Participants

Charles Njuguna; President, Director, CEO & CFO; Koil Energy Solutions, Inc.

Trevor Ashurst; VP, Finance; Koil Energy Solutions, Inc.

Walter Schenker; Analyst; MAZ Capital Advisors

Frank Wisnisky

Presentation

Operator

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to Koil Energy's third-quarter 2023 conference call. (Operator Instructions) As a reminder, this call is being recorded today, Monday, November 13, 2023. A detailed disclaimer related to Koil Energy's forward-looking statements is included in the press release issued Thursday afternoon and filed with the SEC. It is also available on the company's website koilenergy.com or upon request.
A reconciliation of non-GAAP financial measures used in the press release and on today's call is included in the press release and on the website. Listeners are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date made. Koil Energy also undertakes no obligation to revise any of its forward-looking statements to reflect events or circumstances after the date made. At this time, I'd like to turn the call over to CEO, Charles Njuguna. Please go ahead.

Charles Njuguna

Thank you, Gary. Good morning and thank you for joining us today. Our third-quarter results reflect the prevailing climate that has been a feature of the offshore oil and gas industry over the past few years. The increase in revenue is characteristic of the recovery we are beginning to see, especially in the deepwater segments hampered by continued effect of price pressures we faced during the recent downturn, which led us to strategically price some projects at lower than ideal margins. And yes, our cash balance at the end of the quarter was conservatively low but having collected over $2.6 million since the end of the quarter, our current cash balance is roughly what it was at the beginning of the year.
In a moment, [Trevor] will provide further details about our financials, but first, we'll take a look at the broader business environment. Few industries are as impacted by geopolitical events as the oil and gas industry. The tragedies unfolding around the world have led to increased conversations about energy security. When these events, coupled with the under investment in offshore developments during the pandemic and its immediate aftermath and a major focus for new energy sources over the past couple of years, there's a growing consensus about the need to rapidly replenish depleted offshore reserves, our viewpoint, we are witnessing firsthand as we engage our customers.
This changing also outlook provides cautious optimism for us to follow up recent project announcements with further announcements. For instance, we previously mentioned a couple of significant carousel opportunities, which are supposed to have kicked off during the first half of last year but were both delayed for different reasons. At the time we talked about having gone through several rounds of clarifications with the customers and in both cases, having commitment dates by which the customers expected to initiate the projects before both projects were ultimately delayed. While the delays ended up being lower than initially expected, we have recently had conversations about both projects and remain cautiously optimistic about providing positive updates of at least one of them in coming months.
Public commentary has also described an increase in project funding decisions commonly referred to as final investment decisions, RFIDs, with one highly regarded organizations estimating FIDs in 2023 to be 60% higher than the average over the past eight years. The amount of bidding activity we are engaged in best results with our year-to-date project awards almost startling our full year 2022 project awards. And if current conversations pan out as our customers have indicated, we could potentially announce a few million dollars' worth of new orders before the end of the year, the revenue, which should be mostly realized in 2024. However, as we have repeatedly witnessed things could shift to the right.
Speaking about 2024 revenues, a good portion of the revenue from the projects we recently announced will also be realized next year, given the long cycle engineering that's required as well as delays in the receipt of third-party components, which are required for integration into the systems we're building. Despite the slower than ideal industry recovery, we have continued using this time to further our repositioning efforts, such as by advancing our product designs while simultaneously streamlining our engineering and manufacturing processes.
Key initiative has been standardization of traditionally custom products, including some aspects which previously were thought not to be candidates for standardization. I recently sat through a demonstration of the improvements made to one of our core products and will acknowledge and maybe biased. I was very impressed by the progress made by our engineering team.
And speaking of product improvements, the new 20,000 PSI subsea connector we previously announced recently passed all third-party qualification testing, including some testing, which as far as you can tell has never been performed on any competing product. While working on these projects, our engineers were able to reduce the product's unique part count by about 50% over the previous design while more than doubling its capacity. These efforts have not gone unnoticed by our customers as evidenced by new requests following the qualification testing.
So what do these improvements mean for our shareholders? In addition to widening the technical breadth of our product offerings, these efforts enable quicker project execution, therefore, speeding up revenue recognition and project cash flows, ultimately resulting in improved project profitability. Our revenues and profitability increase as we execute a large quantity of fixed-price projects where we design, engineer, and manufacture subsea equipment. These efforts are therefore directly tied to value generation.
These efforts also directly correlate to our customers' value drivers with a key driver being the ability to achieve first oil as quickly as possible. Building on the company's historical reputation for creative solutions to one of problems, we have been able to broaden our name beyond just getting our customers' existing fields back online faster than the competition to also getting new fields online faster than our competitors while meeting all quality and documentation requirements. All factors being constant and hoping the geopolitical issues not broadly escalates, '24 is shaping up to be a turnaround year we have all been waiting for.
Our optimism for the future is further enhanced by the momentum we're seeing from our new branding and relocation efforts and the rekindling of former customer relationships with several million dollars' worth of recent project awards being directly attributable to these efforts. With the (inaudible) of the downtime appearing to be behind us, our focus is on our growth trajectory characterized by four-pillar strategy. The first pillar is our value proposition of being the fastest enabler of our customers' ability to achieve first oil or first gas for new developments or where we're watching the remediation projects getting them back online the fastest. With continued supply chain challenges being faced across the industry, timely project delivery stands out to our customers.
The second pillar is our relentless focus on funding our future which is a function of a laser focus on our cost position and a continuous focus on cost rationalization. The third pillar revolves around our product and service offerings through our renewed product improvement and innovation mindsets. And finally, we ensure we have the right team in place to serve our customers well, and we provide the tools and development necessary to ensure our team succeeds. This is through both development of homegrown talents as well as augmentation with missing skill sets and when necessary, making changes to ensure maximum cohesion.
With our transformation efforts largely behind us, momentum building from the industry's positive reactions to these efforts and market conditions appearing to turn in our favor, the foundation of the company have never been stronger. And we are optimistic that our shareholders will soon start realizing positive benefits from these efforts even as we acknowledge the turnaround has taken longer than we would have all wanted. With that overview, I will now turn the call over to our Vice President of Finance, Trevor Ashurst. Trevor?

Trevor Ashurst

Thank you, Charles. Let's now take a minute to review our third-quarter results. For the three months ended September 30, 2023, Koil Energy generated revenues of $4.1 million, which represents 82% increase when compared to the revenues $2.3 million for the three months ended September 30, 2022. This year-over-year improvement in revenues reflects a collective uplift in both service project and product-oriented fixed-price project activity.
Gross profit was $1.4 million or 33% of revenues for the third quarter of 2023. This represents 21% increase in gross margin when compared to the $269,000 or 12% of revenues we generated for the third quarter of 2022. This relative improvement in gross margin was mainly due to recognizing higher revenues I just mentioned, as well as lower rent expenses during the past quarter.
Operating expenses were $1.6 million in Q3 of 2023 compared to $1.7 million in Q3 of 2022. The 7% decrease was primarily due to relocation costs incurred by the company in the third quarter of last year that were not repeated in the third quarter of this year. The decrease in operating expenses was partially offset by higher R&D costs for the development of our 20,000 psi MQC plate.
Turning to the bottom line, the company reported net loss of $143,000 for the third quarter, which translates to $0.01 loss per diluted share. Our results for the quarter reflect the impact of a few projects we're working through that were strategically priced prior to this year's rise and bidding activity. As compared to generating a net loss of $1.6 million or $0.13 loss per share for Q3 of 2022, so the comparative increase in earnings was driven by gross profit improvement associated with increase in both fixed price and service project activity.
Moving to the balance sheet, our capital structure is composed of $3.4 million in working capital, which includes $1.1 million in cash and $5.5 million in receivables as of September 30 this year. This is compared to having $3.6 million of working capital as of December 31, 2022, which includes $2.4 million in cash and $2.9 million received.
As Charles mentioned earlier, we deployed some fund stores towards building working capital in the third quarter, which led to a dip in our cash balance a year a quarter. However, some of this working capital has since been converted to cash to bring our balances back to expected levels. We also had an outstanding $669,000 receivable at quarter end that was related to employee retention credits claimed under the provisions of the CARES Act.
Subsequent to the end of the quarter, we received $344,000 refund related to the employee retention credits. We unfortunately do not have visibility on when the remainder credit might be paid. This concludes the financial summary for the third quarter. So thank you for your time. I'll now turn the call back over to Charles.

Charles Njuguna

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

Question and Answer Session

Operator

(Operator Instructions) Walter Schenker, MAZ Partners.

Walter Schenker

Hi, Charles, two different subjects. One, I didn't have to ask you about carousels. You brought them up. Could you just give a little more color why after low these many years, you seem to be or hopefully are more confident that we're actually going to get some economic return from in the not-too-distant future. First one, question.

Charles Njuguna

Yeah. Thanks, Walter. The reason the optimism cautiously is that the projects -- there are some large projects which were put on hold. One in particular relates to -- there has been at a number of consolidations in the industry. And so in one case, our company was moving forward with a project and then they got into an M&A situation. And so the projects are put on hold while they walk through all the governmental regulations of the transaction and approvals from different governments. All of that is now behind them, and they are ready to move forward from what they've told us.

Walter Schenker

Okay. And realizing the future is hard to predict, we would hope to hear something within a quarter, two quarters. Now, that seems to be moving forward again by year end.

Charles Njuguna

At this point, they say within a quarter but again, they -- like I said previously, they even gave us a start date. But right now, yes, within the next, let's say, three months, they've indicated we should hear something.

Walter Schenker

And this would be potentially a rental or sale?

Charles Njuguna

Right now we are discussing our rental. The sale option is also on the table. So it depends on the timeline of how long they wanted. But it's more for a storage application with a long-term storage that could -- once they determine the length of their project, at some point, the economics switch over to make it more palatable for them to for sale. So it could go either way.

Walter Schenker

Okay. And just in general, you express increasing optimism for meaningful quarters and improving revenues as we look into next year, how much of that is a function of a generally better environment so that as you look out, there's just seems to be more interest in how much of it is specific to either your capabilities or projects you are already discussing with people which hopefully have a higher likelihood of coming to fruition?

Charles Njuguna

It's a lot of the latter. We have a fair amount of very specific projects we are discussing with clients for larger quantities. For instance, over the past two or three years, we probably had a handful of flying leads that we've built and in many cases in one or two. Right now, we this year alone, I think we are watching probably about 30 flying leads. So we had some large quantity orders. We are watching on that we are discussing, and that's what gives us optimism that things are looking up in addition to the general environment.

Walter Schenker

And given the improved outlook pricing going forward, we'll be at better margins so that the projects all should be hopefully profitable to meaningfully profitable if we get increased revenues.

Charles Njuguna

Yes, sir, in addition to us also evaluating our cost structure and channel.

Walter Schenker

And so looking forward, I would expect a $4 million to $5 million quarter to be in revenues to be a profitable quarter, all other things being equal?

Charles Njuguna

That is our target. Yes, sir.

Walter Schenker

Okay. Well, good luck on the carousel, especially. Thank you, Charles.

Charles Njuguna

Thank you, Walter.

Operator

Frank Wisnisky, private investor.

Frank Wisnisky

Hey, good morning, Charles. 20,000-psi projects, is the R&D for that completed now?

Charles Njuguna

Yes, it's substantially done. We're still working through some final paperwork and clarifications with the regulatory agency. But it's substantially done now.

Frank Wisnisky

All right. And would we expect R&D -- I know it's not a huge number, but would we really expect it to decline or the other things you're working on it will keep that R&D number higher?

Charles Njuguna

It probably would stay potentially relatively flat. We have a couple of other things. We are thinking of for next year, but it would as a percentage of revenue should go down because we are being very strategic with our R&D.

Frank Wisnisky

As the percentage will go down because revenues are going up, hopefully, right?

Charles Njuguna

Yeah, exactly. Revenues are going up, so R&D as a percentage.

Frank Wisnisky

Yeah, and what kind of markets -- you mentioned there had been a lot of interest in it. What kind of markets that get you into? What kind of a customer does it change? Does it broaden your market at all, or it just make you stronger in the areas you are already competing in?

Charles Njuguna

This particular product makes us stronger in the deepwater oil and gas markets because 20,000 psi is the next frontier. However, the efforts that are being done and some of the features that have been used to come up with this product, we are beginning to -- we've identified some new markets we may be able to extend those features into. And that's where additional R&D could occur in 2024, could be in that platform.

Frank Wisnisky

And what kind of competition -- you have much competition in the 20,000 psi area?

Charles Njuguna

There's a handful of big billion-dollar companies, the industry that have some 20,000 psi, a similar connectors based on the testing we've done that they haven't done. And so it's more of a function of now going to the markets and selling it. But what it does is with all the consolidations happening with the bigger companies for a company of our size, able to get it to market a lot quicker than some of the other ones. It does open up the market for us almost -- now, recently I was in Asia last week speaking about some developments in that part of the world. And they were very, very open to conversations about it because we can get to market quicker.

Frank Wisnisky

Switching to the balance sheet for a minute, obviously Trevor had said that a lot of the receivables have come in. You've got a little bit of the employee retention cash coming in. And I noticed you have usually a factoring facility to a very modest degree. Would you see you having to use that factoring more now that your cash position is so good? Are you in that much need of working capital that you'd be factoring out some of the other receivables?

Charles Njuguna

Yeah, the factoring is more of a backstop. And we did factor one invoice. A part of that was really -- the bank is heavily incentivized for us to use it. And they asked us a lot about why aren't we using it and we got it. So we really have factored one invoice just give --

Frank Wisnisky

Yeah. It was tiny. It was only about a $0.25 million or something?

Charles Njuguna

Yeah, just to make sure that when the time comes, if we need it, how would the process work. Yeah. So at this point, we are managing just using our cash and expect to be to continue being the same.

Frank Wisnisky

Okay, good. Thank you. Nice. I'm happy with the improved prospects, and wish you good luck going forward.

Charles Njuguna

Thank you, Frank always good talking to you.

Operator

This concludes our question-and-answer session. I would like to turn the conference back over to Charles Njuguna for any closing remarks.

Charles Njuguna

Thank you, Gary, and thank you to everyone for your continued interest in the company. We look forward to providing further updates in coming months. And with that, let's conclude today's call. Thank you.