Quarterly Report for Quarter Ending September 30, 2026 (Form 10-Q)

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, 2025, 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, telecommunications, hydrogen, and liquefied natural gas.

Industry and Executive Outlook

The energy services industry relies heavily on the capital and operating expenditure programs of upstream energy companies. Operators' decisions to scale back or accelerate their exploration, drilling, and production activities are heavily influenced by the broader energy sector dynamics, including fluctuations in commodity prices driven by various global market forces.

Global energy demand continues to rise. Meeting this demand requires incremental oil and natural gas production alongside growth in renewable energy sources. Years of underinvestment in offshore exploration and development are now fueling a resurgence in subsea activity. Deepwater fields naturally decline at an average rate of just over 10% per year, according to the International Energy Agency (the "IEA"), underscoring the urgency for new development just to maintain current output. From our perspective, we are seeing global operators allocate more capital toward deepwater and ultra-deepwater developments, particularly in the US, Brazil, Norway, the Mediterranean, and West Africa.

There are three primary methods to maintain or expand subsea production:

(1)

Long-cycle greenfield development projects;

(2)

Subsea tie-back projects that connect new wells to existing infrastructure; and

(3)

Maintenance and life-extension activities, including upgrades of aging equipment and systems

Koil Energy provides products and services across all three areas, with a particular focus on subsea tie-back projects. Subsea tie-back development continues to gain momentum as a preferred approach among offshore operators. These projects allow operators to access nearby reservoirs, utilize available topside capacity, and leverage existing subsea infrastructure. In mature basins, tie-back strategies have been employed for decades. In emerging regions, operators are increasingly adopting this approach to accelerate first hydrocarbon production and enhance project returns.

A key advantage of subsea tie-back developments is the potential for shorter payback periods than traditional greenfield projects. Leveraging existing assets, these projects frequently have the potential to achieve first oil within two years of final investment decision. However, success hinges on meticulous planning and swift execution. Integrating new equipment into an aging infrastructure presents both technical challenges and opportunities, making adaptability and foresight essential. Proven, practical design, backed by a deep team experienced in subsea installation and commissioning, plays a critical role in ensuring reliability and staying on schedule. This is KOIL's forte.

Industry forecasts indicate continued strength in the offshore market. According to Westwood Global Energy Ltd. ("Westwood"), 63 offshore final investment decisions (FIDs) were recorded through the first nine months of 2026, and an additional 26 are expected by year-end, which would bring the full-year total to approximately 89, compared with 57 in 2025. Westwood also forecasts approximately 1,380 subsea tree installations through 2030, with contract award activity expected to accelerate over the next several years. These are third-party estimates and are subject to revision.

In the third quarter of 2026, Koil Energy continued to expand its market coverage through forming a strategic partnership with Pipeline Network, a consultancy focused on the oil and gas pipeline services sector, designed to expand Koil Energy's international presence, operational capabilities, and customer support across the Eastern Hemisphere. During the quarter it was also announced that Koil has secured a significant contract in Brazil, marking the Company's first subsea umbilical maintenance campaign in a leading deepwater market. The project's scope includes re-termination and testing of umbilical elements, including chemical injection and hydraulic control lines and electrical cables. We are using proprietary methodology and specialized equipment to perform the pull-in, removal and replacement of umbilical elements. We believe this contract positions us to pursue additional subsea umbilical maintenance opportunities in Brazil and the surrounding region.

Subsequent to September 30, 2026, Koil Energy announced that it had secured a significant contract for Subsea Cable Management Services where the Company will deploy a dedicated team of experienced service supervisors and technicians to provide operational support and coordination, including umbilical spooling and operations. The scope also includes specialized rental equipment and highlights Koil Energy's ability to complement its subsea equipment offerings with experienced field service personnel and ongoing operational support.

In summary, we believe the subsea market is entering a period of sustained development, supported by deepwater investment, increased tieback activity and greater use of existing offshore infrastructure. Operators are increasingly prioritizing shorter-cycle, capital-efficient developments, which we believe may create multi-year opportunities for specialized subsea service providers such as the Company. Industry sources expect subsea wells to account for a growing proportion of offshore production over the next decade.

Results of Operations

Three Months Ended September 30, 2026 Compared to Three Months Ended September 30, 2025

Revenues

		Three Months Ended September 30,								Increase
		2026				2025				$				%
Revenues		$	10,306			$	6,367			$	3,939				62%

The 62% increase in revenues was primarily driven by a $4,862 increase from service work. Partially offset by a decrease in revenue from fixed price projects of $923. The increase in service revenues was primarily driven by a large project involving two of the Company's carousels. The decrease in fixed-price project revenues was attributable to timing of long-term projects ending.

Cost of Sales

		Three Months Ended September 30,								Increase (Decrease)
		2026				2025				$				%
Cost of sales		$	7,532			$	4,315			$	3,217				75%
Gross profit		$	2,774			$	2,052			$	722				35%
Gross profit %			27%				32%				-				(5%	)

Cost of sales increased 75% from the third quarter of 2025 to the third quarter of 2026, generally consistent with higher revenue activity. The rate of increase was above revenue growth, resulting in a 5% decrease in gross profit margin to 27% of sales, compared to 32% in the prior-year period. A greater share of contracts in the current period included significant cost-plus components, which was the primary reason for the decrease. Under these arrangements, we earn a markup on costs incurred, which generally produces a lower gross margin percentage.

The Company records depreciation expense related to revenue-generating property, plant and equipment as cost of sales, which totaled $197 and $124 for the three months ended September 30, 2026 and 2025, respectively.

Selling, general and administrative expenses

		Three Months Ended September 30,								Increase (Decrease)
		2026				2025				$				%
Selling, general & administrative		$	2,327			$	2,514			$	(187	)			(7%	)
Selling, general & administrative as a % of revenue			23%				39%				-				(17%	)

Selling, general and administrative expenses ("SG&A") decreased approximately $187 during the third quarter of 2026 compared with the same period in 2025. The decrease was primarily attributable to a $562 reduction in Other G&A expenses, largely due to the $569 of bad debt expense related to OMSi recorded in the prior-year period, with no comparable expense in the current year. Additional decreases included $85 in legal and corporate expenses and $21 in professional fees. These decreases were partially offset by increases related to corporate growth of $198 in personnel-related expenses, $88 in information technology, $70 in insurance, and $125 across various other accounts.

The Company records depreciation expense related to administrative property, plant and equipment and intellectual property as SG&A, which totaled $18 and $22 for the three months ended September 30, 2026 and 2025, respectively.

Other income, net

		Three Months Ended September 30,								Increase (Decrease)
		2026				2025				$				%
Other income, net		$	(29	)		$	57			$	(86	)			nm
Other income, net as a % of revenue			(0%	)			1%				-				(1%	)

The decline in other income of $86, net was primarily due to the one-time write-down from the WW Champion litigation in the year-ago quarter, which totaled $84. Other fees accounted for the remaining $2.

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.

The following is a reconciliation of net income to Adjusted EBITDA for the three months ended September 30, 2026, and 2025:

		Three Months Ended
		September 30,
		2026				2025
Net income (loss)		$	207			$	(413	)
Add: Interest expense, net			174				-
Add: Income tax expense			21				8
Add: Depreciation and amortization			238				146
Add: Share-based compensation			181				92
Add: Loss on sale of asset			16				-
Add: (Gain) on litigation settlement			-				(84	)
Adjusted EBITDA		$	837			$	(251	)

Adjusted EBITDA increased by $1,088 for the three months ended September 30, 2026, due to higher net income and larger add-backs. Net income increased by $620, primarily due to higher project throughput and the non-recurring OMSi write-off recorded in the prior-year quarter. Borrowings under the nFusion facility increased net interest expense, which raised the interest add-back by $174. The depreciation and amortization add-back increased by $92, due to recently purchased fixed assets placed into service. Share-based compensation increased by $89, reflecting improved financial performance and commissions earned on new project bookings. Other items contributed the remaining $113.

Depreciation and amortization include amortization of intangible assets, which is excluded from depreciation expense disclosed in the Property and Equipment footnote.

Nine Months Ended September 30, 2026 Compared to nine Months Ended September 30, 2025

Revenues

		Nine Months Ended September 30,								Increase
		2026				2025				$				%
Revenues		$	27,709			$	16,799			$	10,910				65%

Revenues increased 65% for the nine months ended September 30, 2026, primarily driven by a $3,301 increase in fixed-price project revenues and a $7,609 increase in service revenues. The increase in fixed-price project revenues was attributable to a large, long-term integrated project, while the increase in service revenues was driven by a large project involving two of the Company's carousels and increased throughput from Koil's larger legacy customers.

Cost of Sales

		Nine Months Ended September 30,								Increase
		2026				2025				$				%
Cost of sales		$	19,342			$	11,341			$	8,001				71%
Gross profit		$	8,367			$	5,458			$	2,909				53%
Gross profit %			30%				32%				-				(2%	)

Cost of sales increased 71% from the first nine months of 2025 to the first nine months of 2026, generally consistent with higher revenue activity. Gross margin declined slightly to 30% of sales from 32%, as a greater share of contracts in the current period included significant cost-plus components.

The Company records depreciation expense related to revenue-generating property, plant and equipment as cost of sales, which totaled $490 and $368 for the nine months ended September 30, 2026, and 2025, respectively. The increase was driven by more fixed assets placed in service.

Selling, general and administrative expenses

		Nine Months Ended September 30,								Increase (Decrease)
		2026				2025				$				%
Selling, general & administrative		$	6,974			$	6,220			$	754				12%
Selling, general & administrative as a % of revenue			25%				37%				-				(12%	)

Selling, general and administrative expenses ("SG&A") increased approximately $754 during the first nine months of 2026 compared with the same period in 2025. The increase was primarily driven by higher personnel costs of $791, information technology expenses of $165, travel and entertainment expenses of $115, public company expenses of $111, insurance expenses of $93, and other expenses of $211. These increases were partially offset by decreases in Other G&A of $548, primarily due to the absence of prior-year bad debt expense related to OMSi, IT professional fees of $127, and other net reductions of $57.

The Company records depreciation expense related to administrative property, plant and equipment and intellectual property as SG&A, which totaled $107 and $81 for the nine months ended September 30, 2026, and 2025, respectively.

Other income, net

		Nine Months Ended September 30,								(Decrease)
		2026				2025				$				%
Other income, net		$	(24	)		$	375			$	(399	)			nm
Other income, net as a % of revenue			(0%	)			2%				-				(2%	)

Other income, net decreased by $399, from income of $375 for the nine months ended September 30, 2025, to an expense of $24 for the nine months ended September 30, 2026. The decrease was primarily due to a $333 gain recognized in the prior-year period upon the favorable resolution of the WW Champion lawsuit, which did not recur. Financial service charges increased by $30, driven by higher foreign exchange activity associated with Brazilian operations. Various other costs accounted for the remaining $36 decrease.

Adjusted EBITDA

The following is a reconciliation of net income to Adjusted EBITDA for the nine months ended September 30, 2026, and 2025:

		Nine Months Ended
		September 30,
		2026				2025
Net income (loss)		$	1,100			$	(382	)
Add (Deduct): Interest (income) expense, net			182				(16	)
Add: Income tax expense			72				23
Add: Depreciation and amortization			597				449
Add: Share-based compensation			562				241
Add: Loss (gain) on sale of asset			15				(12	)
Add: (Gain) on litigation settlement			-				(333	)
Add: Restructuring costs			-				279
Adjusted EBITDA		$	2,528			$	249

Adjusted EBITDA increased by $2,279 for the nine months ended September 30, 2026, due to higher net income and larger add-backs. Net income increased by $1,482, primarily due to higher project throughput without a corresponding increase in overhead and SG&A expenses, and the absence of the one-time OMSi write-off recorded in the prior-year period. Borrowings under the nFusion facility increased net interest expense, which raised the interest add-back by $198. Share-based compensation increased by $321, reflecting improved financial performance and commissions earned on new project bookings. The depreciation and amortization add-back increased by $148 due to recently purchased fixed assets placed into service. Other items completed the remaining $130.

Depreciation and amortization include amortization of intangible assets, which is excluded from depreciation expense disclosed in the Property and Equipment footnote.

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.

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.

On May 19, 2026, we entered into a Loan and Security Agreement with nFusion, pursuant to which nFusion will make revolving loans to the Company from time to time, in amounts determined by nFusion in its good faith business judgment, up to a maximum credit limit of $5,000. The facility is asset-based, and advances are subject to the weekly delivery of borrowing base certificates. The facility has an initial term of 12 months and is scheduled to mature in May 2027. The Company also entered into a The Company expects the facility to be renewed at that time, although renewal remains subject to the terms of the agreement and the parties' mutual agreement.

Subsequent to September 30, 2026, the Company obtained additional liquidity through two transactions. On October 7, 2026, the Company entered into an equipment financing arrangement with 36th Street Capital Partners, LLC, providing $1,122 in financing proceeds designated for specific equipment purchases and related vendor obligations. The financing requires monthly payments of approximately $33 over a 42-month term. Additionally, on October 29, 2026, the Company completed a private placement, generating $5,624 in gross proceeds before placement agent fees and other offering expenses. The Company intends to use the net proceeds from the private placement for working capital and general corporate purposes, including investments in rental equipment. For additional information regarding these transactions, refer to Note 14, Subsequent Events, to the unaudited condensed consolidated financial statements.

The Company's principal liquidity needs are to fund ongoing operations, working capital, and capital expenditures. During the nine months ended September 30, 2026, cash decreased by $974. Net cash used in operating activities totaled $1,055, primarily driven by an increase in accounts receivable. Net cash used in investing activities was $2,914, primarily related to capital expenditures, patent costs, and internal software development. Net cash provided by financing activities was $2,998 and included net payments of $541 to extinguish the Purchase and Sale Agreement/Security Agreement with Zions Bancorporation, N.A., d/b/a Amegy Bank Business Credit Factoring Agreement, net borrowings of $3,499 under the nFusion facility, and $24 of other items. The effect of exchange rate changes on cash equaled a use of $19.

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, 2025, for a discussion of our critical accounting policies and estimates.

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, 2025, for a discussion of recently issued accounting standards. There have been no significant changes to the status or expected impact of these standards during the nine months ended September 30, 2026.

Litigation

OMSi Lawsuit

In December 2024, the Company performed work under purchase orders with OMS International Limited ("OMSi"), a UK-based subsea engineering firm. The Company successfully completed the project in March 2025 and issued invoices totaling $569. OMSi has not remitted payment on the outstanding invoices and has not responded to the Company's repeated requests for payment.

On September 29, 2025, the Company filed a civil action against OMSi in the United States District Court for the Southern District of Texas seeking to recover the unpaid amounts. For the quarter ended September 30, 2025, the Company recorded a reserve of $569 in Allowance for Credit Losses. The Company received a judgment against OMSi in January 2026 in the amount of approximately $575 and is pursuing full recovery. The Company will adjust the reserve as new information becomes available.