Stabilis Solutions, Inc.: Form 10-Q for the period ended Sep 30, 2023

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 2022 Annual Report on Form 10-K filed on March 9, 2023 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 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. We provide LNG solutions to customers in diverse end markets, including aerospace, agriculture, energy, industrial, marine bunkering, mining, pipeline, remote power and utility markets. LNG can be used to deliver natural gas to locations where pipeline service is unavailable, has been interrupted, or needs to be supplemented. LNG can also be used to replace a variety of alternative fuels, including distillate fuel oil and propane, among others, to provide environmental and economic benefits. Increasingly, LNG is being utilized as a transportation fuel in the marine industry and as a propellant in the private rocket launch sector. We believe that these fuel markets are large and provide significant opportunities for LNG usage.

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.

The Company generates 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. 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.

*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 in George West, Texas and a liquefier that can produce up to 30,000 LNG gallons per day in Port Allen, Louisiana. 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. Revenues earned from the production and sales of LNG are included within LNG Product revenue.

*Transportation and Logistics Services—*Stabilis offers our customers a “virtual natural gas pipeline” by providing turnkey LNG transportation and logistics services in North America. We deliver LNG to our customers’ work sites from both our own production facilities and our network of third-party production sources located throughout North 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. Revenues earned from the transportation and logistical services of LNG to our customers are included within LNG Product revenue.

*Cryogenic Equipment Rental—*Stabilis operates a 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 in North 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. Revenues earned from cryogenic equipment rental are included within Rental revenue.

*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 into their operations and our field service technicians help our customers mobilize, commission and reliably operate on the job site. Revenues earned from engineering and field support services are included within Service revenue.

U.S. Department of Energy ("DOE") Approval to Export LNG

During the third quarter of 2022, Stabilis received authorization from the DOE to export domestically produced LNG to all free trade and non-free trade countries, including Asian, European, and Latin American importing nations for up to 51.75 billion cubic feet per year of natural gas equivalent. The authorization is for a term of 28 years. To date, the Company has not made any exports under this approval and has not expended material funds nor entered into any sales commitments. The Company has two years with which to initiate exportation of LNG under this authorization, otherwise the Company will need to obtain an extension for commencement of operations or reapply for the authorization. This authorization supplements the Company's other two export licenses from the DOE and from the National Energy Board of Canada (“NEB”), which authorizes the Company to export LNG to Mexico and Canada, via truck.

Gas Pretreatment Upgrades at our George West, Tx Liquefaction Facility

During the second and third quarters of 2023, the Company was adversely impacted by natural gas feedstock composition changes which reduced production from our George West, Tx liquefaction facility (our "George West facility") as well as overall profitability. In August 2023, the Company completed installation of additional gas pretreatment equipment that allowed our George West facility to resume LNG production at full rates.

Results of Operations

Stabilis 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 sale of the Brazil Operations represents all of the revenues 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 decision to exit the Brazil Operations met the criteria to be reported as discontinued operations. As a result, the Company 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 September 30, 2023 Compared to Three Months Ended September 30, 2022

The comparative tables below reflect our consolidated operating results for the three months ended September 30, 2023 (the “Current Quarter”) as compared to the three months ended September 30, 2022 (the “Prior Year Quarter”) (unaudited, amounts in thousands, except for percentages).

Revenues

During the Current Quarter, revenues decreased $10.5 million, or 41%, compared to the Prior Year Quarter. The change in revenue primarily related to:

• Decreased natural gas prices in the Current Quarter compared to the Prior Year Quarter resulting in decreased revenue of $5.2 million; ​
• Decreased LNG delivered to customers of 3.0 million gallons during the Current Quarter compared to the Prior Year Quarter resulting in decreased revenues of $4.4 million;
• Decreased pricing related to customer mix in the Current Quarter compared to the Prior Year Quarter of $0.2 million;
• Increased revenues from minimum purchase take-or-pay contracts in the Current Quarter compared to the Prior Year Quarter of $0.3 million; and​
• Decreased rental, service and other revenues related to a short term marine bunkering project in the Prior Year Quarter compared to the Current Quarter resulting in decreased revenues of $1.0 million.

Operating Expenses

Costs of revenues. Cost of revenues decreased $7.8 million, or 39%, compared to the Prior Year Quarter. As a percentage of revenue, these costs were 79% and 77% in the Current Quarter and the Prior Year Quarter, respectively. The change in cost of revenues was primarily attributable to:

• Decreased natural gas prices in the Current Quarter compared to the Prior Year Quarter resulting in decreased costs of revenues of $4.8 million; ​
• Decreased LNG delivered to customers of 3.0 million gallons during the Current Quarter compared to the Prior Year Quarter resulting in decreased costs of revenues of $3.3 million; and
• Decreased costs from minimum purchase take-or-pay contracts of $0.1 million during the Current Quarter compared to the Prior Year Quarter; and
• Increased rental, service and other costs incurred during the Current Quarter compared to the Prior Year Quarter of $0.4 million.

Change in unrealized loss on natural gas derivatives. The Company incurred a gain of $0.3 million on the change in unrealized losses associated with the Company's natural gas derivatives in the Current Quarter compared to a gain of $0.9 million in the Prior Year Quarter. The gain in the Current Quarter was due to offsetting amortization of realized losses as call option volumes expired unexercised during the Current 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 $0.7 million primarily due to lower compensation in the Current Quarter compared to the Prior Year Quarter.

Depreciation. Depreciation expense decreased 5% during the Current Quarter as compared to the Prior Year Quarter due to assets reaching the end of their depreciable lives.

Gain on disposal of assets. The Company recorded a gain on the disposal of assets of $1.0 million in the Current Quarter related to insurance proceeds to be received for assets damaged in a fire. See also Note 6 in the Notes to the Condensed Consolidated Financial Statements for a further discussion of this gain.

Net equity income from foreign joint venture operations. Equity Income from the Company's foreign joint venture improved by $0.2 million in Current Quarter compared to the Prior Year Quarter due to increased sales by the Company's joint venture in BOMAY.

Interest income (expense). Interest income, net was $44 thousand for the Current Quarter compared to expense of $0.2 million in the Prior Year Quarter. Interest income in the Current Quarter is related to increased interest rates and income earned on the Company's overnight deposits. The decrease in interest expense compared to the Prior Year Quarter is due to capitalized interest on capital projects.

Interest expense, net - related parties. Related party interest expense decreased $34 thousand in the Current Quarter as compared to the Prior Year Quarter primarily related to lower debt balances and capitalized interest on capital projects.

Other income (expense). Other expense was $2 thousand during the Current Quarter compared to $28 thousand in the Prior Year Quarter related to transactional foreign exchange losses.

Income tax expense. The Company incurred a state and foreign income tax expense of $0.1 million during the Current Quarter compared to a state and foreign income tax benefit of $0.1 million during the Prior Year Quarter. No U.S. federal income tax benefit was recorded for the Current Quarter or Prior Year Quarter as any net U.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. Loss from discontinued operations, net of tax was $1.3 million for the Prior Year Quarter. The Company sold its Brazil Operations on October 31, 2022. There was no activity from discontinued operations during the Current Quarter. See Note 2 in the Notes to Condensed Consolidated Financial Statements for further discussion of the Company's discontinued operations.

Nine Months Ended September 30, 2023 Compared to Nine Months Ended September 30, 2022

The comparative tables below reflect our consolidated operating results for the nine months ended September 30, 2023 (the “Current Year”) as compared to the nine months ended September 30, 2022 (the “Prior Year”) (unaudited, amounts in thousands, except for percentages).

Revenues

During the Current Year, revenues decreased $14.2 million, or 20%, compared to the Prior Year. The change in revenue primarily related to:

• Decreased LNG delivered to customers of 8.9 million gallons during the Current Year compared to the Prior Year resulting in decreased revenues of $11.5 million;
• Decreased natural gas prices in the Current Year compared to the Prior Year resulting in decreased revenue of $7.8 million; ​
• Increased revenues from minimum purchase take-or-pay contracts in the Current Year compared to the Prior Year of $4.9 million;
• Increased pricing to customers in the Current Year compared to the Prior Year of $0.1 million; and​
• Increased rental, service and other revenues of $0.2 million related to a short term marine bunkering project in the first quarter of the Current Year compared to the Prior Year.

Operating Expenses

Costs of revenues. Cost of revenues decreased $12.0 million, or 22%, in the Current Year compared to the Prior Year. As a percentage of revenue, these costs were 78% in the Current Year compared to 79% in the Prior Year. The change in cost of revenues was attributable to:

• Decreased LNG delivered to customers of 8.9 million gallons during the Current Year compared to the Prior Year resulting in decreased costs of revenues of $8.9 million;
• Decreased natural gas prices in the Current Year compared to the Prior Year resulting in decreased costs of revenues of $7.6 million.
• Increased costs from minimum purchase take-or-pay contracts of $1.2 million during the Current Year compared to the Prior Year;
• Increased liquefaction and transportation costs of $0.4 million during the Current Year compared to the Prior Year; and
• Increased rental, service and other costs incurred during the Current Year compared to the Prior Year of $2.9 million.

Change in unrealized loss on natural gas derivatives. The Company incurred a gain of $0.3 million on the change in unrealized losses associated with the Company's natural gas derivatives in the Current Year compared to $27 thousand in the Prior Year. The gain in the Current Year was due to offsetting amortization of realized losses as call option volumes expired unexercised during the Current Year. 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 $0.2 million primarily due to lower compensation in the Current Year compared to the Prior Year.

Gain from disposal of fixed assets. The Company recorded a gain on the disposal of assets of $1.0 million in the Current Year related to insurance proceeds to be received for assets damaged in a fire. See also Note 6 in the Notes to the Condensed Consolidated Financial Statements for a further discussion of this gain.

Depreciation. Depreciation expense decreased 9% during the Current Year as compared to the Prior Year due to assets reaching the end of their depreciable lives.

Net equity income from foreign joint venture operations. Equity Income from the Company's joint venture increased $0.4 million during the Current Year due to increased sales by the Company's joint venture in BOMAY.

Interest income (expense). Interest expense, net decreased $0.2 million for the Current Year compared to the Prior Year. The decrease in the Current Year is related to income earned on the Company's overnight deposits and capitalized interest on capital projects.

Interest expense, net - related parties. Related party interest expense decreased $0.1 million in the Current Year as compared to the Prior Year primarily related to lower debt balances and capitalized interest on capital projects.

Other income (expense). Other expense was $0.1 million for both the Current Year and the Prior Year related to transactional foreign exchange losses.

Income tax expense. The Company incurred a state and foreign income tax expense of $0.2 million during the Current Year compared to a benefit of $0.2 million during the Prior Year. No U.S. federal income tax benefit was recorded for the Current Year or Prior Year as any net U.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. Loss from discontinued operations, net of tax was $1.4 million for the Prior Year. The Company sold its Brazil Operations on October 31, 2022. There was no activity from discontinued operations during the Current Year. 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 the AmeriState Loan and distributions received from our BOMAY joint venture. In prior years, the Company also obtained financing from MG Finance, a related party. During the Current Quarter, our principal source of liquidity was our existing cash balances and cash provided by operations. The Company has used cash flows to invest in fixed assets to support growth as well as to pay interest and principal amounts outstanding under its debt agreements. The Company's sale of the Brazil Operations on October 31, 2022 is not anticipated to adversely impact the Company's future cash flows.

On June 9, 2023, the Company, along with its subsidiaries, Stabilis LNG Eagle Ford LLC, Stabilis GDS, Inc. and Stabilis LNG Port Allen, LLC (collectively, the “Borrowers”) entered into a three-year loan agreement (the “Revolving Credit Facility”) with Cadence Bank. The Revolving Credit Facility provides for a maximum aggregate amount of $10.0 million, subject to a borrowing base of 80% of eligible accounts receivable. The Company may request an increase in the maximum aggregate amount under the Revolving Credit Facility by up to $5.0 million, subject to the approval of Cadence Bank. All borrowings under the Revolving Credit Facility are secured by the Borrowers’ accounts receivable and deposit accounts. Borrowings under the Revolving Credit Facility incur interest at the Prime Rate published by the Wall Street Journal. Any unused portion is subject to a quarterly unused commitment fee of 0.5% per annum. As of September 30, 2023, no amounts have been drawn under the Revolving Credit Facility. The Revolving Credit Facility matures on June 9, 2026. The Revolving Credit Facility contains various restrictions and covenants. As of September 30, 2023, the Company was in compliance with all its covenants related to the Revolving Credit Facility. The Company also has a $10.0 million secured term loan facility with AmeriState Bank, of which, $1.0 million is available for future draws at September 30, 2023.

As of September 30, 2023, we had $4.9 million in cash and cash equivalents on hand and $10.6 million in outstanding debt (net of debt issuance costs), and in lease obligations (of which $2.5 million is due in the next twelve months). Total availability under the Revolving Credit Facility and the secured term loan facility is $3.7 million at September 30, 2023. 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 and 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. Management believes the Company will generate cash flows from its operations along with availability under the Company's debt agreements 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):

Operating Activities

Net cash provided by operating activities totaled $5.4 million for the nine months ended September 30, 2023 compared to $11.5 million for the same period in 2022. The decrease in net cash provided by operating activities of $6.2 million as compared to the Prior Year was primarily attributable to lower net income exclusive of non cash items for depreciation, stock-based compensation, equity income from our joint venture, BOMAY, change in unrealized loss on derivatives and (gain) loss on disposals of fixed assets; changes in working capital and lower dividends from our joint venture, BOMAY.

Investing Activities

Net cash used in investing activities totaled $9.0 million for the nine months ended September 30, 2023 compared to net cash provided by investing activities of $0.1 million for the nine months ended September 30, 2022. The increase in net cash used in the Current Year of $9.1 million was primarily due to cash paid to purchase additional assets.

Financing Activities

Net cash used in financing activities totaled $2.9 million for the nine months ended September 30, 2023, compared to $1.4 million for the nine months ended September 30, 2022. The increase in cash used in financing activities in the Current Year compared to the Prior Year is due to $1.0 million of proceeds received from borrowings in the Prior Year with no proceeds from borrowings in the Current Year. For both periods, the cash used in financing activities was primarily for repayment of debt.

Future Cash Requirements

We require cash to fund our operating expenses and working capital requirements, including costs associated with fuel sales, debt repayments, purchases of equipment and other capital expenditures, 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, 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 ended September 30, 2023 were $9.0 million and primarily related to the purchase of additional liquefaction assets and rolling stock. The Company had purchase orders open of approximately $1.0 million for capital expenditures at September 30, 2023. Future capital expenditures over the next twelve months will be dependent upon investment opportunities as well as the availability of additional capital at favorable terms.

Shelf Registration Statement

On April 11, 2022, the Company filed a registration statement on Form S-3 (the “Shelf Registration”) which was declared effective on April 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. On December 16, 2022, the Company filed a prospectus supplement to the Shelf Registration that allows the Company to sell and issue shares of common stock directly to the public “at the market” as permitted in Rule 415 under the Securities Act. 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. We made no issuances under the Shelf Registration during the nine months ended September 30, 2023.

Off-Balance Sheet Arrangements

As of September 30, 2023, we had no transactions that met the definition of off-balance sheet arrangements that may have a current or future material effect on our consolidated financial position or operating results.

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 in the 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 ended September 30, 2023 from those disclosed within the Company's Annual Report on Form 10-K for the year ended December 31, 2022 as filed with the SEC on March 9, 2023.

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.

Evaluation of Disclosure Controls and Procedures

As required by Rule 13a-15(b) of the Exchange Act, we have evaluated, under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this Report. Our disclosure controls and procedures are designed to provide reasonable assurance that the information required to be disclosed by us in reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure and is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC. Based upon the evaluation, our principal executive officer and principal financial officer have concluded that our disclosure controls and procedures were effective at September 30, 2023.

Changes in Internal Control over Financial Reporting

There have been no changes in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) that occurred during our last fiscal quarter that have materially affected or are reasonably likely to materially affect our internal control over financial reporting.

Our operations and financial results are subject to various risks and uncertainties, including those described in the Part I. “Item 1A. Risk Factors” section of our Annual Report on Form 10-K for the year ended December 31, 2022 filed with the SEC on March 9, 2023 (“Form 10-K”), which could adversely affect our business, financial condition, results of operations, cash flows, and the trading price of our common stock. During the nine months ended September 30, 2023, there have been no material changes in our risk factors disclosed in our 2022 Form 10-K.