The following discussion should be read in conjunction with the Condensed Consolidated Financial Statements and notes thereto included elsewhere in this Form 10-Q ("this Report") and the consolidated financial statements included in the 2021 Annual Report on Form 10-K filed onMarch 10, 2022 with theU.S. Securities and Exchange Commission (the "SEC"). Historical results and percentage relationships set forth in the Condensed Consolidated Statements of Operations and Cash Flows, including trends that might appear, are not necessarily indicative of future operations or cash flows.
Overview
Stabilis Solutions, Inc. and its subsidiaries is an energy transition company that provides turnkey clean energy production, storage, transportation and fueling solutions primarily using liquefied natural gas ("LNG") to multiple end markets acrossNorth America . We provide LNG solutions to customers in diverse end markets, including aerospace, agriculture, energy, industrial, marine bunkering, mining, pipeline, remote clean power and utility markets. LNG can be used to deliver natural gas to locations where pipeline service is not available, has been interrupted, or needs to be supplemented. Our customers use LNG as a partner fuel for renewable energy, and as a cleaner alternative to traditional fuel sources, such as distillate fuel oil (including diesel fuel and other fuel oils) and propane, among others to provide both environmental and economic benefits. We believe that these alternative fuel markets are large and provide significant opportunities for LNG substitution.
We believe that LNG as well as other clean energy solutions will provide an important balance between environmental sustainability, security and accessibility, and economic viability when compared to both renewables and other traditional hydrocarbon-based fuels and will play a key role in the energy transition.
Our LNG operations generate revenue by selling and delivering LNG to our customers, renting cryogenic equipment and providing engineering and field support services. We sell our products and services separately or as a bundle depending on the customer's needs. LNG pricing depends on market pricing for natural gas and competing fuel sources (such as diesel, fuel oil, and propane among others), as well as the customer's purchased volume, contract duration and credit profile. Stabilis' customers use LNG for fuel in their operations for multiple reasons, including lower and more stable fuel costs, reduced environmental emissions, and improved operating performance. LNG Production and Sales-Stabilis builds and operates cryogenic natural gas processing facilities, called "liquefiers," which convert natural gas into LNG through a purification and multiple stage cooling process. We currently own and operate a liquefier that can produce up to 100,000 LNG gallons per day inGeorge West, Texas and a liquefier that can produce up to 30,000 LNG gallons per day inPort Allen, Louisiana , which was purchased onJune 1, 2021 . We also purchase LNG from third-party production sources which allows us to support customers in markets where we do not own liquefiers. We make the determination of LNG and transportation supply sources based on the cost of LNG, the transportation cost to deliver to regional customer locations, and the reliability of the supply source. Transportation and Logistics Services-Stabilis offers our customers a "virtual natural gas pipeline" by providing turnkey LNG transportation and logistics services inNorth America . We deliver LNG to our customers' work sites from both our own production facilities and our network of third-party production sources located throughoutNorth America . We own a fleet of cryogenic trailers to transport and deliver LNG. We also outsource similar equipment and transportation services from qualified third-party providers as required to support our customer base. Cryogenic Equipment Rental-Stabilis owns and operates a rental fleet of mobile LNG storage and vaporization assets, including: transportation trailers, electric and gas-fired vaporizers, ambient vaporizers, storage tanks, and mobile vehicle fuelers. We also own several stationary storage and regasification assets. We believe this is one of the largest fleets of small-scale LNG equipment inNorth America . Our fleet consists primarily of trailer-mounted mobile assets, making delivery to and between customer locations more efficient. We deploy these assets on job sites to provide our customers with the equipment required to transport, store, and consume LNG in their operations. Engineering and Field Support Services-Stabilis has experience in the safe, cost effective, and reliable use of LNG in multiple customer applications. We have also developed many processes and procedures that we believe improve our customers' use of LNG in their operations. Our engineers help our customers design and integrate LNG and hydrogen into their fueling operations and our field service technicians help our customers mobilize, commission and reliably operate on the job site. 24 --------------------------------------------------------------------------------
Biofuels and Hydrogen-We believe that our technical expertise, production, transportation and storage asset capabilities are favorable for other alternative fuels, such as renewable natural gas, synthetic natural gas and hydrogen.
Additionally, we build power and control systems for the energy industry in
Inflationary Pressures:
We continue to experience inflationary pressures for increasing costs for natural gas, liquefaction and transportation at least for the near-term. While we pass a significant portion of the cost of natural gas and transportation on to our customers, we are not able to pass through all costs which has resulted in margin pressure. Recent global events, which includeRussia's invasion ofUkraine , are exacerbating these trends. The ultimate extent and effects of recent events are difficult to estimate, but we expect them to continue to place pressure on the price of natural gas in the near-term. For a more complete discussion of the risks we encounter in our business, please refer to Risk Factors in Part I, Item 1A of the Company's Annual Report on Form 10-K filed with theSEC onMarch 10, 2022 and Part II, Item 1A of the Company's Quarterly Reports on Form 10-Q filed with theSEC onMay 5, 2022 andAugust 11, 2022 .
Recent Developments:
During the quarter, Stabilis received authorization from the
Sale of Brazil Operations and Discontinued Operations
AtSeptember 30, 2022 , the Company determined that it would exit itsBrazil Operations. This decision resulted in discontinued operations presentation for its Brazil Operations and an impairment charge of$1.3 million measured as the estimated fair value of$0.9 million (calculated as the estimated net proceeds that would be received in an orderly and timely sale of the operations) less the carrying value of theBrazil net assets atSeptember 30, 2022 . OnOctober 31, 2022 , the Company entered into a sales agreement and closed on the sale of its Brazil Operations to itsBrazil management team for approximately$.9 million See also Notes 2 and 15 in the Notes to Condensed Consolidated Financial Statements for further discussion of the Company's discontinued operations and sale of the Brazil Operations. 25 --------------------------------------------------------------------------------
Results of Operations
The Company supplies LNG to multiple end markets inNorth America and provides turnkey fuel solutions to help users of propane, diesel and other crude-based fuel products convert to LNG. The anticipated sale of the Brazil Operations represent all of the revenue and expenses previously reported within the Company's Power Delivery segment with the exception of the Company's equity method investment in BOMAY. Further, the Company also believes that the decision to exit the Brazil Operations atSeptember 30, 2022 meets the criteria to be reported as discontinued operations. As a result, the Company believes that it has one reporting segment and the operating results presented in the tables below have been recast to separately present the revenues and expenses related to the Brazil Operations as discontinued operations for all periods presented.
Three Months Ended
The comparative tables below reflect our consolidated operating results for the three months endedSeptember 30, 2022 (the "Current Quarter ") as compared to the three months endedSeptember 30, 2021 (the "PriorYear Quarter ") (unaudited, amounts in thousands, except for percentages). Corporate allocations of$0.1 million previously reported within the Company's Power Delivery Segment have been reclassified to continuing operations for the Prior year Quarter and$0.5 million for the PriorYear Quarter was reclassified from selling, general and administrative expense to costs of rental, service and other in the table below to conform to current period presentation. Three Months Ended September 30, 2022 2021 $ Change % Change Revenues: Revenues 25,819 17,779 8,040 45.2 % Operating expenses: Cost of revenues 19,904 14,369 5,535 38.5 Change in unrealized gain on natural gas derivatives (926) - (926) n/a Selling, general and administrative expenses 3,658 5,286 (1,628) (30.8) Gain from disposal of fixed assets 46 - 46 n/a Depreciation expense 2,115 2,284 (169) (7.4) Impairment of right-of-use lease asset - 376 (376) (100.0) Total operating expenses 24,797 22,315 2,482 11.1 Income (loss) from operations before equity income 1,022 (4,536) 5,558 122.5 Net equity income from foreign joint venture operations 114 246 (132) (53.7) Income (loss) from operations 1,136 (4,290) 5,426 126.5 Other income (expense): Interest expense, net (150) (119) (31) (26.1) Interest expense, net - related parties (49) (120) 71 59.2 Other income (expense) (28) 37 (65) n/a Total other income (expense) (227) (202) (25) n/a Net income (loss) from continuing operations before income tax expense 909 (4,492) 5,401 120.2 Income tax (benefit) expense (115) 89 (204) (229.2) Net income (loss) from continuing operations 1,024 (4,581) 5,605 122.4 Loss from discontinued operations, net of tax (1,301) (44) (1,257) n/a Net loss$ (277) $ (4,625) $ 4,348 94.0 26
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Revenues
During theCurrent Quarter , revenues increased$8.0 million , or 45%, compared to the PriorYear Quarter related to an increase in LNG product revenue of$7.2 million and an increase in rental, service and other revenue of$0.8 million . The increase in LNG product revenue was primarily related to:
•Additional LNG gallons delivered during the
•Increased natural gas prices during the
•Increased pricing charged to our customers in response to increased costs from inflationary pressures.
The increase in rental, service and other revenue related to additional projects (primarily for marine bunkering) with equipment and increased labor revenues.
Operating Expenses
Costs of revenues. Cost of revenues increased$5.5 million , or 39%. due to an increase in the cost of LNG product of$4.8 million and an increase in the costs of rental, service and other of$0.7 million in theCurrent Quarter compared to the PriorYear Quarter . The increased costs related to LNG product were attributable to:
•Additional LNG gallons delivered during the
•Increased natural gas prices during the
•Inflationary pressures, including increased transportation costs and increased liquefaction costs; and
•Increased electricity prices, particularly in
As a percentage of LNG product revenue, these costs decreased from 83% in the PriorYear Quarter to 74% in theCurrent Quarter . The decrease is primarily due to increased pricing charged to our customers. The increase in the costs of rental, service and other was primarily due to additional projects (primarily for marine bunkering) and increased costs for rental equipment to service additional contracts and increased service personnel to support increased services work. Change in unrealized gain on natural gas derivatives. The Company incurred an unrealized gain of$0.9 million in theCurrent Quarter on its natural gas derivatives. The unrealized gain was due to higher future natural gas prices atSeptember 30, 2022 as compared toJune 30, 2022 . The Company had no derivatives in the PriorYear Quarter . See also Note 4 in the Notes to the Condensed Consolidated Financial Statements for a further discussion of our derivatives. Selling, general and administrative expenses. Selling, general and administrative expense decreased$1.6 million , or 31%, during theCurrent Quarter compared to the PriorYear Quarter . During the PriorYear Quarter , we recorded$2.2 million for the immediate vesting of restricted common stock related to our executive transition occurring in the PriorYear Quarter in addition to$0.8 million in severance and legal costs. Savings from the non-recurrence of these PriorYear Quarter expenses were partially offset during theCurrent Quarter by higher stock-based compensation expenses and increased compensation related to additional headcount to support our operations. Gain from disposal of fixed assets. There were no significant gains or losses from disposal of fixed assets in either theCurrent Quarter or the PriorYear Quarter .
Depreciation. Depreciation expense decreased 7% during the
Net equity income from foreign joint venture operations. Income from investments the Company's foreign joint venture decreased$0.1 million during theCurrent Quarter due to supply chain challenges as well as foreign exchange losses resulting from a strongU.S. dollar compared to the PriorYear Quarter .
Interest expense, net. Interest expense increased
Interest expense, net - related parties. Related party interest expense decreased$0.1 million during theCurrent Quarter as compared to the PriorYear Quarter primarily related to repayment of related party debt and due to amendments to the M/G Finance note payable which lowered the interest rate from 12% to 6%. 27 --------------------------------------------------------------------------------
Other income (expense). Other expense was
Income tax expense. The Company incurred a state and foreign income tax benefit of$0.1 million during theCurrent Quarter compared to a state and foreign income tax expense of$0.1 million during the PriorYear Quarter . NoU.S. federal income tax benefit was recorded for theCurrent Quarter or PriorYear Quarter as any netU.S. deferred tax assets generated from operating losses were offset by a change in the Company's valuation allowance on net deferred tax assets. Discontinued Operations. Operating loss from discontinued operations, net of tax was$1.3 million and$44 thousand for theCurrent Quarter and the PriorYear Quarter , respectively.The Current Quarter operating loss from discontinued operations increased in theCurrent Quarter compared to the PriorYear Quarter due to the impairment of$1.3 million recorded as a result of the anticipated sale of the Brazil Operations. See Note 2 in the Notes to Condensed Consolidated Financial Statements for further discussion of the Company's discontinued operations.
Nine Months Ended
The following table reflects line items from the accompanying Condensed Consolidated Statements of Operations for the nine months endedSeptember 30, 2022 (the "Current Year") as compared to the nine months endedSeptember 30, 2021 (the "Prior Year") (unaudited, amounts in thousands, except for percentages). Corporate allocations of$0.6 million previously reported within the Company's Power Delivery Segment have been reclassified to continuing operations for the Prior Year and$1.5 million for the Prior Year was reclassified from selling, general and administrative expense to costs of rental, service and other, and$0.3 million was reclassified from costs of LNG product to costs of rental, service and other to conform to current period presentation. Nine Months Ended September 30, 2022 2021 $ Change % Change Revenues: Revenues 69,236 48,291 20,945 43.4 % Operating expenses: Cost of revenues 54,945 37,301 17,644 47.3 Change in unrealized gain on natural gas derivatives (27) - (27) n/a Selling, general and administrative expenses 9,643 10,558 (915) (8.7) Gain from disposal of fixed assets (34) (24) (10) (41.7) Depreciation expense 6,589 6,653 (64) (1.0) Impairment of right-of-use lease asset - 376 (376) (100.0) Total operating expenses 71,116 54,864 16,252 29.6 Loss from operations before equity income (1,880) (6,573) 4,693 71.4 Net equity income from foreign joint venture operations 887 1,075 (188) (17.5) Loss from operations (993) (5,498) 4,505 81.9 Other income (expense): Interest expense, net (437) (189) (248) (131.2) Interest expense, net - related parties (129) (441) 312 70.7 Other income (expense) (99) 1,031 (1,130) n/a Total other income (expense) (665) 401 (1,066) n/a Net loss from continuing operations before income tax expense (1,658) (5,097) 3,439 (67.5) Income tax (benefit) expense (248) 229 (477) (208.3) Loss from continuing operations (1,410) (5,326) 3,916 73.5 Loss from discontinued operations, net of tax (1,441) (128) (1,313) n/a Net loss$ (2,851) $ (5,454) $ 2,603 47.7 28
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Revenues
During the Current Year, revenues increased$20.9 million , or 43%, due to increased LNG product revenue of$20.8 million and increased rental, service and other revenue of$0.1 million compared to the Prior Year. The increase in LNG product revenue was primarily due to:
•Additional LNG gallons delivered during the Current Year compared to the Prior Year;
•Increased natural gas prices compared to the Prior Year; and
•Increased pricing charged to our customers.
The increase in rental, service and other revenue was primarily due to additional projects (primarily for marine bunkering) with additional equipment and labor revenues compared to the Prior Year.
Operating Expenses
Cost of revenues. Cost of revenues increased$17.6 million , or 47%, in the Current Year compared to the Prior Year due to and increase in the cost of LNG product of$16.5 million and an increase in the cost of rental, service and other revenue of$1.1 million . The increase in the cost of LNG product was due to:
•Additional LNG gallons delivered during the Current Year compared to the Prior Year;
•Increased natural gas prices during the Current Year compared to the Prior Year;
•Inflationary pressures including increased transportation costs and increased liquefaction costs; and
•Increased electricity prices, particularly in
As a percentage of LNG product revenue, these costs decreased from 79% in the Prior Year to 78% in the Current Year. The decrease is primarily due to increased pricing charged to our customers. The increase in cost of rental, service, and other was primarily due to additional projects (primarily for marine bunkering) and increased costs for rental equipment to service additional contracts and increased service personnel to support increased services work. Change in unrealized gain on natural gas derivatives. We incurred an unrealized gain of$27 thousand in the Current Year on our natural gas derivatives. The unrealized gain was due to higher future natural gas prices atSeptember 30, 2022 as compared to the time of purchase of the derivatives. We had no derivatives in the Prior Year. See Note 4 in the Notes to Condensed Consolidated Financial Statements for a further discussion of our derivatives. Selling, general and administrative expenses. Selling, general and administrative expenses decreased$0.9 million or 9% in the Current Year compared to the Prior Year. During the Prior Year, we recorded$2.2 million for the immediate vesting of restricted common stock related to our executive transition occurring in the Prior Year in addition to$0.8 million in severance and legal costs. Savings from the non-recurrence of these Prior Year expenses were partially offset during the Current Year by higher stock-based compensation expenses and increased compensation related to additional headcount to support our operations.
Gain from disposal of fixed assets. There were no significant gains or losses from disposal of fixed assets in either the Current Year or the Prior Year.
Depreciation. Depreciation expense decreased$0.1 million in the Current Year compared to the Prior Year primarily due to assets reaching the end of their depreciable lives. Net equity income from foreign joint venture operations. Income from investments in the Company's foreign joint venture decreased$0.2 million during the Current Year compared to the Prior Year primarily due to supply chain challenges as well as foreign exchange losses resulting from a strongU.S. dollar compared to the Prior Year. Other Income (Expense)
Interest expense, net. Interest expense increased
Interest expense, net - related parties. Related party interest expense
decreased
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Other Income (Expense). Other expense was
Income tax (benefit) expense. The Company incurred an income tax benefit in the Current Year of$0.2 million compared to income tax expense of$0.2 million in the Prior Year. The benefit in the Current Year was due to a favorable income tax result upon filing theMexico income tax return. NoU.S. federal income tax benefit was recorded for the Current Year or Prior Year as any netU.S. deferred tax assets generated from operating losses were offset by a change in the Company's valuation allowance on net deferred tax assets. Discontinued Operations. Operating loss from discontinued operations was$1.4 million and$0.1 million for the Current Year and the Prior Year, respectively. The Current Year operating loss from discontinued operations increased compared to the Prior Year due to the impairment of$1.3 million recorded as a result of the anticipated sale of the Brazil Operations. See Note 2 in the Notes to Condensed Consolidated Financial Statements for further discussion of the Company's discontinued operations.
Liquidity and Capital Resources
Historically, our principal sources of liquidity have consisted of cash on hand, cash provided by our operations, proceeds received from borrowings under our AmeriState Loan, and distributions from our BOMAY joint venture. In prior years, the Company also obtained equipment financing from M/G Finance, a related party. During the Current Year, our principal sources of liquidity were cash provided by our operations, cash generated from sales of assets and deposits received from customers. We have used cash flows generated from operations to invest in fixed assets and increased working capital to support growth as well as to pay interest and principal amounts outstanding under our debt borrowings. The Company's decision to exit its Brazil Operations is not anticipated to adversely impact the Company's future cash flows. As ofSeptember 30, 2022 , we had$11.1 million in cash and cash equivalents on hand and 13.1 million in outstanding debt (net of debt issuance costs) and lease obligations (of which$3.6 million is due in the next twelve months). The Company has a$10.0 million loan facility with$1.0 million available for future draws under the loan facility atSeptember 30, 2022 . The Company has also filed a shelf registration statement (described below) which provides the Company the flexibility to raise capital to fund working capital requirements, repay debt and/or fund future transactions. The Company is subject to substantial business risks and uncertainties inherent in the LNG industry. The Company has implemented a number of cost control measures and increased pricing to customers in response to inflationary costs; however, there is no assurance that the Company will be able to generate sufficient cash flows in the future to sustain itself or to support future growth. We have experienced a significant increase in sales since mid-2021. Accordingly, management believes the business will generate sufficient cash flows from its operations along with availability under our loan facility that is sufficient to fund the business for the next twelve months. As we continue to grow, management continues to evaluate additional financing alternatives, however, there is no guarantee that additional financing will be available or available at terms that would be beneficial to shareholders. 30 --------------------------------------------------------------------------------
Cash Flows
Cash flows provided by (used in) our operating, investing and financing activities are summarized below (unaudited, in thousands):
Nine Months Ended September 30, 2022 2021 Net cash provided by (used in): Operating activities $ 11,538$ 5,429 Investing activities 69 (6,690) Financing activities (1,422) 2,451 Effect of exchange rate changes on cash 7 (76) Net increase in cash and cash equivalents $ 10,192$ 1,114 Operating Activities Net cash provided by operating activities totaled$11.5 million for the nine months endedSeptember 30, 2022 compared to$5.4 million for the same period in 2021. The increase in net cash provided by operating activities of$6.1 million as compared to the Prior Year was primarily attributable to deposits received from customers and improved profitability in the Current Year when excluding the impacts of non-cash expenses and gains included in net loss such as depreciation, stock-based compensation, unrealized loss on natural gas derivatives and gain on extinguishment of debt compared to the Prior Year.
Investing Activities
Net cash provided by investing activities totaled$0.1 million for the nine months endedSeptember 30, 2022 compared to cash used of$6.7 million for the nine months endedSeptember 30, 2021 . The decrease in net cash used in the Current Year was primarily due to the acquisition of ourPort Allen liquefaction facility onJune 1, 2021 , which included$5.0 million in cash paid. Additionally, proceeds of$2.0 million were received for assets held for sale during 2022. Financing Activities Net cash used in financing activities totaled$1.4 million for the nine months endedSeptember 30, 2022 , compared to net cash provided by financing activities totaling$2.5 million for the Prior Year primarily from proceeds received from borrowings under the AmeriState Loan of$7.0 million , partially offset by repayments of debt.
Future Cash Requirements
We require cash to fund our operating expenses and working capital requirements, including costs associated with fuel sales, capital expenditures, debt repayments and repurchases, equipment purchases, maintenance of LNG production facilities, mergers and acquisitions (if any), pursuing market expansion, supporting sales and marketing activities, support of legislative and regulatory initiatives, and other general corporate purposes. While we believe we have sufficient liquidity and capital resources to fund our operations and repay our debt, we may elect to pursue additional financing activities such as refinancing existing debt, obtaining new debt, or debt or equity offerings to provide flexibility with our cash management. Certain of these alternatives may require the consent of current lenders or stockholders, and there is no assurance that we will be able to execute any of these alternatives on acceptable terms or at all. Capital expenditures for the nine months endedSeptember 30, 2022 were$1.7 million and primarily related to capital expenditures for our operations inMexico and the addition of rolling stock and replacement assets. The Company had open purchase orders of approximately$1.5 -$2.0 million atSeptember 30, 2022 for capital expenditures over the next twelve months.
Shelf Registration Statement
OnApril 11, 2022 , the Company filed a registration statement on Form S-3 (the "Shelf Registration") which was declared effective onApril 26, 2022 and will permit the Company to issue up to$100.0 million in either common stock, preferred stock, warrants or a combination of the above, and gives the Company the flexibility to raise capital to fund working capital requirements, repay debt and/or fund future transactions. As a smaller reporting company, we are subject to General Instruction I.B.6 of Form S-3, which limits the amounts that we may sell under the Shelf Registration to no more than one-third of our public 31 --------------------------------------------------------------------------------
float in any twelve month period as measured in accordance with such instruction. There is no assurance that we will be able to raise capital pursuant to the Shelf Registration on acceptable terms or at all.
Off-Balance Sheet Arrangements
As of
Critical Accounting Policies and Estimates
The discussion and analysis of our financial condition and results of operations are based on our Condensed Consolidated Financial Statements, which have been prepared in accordance with accounting principles generally accepted inthe United States of America ("U.S. GAAP") which requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosures of contingent assets and liabilities known to exist at the date of the Condensed Consolidated Financial Statements and the reported amounts of revenues and expenses during the reporting period. We evaluate our estimates on an ongoing basis, based on historical experience and on various other assumptions that are believed to be reasonable under the circumstances. There can be no assurance that actual results will not differ from those estimates. There have been no significant changes in the Company's "Critical Accounting Policies and Estimates" during the three and nine months endedSeptember 30, 2022 from those disclosed within the Company's Annual Report on Form 10-K for the year endedDecember 31, 2021 as filed with theSEC onMarch 10, 2022 .
New Accounting Standards
See Note 1 to the Notes to Condensed Consolidated Financial Statements included elsewhere in this report for information on new accounting standards.
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