STABILIS SOLUTIONS, INC.
The following discussion should be read in conjunction with the consolidated
financial statements and notes thereto included in Item 8. Financial Statements
and Supplementary Data of this Form 10-K. Historical results and percentage
relationships set forth in the consolidated statements of operations and cash
flows, including trends that might appear, are not necessarily indicative of
future operations or cash flows.
OVERVIEWDuring 2021, the Company operated and managed its business through two operating segments: LNG and Power Delivery.
LNG Segment
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 through its LNG segment. We provide LNG solutions to customers in diverse end markets, including aerospace, agriculture, industrial, utility, pipeline, mining, energy, remote clean power, and high horsepower transportation 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 an 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 also have the capability, knowledge and expertise to deliver other clean energy fuels still in commercial development such as hydrogen, renewable natural gas and synthetic natural gas which we believe will play an increasingly important role in the energy transition as clean energy initiatives increase globally, including the development of hydrogen powered marine vessels, fueling station infrastructure and fuel cell technologies.
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 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 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 them with turnkey LNG transportation and logistics services inNorth America . We deliver LNG to our customers' work sites from both our own production facility and our network of 37 third-party production sources located throughoutNorth America . We own a fleet of LNG fueled trucks and cryogenic trailers to transport and deliver LNG. We also outsource similar equipment and transportation services for LNG from qualified third-party providers as required to support our customer base. Cryogenic Equipment Rental-Stabilis owns and operates a rental fleet of approximately 162 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 37 -------------------------------------------------------------------------------- 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 fueling operations. Engineering and Field Support Services-Stabilis has experience in the safe, cost effective, and reliable use of LNG and hydrogen 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 into their fueling operations and our field service technicians help our customers mobilize, commission and reliably operate on the job site. Marine Bunkering of LNG-We believe that opportunities to provide LNG as a fuel source to the marine transportation industry represent a significant opportunity for us. As shipping and marine transportation companies expand the use of LNG as a fuel source we believe that we are positioned to capitalize on future growth.The International Maritime Organization ("IMO") has imposed a global sulfur cap of 0.5% on ships trading outside of established emission control areas starting inJanuary 2020 , a level that could be difficult to achieve using common marine fuels, such as heavy fuel oil, but could be achieved using LNG. Large marine vessels can take several hundred thousand gallons of LNG in a single fuel bunkering event. Other Clean Energy Fuels such as Hydrogen,Renewable Natural Gas and Synthetic Natural Gas-We believe that our technical expertise, production, transportation and storage asset capabilities are favorable for other clean energy fuels such as renewable natural gas, synthetic natural gas and hydrogen, The current market demand for these is currently very small as they are not yet commercially viable compared to more traditional hydrocarbon-based fuel sources (including natural gas). However, production and distribution technologies are currently under development by various manufacturers for all of these. As we believe societies and governments strive for a decarbonized world, development of commercially viable, zero emission fuel technologies could make these a key energy transition fuel in the coming decades. Hydrogen can be transported by trucks, pipelines or ships depending on the targeted end-use. We expect that small-scale hydrogen distribution using equipment and expertise similar to that used for small-scale LNG will play an important role in the ultimate acceptance and utilization of hydrogen as a low to zero emission fuel source.
Power Delivery Segment
As a result of the business combination withAmerican Electric , Stabilis provides electrical switch-gear, generator and instrumentation construction, installation and service to the marine, power generation, oil and gas, and broad industrial market segments inBrazil through its Power Delivery segment. Our products are used to safely distribute and control the flow of electricity from a power generation source to mechanical devices utilizing the power. We also offer a range of electrical and instrumentation turnarounds, maintenance and renovation projects.
Additionally, we build power and control systems for the energy industry in
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RESULTS OF OPERATIONS
Our revenues are derived from two operating segments. The LNG Segment supplies
LNG to multiple end markets in North America and provides turnkey fuel solutions
to help users of propane, diesel and other crude-based fuel products convert to
LNG. The Power Delivery Segment provides power delivery equipment and services
in Brazil and through our BOMAY joint venture in China . We evaluate the
performance of our segments based primarily on segment operating income. See
also Note 3 of the Notes to Consolidated Financial Statements for further
discussion of our segments. In evaluating our operating performance, we believe
that gallons delivered and plant utilization are important operating performance
metrics in addition to revenues and operating income for our LNG operations. The
comparative tables below reflect our consolidated operating results as well as
those of our two operating segments for the year ended December 31, 2021 (the
"Current Year") as compared to the year ended December 31, 2020 (the "Prior
Year") (amounts in thousands, except percentages):
Consolidated Results Year Ended December 31,
2021 2020 Change % Change
Revenue:
LNG product $ 55,699 $ 27,339 $ 28,360 103.7 %
Rental, service and other 13,472 8,951 4,521 50.5
Power delivery 7,994 5,260 2,734 52.0
Total revenues 77,165 41,550 35,615 85.7
Operating expenses:
Costs of LNG product 45,185 20,362 24,823 121.9
Costs of rental, service and other 8,158 5,230 2,928 56.0
Costs of power delivery 6,138 4,419 1,719 38.9
Selling, general and administrative 17,320 10,764 6,556 60.9
Gain on disposal of fixed assets (24) (283) 259 91.5
Depreciation 9,059 9,041 18 0.2
Impairment of right-of-use lease asset 376 - 376 n/a
Total operating expenses 86,212 49,533 36,679 74.0
Loss from operations before equity income (9,047) (7,983) (1,064) (13.3)
Net equity income from foreign joint ventures'
operations:
Income from investments in foreign joint ventures 2,146 2,705 (559) (20.7)
Foreign joint ventures' operations related
expenses (363) (249) (114) (45.8)
Net equity income from foreign joint ventures'
operations 1,783 2,456 (673) (27.4)
Loss from operations (7,264) (5,527) (1,737) (31.4)
Other income (expense):
Interest expense, net (373) (45) (328) (728.9)
Interest expense, net - related parties (577) (871) 294 33.8
Other income (expense) 1,224 (57) 1,281 2,247.4
Total other income (expense) 274 (973) 1,247 128.2
Loss before income tax expense (6,990) (6,500) (490) (7.5)
Income tax expense 808 256 552 215.6
Net loss $ (7,798) $ (6,756) $ (1,042) (15.4) %
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LNG Segment Year Ended December 31,
2021 2020 Change % Change
Revenue:
LNG product $ 55,699 $ 27,339 $ 28,360 103.7 %
Rental, service and other 13,472 8,951 4,521 50.5
Total revenues 69,171 36,290 32,881 90.6
Operating expenses:
Costs of LNG product 45,185 20,362 24,823 121.9
Costs of rental, service and other 8,158 5,230 2,928 56.0
Selling, general and administrative 15,383 8,602 6,781 78.8
Loss (gain) on disposal of fixed assets (24) (283) 259 91.5
Depreciation 8,894 8,911 (17) (0.2)
Impairment of right-of-use lease asset 376 - 376 n/a
Total operating expenses 77,972 42,822 35,150 82.1
Loss from operations $ (8,801) $ (6,532) $ (2,269) (34.7) %
Power Delivery Segment Year Ended December 31,
2021 2020 Change % Change
Revenue:
Power delivery $ 7,994 $ 5,260 $ 2,734 52.0 %
Operating expenses:
Costs of power delivery 6,138 4,419 1,719 38.9
Selling, general and administrative 1,937 2,162 (225) (10.4)
Depreciation 165 130 35 26.9
Total operating expenses 8,240 6,711 1,529 22.8
Loss from operations before equity income (246) (1,451) 1,205 (83.0)
Net equity income from foreign joint ventures'
operations:
Income from equity investments in foreign joint
ventures 2,146 2,705 (559) (20.7)
Foreign joint ventures' operations related
expenses (363) (249) (114) (45.8)
Net equity income from foreign joint ventures'
operations 1,783 2,456 (673) (27.4)
Income from operations $ 1,537 $ 1,005 $ 532 52.9 %
Revenue
LNG Product Revenue. During the Current Year LNG Product revenues increased
•An increase of 23.0 million LNG gallons delivered compared to the Prior Year particularly with power generation customers; and
•Increased natural gas prices compared to the Prior Year which are passed onto our customers. The average price per gallon of natural gas in the Current Year was$0.32 per gallon compared to$0.18 per gallon in the Prior Year. Rental, Service, and Other Revenue. Rental, service and other revenues increased by$4.5 million or 51% in the Current Year compared to Prior Year primarily related to the economic recovery and a higher concentration of current projects with additional equipment and labor revenues from projects inMexico and withU.S. power generation customers.
Power Delivery. Power Delivery revenue increased
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--------------------------------------------------------------------------------Operating Expenses
Costs of LNG Product. Cost of product in the Current Year increased$24.8 million or 122% compared to Prior Year. As a percentage of LNG product revenue, these costs increased from 74% in the Prior Year to 81% in the Current Year. The increased costs were attributable to:
•Inflationary pressure including increased costs from higher natural gas prices, increased transportation costs and increased liquefaction costs; and
•Additional LNG gallons delivered.
Costs of Rental, Service, and Other Revenue. This cost increased
Costs of Power Delivery. Costs increased
Selling, general and administrative. Selling, general and administrative expense increased$6.6 million or 61% during the Current Year as compared to the Prior Year due to •$2.2 million related to the immediate vesting of restricted stock units as well as$0.8 million of severance and legal expenses associated with our executive transition;
•$0.3 million related to an expense of capitalized engineering designs;
•Increased compensation related to on-going stock-based compensation, increased headcount and commissions associated with revenue growth; and
•Increased travel costs.
Depreciation. Depreciation expense increased by less than 1% during the Current Year as compared to the Prior Year due to assets reaching the end of their depreciable lives, offset by additional depreciation expense on ourPort Allen facility which was acquired onJune 1, 2021 . Impairment of right-of-use lease asset.. During the Current Year, we recorded an impairment of$0.4 million related to the settlement and release of ourHouston office lease. See Note 10 of the Notes to Consolidated Financial Statements for additional discussion of our lease settlement.
Gain on the disposal of fixed assets. The gain on disposal of fixed assets in
the Current Year was
Net Equity Income From
Income from Investments inForeign Joint Ventures . Income from investments in foreign joint ventures decreased by$0.6 million , or 21%, in the Current Year compared to the Prior Year primarily due to increased administrative costs in the Current Year. Other Income (Expense) Interest expense, net. Interest expense increased by$0.2 million in the Current Year primarily due to interest associated with the Company's advancing loan withAmeriState Bank . Interest expense, net - related parties. Related party interest expense decreased by$0.3 million during the Current Year as compared to the Prior Year primarily related to repayment of the short-term note payable - related party of$1.1 million as further discussed in Note 9 of the Notes to Consolidated Financial Statements and the maturity of capital leases in 2020 and January of 2021, partially offset by a scheduled increase in interest rates in the Current Year.
Other income (expense). Other income was
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--------------------------------------------------------------------------------Income tax expense
The Company incurred state and foreign income tax expense of$0.8 million during the Current Year primarily related to foreign taxes paid in connection with the cash dividend received from our BOMAY joint venture. The Company incurred state income and foreign tax expense of$0.3 million in the Prior Year. 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. SEASONALITY AND INFLATION We did not experience significant variations in volume of LNG delivered to our customers during 2021, and we do not expect future volumes to be significantly impacted by seasonal variations. However, our revenues are susceptible to variations due to changes in the price of natural gas as we pass this cost onto our customer. The price of natural gas can fluctuate at any time during the year due to isolated factors, but on average, natural gas prices tend to be higher in peak winter and peak summer months when heating and cooling demand is seasonally higher. The Company experienced higher than normal inflationary pressure during the latter part of 2021 which we expect to continue into 2022. Specifically, costs for fuel, repairs, maintenance, electricity, wages for skilled labor and insurance continue to increase. We believe that inflationary pressures are the result of a post-COVID-19 period of recovery, economic growth and demand in recent months. Public concern increased recently with a resurgence in COVID-19 infections due to the Omicron variant during Q4 2021 and early into Q1 2022. This resurgence resulted in reinstatement of certain COVID restrictions in certain parts of the world and uneasiness concerning future demand and growth. However, the effects of the Omicron variant thus far appear to be shorter-lived and have not significantly repressed recent increased economic growth and demand. Increases in economic growth and demand have been limited by skilled labor and transportation resources within our markets resulting in a period of increasing costs. Further, natural gas inventories and production, which decreased during the COVID-19 pandemic, have been slow to respond. 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 and decreasing margins. No assurances can be made about future price trends. As post-COVID-19 pandemic demand continues to evolve, the economy, commodity prices, demand for our products and our cost of operations and share price may all be impacted. The ultimate extent and effects of these impacts are difficult to estimate; however, continued periods of increasing costs could adversely impact our future results and operating cash flows. LIQUIDITY AND CAPITAL RESOURCES Historically, our principal sources of liquidity have consisted of cash on hand, cash provided by our operations, and distributions from our BOMAY joint venture. Additionally, the Company obtained equipment financing from MG Finance, a related party. During the Current Year, our principal sources of liquidity were cash provided by our operations and an advancing loan facility withAmeriState Bank in the aggregate principal amount of up to$10.0 million . We have used a portion of our cash flows generated from operations to invest in fixed assets to support growth as well as to pay interest and principal amounts outstanding under our borrowings and increased working capital needs resulting from growth. As ofDecember 31, 2021 , we had$2.1 million in cash and cash equivalents on hand and$12.4 million in outstanding debt (net of debt issuance costs) and finance lease obligations (of which$2.1 million is due in 2022). Future availability under the advancing loan facility was$2.0 million atDecember 31, 2021 . 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. Over the last two quarters of 2021, we experienced a significant increase in sales. Further, we have implemented cost rationalization programs to eliminate unnecessary spending and we have increased our pricing to our customers. Accordingly, management believes the business will generate sufficient cash flows from its operations along with availability under our advancing loan facility that is sufficient to fund the business for the next 12 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. 42 --------------------------------------------------------------------------------
Cash Flows
Cash flows provided by (used in) our operating, investing and financing
activities are summarized below (in thousands):
Year Ended
2021 2020
Net cash provided by (used in):
Operating activities $ 4,906 $ 1,336
Investing activities (7,520) (256)
Financing activities 3,011 (3,202)
Effect of exchange rate changes on cash (151) (43)
Net increase (decrease) in cash and cash equivalents 246 (2,165)
Cash and cash equivalents, beginning of period 1,814 3,979
Cash and cash equivalents, end of period $ 2,060 $ 1,814
Operating Activities
Net cash provided by operating activities totaled $4.9 million and $1.3 million
for the twelve months ended December 31, 2021 and 2020, respectively. The
increase in net cash provided by operating activities of $3.6 million as
compared to the Prior Year was primarily attributable to increased revenues and
improved profitability when excluding noncash items such as stock-based
compensation, depreciation, impairment charges and the gain on extinguishment of
debt pursuant to the Paycheck Protection Program ("the PPP Loan").
Investing Activities
Net cash used in investing activities totaled$7.5 million and$0.3 million for the twelve months endedDecember 31, 2021 and 2020, respectively. The increase in net cash used in the Current Year was primarily due to the acquisition of the LNG plant inPort Allen, Louisiana and purchases of vaporizers and other LNG equipment. Financing Activities Net cash provided by financing activities totaled$3.0 million for the twelve months endedDecember 31, 2021 compared to$3.2 million net cash used by financing activities for 2020. Cash provided from financing activities for the Current Year primarily related to proceeds received from theAmeriState Bank loan facility, partially offset by payments made on notes payable including from related parties. Cash used by financing activities of$3.2 million from the Prior Year was primarily attributable to payments of$5.2 million made on notes payable including from related parties partially offset by$2.0 million of borrowings,$1.1 million of which was received pursuant to the PPP Loan.
Future Cash Requirements
Uses of Liquidity and Capital Resources
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 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, 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
We anticipate between$4.0 million to$6.0 million in capital expenditures in 2022. These capital expenditures primarily relate to the addition of rolling stock and replacement assets. 43 --------------------------------------------------------------------------------
Debt Level and Debt Compliance
We had total indebtedness net of debt issuance costs of
2022 $ 2,131 2023 2,567 2024 774 2025 1,142 2026 1,142 Thereafter 4,952
Total long-term debt, including current maturities and debt issuance costs
$ 12,708
We expect our total interest payment obligations relating to our indebtedness to be approximately$0.6 million for the year endingDecember 31, 2022 . Certain of the agreements governing our outstanding debt, which are discussed in Note 9 of our Consolidated Financial Statements, have certain covenants with which we must comply. As ofDecember 31, 2021 , we were in compliance with all of these covenants. CONTRACTUAL OBLIGATIONS We are committed to make cash payments in the future pursuant to certain of our contracts. The following table summarizes certain contractual obligations in place as ofDecember 31, 2021 (in thousands):
Payments Due By Period
Total 2022 2023 2024 2025 2026 Thereafter
Term Loan to
-
466 466 455 391 325 638
MG Finance note payable - related
party 3,603 1,168 2,435 - - - -
Interest - MG Finance note payable
(2) 244 166 78 - - - -
Finance Lease Obligations 81 19 20 42
Interest - Finance lease
obligations 13 7 6 - - - -
Operating Lease Obligations (3) 690 339 164 148 38 1 -
Insurance and other notes payable 1,108 963 132 13 - - -
Total $ 16,477 $ 3,128 $ 3,301 $ 1,419 $ 1,571 $ 1,468 $ 5,590
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(1)Obligation with AmeriState Bank to provide for an advancing term loan
facility for working capital needs for our LNG liquefaction plant in Texas in
the aggregate principal amount of up to $10.0 million . The term loan facility
matures on April 8, 2031 and bears interest at 5.75% per annum through April 8,
2026 , and the U.S. prime lending rate plus 2.5% per annum thereafter.
(2)Obligation is a secured promissory note payable to MG Finance, a related
party. The note as amended bears interest at 6% and matures in
(3)Operating lease obligations primarily relate to office lease space inWashington andBrazil . TheWashington lease renewed in 2018 for an additional 4 year term. We have three facility leases inBrazil expiring at various dates in 2022 and 2024.
See additional discussion of our debt and lease obligations in Notes 9 and 10 of the Notes to Consolidated Financial Statements.
Contingencies
In the normal course of our business, we become involved in various litigation
matters. In addition, from time to time we are involved in tax and other
disputes with various government agencies. Management has used estimates in
determining our potential exposure to these matters and has recorded reserves in
our financial statements related thereto as appropriate. It is possible that a
change in estimate related to these exposures could occur, but we do not expect
such changes in the estimated costs
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--------------------------------------------------------------------------------would have a material effect on our business, consolidated financial position or results of operations. See Note 13 to the Notes to Consolidated Financial Statements for further discussion of our contingencies.
Off-Balance Sheet Arrangements
As of
NEW ACCOUNTING STANDARDSSee Note 1 of the Notes to Consolidated Financial Statements for further information related to new accounting standards.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The discussion and analysis of our financial condition and results of operations
are based on our consolidated financial statements, which have been prepared in
accordance with U.S. GAAP. The preparation of these consolidated financial
statements 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 consolidated financial statements
and the reported amounts of revenues and expenses during the reporting period.
Critical accounting policies are those policies that the Company believes are
the most important to the portrayal of the Company's financial condition and
results, and require difficult, subjective, or complex judgments, often as a
result of the need to make estimates about the effects of matters that are
inherently uncertain. 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. The Company has identified the
following critical accounting policies as they require significant judgments,
estimates or are inherently complex.
Revenue Recognition
The Company recognizes revenue from our contracts in accordance with Accounting
Standards Update ("ASU") 2014-09, Topic 606 "Revenue from Contracts with
Customers" ("Topic 606"). Topic 606 requires entities to recognize revenue in a
way that depicts the transfer of promised goods or services to customers in an
amount that reflects the consideration to which the entity expects to be
entitled in exchange for those goods or services. Revenues from contracts with
customers are disaggregated into (1) LNG product (2) rental, service, and other,
and (3) power delivery.
The Company recognizes revenue associated with the sale of LNG at the point in
time when the customer obtains control of the asset. In evaluating when a
customer has control of the asset, the Company primarily considers whether the
transfer of legal title and physical delivery has occurred, whether the customer
has significant risks and rewards of ownership, and whether the customer
accepted delivery and a right of payment exists. Revenues from the providing of
services, transportation and equipment to customers is recognized as the service
is performed.
Revenue is measured as consideration specified in a contract with a customer and
excludes any sales incentives and amounts collected on behalf of third parties.
The Company recognizes revenue when it satisfies a performance obligation by
transferring control over a product or service to a customer. Amounts are billed
upon completion of service or transfer of a product and are generally due within
30 days.
LNG product revenue generated includes the revenue from the product and delivery
of the LNG to our customer's location. Product revenue is recognized upon
delivery of the related item to the customer, at which point the customer
controls the product and the Company has an unconditional right to payment.
Product contracts are established by agreeing on a sales price or transaction
price for the related item. Revenue is recognized when the customer has taken
control of the product. Payment terms for product contracts are generally within
thirty days from the receipt of the invoice. The Company acts as a principal
when using third party transportation companies and therefore recognizes the
gross revenue for the delivery of LNG.
Rental, service and other revenue generated by the Company includes equipment
and human resources provided to the customer to support the use of LNG and power
delivery equipment and services in their application. Rental contracts are
established by agreeing on a rental price or transaction price for the related
piece of equipment and the rental period which is generally daily or monthly.
The Company maintains control of the equipment that the customer uses and can
replace the rented equipment with similar equipment should the rented equipment
become inoperable or the Company chooses to replace the
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equipment for maintenance purposes. Revenue is recognized as the rental period
is completed and for periods that cross month end, revenue is recognized for the
portion of the rental period that has been completed to date. Payment terms for
rental contracts are generally within thirty days from the receipt of the
invoice. Performance obligations for rental revenue are considered to be
satisfied as the rental period is completed based upon the terms of the related
contract. LNG service revenue generated by the Company consists of mobilization
and demobilization of equipment and onsite technical support while customers are
consuming LNG in their applications. Service revenue is billed based on
contractual terms that can be based on an event (i.e. mobilization or
demobilization) or an hourly rate. Revenue is recognized as the event is
completed or work is done. Payment terms for service contracts are generally
within thirty days from the receipt of the invoice. Performance obligations for
service revenue are considered to be satisfied as the event is completed or work
is done per the terms of the related contract.
Power Delivery revenue is generated from time and material projects, consulting
services, and the resale of electrical and instrumentation equipment. Revenue is
billed based on contractual terms that can be based on an event or an hourly
rate. Revenue is recognized as the event is completed or work is done. Payment
terms for service contracts are generally within thirty days from the receipt of
the invoice. Performance obligations for service revenue are considered to be
satisfied as the event is completed or work is done per the terms of the related
contract. The resale of electrical and instrumentation equipment is billed upon
delivery and are generally due within thirty days from the receipt of the
invoice.
All outstanding accounts receivable, net of allowance, on the consolidated balance sheet are typically due and collected within 60 days.
Impairment of Long-Lived Assets and
The determination and calculation of impairment requires significant judgment regarding estimates of fair value and the projection of future cash flows.
LNG liquefaction facilities, and other long-lived assets held and used by the Company are reviewed periodically for potential impairment whenever events or changes in circumstances indicate that a particular asset's carrying value may not be recoverable. Recoverability generally is determined by comparing the carrying value for the asset to the expected undiscounted future cash flows of the asset. If the carrying value of the asset is not recoverable, the amount of impairment loss is measured as the excess, if any, of the carrying value of the asset over its estimated fair value. The estimated undiscounted future cash flows are based on projections of future operating results; these projections contain estimates of the value of future contracts that have not yet been obtained, future commodity pricing and our future cost structure, among others. Projections of future operating results and cash flows may vary significantly from actual results. Management reviews its estimates of cash flows on an ongoing basis using historical experience, business plans, overall market conditions, and other factors.Goodwill represents the excess of the cost of an acquired entity over the fair value of the identifiable assets acquired less liabilities assumed. Intangible assets are assets that lack physical substance (excluding financial assets).Goodwill acquired in a business combination and intangible assets with indefinite useful lives are not amortized, and intangible assets with finite useful lives are amortized.Goodwill and intangible assets not subject to amortization are tested for impairment annually or more frequently if events or changes in circumstances indicate the assets carrying value may not be recoverable. We currently test goodwill for impairment annually in the third quarter unless we determine that a triggering event has occurred requiring an earlier test. We completed our annual assessment of goodwill during 2020 and 2021 and determined no impairment of goodwill was warranted.
Income Taxes
The calculation of income taxes is inherently complex. Additionally, the determination of the adequacy of any needed valuation allowance requires significant judgment. Deferred income taxes are accounted for under the asset-and-liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance is recorded when it is more likely than not that the deferred tax asset will not be realized.
The Company recognizes the effect of income tax positions only if those positions are more likely than not to be sustained. Recognized income tax positions are measured at the largest amount that is greater than 50% likely of being realized. Changes in
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--------------------------------------------------------------------------------recognition or measurement are reflected in the period in which the change in judgment occurs. The Company records interest related to unrecognized tax benefits in interest expense and penalties in selling, general and administrative expenses.
Fair Value Measurements
The determination of fair value requires significant judgements and estimates by management. The Company utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs to the extent possible. The Company determines fair value based on assumptions that market participants would use in pricing an asset or liability in the principal or most advantageous market. When considering market participant assumptions in the fair value measurements, the fair value hierarchy distinguishes between observable and unobservable inputs, which are categorized in one of the following levels in accordance withU.S. GAAP:
Level 1 Inputs-Unadjusted quoted prices in active markets for identical assets or liabilities accessible to the reporting entity at the measurement date.
Level 2 Inputs-Other than quoted prices included in Level 1 inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the asset or liability.
Level 3 Inputs-Unobservable inputs for the asset or liability used to measure fair value to the extent that observable inputs are not available, thereby, allowing for situations in which there is little, if any, market activity for the asset or liability at the measurement date.
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