areas throughout the world. These products are often developed in direct response to customer requests for solutions to critical needs in the field. The Company primarily serves the offshore oil and gas market; however, the Company’s product offerings and service capabilities are based on core competencies that are indifferent to energy source and can be applied to additional markets, including offshore wind, offshore wave energy, hydrogen, and liquefied natural gas.
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 either advance or cut back their exploration, drilling, and production operations is largely determined by the overall condition of the energy industry. The oil and gas industry in particular has historically been characterized by fluctuations in commodity prices, which are driven by a variety of market forces affecting supply and demand. We believe a convergence of economic, geopolitical, trade, and policy factors has highlighted the issue of years of underinvestment in upstream hydrocarbon production and appears to have driven operators to focus on optimizing production volumes. Per the International Energy Agency’s July 2024 Oil Market Report, the global demand for oil is expected to increase by approximately one million barrels per day in 2024. As a result, we anticipate global offshore oil production to continue its pivotal role in meeting the world’s energy demands this year.
Results of Operations
Three Months Ended June 30, 2024 Compared to Three Months Ended June 30, 2023
Revenues
Three Months Ended June 30, | Increase (Decrease) | |||||||||||||||
| 2024 | 2023 | $ | % | |||||||||||||
| Revenues | $ | 5,779 | $ | 3,508 | $ | 2,271 | 65% | |||||||||
The 65% increase in revenues was primarily driven by an increase in fixed price contracts for the manufacture of flying leads and hydraulic distribution manifolds, partially offset by a decline in service contract activity when compared to revenues for the three months ended June 30, 2023.
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Cost of Sales
Three Months Ended June 30, | Increase (Decrease) | |||||||||||||||
| 2024 | 2023 | $ | % | |||||||||||||
| Cost of sales | $ | 3,530 | $ | 2,360 | $ | 1,170 | 50% | |||||||||
| Gross profit | $ | 2,249 | $ | 1,148 | $ | 1,101 | 96% | |||||||||
| Gross profit % | 39% | 33% | – | 6% | ||||||||||||
The growth in gross profit and gross profit percentage was primarily driven by increased revenues when compared to the three months ended June 30, 2023.
The Company records depreciation expense related to revenue-generating property, plant and equipment as cost of sales, which totaled $122 and $127 for the three months ended June 30, 2024 and 2023, respectively.
Selling, general and administrative expenses
Three Months Ended June 30, | Increase (Decrease) | |||||||||||||||
| 2024 | 2023 | $ | % | |||||||||||||
| Selling, general & administrative | $ | 1,268 | $ | 1,569 | $ | (301 | ) | (19)% | ||||||||
| Selling, general & administrative as a % of revenue | 22% | 45% | – | (23)% | ||||||||||||
The decrease in selling, general, and administrative expenses (“SG&A”) was primarily due to lower administrative payroll expense, advertising expense, research and development expense, and rental expense related to the Company’s short-term lease for furniture at the Company’s operating facility.
The Company records depreciation expense related to administrative property, plant and equipment and intellectual property as SG&A, which totaled $27 for both the three months ended June 30, 2024 and 2023.
Adjusted EBITDA
Management evaluates Company performance based on a measure that is not in accordance with accounting principles generally accepted in the United States of America (“US GAAP”), 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 impairments, non-cash gains or losses on the sale of property, plant and equipment (“PP&E”), other non-cash items and one-time charges (“Adjusted 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 Adjusted EBITDA calculation, however, are derived from amounts included in the accompanying condensed consolidated statements of operations.
We believe Adjusted 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.
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The following is a reconciliation of net income (loss) to Adjusted EBITDA for the three months ended June 30, 2024 and 2023:
| Three Months Ended | ||||||||
| June 30, | ||||||||
| 2024 | 2023 | |||||||
| Net income (loss) | $ | 984 | $ | (433 | ) | |||
| (Deduct) Add: Interest (income) expense, net | (5 | ) | 2 | |||||
| Add: Income tax expense | 2 | 4 | ||||||
| Add: Depreciation and amortization | 149 | 154 | ||||||
| Add: Share-based compensation | 34 | 16 | ||||||
| Add (Deduct): Loss (gain) on sale of asset | 3 | (1 | ) | |||||
| Adjusted EBITDA | $ | 1,167 | $ | (258 | ) | |||
The $1,425 increase in Adjusted EBITDA was primarily driven by gross profit improvement associated with the increase in fixed price contracts during the three months ended June 30, 2024 as compared to the three months ended June 30, 2023.
Six Months Ended June 30, 2024 Compared to Six Months Ended June 30, 2023
Revenues
Six Months Ended June 30, | Increase (Decrease) | |||||||||||||||
| 2024 | 2023 | $ | % | |||||||||||||
| Revenues | $ | 11,570 | $ | 7,232 | $ | 4,338 | 60% | |||||||||
The 60% increase in revenues was primarily driven by an increase in fixed price contracts for the manufacture of flying leads and hydraulic distribution manifolds, partially offset by a decrease in service contract activity when compared to revenues for the six months ended June 30, 2023.
Cost of Sales
Six Months Ended June 30, | Increase (Decrease) | |||||||||||||||
| 2024 | 2023 | $ | % | |||||||||||||
| Cost of sales | $ | 7,290 | $ | 4,442 | $ | 2,848 | 64% | |||||||||
| Gross profit | $ | 4,280 | $ | 2,790 | $ | 1,490 | 53% | |||||||||
| Gross profit % | 37% | 39% | – | (2)% | ||||||||||||
The growth in gross profit was primarily driven by increased revenues, and the decrease in gross profit as a percentage of sales was mainly due to incurring higher materials costs associated with the increase in fixed price contracts when compared to the six months ended June 30, 2023.
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The Company records depreciation expense related to revenue-generating property, plant and equipment as cost of sales, which totaled $238 and $253 for the six months ended June 30, 2024 and 2023, respectively.
Selling, general and administrative expenses
Six Months Ended June 30, | Increase (Decrease) | |||||||||||||||
| 2024 | 2023 | $ | % | |||||||||||||
| Selling, general & administrative | $ | 2,729 | $ | 3,306 | $ | (577 | ) | (17)% | ||||||||
| Selling, general & administrative as a % of revenue | 24% | 46% | – | (22)% | ||||||||||||
The decrease in SG&A was primarily due to lower administrative payroll expense, advertising expense, research and development expense, and rental expense related to the Company’s short-term lease for furniture at the Company’s operating facility.
The Company records depreciation expense related to administrative property, plant and equipment and intellectual property as SG&A, which totaled $55 and $53 for the six months ended June 30, 2024 and 2023, respectively.
Adjusted EBITDA
The following is a reconciliation of net income (loss) to Adjusted EBITDA for the six months ended June 30, 2024 and 2023:
| Six Months Ended | ||||||||
| June 30, | ||||||||
| 2024 | 2023 | |||||||
| Net income (loss) | $ | 1,560 | $ | (530 | ) | |||
| (Deduct) Add: Interest (income) expense, net | (13 | ) | 4 | |||||
| Add: Income tax expense | 5 | 5 | ||||||
| Add: Depreciation and amortization | 293 | 306 | ||||||
| Add: Share-based compensation | 53 | 40 | ||||||
| Add (Deduct): Loss (gain) on sale of asset | 3 | (2 | ) | |||||
| Add: Relocation costs | – | 9 | ||||||
| Adjusted EBITDA | $ | 1,901 | $ | (168 | ) | |||
The $2,069 increase in Adjusted EBITDA was primarily driven by revenue and gross profit improvement associated with the increase in fixed price contracts during the six months ended June 30, 2024 as compared to the six months ended June 30, 2023.
Liquidity and Capital Resources
As an offshore energy services provider, our revenues, profitability, cash flows, and future rate of growth are generally dependent on the condition of the global oil and gas industry and our customers’ ability to invest capital for offshore exploration, drilling and production, and maintenance of offshore drilling and production facilities. Oil and gas prices and the level of offshore drilling and production activity have historically been characterized by significant volatility. At times, we enter into large, fixed-price contracts which may require significant lead time and investment. A decline in offshore drilling and production activity could result in lower contract volume or delays in significant contracts, which could negatively impact our earnings and cash flows. Our earnings and cash flows could also be negatively affected by delays in payments by significant customers or delays in the completion of our contracts for any reason.
| 17 |
The Company believes it will have adequate liquidity to meet its future operating requirements. We are generally dependent on our cash flows from operations to fund our working capital requirements, and the uncertainties noted above create risks that we may not achieve our planned earnings or cash flow from operations. In 2023, the Company entered into a Purchase and Sale Agreement/Security Agreement with Zions Bancorporation, N.A., d/b/a Amegy Bank Business Credit (“Amegy”), which provides for Koil Energy from time to time to sell its accounts receivable and other rights to payment to Amegy, subject to Amegy’s right to approve or reject future accounts receivable and other rights proposed for sale, in its sole discretion. The total value of accounts receivable sold to Amegy as of June 30, 2024 was $579.
The principal liquidity needs of the Company are to fund ongoing operations, working capital, and capital expenditures. During the six months ended June 30, 2024, the Company reported a $571 decrease in cash. The Company used $756 of net cash in operating activities, primarily driven by net changes in operating assets and liabilities of $2,706. This was partially offset by net income of $1,560 and other adjustments of $390 to reconcile net income to net cash used in operating activities, which mainly includes items such as non-cash lease expense, share-based compensation, and depreciation and amortization. The Company used $62 of net cash for investing activities, primarily to fund capital expenditures. The Company also generated $247 of net cash from financing activities, primarily driven by proceeds received from short-term borrowings.
During the six months ended June 30, 2023, the Company reported a $6 decrease in cash. The Company generated $238 of net cash from operating activities, primarily driven by offsetting a net loss of $530 with $830 of non-cash adjustments to reconcile net loss to net cash provided by operating activities, which mainly includes items such as non-cash lease expense, share-based compensation, and depreciation and amortization. This was partially offset by changes in operating assets and liabilities of $62. The Company used $80 in net cash for investing activities, primarily to fund capital expenditures. The Company also used $164 in net cash for financing activities, primarily for principal payments made under its finance lease obligations.
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. 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, 2023 for a discussion of our critical accounting policies and estimates.
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Allowance for Credit Losses
The estimation of anticipated credit losses that may be incurred as we work through the invoice collection process with our customers requires us to make judgments and estimates regarding our customers’ ability to pay amounts due. We monitor our customers’ payment history and current credit worthiness, if needed, to determine that collectability is reasonably assured. We provide an allowance for credit losses based by reviewing each accounts receivable balance with respect to a debtor’s ability to make payments. We also evaluate historical loss rates as well as consider forward-looking factors specific to the debtors, the overall economic environment, and management expectations to determine expected losses. When certain accounts are determined to require an allowance, they are expensed by a provision for bad debts in that period. At June 30, 2024 and 2023, we estimated the allowance for credit losses requirement to be $0. There were no charges to bad debt expense for the three and six months ended June 30, 2024. The Company recorded no charges and a $1 charge to bad debt expense during the three and six months ended June 30, 2023, respectively. We believe that no allowance for credit losses is necessary under current conditions; however, uncertainties regarding changes in the financial condition of our customers could impact the amount and timing of any additional credit losses that may be required.
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, 2023 for a discussion of recently issued accounting standards.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not Applicable
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
The Company’s disclosure controls and procedures are designed to ensure that such information required to be disclosed by the Company in reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. The Company’s disclosure controls and procedures are also designed to ensure that such information is accumulated and communicated to management, including the principal executive and the principal financial officer, as appropriate to allow timely decisions regarding required disclosures. There are inherent limitations to the effectiveness of any system of disclosure controls and procedures, including the possibility of human error and the circumvention or overriding of controls and procedures. Accordingly, even effective disclosure controls and procedures can only provide reasonable assurance that control objectives are attained. The Company’s disclosure controls and procedures are designed to provide such reasonable assurance.
The Company’s management, with the participation of the principal executive and principal financial officer, evaluated the effectiveness of the design and operation of the Company’s disclosure controls and procedures as of June 30, 2024, as required by Rule 13a-15(e) of the Exchange Act. Based on that evaluation, the principal executive and the principal financial officer have concluded that the Company’s disclosure controls and procedures were effective as of June 30, 2024.
Changes in Internal Control Over Financial Reporting
The Company’s management, with the participation of the principal executive and principal financial officer, have concluded there were no changes in internal control over financial reporting during the six months ended June 30, 2024.
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PART II – OTHER INFORMATION
ITEM 5. OTHER INFORMATION
During
the quarter ended June 30, 2024, no director or officer of the Company
ITEM 6. EXHIBITS
Exhibits required by Item 601 of Regulation S-K are listed in the Index to Exhibits of this Quarterly Report on Form 10-Q, which is incorporated herein by reference.
| 20 |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| August 5, 2024 | /s/ Erik Wiik | |
| Date | Erik Wiik | |
| President and Chief Executive Officer | ||
| (Principal Executive Officer) | ||
| August 5, 2024 | /s/ Trevor Ashurst | |
| Date | Trevor Ashurst | |
| Vice President of Finance | ||
| (Principal Financial Officer) | ||
| August 5, 2024 | /s/ Troy Aymond | |
| Date | Troy Aymond | |
| Corporate Controller | ||
| (Principal Accounting Officer) |
| 21 |
INDEX TO EXHIBITS
| 31.1* | Rule 13a-14(a)/15d-14(a) Certification of the President and Chief Executive Officer |
| 31.2* | Rule 13a-14(a)/15d-14(a) Certification of the Vice President of Finance |
| 32.1* | Section 1350 Certification of the President and Chief Executive Officer |
| 32.2* | Section 1350 Certification of the Vice President of Finance |
| 101.INS* | XBRL Instance Document |
| 101.SCH* | XBRL Schema Document |
| 101.CAL* | XBRL Calculation Linkbase Document |
| 101.DEF* | XBRL Definition Linkbase Document |
| 101.LAB* | XBRL Label Linkbase Document |
| 101.PRE* | XBRL Presentation Linkbase Document |
______________________________
* Filed or furnished herewith.
| 22 |