STABILIS SOLUTIONS, INC.
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 on March 10, 2022 with the U.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 operates and manages its business through two operating segments: LNG and Power Delivery.
LNG SegmentStabilis 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 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 both LNG and hydrogen 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 20 -------------------------------------------------------------------------------- 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 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 and hydrogen 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. 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
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
Recent Developments
We have experienced and anticipate that we will continue to experience increasing costs for natural gas, liquefaction and transportation at least for the near-term for our LNG segment. 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 decreased margins as a percentage of revenue. Recent global events are exacerbating several trends, including broad-based inflation and supply chain pressure for key materials, commodities, and labor. These events includeRussia's invasion ofUkraine and a resurgence of COVID-19 operating restrictions inChina .
The invasion ofUkraine byRussia and the resulting sanctions imposed bythe United States , theUnited Kingdom and theEuropean Union in response have increased the level of economic and political uncertainty. These sanctions are expected to create supply chain disruptions particularly in relation to the supply and price of natural gas inEurope which is also expected to increase the price of natural gas globally. Broader consequences of this conflict could also create a re-focus by governments on the importance of energy security, diversity and reliability which may also create diverging regional economic conditions, instability and geopolitical shifts. Long-term, we are still optimistic on the future of LNG, but we expect global supply to remain constrained at least in the near-term which we anticipate will continue to place pressure on the price of natural gas. 21
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COVID-19 resurgence in
During the three months endedMarch 31, 2022 , our joint venture inChina was negatively impacted by operating closures and restrictions imposed by the Chinese government due to the resurgence of COVID-19. Continued operating closures and restrictions inChina may result in a broad disruptions to global andU.S. supply chains. The ultimate extent and effects ofRussia's invasion ofUkraine and the COVID-19 resurgence inChina are difficult to estimate; however, continued periods of increasing costs could adversely impact our future results, operating cash flows and share price of our common stock. They may also have the effect of heightening many other risks disclosed in our public filings, any of which could materially and adversely affect our business and results of operations. Such risks include, but are not limited to:
•Our energy-related infrastructure is subject to operational, regulatory, environmental, political, legal and economic risks;
•Our risk management strategies cannot eliminate all LNG price and supply risks; any non-compliance with our risk management strategies could result in significant financial losses;
•We have operations and investment in foreign countries and we could experience losses from foreign economies as well as unexpected operating, financial political or cultural factors;
•Weakened global macro-economic conditions may adversely affect our industry, ability to access capital, business and results of operations;
•Increased inflation or periods of prolonged inflation may adversely impact the economy, our industry and results of operations; and
•The spread of a contagious illness such as COVID-19 or resurgence of a COVID-19 variant, may adversely affect our business, operations and financial condition;
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 as well as the additional risks identified and described in Part II. "Item 1A Risk Factors" of this Report. 22 --------------------------------------------------------------------------------
Results of Operations
The LNG Segment 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 Power Delivery Segment provides power delivery equipment and services inBrazil and through our BOMAY joint venture inChina . We evaluate the performance of our segments based primarily on segment operating income. See also Note 3 of the Notes to Condensed Consolidated Financial Statements for further discussion of our segments.
Three Months Ended
The comparative tables below reflect our consolidated operating results as well as the operating results of our two operating segments for the three months endedMarch 31, 2022 (the "Current Quarter ") as compared to the three months endedMarch 31, 2021 (the "PriorYear Quarter ") (unaudited, amounts in thousands, except for percentages). In the table below,$0.5 million for the PriorYear Quarter was reclassified from selling, general and administrative expense to costs of rental, service and other within our LNG segment to conform to current period presentation. Three Months Ended Consolidated March 31, 2022 2021 $ Change % Change Revenue: LNG product$ 16,785 $ 11,695 $ 5,090 43.5 % Rental, service and other 3,482 4,425 (943) (21.3) Power delivery 2,766 1,544 1,222 79.1 Total revenues 23,033 17,664 5,369 30.4 Operating expenses: Costs of LNG product 12,744 8,812 3,932 44.6 Costs of rental, service and other 2,760 2,751 9 0.3 Costs of power delivery 2,113 1,160 953 82.2 Selling, general and administrative 3,566 2,715 851 31.3 Gain from disposal of fixed assets (80) - (80) n/a Depreciation 2,322 2,225 97 4.4 Total operating expenses 23,425 17,663 5,762 32.6 Income (loss) from operations before equity income (392) 1 (393) n/a Net equity income from foreign joint ventures' operations 87 354 (267) (75.4) Income (loss) from operations (305) 355 (660) n/a Other income (expense): Interest expense, net (154) (17) (137) (805.9) Interest expense, net - related parties (31) (173) 142 (82.1) Other income (expense) (45) 90 (135) n/a Total other income (expense) (230) (100) (130) (130.0) Income (loss) before income tax expense (535) 255 (790) n/a Income tax expense (benefit) (129) 80 (209) n/a Net income (loss)$ (406) $ 175 $ (581) n/a 23
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Segment Results
Three Months Ended
LNG Segment March 31,
2022 2021 $ Change % Change
Revenue:
LNG product $ 16,785 $ 11,695 $ 5,090 43.5 %
Rental, service and other 3,482 4,425
(943) (21.3)
Total revenues 20,267 16,120 4,147 25.7
Operating expenses:
Costs of LNG product 12,744 8,812 3,932 44.6
Costs of rental, service and other 2,760 2,751 9 0.3
Selling, general and administrative 2,861 2,101 760 36.2
Gain from disposal of fixed assets (80) - (80) n/a
Depreciation 2,277 2,188 89 4.1
Total operating expenses 20,562 15,852 4,710 29.7
Income (loss) from operations
(563) n/a
Three Months Ended
Power Delivery Segment March 31,
2022 2021 $ Change % Change
Revenue:
Power delivery $ 2,766 $ 1,544 $ 1,222 79.1 %
Operating expenses:
Costs of power delivery 2,113 1,160 953 82.2
Selling, general and administrative 705 614 91 14.8
Depreciation 45 37 8 21.6
Total operating expenses 2,863 1,811 1,052 58.1
Loss from operations before equity income (97) (267) 170 63.7
Net equity income from foreign joint
ventures' operations 87 354 (267) (75.4)
Income (loss) from operations $ (10) $ 87 $ (97) n/a
Revenue
LNG product revenue. During the
•Additional LNG gallons delivered during the
•Increased natural gas prices compared to the Prior
Rental, service, and other revenue. Rental, service and other revenue decreased by$0.9 million , or 21%, in theCurrent Quarter relative to the PriorYear Quarter due to fewer projects with additional equipment and labor revenues from projects inMexico and power generation customers.
Power delivery. Power delivery revenue increased by
24
--------------------------------------------------------------------------------Operating Expenses
Costs of LNG product. Cost of product in the
•Inflationary pressures including increased costs from higher natural gas prices, increased transportation costs and increased liquefaction costs; and
•An increase of 1.5 million LNG gallons delivered.
Costs of rental, service, and other. Costs in the
Costs of power delivery. Costs increased$1.0 million , or 82%, in theCurrent Quarter due to the higher sales activity levels, higher prices and favorable foreign currency translation rates. Selling, general and administrative. Selling, general and administrative expense increased$0.9 million , or 31%, during theCurrent Quarter primarily due to higher stock-based compensation expenses and increased compensation related to additional headcount to support our operations. Gain from disposal of fixed assets. Gain from disposal of fixed assets for theCurrent Quarter was primarily related to a gain on sale of LNG tractors of$0.1 million .
Depreciation. Depreciation expense increased 4% during the
Net Equity Income From
Net equity income from investments in foreign joint ventures. Income from investments in foreign joint ventures decreased$0.3 million during theCurrent Quarter due to governmental operating restrictions imposed inChina due to as resurgence of COVID-19 during theCurrent Quarter .
Other Income (Expense)
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 that was replaced with the Company's loan withAmeriState Bank inApril 2021 and due to amendments to the MG Finance note payable which lowered the interest rate from 12% to 6%.
Other income (expense). Other expense was
Income tax expense. The Company incurred state and foreign income tax benefit of$0.1 million during theCurrent Quarter compared to expense of$0.1 million during the PriorYear Quarter .The Current Quarter benefit was attributable to a favorable income tax result upon filing theMexico income tax return. NoU.S. federal income tax benefit was recorded for theCurrent Quarter or Prior 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.
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 M/G Finance, a related party. We also have a loan facility withAmeriState Bank in the aggregate principal amount of up to$10.0 million . During theCurrent Quarter , our principal sources of liquidity were cash provided by our operations. We have used a portion of our 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. 25 -------------------------------------------------------------------------------- As ofMarch 31, 2022 , we had$2.5 million in cash and cash equivalents on hand and$12.3 million in outstanding debt (net of debt issuance costs) and finance lease obligations (of which$2.3 million is due in the next twelve months). Future availability under the loan facility atMarch 31, 2022 , was$2.0 million . DuringApril 2022 , we drew$1.0 million under our loan withAmeriState Bank such that, our remaining availability under the AmeriState loan facility is$1.0 million as of the date of this Report. The Company also filed a shelf registration statement (described below) which allows for and grants 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.
Cash Flows
Cash flows provided by (used in) our operating, investing and financing activities are summarized below (unaudited, in thousands):
Three Months Ended March 31,
2022 2021
Net cash provided by (used in):
Operating activities $ 2,238 $ 2,563
Investing activities (818) (298)
Financing activities (1,132) (1,079)
Effect of exchange rate changes on cash 193 62
Net increase in cash and cash equivalents $ 481 $ 1,248
Operating Activities
Net cash provided by operating activities totaled $2.2 million for the three
months ended March 31, 2022 compared to $2.6 million for the same period in
2021. The decrease in net cash provided by operating activities of $0.3 million
as compared to the Prior Year Quarter was primarily attributable to a net
operating loss and payments of accounts payable and accrued expenses partially
offset by collections of accounts receivable in the Current Quarter compared to
the Prior Year Quarter .
Investing Activities
Net cash used in investing activities totaled $0.8 million and $0.3 million for
the three months ended March 31, 2022 and 2021, respectively. The increase in
net cash used in the Current Quarter was primarily due to addition of rolling
stock and other gas distribution equipment.
Financing Activities
Net cash used in financing activities totaled$1.1 million for the three months endedMarch 31, 2022 , compared to net cash used in financing activities totaling$1.1 million for the PriorYear Quarter . Cash used in financing activities for both periods was primarily due to repayment 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 alternativesmay 26 --------------------------------------------------------------------------------
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 three months endedMarch 31, 2022 were$0.9 million and primarily related to capital expenditures for our operations inMexico and the addition of rolling stock and replacement assets within our LNG segment. We anticipate between$3.0 million to$5.0 million in capital expenditures for the remainder of 2022 primarily related to the addition of rolling stock and replacement assets.
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 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 the Company's "Critical Accounting
Policies and Estimates" during the three months ended
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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