Stabilis Solutions, Inc.: Form 10-Q for the period ended Sep 30, 2024

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 2023 Annual Report on Form 10-K filed on March 7, 2024 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.

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

In the third quarter of 2022, Stabilis received authorization from the DOE to export domestically produced LNG to all free trade ("FTA") and non-free trade ("non-FTA") countries, for up to 51.75 billion cubic feet per year (or approximately 1.0 MTPA) of natural gas equivalent. The authorization is for shipments of LNG and is for a term of 28 years. As of September 30, 2024, the Company has met the initial time requirement to initiate exports to non-FTA countries. For exports to FTA countries, the Company has five years from the date it received the authorization with which to initiate exportation of LNG.

The DOE authorization received during the third quarter of 2022 supplements the Company's other existing export license from the DOE, which authorizes the Company to import and export LNG from and to Canada and Mexico, via truck. In the nine months ended September 30, 2024, we delivered LNG to Mexico and Belgium.

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.

Three Months Ended September 30, 2024 Compared to Three Months Ended September 30, 2023

The comparative tables below reflect our consolidated operating results for the three months ended September 30, 2024 (the “Current Quarter”) as compared to the three months ended September 30, 2023 (the “Prior Year Quarter”) (unaudited, amounts in thousands, except for percentages).

Revenue

During the Current Quarter, revenues increased $2.3 million, or 15%, compared to the Prior Year Quarter. The change in revenue primarily related to:

• Increased gallons of LNG delivered in the Current Quarter compared to the Prior Year Quarter resulting in an increase in revenues of $2.5 million;
• Increased customer pricing mix in the Current Quarter compared to the Prior Year Quarter, resulting in increased revenues of $0.8 million; and
• Increased rental, service and other revenues in the Current Quarter compared to the Prior Year Quarter, resulting in increased revenues of $0.2 million;
• These increases were partially offset by decreased revenues of $0.8 million related to lower natural gas prices and $0.4 million in decreased take-or-pay contracts in the Current Quarter compared to the Prior Year Quarter.

Operating Expenses

Cost of revenues. Cost of revenues increased $0.6 million, or 5%, compared to the Prior Year Quarter. As a percentage of revenue, these costs were 72% and 79% in the Current Quarter and the Prior Year Quarter, respectively. The change in cost of revenues was primarily attributable to:

• Increased gallons of LNG delivered in the Current Quarter compared to the Prior Year Quarter resulting in an increase in cost of revenues of $2.0 million; and
• Increased rental, service and other costs in the Current Quarter compared to the Prior Year Quarter resulting in an increase in cost of revenues of $0.1 million;
• These increases were partially offset by lower natural gas, liquefaction and transportation costs in the Current Quarter compared to the Prior Year Quarter resulting in decreased cost of revenue of $1.5 million.​

Change in unrealized gain/loss on natural gas derivatives. The Company recognized a loss of $13 thousand from the change in unrealized (gain) loss on natural gas derivatives in the Current Quarter compared to a gain of $0.3 million in the Prior Year Quarter. The loss was due to low natural gas prices.

Selling, general and administrative expenses. Selling, general and administrative expense increased $33 thousand in the Current Quarter compared to the Prior Year Quarter primarily due to increased compensation costs related to hiring, partially offset by decreased professional services costs.

Depreciation. Depreciation expense decreased $0.2 million 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 disposal of assets of $0.1 million in the Current Quarter related to the sale of certain fixed assets during the Current Quarter in which proceeds of $0.1 million were received. In the Prior Year Quarter, a gain on the disposal of assets was recorded related to insurance proceeds received for assets damaged in a fire.

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

Interest (expense) income. Interest income, net was $0.1 million for both the Current Quarter and the Prior Year Quarter, related to interest income earned on the Company's cash balances during the both periods.

Interest expense, net - related parties. There was no related party interest expense in the Current Quarter, as the related party debt financing was paid in full at the end of fiscal year 2023, as compared to related party interest expense of $15 thousand in the Prior Year Quarter.

Other income (expense). Other income was $10 thousand during the Current Quarter compared to other expense of $3 thousand in the Prior Year Quarter related to transactional foreign exchange gains (losses).

Income tax expense. The Company incurred state and foreign income tax benefit of $0.1 million during the Current Quarter compared to income tax expense of $0.1 million during the Prior Year Quarter due to revisions to estimated state taxes in the Current Quarter. No U.S. federal income taxes were recorded for the Current Quarter or Prior Year Quarter as any net U.S. deferred tax assets generated from operating losses or used from operating income were offset by a change in the Company's valuation allowance on net deferred tax assets.

Nine Months Ended September 30, 2024 Compared to Nine Months Ended September 30, 2023

The comparative tables below reflect our consolidated operating results for the nine months ended September 30, 2024 (the “Current Year”) as compared to the nine months ended September 30, 2023 (the “Prior Year”) (unaudited, amounts in thousands, except for percentages).

Revenue

During the Current Year, revenues increased $0.9 million, or 2%, compared to the Prior Year. The change in revenue primarily related to:

• Increased gallons of LNG delivered in the Current Year compared to the Prior Year resulting in an increase in revenues of $9.3 million;
• Increased pricing related to customer mix in the Current Year compared to the Prior Year resulting in an increase in revenues of $2.3 million; and
• Increased rental, service and other revenues in the Current Year compared to the Prior Year, resulting in an increase in revenues of $1.2 million;
• These increases were partially offset by lower natural gas prices in the Current Year compared to the Prior Year resulting in decreased revenue of $7.3 million and decreased revenues from minimum purchase take-or-pay contracts in the Current Year compared to the Prior Year of $4.6 million.

Operating Expenses

Cost of revenues. Cost of revenues during the Current Year decreased $3.2 million, or 8%, compared to the Prior Year. As a percentage of revenue, these costs were 71% and 78% in the Current Year and the Prior Year, respectively. The change in cost of revenues was primarily attributable to:

• Lower natural gas prices in the Current Year compared to the Prior Year resulting in decreased costs of revenues of $8.3 million; ​
• Decreased rental, service and other costs in the Current Year compared to the Prior Year, resulting in decreased costs of $0.8 million;
• Decreased costs from minimum purchase take-or-pay contracts during the Current Year compared to the Prior Year of $1.4 million; and
• These decreases were partially offset by increased gallons of LNG delivered in the Current Year compared to the Prior Year resulting in higher costs of $7.3 million.

Change in unrealized gain/loss on natural gas derivatives. The Company recognized a gain of $0.3 million in the change in unrealized (gain) loss on natural gas derivatives for both the Current Year and the Prior Year. The gains in both periods were due to offsetting amortization of realized losses as call option volumes expired.

Selling, general and administrative expenses. Selling, general and administrative expense increased $0.4 million in the Current Year compared to the Prior Year primarily due to increased compensation costs partially offset by decreased professional services costs.

Depreciation. Depreciation expense decreased $0.7 million during the Current Year as compared to the Prior Year due to assets reaching the end of their depreciable lives.

Gain on disposal of assets. The Company recorded a gain on disposal of assets of $0.3 million in the Current Year related to the sale of certain assets in which proceeds of $0.3 million were received. In the Prior Year, a gain on the disposal of assets was recorded related to insurance proceeds received for assets damaged in a fire.

Net equity income from foreign joint venture operations. Equity income from the Company's foreign joint venture decreased by $0.3 million in Current Year compared to the Prior Year due to decreased net profits by the joint venture.

Interest (expense) income. Interest income, net was $0.1 million for the Current Year compared to interest expense of $0.2 million in the Prior Year. The decrease in interest expense, net compared to the Prior Year is due to capitalized interest on capital projects and interest income earned on the Company's cash balances during the Current Year.

Interest expense, net - related parties. There was no related party interest expense in the Current Year, as the related party debt financing was paid in full at the end of fiscal year 2023, as compared to related party interest expense of $0.1 million in the Prior Year.

Other income (expense). Other income was $15 thousand during the Current Year compared to expense of $0.1 million in the Prior Year related to transactional foreign exchange gains (losses).

Income tax expense. The Company incurred a state and foreign income tax expense of $0.4 million during the Current Year compared to $0.2 million during the Prior Year due to improved operating results. No U.S. federal income taxes were recorded for the Current Year or Prior Year as any net U.S. deferred tax assets generated from operating losses or used from operating income 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 provided by our operations, cash on hand, proceeds received from borrowings under debt agreements and distributions received from our BOMAY joint venture. During the Current Year, our principal sources of liquidity were cash provided from our operations, our existing cash balances and distributions received from our BOMAY joint venture. The Company used cash flows generated from operations to invest in fixed assets to support growth, as well as to pay interest and principal outstanding under its debt agreements.

The Company has a three-year Revolving Credit Facility with Cadence Bank which 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, 2024, 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. The Company also has $1.0 million in remaining availability under its Secured Term Note with Ameristate Bank. As of September 30, 2024, the Company was in compliance with all its covenants related to its debt.

As of September 30, 2024, we had $12.4 million in cash and cash equivalents on hand and $9.8 million in outstanding debt (net of debt issuance costs), and lease obligations (of which $2.4 million is due in the next twelve months). The Company has total availability under the Revolving Credit Facility and the Ameristate Secured Term Loan Facility of $3.2 million at September 30, 2024. During the nine months ended September 30, 2024, the Company made no draws on either the Revolving Credit Facility or the Ameristate Secured Term Loan Facility. 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 business will generate sufficient 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 debt or equity financing or other opportunities to raise capital 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 $11.5 million for the nine months ended September 30, 2024 compared to $5.4 million for the same period in 2023. The increase in net cash provided by operating activities of $6.1 million as compared to the Prior Year was primarily attributable to higher net income, changes in working capital and higher distributions received from the Company's equity investment in BOMAY.

Investing Activities

Net cash used in investing activities totaled $3.2 million for the nine months ended September 30, 2024 compared to $9.0 million for the nine months ended September 30, 2023. The decrease in net cash used in investing activities in the Current Year of $5.8 million was primarily due to cash paid to purchase additional liquefaction assets to support growth in the Prior Year and proceeds received from the sale of assets in the Current Year.

Financing Activities

Net cash used in financing activities totaled $1.3 million for the nine months ended September 30, 2024, compared to $2.9 million for the nine months ended September 30, 2023. The decrease in cash used in financing activities in the Current Year compared to the Prior Year is due to lower debt payments as a result of having fully repaid related party debt as of December 31, 2023.

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. Additionally, the Company may pursue expansion activities to increase liquefaction capabilities. In the event the Company pursues expansion, there is no assurance the Company will be able to secure additional liquidity.

Capital expenditures for the nine months ended September 30, 2024 were $3.6 million and primarily related to the purchase of additional liquefaction assets, refurbishments and upgrades to existing assets and rolling stock. Future capital expenditures over the next twelve months will be dependent upon business needs as well as the availability of additional capital at favorable terms which is difficult to predict. At September 30, 2024, the Company had purchase orders and payables open related to capital expenditures of approximately $6.0 million.

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. At September 30, 2024 we have made no issuances under the Shelf Registration.

Off-Balance Sheet Arrangements

As of September 30, 2024, we had no transactions that met the definition of off-balance sheet arrangements that have or are reasonably likely to have a current or future material effect on our consolidated financial position, operating results, liquidity, cash requirements or capital resources.

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, 2024 from those disclosed within the Company's Annual Report on Form 10-K for the year ended December 31, 2023 as filed with the SEC on March 7, 2024.

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, 2024.

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, 2023 filed with the SEC on March 7, 2024 (“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, 2024, there have been no material changes in our risk factors disclosed in our 2023 Form 10-K.