(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
General
Industry and Executive Outlook
The energy services industry is dependent on the capital and operating expenditure programs of energy companies. The decision for operators to cut back or accelerate their exploration, drilling, and production operations is substantially driven by the overall condition of the energy industry. Particularly, the oil and gas industry has historically been characterized by fluctuations in commodity prices, which are driven by a variety of market forces.
To further enhance our growth prospects, we made two significant announcements this year: a relocation of the business and a rebranding of the Company.
The transition to our newly leased premises was completed in October. As we settle into the new space, we continue to receive positive feedback from our customers. In the second quarter of 2022, we received our first purchase order to provide hydrogen energy services. The scope of this project initially focuses on storage, management and enhancement of customer furnished materials utilizing our alloy welding and other fabrication capabilities. Following validation of these early-stage activities, future phases could lead to systems integration activities potentially including the commissioning of systems being developed for the retail consumer market.
Rebranding the Company from
As we look towards the future, our growth efforts will revolve around three pillars: (i) Systems, (ii) Technology and (iii) Partnerships. These three pillars will be energy source agnostic.
Systems primarily relates to our legacy offerings in the oil and gas segment but represents the shift in our approach to becoming a provider of integrated systems instead of providing only individual components. We have previously realized success with this strategy and have identified several opportunities to pursue on a systematic basis.
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Technology entails the development of new equipment and associated services that straddle both traditional oil and gas as well as renewable energy sources. Our product development team is already hard at work and, in just a short amount of time, has already identified a potentially patentable offering. This pillar will also include our ongoing efforts to further enhance the environmental friendliness of our equipment.
Partnerships involve the collaboration with like-minded organizations where we will seek to leverage our core competencies to jointly capitalize on future opportunities. This will likely be a longer-term strategy and could develop in a variety of ways, such as project specific consortia, strategic alliances, or operational joint ventures.
We will continue to provide additional details in due course as we work with our team to accomplish our vision of having the most experienced, professional and dependable team, who seek to develop the most innovative solutions, including the most efficient and reliable equipment, with the ultimate goal of providing best-in-class returns for our stockholders.
Results of Operations Three Months EndedSeptember 30, 2022 Compared to Three Months EndedSeptember 30, 2021 Revenues Three Months Ended September 30, Increase (Decrease) 2022 2021 $ % Revenues$ 2,257 $ 3,550 $ (1,293 ) (36 )%
The 36 percent decrease in revenues was primarily driven by an overall decline in project activity characterized by a shift from product oriented, fixed price contracts to short duration projects utilizing our support services and rental solutions.
Cost of Sales Three Months Ended September 30, Increase (Decrease) 2022 2021 $ % Cost of sales$ 1,988 $ 2,713 $ (725 ) (27 )% Gross profit$ 269 $ 837 $ (568 ) (68 )% Gross profit % 12% 24% - (12 )%
The decrease in gross profit and gross profit as a percentage of sales during
the three months ended
The Company records depreciation expense related to revenue-generating property,
plant and equipment as cost of sales, which totaled
Selling, general and administrative expenses
Three Months Ended September 30, Increase (Decrease) 2022 2021 $ % Selling, general & administrative$ 1,644 $ 1,336 $ 308 23% Selling, general & administrative as a % of revenue 73% 38% - 35% 18
The increase in selling, general and administrative expenses ("SG&A") for the
three months ended
Other income, net
During the three months ended
Loss on sale of assets
Loss on sales of assets was approximately
Modified EBITDA
Our management evaluates our performance based on a non-US GAAP measure which consists of earnings (net income or loss) available to common stockholders before net interest income, income taxes, depreciation and amortization, non-cash share-based compensation expense, non-cash gains or losses on the sale of property, plant and equipment ("PP&E"), other non-cash items and one-time charges ("Modified EBITDA"). This measure may not be comparable to similarly titled measures employed by other companies. The measure should not be considered in isolation or as a substitute for operating income or loss, net income or loss, cash flows provided by operating, investing, or financing activities, or other cash flow data prepared in accordance with US GAAP. The amounts included in the Modified EBITDA calculation, however, are derived from amounts included in the accompanying consolidated statements of operations.
We believe Modified EBITDA is a useful measure of a company's operating performance, which can vary substantially from company to company depending upon accounting methods and book value of assets, financing methods, capital structure and the method by which assets were acquired. It helps investors more meaningfully evaluate and compare the results of our operations from period to period by removing the impact of our capital structure (primarily interest), asset base (primarily depreciation and amortization), and actions that do not affect liquidity (share-based compensation expense) from our operating results. Additionally, it helps investors identify items that are within our operational control. Depreciation and amortization charges, while a component of operating income, are fixed at the time of the asset purchase or acquisition in accordance with the depreciable lives of the related asset and as such are not a directly controllable period operating charge.
The following is a reconciliation of net income (loss) to Modified EBITDA for
the three months ended
Three Months Ended September 30, 2022 2021 Net income (loss)$ (1,579 ) $ 332 Add: Interest expense, net 5 1 Add: Income tax expense 4 5 Add: Depreciation and amortization 161 209 Add: Share-based compensation - 9 Add: Relocation costs 262 - Add: Loss on sale of asset 147 148 Deduct: Forgiveness of PPP loan - (1,111 ) Modified EBITDA$ (1,000 ) $ (407 ) 19
The
Nine Months EndedSeptember 30, 2022 Compared to Nine Months EndedSeptember 30, 2021 Revenues Nine Months Ended September 30, Increase (Decrease) 2022 2021 $ % Revenues$ 9,357 $ 12,000 $ (2,643 ) (22 )%
The 22 percent decrease in revenues was primarily driven by an overall decline in project activity characterized by a shift from product oriented, fixed price contracts to short duration projects utilizing our support services and rental solutions.
Cost of Sales Nine Months Ended September 30, Increase (Decrease) 2022 2021 $ %
Cost of sales
- 1 %
The decrease in gross profit was due to lower revenues for the nine months ended
The Company records depreciation expense related to revenue-generating property,
plant and equipment as cost of sales, which totaled
Selling, general and administrative expenses
Nine Months Ended September 30, Increase (Decrease) 2022 2021 $ % Selling, general & administrative$ 4,730 $ 4,623 $ 107 2% Selling, general & administrative as a % of revenue 51% 39% - 12%
The increase in SG&A was primarily due to incurring costs related to the
relocation of the Company to a new facility and rebranding the Company from
Other income, net
Other net income during the nine months ended
20 Gain/Loss on sale of assets
The Company recorded a
Modified EBITDA
The following is a reconciliation of net income (loss) to Modified EBITDA for
the nine months ended
Nine Months Ended September 30, 2022 2021 Net income (loss)$ (1,666 ) $ 1,204 Add: Interest expense, net 10 8 Add: Income tax expense 19 15 Add: Depreciation and amortization 530 731 Add: Share-based compensation 71 46 Add: Relocation costs 291 -
(Deduct) Add: (Gain) loss on sale of asset (41 ) 94 Deduct: Forgiveness of PPP loan
- (2,222 ) Deduct: Reversal of litigation accrual (100 ) - Modified EBITDA$ (886 ) $ (124 )
The
Liquidity and Capital Resources
The Company believes it will have adequate liquidity to meet its future operating requirements through a combination of cash on hand, cash expected to be generated from operations, and potential sales of PP&E. Given the volatility in oil prices and the impact on global economic activity caused by the COVID-19 pandemic, as well as recent increases in raw materials costs and ongoing supply chain constraints, the Company cannot predict this with certainty. To mitigate this uncertainty and preserve liquidity, the Company will continue to exercise discipline when making capital investments and practice opportunistic cost containment initiatives, which can include workforce alignment and limiting overhead spending and research and development efforts to only critical items.
During the nine months ended
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During the nine months ended
Off-Balance Sheet Arrangements
The Company has no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on its financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to investors.
Critical Accounting Estimates
The preparation of financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and reported amounts of revenues and expenses during the reporting period. The most significant estimates used in the financial statements relate to revenue recognition where the Company measures progress towards completion on a cost-to-cost basis for fixed-price contracts, the allowance for doubtful accounts, and the valuation allowance for deferred income tax assets. Significant estimates are also used in management's assessment of conditions or events that raise substantial doubt about the Company's ability to continue as a going concern. These estimates require judgments, which are based on historical experience and on various other assumptions, as well as specific circumstances. Estimates may change as new events occur, additional information becomes available or operating environments change.
Refer to Part II. Item 7. "Management's Discussion and Analysis of Financial
Condition and Results of Operations," in our Annual Report on Form 10-K for the
year ended
Allowance for Doubtful Accounts and Bad Debt Expense
The Company provides an allowance on trade receivables based on a specific
review of each customer's accounts receivable balance with respect to its
ability to make payments. When specific accounts are determined to require an
allowance, they are expensed by a provision for bad debts in that period. At
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
22
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