Company Quick10K Filing
Nextdecade
Closing Price ($) Shares Out (MM) Market Cap ($MM)
$0.00 107 $654
10-K 2020-03-03 Annual: 2019-12-31
10-Q 2019-11-05 Quarter: 2019-09-30
10-Q 2019-08-06 Quarter: 2019-06-30
10-Q 2019-05-07 Quarter: 2019-03-31
10-K 2019-03-06 Annual: 2018-12-31
10-Q 2018-11-09 Quarter: 2018-09-30
10-Q 2018-08-09 Quarter: 2018-06-30
10-Q 2018-05-09 Quarter: 2018-03-31
10-K 2018-03-08 Annual: 2017-12-31
10-Q 2017-11-08 Quarter: 2017-09-30
10-Q 2017-08-09 Quarter: 2017-06-30
10-Q 2017-05-15 Quarter: 2017-03-31
10-K 2017-03-10 Annual: 2016-12-31
10-Q 2016-11-14 Quarter: 2016-09-30
10-Q 2016-08-15 Quarter: 2016-06-30
10-Q 2016-05-20 Quarter: 2016-03-31
10-K 2016-04-01 Annual: 2015-12-31
10-Q 2015-11-03 Quarter: 2015-09-30
10-Q 2015-08-13 Quarter: 2015-06-30
10-Q 2015-05-18 Quarter: 2015-03-31
8-K 2020-03-02 Enter Agreement
8-K 2020-01-24 Enter Agreement, Regulation FD, Exhibits
8-K 2019-12-27 Officers
8-K 2019-11-21 Regulation FD, Exhibits
8-K 2019-10-24 Enter Agreement, Sale of Shares, Regulation FD, Exhibits
8-K 2019-10-01 Other Events, Exhibits
8-K 2019-08-07 Regulation FD
8-K 2019-07-12 Shareholder Vote, Exhibits
8-K 2019-06-04 Officers, Other Events
8-K 2019-05-24 Enter Agreement, Regulation FD
8-K 2019-05-17 Enter Agreement, Sale of Shares, Exhibits
8-K 2019-04-01 Regulation FD
8-K 2019-03-06 Enter Agreement, Off-BS Arrangement, Regulation FD, Exhibits
8-K 2019-02-11 Regulation FD
8-K 2018-09-25 Shareholder Vote
8-K 2018-09-05 Officers
8-K 2018-08-28 Officers, Regulation FD, Exhibits
8-K 2018-08-24 Enter Agreement, Sale of Shares, Regulation FD, Other Events, Exhibits
8-K 2018-08-24 Enter Agreement, Sale of Shares, Regulation FD, Other Events, Exhibits
8-K 2018-08-03 Enter Agreement, Sale of Shares, Regulation FD, Exhibits
8-K 2018-06-15 Shareholder Vote
8-K 2018-04-24 Regulation FD
8-K 2018-04-11 Enter Agreement, Sale of Shares, Exhibits
8-K 2018-02-20 Other Events
8-K 2018-02-13 Regulation FD
8-K 2018-01-23 Officers, Exhibits
NEXT 2019-12-31
Part I
Item 1. Business
Item 1A. Risk Factors
Item 1B. Unresolved Staff Comments
Item 2. Properties
Item 3. Legal Proceedings
Item 4. Mine Safety Disclosures
Part II
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Item 6. Selected Financial Data
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Item 8. Financial Statements and Supplementary Data
Note 1 - Background and Basis of Presentation
Note 2 - Summary of Significant Accounting Policies
Note 3 - Prepaid Expenses and Other Current Assets
Note 4 - Investment Securities
Note 5 - Property, Plant and Equipment
Note 6 - Leases
Note 7 - Other Non-Current Assets
Note 8 - Accrued Liabilities and Other Current Liabilities
Note 9 - Preferred Stock and Common Stock Warrants
Note 10 - Net Loss per Share Attributable To Common Stockholders
Note 11 - Share-Based Compensation
Note 12 - Income Taxes
Note 13 - Commitments and Contingencies
Note 14 - Recent Accounting Pronouncements
Note 15 - Subsequent Events
Item 9. Changes in and Disagreements with Accountants
Item 9A. Controls and Procedures
Item 9B. Other Information
Part III
Part IV
Item 15. Exhibits and Financial Statement Schedules
Item 16. Form 10-K Summary
EX-4.1 ex_174493.htm
EX-4.6 ex_173613.htm
EX-10.22 ex_171622.htm
EX-10.23 ex_171623.htm
EX-10.24 ex_171624.htm
EX-10.25 ex_171625.htm
EX-10.26 ex_171626.htm
EX-21.1 ex_167915.htm
EX-23.1 ex_167916.htm
EX-31.1 ex_167918.htm
EX-31.2 ex_167919.htm
EX-32.1 ex_167920.htm
EX-32.2 ex_167921.htm

Nextdecade Earnings 2019-12-31

NEXT 10K Annual Report

Balance SheetIncome StatementCash Flow

Comparables ($MM TTM)
Ticker M Cap Assets Liab Rev G Profit Net Inc EBITDA EV G Margin EV/EBITDA ROA
GPOR 478 6,273 2,714 1,481 594 382 669 2,545 40% 3.8 6%
XOG 505 4,429 2,384 929 0 97 523 2,083 0% 4.0 2%
NOG 801 1,902 1,388 857 330 250 309 1,944 39% 6.3 13%
GTE 505 1,960 955 443 0 12 57 1,126 0% 19.6 1%
NEXT 597 170 33 0 0 -22 -22 593 -27.0 -13%
DMLP 650 124 6 59 54 40 50 628 92% 12.5 33%
WTI 632 1,027 1,285 526 0 203 179 1,309 0% 7.3 20%
LPI 616 2,278 1,198 834 0 49 292 1,569 0% 5.4 2%
DNR 668 4,754 3,408 964 0 194 517 3,044 0% 5.9 4%
CRK 1,473 4,552 3,107 633 0 92 402 3,928 0% 9.8 2%

10-K 1 next20191231_10k.htm FORM 10-K next20191231_10k.htm
 

 

 

Table of Contents



 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-K

 

(MARK ONE)

 

      ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the fiscal year ended December 31, 2019

 

      TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from                    to                    

 

Commission File No. 001-36842

 

NEXTDECADE CORPORATION

(Exact name of registrant as specified in its charter)

 

Delaware

46-5723951

(State or other jurisdiction of incorporation or organization)

(I.R.S. Employer Identification No.)

 

 

1000 Louisiana Street, Suite 3900

 

Houston, Texas

77002

(Address of principal executive offices)

(Zip code)

 

Registrant’s telephone number, including area code: (713) 574-1880

 

Securities registered pursuant to Section 12(b) of the Act: 

 

Title of each Class:

Trading Symbol:

Name of each exchange on which registered:

Common stock $0.0001 par value

NEXT The Nasdaq Stock Market LLC

 

Securities registered pursuant to Section 12(g) of the Act:

Redeemable Warrants, each to purchase one share of Company common stock

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes  ☐  No  ☒ 

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes  ☐   No ☒  

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒   No  ☐  

 

Indicate by check mark whether the registrant has submitted electronically, every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes ☒     No  ☐  

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

Accelerated filer

Non-accelerated filer

☐    

Smaller reporting company

 

 

Emerging growth company

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.    ☒

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐  No ☒

 

The aggregate market value of the registrant’s voting and non-voting common equity held by non-affiliates of the registrant was approximately $129.0 million as of June 28, 2019 (based on the closing price of the registrant's common stock on June 28, 2019 of $6.32 per share). 

 

120,837,640 shares of the registrant’s Common Stock, $0.0001 par value, were outstanding as of February 28, 2020. 

 

Documents incorporated by reference: The definitive proxy statement for the registrant's Annual Meeting of Stockholders (to be filed within 120 days of the close of the registrant's fiscal year) is incorporated by reference into Part III of this Form 10-K.

 



 

 

 

NEXTDECADE CORPORATION

 

TABLE OF CONTENTS

 

 

Page

Part I

Item 1. Business

4

Item 1A. Risk Factors

7

Item 1B. Unresolved Staff Comments

21

Item 2. Properties

21

Item 3. Legal Proceedings

21

Item 4. Mine Safety Disclosures

21

Part II

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

22

Item 6. Selected Financial Data

22

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

23

Item 7A. Quantitative and Qualitative Disclosures About Market Risks

27

Item 8. Financial Statements and Supplementary Data

28

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

49

Item 9A. Controls and Procedures

49

Item 9B. Other Information

49

Part III

Part IV

Item 15. Exhibits

51

Item 16. Form 10-K Summary

53

Signatures

54

 

 

 

 

Organizational Structure

 

The following diagram depicts our abbreviated organizational structure as of December 31, 2019 with references to the names of certain entities discussed in this Annual Report.

 

 

Unless the context requires otherwise, references to “NextDecade,” the “Company,” “we,” “us” and “our” refer to NextDecade Corporation and its consolidated subsidiaries.

 

 

Cautionary Statement Regarding Forward-Looking Statements

 

This Annual Report on Form 10-K contains certain statements that are, or may be deemed to be, “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). All statements other than statements of historical fact contained in this Annual Report on Form 10-K, including statements regarding our future results of operations and financial position, strategy and plans, and our expectations for future operations, are forward-looking statements. The words “anticipate,” “contemplate,” “estimate,” “expect,” “project,” “plan,” “intend,” “believe,” “may,” “might,” “will,” “would,” “could,” “should,” “can have,” “likely,” “continue,” “design” and other words and terms of similar expressions, are intended to identify forward-looking statements.

 

We have based these forward-looking statements largely on our current expectations and projections about future events and trends that we believe may affect our financial condition, results of operations, strategy, short-term and long-term business operations and objectives and financial needs.

 

Although we believe that the expectations reflected in our forward-looking statements are reasonable, actual results could differ from those expressed in our forward-looking statements. Our future financial position and results of operations, as well as any forward-looking statements are subject to change and inherent risks and uncertainties, including those described in the section entitled “Risk Factors” in this Annual Report on Form 10-K. You should consider our forward-looking statements in light of a number of factors that may cause actual results to vary from our forward-looking statements including, but not limited to:

 

 

our progress in the development of our liquefied natural gas (“LNG”) liquefaction and export projects and the timing of that progress;

 

 

our final investment decision ("FID") in the construction and operation of a LNG terminal at the Port of Brownsville in southern Texas (the “Terminal”) and the timing of that decision;

 

  the successful completion of the Terminal by third-party contractors and an approximately 137-mile pipeline to supply gas to the Terminal being developed by a third-party;

 

 

our ability to secure additional debt and equity financing in the future to complete the Terminal;

 

   the accuracy of estimated costs for the Terminal; 

 

  statements that the Terminal, when completed, will have certain characteristics, including amounts of liquefaction capacities;

 

 

the development risks, operational hazards, regulatory approvals applicable to the Terminal’s and the third-party pipeline's construction and operations activities;

 

 

our anticipated competitive advantage and technological innovation which may render our anticipated competitive advantage obsolete;

 

 

the global demand for and price of natural gas (versus the price of imported LNG);

 

 

the availability of LNG vessels worldwide;

 

 

changes in legislation and regulations relating to the LNG industry, including environmental laws and regulations that impose significant compliance costs and liabilities;

 

 

risks related to doing business in and having counterparties in foreign countries;

 

 

 our ability to maintain the listing of our securities on a securities exchange or quotation medium; 

 

   changes adversely affecting the business in which we are engage; 

 

   management of growth; 

 

 

 general economic conditions; 

 

 

 our ability to generate cash; 

 

 

 compliance with environmental laws and regulations; and 

 

 

 the result of future financing efforts and applications for customary tax incentives. 

 

 

Should one or more of the foregoing risks or uncertainties materialize in a way that negatively impacts us, or should the underlying assumptions prove incorrect, our actual results may vary materially from those anticipated in our forward-looking statements and, our business, financial condition and results of operations could be materially and adversely affected.

 

You should not rely upon forward-looking statements as predictions of future events. In addition, neither we nor any other person assumes responsibility for the accuracy and completeness of any of these forward-looking statements. Except as required by applicable law, we do not undertake any obligation to publicly correct or update any forward-looking statement.

 

Please read “Risk Factors” contained in this Annual Report on Form 10-K for a more complete discussion of the risks and uncertainties mentioned above and for a discussion of other risks and uncertainties. All forward-looking statements attributable to us are expressly qualified in their entirety by these cautionary statements and hereafter in our other filings with the Securities and Exchange Commission (the “SEC”) and public communications. You should evaluate all forward-looking statements made by us in the context of these risks and uncertainties.

 

 

 

Part I

 

Item 1. Business

 

Our Formation

 

We were incorporated in Delaware on May 21, 2014 and were formed for the purpose of acquiring, through a merger, share exchange, asset acquisition, stock purchase, recapitalization, reorganization or other similar business combination, one or more businesses or entities. On July 24, 2017, one of our subsidiaries merged with and into NextDecade LLC, a LNG development company founded in 2010 to develop LNG export projects and associated pipelines.  Prior to the merger with NextDecade LLC, we had no operations and our assets consisted of cash proceeds received in connection with our initial public offering.

 

Our common stock trades on the Nasdaq Capital Market (“Nasdaq”) under the symbol “NEXT.”

 

Our warrants issued in connection with our initial public offering in 2015 (the “IPO Warrants”) trade on the OTC Pink Market under the symbol “NEXTW.”

 

Company Overview

 

Our management is comprised of a team of industry leaders with extensive experience in LNG marketing and project development. We have focused and continue to focus our development activities on the Terminal and have undertaken and continue to undertake various initiatives to evaluate, design and engineer the Terminal that we expect will result in demand for LNG supply at the Terminal, which would enable us to seek construction financing to develop the Terminal. We believe the Terminal possesses competitive advantages in several important areas, including engineering, design, commercial, regulatory and gas supply. We submitted a pre-filing request for the Terminal and the Pipeline (as described below) to the Federal Energy Regulatory Commission (the “FERC”) in March 2015 and filed a formal application with the FERC in May 2016. We also believe we have robust commercial offtake and gas supply strategies and we estimate that the Terminal will commence commercial operations as early as 2023.

 

On March 2, 2020, we completed the sale of Rio Bravo to Spectra Energy Transmission II, LLC, a wholly owned subsidiary of Enbridge, Inc. Rio Bravo is developing a proposed 137-mile interstate natural gas pipeline (the “Pipeline”) to supply natural gas to the Terminal.  In connection with the sale of Rio Bravo, our indirect, wholly owned subsidiary, Rio Grande LNG Gas Supply LLC (“Rio Grande Gas Supply”), entered into precedent agreements (the “Transportation Precedent Agreements”) with Rio Bravo and Valley Crossing Pipeline, LLC (“VCP”), pursuant to which Rio Grande Gas Supply will retain its rights to the natural gas firm transportation capacity on the Pipeline for a term of at least twenty years and Rio Bravo and VCP, will provide firm pipeline transportation service to Rio Grande Gas Supply in order to supply natural gas to the Terminal. As of March 2, 2020, VCP and Rio Bravo are wholly owned subsidiaries of Enbridge, Inc.

 

We believe that the Terminal, to be located on a 984-acre site in Brownsville, Texas, along with the Pipeline to connect the Terminal to the Agua Dulce supply area, is well-positioned among the second wave of United States (“U.S.”) LNG projects. It is located to take advantage of natural gas resources in Texas, including the Permian Basin and Eagle Ford Shale. We plan to construct, develop, own and operate the Terminal. 

 

On November 22, 2019, the Terminal and the Pipeline received an order from the FERC (“the Order”) authorizing the siting, construction, and operation of six liquefaction trains, four LNG storage tanks (each with a capacity of 180,000 cubic meters), two marine jetties for ocean-going LNG vessels, one turning basin, and six truck loading bays for LNG and natural gas liquids and all associated facilities for the production of up to 27 million tonnes per annum ("mtpa").  Simultaneously, FERC issued a certificate of public convenience and necessity authorizing the construction of the Pipeline, which will be developed by a third-party following our sale of Rio Bravo and is expected to be comprised of twin, 137-mile-long, 42-inch-outside diameter, natural gas pipelines, three 180,000-horsepower compressor stations, two 30,000- horsepower interconnect booster stations, six mainline valve sites, four metering sites, and various ancillary facilities. The twin pipelines are expected to be rated to a maximum allowable operating pressure of 1,480 pounds per square inch and total deliverability of at least 4.5 billion cubic feet per day (“Bcf/d”). On January 23, 2020, the FERC issued its final order on rehearing rejecting all challenges to the Order.  While the Order authorizes six liquefaction trains, we may make a positive FID on as few as two liquefaction trains.

 

We have also leased a 994-acre site on the Houston Ship Channel in Texas City, Texas for our second U.S. LNG project, which is expected to be permitted for up to three trains (each with a nominal capacity of 5.5 mtpa), a minimum of two LNG storage tanks (each with a capacity of 200,000 cubic meters), two marine jetties for ocean-going LNG vessels and one turning basin (the “Galveston Bay Terminal”). We intend to use similar design and engineering for the Galveston Bay Terminal as for the Terminal.

 

Engineering, Procurement, and Construction

 

During the third quarter of 2018, we initiated a competitive engineering, procurement and construction (“EPC”) bid process. We received expressions of interest (the “EOIs”) from multiple EPC contractors to participate in the EPC process. We reviewed the EOIs against a series of selection criteria and issued formal invitations to bid to Bechtel Oil, Gas and Chemicals, Inc. ("Bechtel"), Fluor Enterprises, Inc. ("Fluor") and McDermott International, Inc. In December 2018, each of the EPC bidders provided us with an endorsement of the Terminal’s front-end engineering and design (“FEED”), which indicates the bidders’ confirmation that the Terminal is technically feasible and can be further designed, engineered, permitted, constructed, commissioned and safely placed into operations. On April 22, 2019, we received EPC bid packages from each of Bechtel and Fluor, two of the global LNG market’s leading EPC contractors.  The technical and commercial bid packages, which were received on-schedule, were for fully wrapped lump-sum separated turnkey (“LSTK”) EPC contracts for the Terminal.

 

On May 24, 2019, Rio Grande entered into two LSTK EPC agreements with Bechtel for the construction of (i) two LNG trains with expected aggregate production capacity up to approximately 11.74 mtpa, two 180,000m3 full containment LNG tanks, one marine loading berth, related utilities and facilities, and all related appurtenances thereto, together with certain additional work options (the “Trains 1 and 2 EPC Agreement”) and (ii) an LNG train with expected production capacity of up to approximately 5.87 mtpa, related utilities and facilities, and all related appurtenances  thereto (the “Train 3 EPC Agreement” and together with the Trains 1 and 2 EPC Agreement, the “EPC Agreements”).  During 2019, we issued two limited notice to proceed (“LNTP”) to Bechtel under the Trains 1 and 2 EPC Agreement.

 

 

Commercial

 

We are continuing commercial discussions with a variety of parties ranging from large utilities and state-sponsored enterprises to portfolio and multinational commodity interests. Leveraging the global relationships and extensive experience of our management team, we expect to sign long-term binding offtake commitments for substantially all of the Terminal’s capacity prior to a FID.

 

We believe the Terminal’s location will provide customers with access to low-cost natural gas from the Permian Basin and Eagle Ford Shale. We are focused on selling LNG to customers through a “free on board” model whereby a marketing affiliate would acquire feed gas, the Terminal would produce the LNG and the title transfer would occur at the interface between the Terminal and the customer’s ship.

 

We offer multiple LNG pricing options, meeting the evolving needs of our customers and maximizing our total addressable market. Global LNG customers are expressing interest in contracting their LNG offtake to indexes other than Henry Hub. We are working with U.S. producers to provide alternative indexation, including netback pricing, to satisfy global LNG customers’ needs.  LNG pricing options may include indexation to Brent Crude Oil, Agua Dulce hub, Waha hub, Japan Korea Marker ("JKM") and Title Transfer Facility ("TTF"), among others.

 

In March 2019, we entered into a 20-year sale and purchase agreement (the "SPA") with Shell NA LNG LLC (“Shell”) for the supply of two million tonnes per annum of liquefied natural gas from the Terminal.  Pursuant to the SPA, Shell will purchase LNG on a free-on-board basis starting from the commercial operation date of the Terminal, currently expected in 2023, with approximately three-quarters of the purchased LNG volume indexed to Brent and the remaining volume indexed to domestic United States gas indices, including Henry Hub. The Shell SPA becomes effective upon the satisfaction of certain conditions precedent, which include a positive FID in the Terminal.

 

Governmental Permits, Approvals and Authorizations

 

We will be required to obtain governmental approvals and authorizations to implement our proposed business strategy, which includes the design, construction and operation of the Terminal and the export of LNG from the U.S. to foreign countries. The design, construction and operation of LNG export terminals is a regulated activity and is subject to Section 3 of the Natural Gas Act (the "NGA"). Federal law has bifurcated regulatory jurisdiction of LNG export activities. The FERC has jurisdiction over the siting, construction and permitting of LNG export facilities. The U.S. Department of Energy (the “DOE”) has jurisdiction over the import and export of the natural gas commodity, including natural gas in the form of LNG. The FERC also has jurisdiction over the siting, construction and operation of interstate natural gas pipelines under Section 7 of the NGA and regulates interstate pipelines’ terms and conditions of service under Sections 4 and 5 of the NGA. In 2002, the FERC established a policy of not regulating the terms and conditions of service for LNG import or export facilities or requiring that LNG import or export facilities operate as “open access” facilities for all customers. The Energy Policy Act of 2005, which amended the NGA, codified this policy until January 1, 2015, and the FERC has not indicated that it intends to depart from its policy of not regulating the terms or conditions of service or requiring that LNG terminals operate on an open access basis.

 

Although the FERC acts as the lead agency with jurisdiction over LNG import and export facilities, other federal and state agencies act as cooperating agencies, coordinating with the FERC to evaluate applications for LNG export facilities. These agencies include the U.S. Department of Transportation’s Pipeline and Hazardous Materials Safety Administration (the “PHMSA”), the U.S. Coast Guard (the “Coast Guard”), the U.S. Army Corps of Engineers, the U.S. Environmental Protection Agency, the International Boundary and Water Commission and other federal agencies with jurisdiction over potential environmental impacts of LNG terminal construction and operation. Certain federal laws, such as the Clean Water Act, the Clean Air Act and the Coastal Zone Management Act, delegate authority over certain actions to state agencies, like the Texas Commission on Environmental Quality and the Railroad Commission of Texas. In reviewing an application for an LNG import or export terminal or an interstate natural gas pipeline, the FERC also works with these state agencies that have jurisdiction over certain aspects of LNG terminal or interstate natural gas pipeline construction or operation.

 

In particular, the PHMSA has established safety standards for interstate natural gas pipelines and LNG facilities. Similarly, the Coast Guard has established safety regulations for marine operations at LNG facilities and the operation of LNG carriers. The FERC, the PHMSA and the Coast Guard entered into a Memorandum of Understanding in 2004 that establishes the FERC’s primary role in evaluating LNG terminal applications and defines the process for coordinating the review of an LNG import or export terminal application with the PHMSA and the Coast Guard. In 2018, the FERC and the PHMSA entered into a separate Memorandum of Understanding that establishes the process and timeline by which the PHMSA should determine whether an LNG terminal project will meet the PHMSA’s LNG safety siting standards.

 

We filed our formal application for the Terminal with the FERC on May 5, 2016, received a Final Environmental Impact Statement from the FERC on April 26, 2019 and received the Order on November 22, 2019 authorizing the siting, construction and operation of the Terminal. Other major regulatory permits obtained in 2019 include the Biological Opinion and Incidental Take Statement from the U.S. Fish and Wildlife Service.  Following receipt of the Order on November 22, 2019, two requests for re-hearing were filed challenging the Order. One of those requests for rehearing also requested that the FERC stay the Order. On January 23, 2020, the FERC issued its Order on Rehearing and Stay in which the FERC rejected all challenges presented in the requests for rehearing and the request for stay.

  

Separately, we submitted a pre-filing request to the FERC for the Galveston Bay Terminal on August 31, 2018, and the FERC initiated its pre-filing process for that application on October 10, 2018.

 

Section 3 of the NGA requires prior authorization by the DOE for the import or export of natural gas, including LNG, from the U.S. The DOE’s practice has been to include certain reporting requirements in its LNG export authorizations, including mandating the reporting of the foreign destination of U.S.-sourced LNG. In December 2018, the DOE clarified its reporting requirements, directing LNG export authorization holders and their downstream counterparties to report the destination to which the U.S.-sourced LNG was “actually delivered,” in contrast to the agency’s prior policy requiring the reporting of where the LNG was “delivered for end use.” This revised policy recognizes the increasing flexibility and liquidity in the global LNG market.

 

On September 7, 2016, Rio Grande obtained an authorization for export of LNG to countries with which the U.S. has a Free Trade Agreement (“FTA”) on our own behalf and as an agent for others for a term of 30 years. On June 13, 2018, Galveston Bay obtained a similar authorization for export of LNG to FTA countries on our own behalf and as an agent for others for a term of 20 years. The DOE’s December 2018 order adjusting the reporting requirements applies to both of the authorizations for LNG to FTA countries. However, many of our target markets are not FTA countries. We have applied to the DOE for approval to export LNG to non-FTA countries for both projects.  As a result of the legal standard under the NGA and consistent with federal appeals court precedent, the DOE has adopted an approach whereby it issues a non-FTA authorization after the FERC issues its order authorizing the project facilities. On February 10, 2020, the DOE issued its “Opinion and Order Granting Long-Term Authorization to Export Liquefied Natural Gas to Non-Free Trade Agreement Nations to Rio Grande" in DOE/FE Order No. 4492.  There are no legal intervenors in the docket and therefore we expect that this order is final.

 

 

Gas Supply

 

The proposed Terminal site will be located in Brownsville, Texas, benefiting from close access to the Permian Basin and Eagle Ford Shale. We expect to realize material benefits from providing our customers with access to these low-cost associated gas resources.  Major oil companies and independent shale producers have created extraordinary efficiencies and improvements, including enhanced well recoveries through extended lateral lengths and hydraulic fracturing technology, rig productivity, and operating and lifecycle costs. However, U.S. demand has not risen proportionally with the growth in recoverable reserves.

 

Through the Pipeline, projected to have interconnects with a combined receipt capacity of more than 10 Bcf/d, we believe that we will have supply flexibility established by the Transportation Precedent Agreements. The combination of increased production and expanding takeaway capacity indicates that the Agua Dulce supply area, from which the Pipeline is proposed to be routed, is expected to become increasingly liquid and remain competitively priced to Henry Hub. We believe our proximity to two major gas reserves basins, increasing takeaway capacity in the area, a significant influx of production and infrastructure investment, as well as our existing contacts and discussions with some of the largest regional operators, represent key elements of a compelling feed gas strategy for partners and customers alike. We are continuing to advance substantive negotiations in these areas.

 

The Permian Basin offers one of the deepest inventories of economic natural gas resource in the world. According to RS Energy Group, there are approximately 700 trillion cubic feet ("Tcf") of remaining natural gas resource in the Permian Basin and Eagle Ford Shale. Permian Basin economics are largely driven by the production of oil, not gas; due to flaring restrictions, producers must market their natural gas in order to sustain oil production programs. We believe the Permian Basin will produce significant quantities of low-cost natural gas for decades.

 

Driven by the Permian Basin, natural gas production in Texas continues to grow at a rapid pace. According to data from the Energy Information Administration ("EIA"), natural gas production in the Permian Basin, alone, has grown by more than 40 percent annually in recent years. By the end 2019, the Permian Basin was producing more than 11 billion cubic feet per day ("Bcf/d") of natural gas. We estimate dry gas production in Texas could still reach nearly 40 Bcf/d by 2030.

 

There is not enough domestic demand within Texas to support our projections for Texas natural gas production. We believe new LNG projects will need to absorb large volumes of natural gas. To support Permian Basin gas production, Texas may need more than 14 Bcf/d of LNG export capacity by 2030; in a higher oil price environment, even more LNG export capacity may be needed. To date, only 6 Bcf/d of LNG export capacity on the Texas Gulf Coast has achieved a final investment decision. We estimate that 8.2 Bcf/d of incremental LNG FIDs – equivalent to more than 60 mtpa – may be needed in the next 12 to 36 months to support Permian Basin gas production forecasts.

 

Competition

 

We are subject to a high degree of competition in all aspects of our business. See “Item 1.A — Risk Factors —Competition in the energy industry is intense, and some of our competitors have greater financial, technological and other resources.

 

The Terminal will compete with liquefaction facilities worldwide to supply low-cost liquefaction to the market. In addition, we will compete with a variety of companies in the global LNG market, such as independent, technology-driven companies, state-owned and other independent oil and natural gas companies and utilities. Many of these competitors have longer operating histories, more development experience, greater name recognition, greater access to the LNG market, more employees and substantially greater financial, technical and marketing resources than we currently possess.

 

Employees

 

As of December 31, 2019, we had 74 full-time employees and 14 independent contractors. We hire independent contractors on an as-needed basis and have no collective bargaining agreements with our employees.

 

Offices

 

Our principal executive offices are located at 1000 Louisiana St., Suite 3900, Houston, Texas, 77002, and our telephone number is (713) 574-1880.

 

Available Information

 

Our internet website address is www.next-decade.com. We intend to use our website as a means of disclosing material non-public information and for complying with disclosure obligations under Regulation FD. Such disclosures will be included on our website under the heading “Investors.” Accordingly, investors should monitor such portion of our website, in addition to following our press releases and SEC filings. Within our website under the heading “Investors,” we make available free of charge our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to those reports filed with or furnished to the SEC under applicable securities laws. These materials are made available as soon as reasonably practical after we electronically file such materials with or furnish such materials to the SEC. Information on our website is not incorporated by reference into this Annual Report on Form 10-K and should not be considered part of this document. In addition, we intend to disclose on our website any amendments to, or waivers from, our Code of Conduct and Ethics that are required to be publicly disclosed pursuant to rules of the SEC.

 

The SEC also maintains a website that contains reports, proxy and information statements and other information regarding issuers that file electronically with the SEC at www.sec.gov.

 

 

 

Item 1A. Risk Factors

 

We are subject to uncertainties and risks due to the nature of the business activities we conduct. The following information describes certain uncertainties and risks that could affect our business, financial condition or results of operations or could cause actual results to differ materially from estimates or expectations contained in our forward-looking statements on page 3 of this Annual Report on Form 10-K. This section does not describe all risks applicable to us, our industry or our business, and it is intended only as a summary of known material risks that are specific to us. We may experience additional risks and uncertainties not currently known to us or that we currently deem to be immaterial which may materially and adversely affect our business, financial condition and results of operations.

 

We are in the process of developing LNG liquefaction and export projects, and the success of such projects is unpredictable; as such, positive cash flows and even revenues will be several years away, if they occur at all. 

 

We are not expected to generate cash flow, or even obtain revenues, unless and until the Terminal is operational, which is expected to be at least three years away, and accordingly, distributions to investors may be limited, delayed, or non-existent.

 

Our cash flow and consequently our ability to distribute earnings is solely dependent upon the revenue Rio Grande receives from the Terminal and the transfer of funds by Rio Grande to NextDecade in the form of distributions or otherwise. Rio Grande’s ability to complete the Terminal, as discussed further below, will be dependent upon, among other things, our ability to obtain necessary regulatory approvals and raise the capital necessary to fund development of the Terminal.

 

Our ability to pay dividends is almost entirely dependent upon our ability to complete the Terminal and generate cash and net operating income from operations. We do not expect to generate any revenue until the completion of construction of the first phase of the Terminal. Upon such completion, financing and numerous other factors affecting the Terminal may reduce our cash flow. As a result, we may not make distributions of any amount or any distributions may be delayed.

 

Substantially all of our anticipated revenue will be dependent upon the Terminal. Due to our lack of asset diversification, adverse developments at or affecting the Terminal would have a significantly greater impact on our financial condition and results of operations than if we maintained a more diverse portfolio of assets.

 

We will be required to seek additional debt and equity financing in the future to complete the Terminal and may not be able to secure such financing on acceptable terms, or at all. 

 

Since we will be unable to generate any revenue while we are in the development and construction stages for multiple years, we will need additional financing to provide the capital required to execute our business plan. We will need significant funding to develop and construct the Terminal as well as for working capital requirements and other operating and general corporate purposes.

 

There can be no assurance that we will be able to raise sufficient capital on acceptable terms, or at all. If sufficient capital is not available on satisfactory terms, we may be required to delay, scale back or eliminate the development of business opportunities, and our operations and financial condition may be adversely affected to a significant extent.

 

Debt financing, if obtained, may involve agreements that include liens on Terminal assets and covenants limiting or restricting our ability to take specific actions, such as paying dividends or making distributions, incurring additional debt, acquiring or disposing of assets and increasing expenses. Debt financing would also be required to be repaid regardless of our operating results.

 

In addition, the ability to obtain financing for the Terminal is expected to be contingent upon, among other things, our ability to enter into sufficient long-term commercial agreements prior to the commencement of construction. For additional information regarding our ability to enter into sufficient long-term commercial agreements, see “— Our ability to generate cash is substantially dependent upon us entering into satisfactory contracts with third parties and the performance of those third parties under those contracts.”

 

 

Postponement in making a positive FID in the construction and operation of the Terminal may require us to amend some of our agreements.

 

The terms of certain agreements to which we are a party require that a positive FID in the Terminal occur no later than specified dates or may otherwise terminate at the end of their respective terms.  If we postpone making a positive FID in the construction and operation of the Terminal beyond any such date or term, we may need to amend the corresponding agreement in order to extend such date or term.  Our business could be materially adversely affected if certain of such agreements are not amended.

 

The Terminal’s operations will be substantially dependent on the development and operation of the Pipeline by Enbridge, Inc. and its affiliates.

 

The Terminal will be dependent on a pipeline owned by an affiliate of Enbridge, Inc. (the “Transporter”) for the delivery of all of its natural gas. The Pipeline is currently in development and its construction will require the Transporter to secure options for rights-of-way along the approximately 137-mile proposed Pipeline route. It is possible that, in negotiating to secure these rights-of-way, the Transporter encounters recalcitrant landowners or competitive projects, which could result in additional time needed to secure the Pipeline route and, consequently, delays in, or abandonment of, its construction. Construction of the Pipeline could be delayed or abandoned for any of many other reasons, such as it becoming economically disadvantageous to the Transporter, a failure to obtain or maintain necessary permits for construction or operation, mechanical or structural failures, inadvertent damages during construction, or any terrorist attack, including cyberterrorism, affecting the Pipeline or the Transporter. Any such delays in the construction of the Pipeline could delay the development of the Terminal and its becoming operational.

 

We may be subject to risks related to doing business in, and having counterparties based in, foreign countries. 

 

We may engage in operations or make substantial commitments to and investments in, and enter into agreements with, counterparties located outside the U.S., which would expose us to political, governmental and economic instability and foreign currency exchange rate fluctuations.

 

Any disruption caused by these factors could harm our business, results of operations, financial condition, liquidity and prospects. Risks associated with potential operations, commitments and investments outside of the U.S. include but are not limited to risks of:

 

 

currency exchange restrictions and currency fluctuations;

 

 

war or terrorist attack;

 

 

expropriation or nationalization of assets;

 

 

renegotiation or nullification of existing contracts or international trade arrangements;

 

 

changing political conditions;

 

 

macro-economic conditions impacting key markets and sources of supply;

 

 

changing laws and policies affecting trade, taxation, financial regulation, immigration, and investment;

 

 

the implementation of tariffs by the U.S. or foreign countries in which we do business;

 

 

duplicative taxation by different governments;

 

 

general hazards associated with the assertion of sovereignty over areas in which operations are conducted, transactions occur, or counterparties are located; and

 

 

the unexpected credit rating downgrade of countries in which our LNG customers are based.

 

As our reporting currency is the U.S. dollar, any operations conducted outside the U.S. or transactions denominated in foreign currencies would face additional risks of fluctuating currency values and exchange rates, hard currency shortages and controls on currency exchange. In addition, we would be subject to the impact of foreign currency fluctuations and exchange rate changes on our financial reports when translating our assets, liabilities, revenues and expenses from operations or transactions outside of the U.S. into U.S. dollars at the then-applicable exchange rates. These translations could result in changes to our results of operations from period to period.

 

Costs for the Terminal are subject to various factors. 

 

Construction costs for the Terminal will be subject to various factors such as economic and market conditions, government policy, claims and litigation risk, competition, the final terms of any definitive agreement for services with our EPC service provider, change orders, delays in construction, legal and regulatory requirements, unanticipated regulatory delays, site issues, increased component and material costs, escalation of labor costs, labor disputes, increased spending to maintain our construction schedule and other factors. In particular, costs for the Terminal are expected to be substantially affected by:

 

 

global prices of nickel, steel, concrete, pipe, aluminum and other component parts of the Terminal and the contractual terms upon which our contractors are able to source and procure required materials;

 

 

any U.S. import tariffs or quotas on steel, aluminum, pipe or other component parts of the Terminal, which may raise the prices of certain materials used in the Terminal;

 

 

commodity and consumer prices (principally, natural gas, crude oil and fuels that compete with them in our target markets) on which our economic assumptions are based;

 

 

the exchange rate of the U.S. Dollar with other currencies;

 

 

changes in regulatory regimes in the U.S. and the countries to which we will be authorized to sell LNG;

 

 

levels of competition in the U.S. and worldwide;

 

 

changes in the tax regimes in the countries to which we sell LNG or in which we operate;

 

 

cost inflation relating to the personnel, materials and equipment used in our operations;

 

 

delays caused by events of force majeure or unforeseeable climatic events;

 

 

interest rates; and

 

 

synergy benefits associated with the development of multiple phases of the Terminal using identical design and construction philosophies.

 

In addition to our willingness to make a FID and our ability to construct the Terminal and achieve operations, events related to such activities may cause actual costs of the Terminal to vary from the range, combination and timing of assumptions used for projected costs of the Terminal. Such variations may be material and adverse, and an investor may lose all or a portion of its investment.

 

 

The construction and operation of the Terminal remains subject to further governmental approvals, and some approvals may be subject to further conditions, review and/or revocation and other legal and regulatory risks, which may result in delays, increased costs or decreased cash flows.

 

We are required to obtain governmental approvals and authorizations to implement our proposed business strategy, which includes the design, construction and operation of the Terminal and the export of LNG from the U.S. to foreign countries. As described above under “Business− Governmental Permits, Approvals and Authorizations,” the design, construction and operation of LNG export terminals is a highly regulated activity in the U.S., subject to a number of permitting requirements, regulatory approvals and ongoing safety and operational compliance programs. There is no guarantee that we will obtain or, if obtained, maintain these governmental authorizations, approvals and permits. Failure to obtain, or failure to obtain on a timely basis, or failure to maintain any of these governmental authorizations, approvals and permits could have a material adverse effect on our business, results of operations, financial condition and prospects.

 

Authorizations obtained from the FERC, the DOE and other federal and state regulatory agencies also contain ongoing conditions, and additional approval and permit requirements may be imposed. We do not know whether or when any such approvals or permits can be obtained, or whether any existing or potential interventions or other actions by third parties will interfere with our ability to obtain and maintain such permits or approvals. If we are unable to obtain and maintain the necessary approvals and permits, including as a result of untimely notices or filings, we may not be able to recover our investment in the Terminal. Additionally, government disruptions, such as a U.S. government shutdown, may delay or halt our ability to obtain and maintain necessary approvals and permits. There is no assurance that we will obtain and maintain these governmental permits, approvals and authorizations, or that we will be able to obtain them on a timely basis, and failure to obtain and maintain any of these permits, approvals or authorizations could have a material adverse effect on our business, contracts, financial condition, operating results, cash flow, liquidity and prospects.

 

In addition, some of these governmental authorizations, approvals and permits require extensive environmental review. Some groups have perceived, and other groups could perceive, that the proposed construction and operation of the Terminal or the Galveston Bay Terminal could negatively impact the environment or cultural heritage sites. Objections from such groups could cause delays, damage to reputation and difficulties in obtaining governmental authorizations, approvals or permits or prevent the obtaining of such authorizations, approvals or permits altogether. Although the necessary authorizations, approvals and permits to construct and operate the Terminal and the Galveston Bay Terminal may be obtained, such authorizations, approvals and permits may be subject to ongoing conditions imposed by regulatory agencies or may be subject to legal proceedings not involving us, which is customary for U.S. LNG projects.

 

The Terminal and the Galveston Bay Terminal will be subject to a number of environmental laws and regulations that impose significant compliance costs, and existing and future environmental and similar laws and regulations could result in increased compliance costs, liabilities or additional operating restrictions.

 

Our business will be subject to extensive federal, state and local regulations and laws, including regulations and restrictions on discharges and releases to the air, land and water and the handling, storage and disposal of hazardous materials and wastes in connection with the development, construction and operation of its liquefaction facilities. These regulations and laws will require us to maintain permits, provide governmental authorities with access to its facilities for inspection and provide reports related to its compliance. Violation of these laws and regulations could lead to substantial fines and penalties or to capital expenditures related to pollution control or remediation equipment that could have a material adverse effect on our business, results of operations, financial condition, liquidity and prospects. Federal and state laws impose liability, without regard to fault or the lawfulness of the original conduct, for the release of certain types or quantities of hazardous substances into the environment. As the owner and operator of the Terminal and the Galveston Bay Terminal, we could be liable for the costs of cleaning up hazardous substances released into the environment and for damage to natural resources.

 

In addition, future federal, state and local legislation and regulations, such as regulations regarding greenhouse gas emissions and the transportation of LNG may impose unforeseen burdens and increased costs on our business that could have a material adverse effect on our financial results. As an international shipper of LNG, our operations could also be impacted by environmental laws applicable under international treaties or foreign jurisdictions.

 

 

Changes in legislation and regulations or interpretations thereof, such as those relating to the importation and exportation of LNG, could have a material adverse effect on our business, results of operations, financial condition, liquidity and prospects and could cause additional expenditures and delays in connection with the proposed LNG facilities and their construction.

 

The laws, rules and regulations applicable to our business, including federal agencies’ interpretations of and policies under such laws rules and regulations, are subject to change, either through new or modified regulations enacted on the federal, state or local level or by a change in policy of the agencies charged with enforcing such regulations. For example, the provisions of the Energy Policy Act of 2005 that codified the FERC’s policy of not regulating the terms and conditions of service for LNG import or export facilities expired in 2015. Although the FERC has not indicated that it intends to depart from this policy, there can be no assurance it will not do so in the future. The nature and extent of any changes in these laws, rules, regulations and policies may be unpredictable and may have material effects on our business. Future legislation and regulations or changes in existing legislation and regulations, or interpretations thereof, such as those relating to the liquefaction, storage, or regasification of LNG, or its transportation, could cause additional expenditures, restrictions and delays in connection with our operations as well as other future projects, the extent of which cannot be predicted and which may require us to limit substantially, delay or cease operations in some circumstances. Revised, reinterpreted or additional laws and regulations that result in increased compliance costs or additional operating costs and restrictions could have an adverse effect on our business, the ability to expand our business, including into new markets, results of operations, financial condition, liquidity and prospects.

 

We will be dependent on third-party contractors for the successful completion of the Terminal, and these contractors may be unable to complete the Terminal or may build a non-conforming Terminal. 

 

The construction of the Terminal is expected to take several years, will be confined to a limited geographic area and could be subject to delays, cost overruns, labor disputes and other factors that could adversely affect financial performance or impair our ability to execute our scheduled business plan.

 

Timely and cost-effective completion of the Terminal in conformity with agreed-upon specifications will be highly dependent upon the performance of third-party contractors pursuant to their agreements. However, we have not yet entered into definitive agreements with certain of the contractors, advisors and consultants necessary for the development and construction of the Terminal. We may not be able to successfully enter into such construction contracts on terms or at prices that are acceptable to us.

 

Further, faulty construction that does not conform to our design and quality standards may have an adverse effect on our business, results of operations, financial condition and prospects. For example, improper equipment installation may lead to a shortened life of our equipment, increased operations and maintenance costs or a reduced availability or production capacity of the affected facility. The ability of our third-party contractors to perform successfully under any agreements to be entered into is dependent on a number of factors, including force majeure events and such contractors’ ability to:

 

 

design, engineer and receive critical components and equipment necessary for the Terminal to operate in accordance with specifications and address any start-up and operational issues that may arise in connection with the commencement of commercial operations;

 

 

attract, develop and retain skilled personnel and engage and retain third-party subcontractors, and address any labor issues that may arise;

 

 

post required construction bonds and comply with the terms thereof, and maintain their own financial condition, including adequate working capital;

 

 

adhere to any warranties the contractors provide in their EPC contracts; and

 

 

respond to difficulties such as equipment failure, delivery delays, schedule changes and failure to perform by subcontractors, some of which are beyond their control, and manage the construction process generally, including engaging and retaining third-party contractors, coordinating with other contractors and regulatory agencies and dealing with inclement weather conditions.

 

Furthermore, we may have disagreements with our third-party contractors about different elements of the construction process, which could lead to the assertion of rights and remedies under the related contracts, resulting in a contractor’s unwillingness to perform further work on the relevant project. We may also face difficulties in commissioning a newly constructed facility. Any of the foregoing issues or significant project delays in the development or construction of the Terminal could materially and adversely affect our business, results of operations, financial condition and prospects.  

 

 

Our ability to generate cash is substantially dependent upon us entering into satisfactory contracts with third parties and the performance of those third parties under those contracts. 

 

We have not yet entered into, and may never be able to enter into, satisfactory commercial arrangements with third-party suppliers of feedstock or other required supplies to the Terminal, or customers for products and services from the Terminal.

 

Our business strategy regarding how and when the Terminal’s export capacity or LNG produced by the Terminal is marketed may change based on market factors. Without limitation, our business strategy may change due to inability to enter into agreements with customers or based on our or market participants’ views regarding future supply and demand of LNG, prices, available worldwide natural gas liquefaction capacity or regasification capacity or other factors. If efforts to market the Terminal’s export capacity or LNG produced by the Terminal are not successful, our business, results of operations, financial condition and prospects may be materially and adversely affected.

 

Our construction and operations activities will be subject to a number of development risks, operational hazards, regulatory approvals and other risks which may not be fully covered by insurance, and which could cause cost overruns and delays that could have a material adverse effect on our business, results of operations, financial condition, liquidity and prospects. 

 

Siting, development and construction of the Terminal will be subject to the risks of delay or cost overruns inherent in any construction project resulting from numerous factors, including, but not limited to, the following:

 

 

difficulties or delays in obtaining, or failure to obtain, sufficient debt or equity financing on reasonable terms;

 

 

failure to obtain all necessary government and third-party permits, approvals and licenses for the construction and operation of any of the proposed LNG facilities;

 

 

failure to obtain sale and purchase agreements that generate sufficient revenue to support the financing and construction of the Terminal;

 

 

difficulties in engaging qualified contractors necessary to the construction of the contemplated Terminal or other LNG facilities;

 

 

shortages of equipment, materials or skilled labor;

 

 

natural disasters and catastrophes, such as hurricanes, explosions, fires, floods, industrial accidents and terrorism;

 

 

delays in the delivery of ordered materials;

 

 

work stoppages and labor disputes;

 

 

competition with other domestic and international LNG export terminals;

 

 

unanticipated changes in domestic and international market demand for and supply of natural gas and LNG, which will depend in part on supplies of and prices for alternative energy sources and the discovery of new sources of natural resources;

 

 

unexpected or unanticipated additional improvements; and

 

 

adverse general economic conditions.

 

Delays beyond the estimated development periods, as well as cost overruns, could increase the cost of completion beyond the amounts that are currently estimated, which could require us to obtain additional sources of financing to fund the activities until the Terminal is constructed and operational, which could cause further delays. The need for additional financing may also make the Terminal uneconomic. Any delay in completion of the Terminal may also cause a delay in the receipt of revenues projected from the Terminal or cause a loss of one or more customers. As a result, any significant construction delay, whatever the cause, could have a material adverse effect on our business, results of operations, financial condition, liquidity and prospects.

 

 

Our operations will be subject to all of the hazards inherent in the receipt and processing of natural gas to LNG, and associated short-term storage including:

 

 

damage to pipelines and plants, related equipment, loading terminal, and surrounding properties caused by hurricanes, tornadoes, floods, fires and other natural disasters, acts of terrorism and acts of third parties;

 

 

damage from subsurface and/or waterway activity (for example, sedimentation of shipping channel access);

 

 

leaks of natural gas, natural gas liquids, or oil or losses of natural gas, natural gas liquid, or oil as a result of the malfunction of equipment or facilities;

 

 

fires, ruptures and explosions;

 

 

other hazards that could also result in personal injury and loss of life, pollution and suspension of operations; and

 

 

hazards experienced by other operators that may affect our operations by instigating increased regulations and oversight.

 

Any of these risks could adversely affect our ability to conduct operations or result in substantial loss to us as a result of claims for:

 

 

injury or loss of life;

 

 

damage to and destruction of property, natural resources and equipment;

 

 

pollution and other environmental damage;

 

 

regulatory investigations and penalties;

 

 

suspension of our operations;

 

 

failure to perform contractual obligations; and

 

 

repair and remediation costs.

 

Due to the scale of the Terminal, we may encounter capacity limits in insurance markets, thereby limiting our ability to economically obtain insurance with our desired level of coverage limits and terms. We may elect not to obtain insurance for any or all of these risks if we believe that the cost of available insurance is excessive relative to the risks presented. In addition, contractual liabilities and pollution and environmental risks generally are not fully insurable. The occurrence of an event that is not fully covered by insurance could have a material adverse effect on our business, financial condition and results of operations.

 

 

We may experience increased labor costs, and the unavailability of skilled workers or our failure to attract and retain qualified personnel could adversely affect us. In addition, changes in our senior management or other key personnel could affect our business operations. 

 

We are dependent upon the available labor pool of skilled employees authorized to work in the U.S. We compete with other energy companies and other employers to attract and retain qualified personnel with the technical skills and experience required to construct and operate our facilities and pipelines and to provide our customers with the highest quality service. A shortage in the labor pool of skilled workers able to legally work in the U.S. or other general inflationary pressures or changes in applicable laws and regulations could make it more difficult for us to attract and retain qualified personnel and could require an increase in the wage and benefits packages that we offer, thereby increasing our operating costs. Any increase in our operating costs could materially and adversely affect our business, financial condition, operating results, liquidity and prospects.

 

We depend on our executive officers for various activities. We do not maintain key person life insurance policies on any of our personnel. Although we have arrangements relating to compensation and benefits with certain of our executive officers, we do not have any employment contracts or other agreements with key personnel binding them to provide services for any particular term. The loss of the services of any of these individuals could have a material adverse effect on our business.

 

Technological innovation, competition or other factors may negatively impact our anticipated competitive advantage or our processes. 

 

Our success will depend on our ability to create and maintain a competitive position in the natural gas liquefaction industry. We do not have any exclusive rights to any of the technologies that we will be utilizing. In addition, the technology we anticipate using in the Terminal may face competition due to the technological advances of other companies or solutions, including more efficient and cost-effective processes or entirely different approaches developed by one or more of our competitors or others, which could affect our business, results of operations, financial condition, liquidity and prospects.

 

Failure of exported LNG to be a competitive source of energy for international markets could adversely affect our customers and could materially and adversely affect our business, contracts, financial condition, operating results, cash flow, liquidity and prospects.

 

Operations of the Terminal will be dependent upon our ability to deliver LNG supplies from the U.S., which is primarily dependent upon LNG being a competitive source of energy internationally. The success of our business plan is dependent, in part, on the extent to which LNG can, for significant periods and in significant volumes, be supplied from North America and delivered to international markets at a lower cost than the cost of alternative energy sources. Through the use of improved exploration technologies, additional sources of natural gas may be discovered outside the U.S., which could increase the available supply of natural gas outside the U.S. and could result in natural gas in those markets being available at a lower cost than that of LNG exported to those markets.

 

Additionally, our liquefaction projects will be subject to the risk of LNG price competition at times when we need to replace any existing LNG sale and purchase contract, whether due to natural expiration, default or otherwise, or enter into new LNG sale and purchase contracts. Factors relating to competition may prevent us from entering into a new or replacement LNG sale and purchase contract on economically comparable terms as prior LNG sale and purchase contracts, or at all. Factors which may negatively affect potential demand for LNG from our liquefaction projects are diverse and include, among others:

 

 

increases in worldwide LNG production capacity and availability of LNG for market supply;

 

 

decreases in demand for LNG or increases in demand for LNG, but at levels below those required to maintain current price equilibrium with respect to supply;

 

 

increases in the cost of natural gas feedstock supplied to any project;

 

 

decreases in the cost of competing sources of natural gas or alternate sources of energy such as coal, heavy fuel oil, diesel, nuclear, hydroelectric, wind and solar;

 

 

decrease in the price of non-U.S. LNG, including decreases in price as a result of contracts indexed to lower oil prices;

 

 

increases in capacity and utilization of nuclear power and related facilities;

 

 

increases in the cost of LNG shipping; and

 

 

displacement of LNG by pipeline natural gas or alternate fuels in locations where access to these energy sources is not currently available.

 

Political instability in foreign countries that import natural gas, or strained relations between such countries and the U.S. may also impede the willingness or ability of LNG suppliers, purchasers and merchants in such countries to import LNG from the U.S. Furthermore, some foreign purchasers of LNG may have economic or other reasons to obtain their LNG from non-U.S. markets or our competitors’ liquefaction facilities in the U.S.

 

As a result of these and other factors, LNG may not be a competitive source of energy internationally. The failure of LNG to be a competitive supply alternative to local natural gas, oil and other alternative energy sources in markets accessible to our customers could adversely affect the ability of our customers to deliver LNG from the U.S. on a commercial basis. Any significant impediment to the ability to deliver LNG from the U.S. generally or from the Terminal specifically could have a material adverse effect on our customers and our business, contracts, financial condition, operating results, cash flow, liquidity and prospects.

 

 

Decreases in the global demand for and price of natural gas (versus the price of imported LNG) could lead to reduced development of LNG projects worldwide. 

 

We are subject to risks associated with the development, operation and financing of domestic LNG facilities. The development of domestic LNG facilities and projects is generally based on assumptions about the future price of natural gas and LNG and the conditions of the global natural gas and LNG markets. Natural gas and LNG prices have been, and are likely to remain in the future, volatile and subject to wide fluctuations that are difficult to predict. As a result, our activities will expose us to risks of commodity price movements, which we believe could be mitigated by entering into long-term LNG sales contracts. There can be no assurance that we will be successful in entering into long-term LNG sales contracts. Additionally, the global LNG market could shift toward the use of shorter-term LNG sales contracts.

 

Fluctuations in commodity prices may create a mismatch between natural gas and petroleum prices, which could have a significant impact on our future revenues. Commodity prices and volumes are volatile due to many factors over which we have no control, including competing liquefaction capacity in North America; the international supply and receiving capacity of LNG; LNG marine transportation capacity; weather conditions affecting production or transportation of LNG from the Terminal; domestic and global demand for natural gas; the effect of government regulation on the production, transportation and sale of natural gas; oil and natural gas exploration and production activities; and the development of and changes in the cost of alternative energy sources for natural gas and political and economic conditions worldwide.

 

Our activities are also dependent on the price and availability of materials for the construction of the Terminal, such as nickel, aluminum, pipe, and steel, which may be subject to import tariffs in the U.S. market and are all also subject to factors affecting commodity prices and volumes. In addition, authorities with jurisdiction over wholesale power rates in the U.S., Europe and elsewhere, as well as independent system operators overseeing some of these markets, may impose price limitations, bidding rules and other mechanisms which may adversely impact or otherwise limit trading margins and lead to diminished opportunities for gain. We cannot predict the impact energy trading may have on our business, results of operations or financial condition.

 

Further, the development of liquefaction facilities takes a substantial amount of time, requires significant capital investment, may be delayed by unforeseen and uncontrollable factors and is dependent on our financial viability and ability to market LNG internationally.

 

Competition in the LNG industry is intense, and some of our competitors have greater financial, technological and other resources. 

 

We plan to operate in the highly competitive area of LNG production and face intense competition from independent, technology-driven companies as well as from both major and other independent oil and natural gas companies and utilities.

 

Many competing companies have secured access to, or are pursuing development or acquisition of, LNG facilities in North America. We may face competition from major energy companies and others in pursuing our proposed business strategy to provide liquefaction and export products and services at the Terminal. In addition, competitors have and are developing LNG terminals in other markets, which will compete with U.S. LNG facilities. Some of these competitors have longer operating histories, more development experience, greater name recognition, superior tax incentives, more employees and substantially greater financial, technical and marketing resources than we currently possess. The superior resources that some of these competitors have available for deployment could allow them to compete successfully against us, which could have a material adverse effect on our business, results of operations, financial condition, liquidity and prospects.

 

There may be shortages of LNG vessels worldwide, which could have a material adverse effect on our business, results of operations, financial condition, liquidity and prospects. 

 

The construction and delivery of LNG vessels requires significant capital and long construction lead times, and the availability of the vessels could be delayed to the detriment of our business and customers due to the following:

 

 

an inadequate number of shipyards constructing LNG vessels and a backlog of orders at these shipyards;

 

 

political or economic disturbances in the countries where the vessels are being constructed;

 

 

changes in governmental regulations or maritime self-regulatory organizations;

 

 

work stoppages or other labor disturbances at the shipyards;

 

 

bankruptcies or other financial crises of shipbuilders;

 

 

quality or engineering problems;

 

 

weather interference or catastrophic events, such as a major earthquake, tsunami, or fire; or

 

 

shortages of or delays in the receipt of necessary construction materials.

 

We will rely on third-party engineers to estimate the future capacity ratings and performance capabilities of the Terminal, and these estimates may prove to be inaccurate.

 

We will rely on third parties for the design and engineering services underlying our estimates of the future capacity ratings and performance capabilities of the Terminal. Any of our LNG facilities, when constructed, may not have the capacity ratings and performance capabilities that we intend or estimate. Failure of any of our facilities to achieve our intended capacity ratings and performance capabilities could prevent us from achieving the commercial start dates under our future LNG sale and purchase agreements and could have a material adverse effect on our business, contracts, financial condition, operating results, cash flow, liquidity and prospects.

 

 

Terrorist attacks, including cyberterrorism, or military campaigns involving us or the Terminal could result in delays in, or cancellation of, construction or closure of the Project. 

 

A terrorist or military incident involving the Terminal may result in delays in, or cancellation of, construction of the Terminal, which would increase our costs and prevent us from obtaining expected cash flows. A terrorist incident could also result in temporary or permanent closure of the Terminal, which could increase costs and decrease cash flows, depending on the duration of the closure. Operations at the Terminal could also become subject to increased governmental scrutiny that may result in additional security measures at a significant incremental cost. In addition, the threat of terrorism and the impact of military campaigns may lead to continued volatility in prices for natural gas that could adversely affect our business and customers, including the ability of our suppliers or customers to satisfy their respective obligations under our commercial agreements. Instability in the financial markets as a result of terrorism, including cyberterrorism, or war could also materially adversely affect our ability to raise capital. The continuation of these developments may subject our construction and operations to increased risks, as well as increased costs, and, depending on their ultimate magnitude, could have a material adverse effect on our business, contracts, financial condition, operating results, cash flow, liquidity and prospects.

 

The operation of the Terminal may be subject to significant operating hazards and uninsured risks, one or more of which may create significant liabilities and losses that could have a material adverse effect on our business, results of operations, financial condition, liquidity and prospects. 

 

The plan of operations for the Terminal is subject to the inherent risks associated with LNG operations, including explosions, pollution, release of toxic substances, fires, hurricanes and other adverse weather conditions, and other hazards, each of which could result in significant delays in commencement or interruptions of operations and/or result in damage to or destruction of the Terminal and assets or damage to persons and property.

 

We do not, nor do we intend to, maintain insurance against all these risks and losses. We may not be able to maintain desired or required insurance in the future at rates that we consider reasonable. The occurrence of a significant event not fully insured or indemnified against could have a material adverse effect on our business, contracts, financial condition, operating results, cash flow, liquidity and prospects.

 

 

We are dependent on a limited number of customers for the purchase of LNG. 

 

The number of potential customers is limited. Some potential purchasers of the LNG to be produced from the Terminal are new to the LNG business and have limited experience in the industry. We will be reliant upon the ability of these customers to enter into satisfactory downstream arrangements in their home markets for the licenses to import and sell re-gasified LNG. Some of these jurisdictions are heavily regulated and dominated by state entities. In certain instances, customers may require credit enhancement measures in order to satisfy project-financing requirements.

 

Our U.S. competitors have acquired significant property tax incentives, and we may not be able to acquire or may not have acquired similar incentives from applicable taxing entities. 

 

Due to the size of the Terminal’s capital investment, property taxes represent large operating costs for the Terminal. The principal taxing entities are the Point Isabel Independent School District (“PIISD”) and Cameron County (the “County”). Due to local opposition supported by national environmental interest groups, PIISD did not initially accept our application for a value limitation agreement pursuant to the State of Texas tax code provisions for economic development. We intend to resubmit the application for consideration, but there is no guaranty that it will be accepted and approved. Approval of these tax incentives is an important component of the Terminal’s competitiveness. Failure to gain approval of tax incentives by PIISD and other applicable tax authorities on comparable terms with competitors could materially impact the Terminal’s competitiveness.

 

On October 3, 2017, we executed four tax abatement agreements with the County; however, there is no assurance that the terms of such tax abatement agreements are competitive with other Gulf Coast liquefaction projects.

 

Objections from local communities can delay the Terminal. 

 

Some local communities could perceive the proposed construction and operation of the Terminal as negatively impacting the environment, wildlife, cultural heritage sites or the public health of residents. Objections from local communities could cause delays, limit access to or increase the cost of construction capital, cause reputational damage and impede us in obtaining or renewing permits.

 

 

The Terminal will be dependent on the availability of gas supply at the Agua Dulce supply area.  

 

The Pipeline is expected to collect and transport natural gas to the Terminal. The proposed Pipeline route passes through Jim Wells, Kleberg, Kenedy, Willacy, and Cameron Counties in Texas. The header system at the upstream end of the Pipeline is intended to have multiple interconnects to the existing natural gas pipeline grid located in the Agua Dulce supply area (the “Agua Dulce Hub”). The Agua Dulce Hub includes deliveries from, but not limited to, ConocoPhillip’s 1,100-mile South Texas intrastate and gas gathering pipeline system and ExxonMobil’s 925 MMcf/d King Ranch processing facility. As the Pipeline system interconnects are expected to be relatively close to the Agua Dulce Hub, it is expected that gas will be available for purchase in large volumes at commercially acceptable prices. Nonetheless, disruptions in upstream supply sources or increased market demand could impact the availability of gas supply to the Pipeline header system, which would result in curtailments at the Terminal.

 

Each liquefaction train for the Terminal is expected to involve the transportation and liquefaction of approximately 0.75 Bcf/day of natural gas, for a total of 4.5 Bcf/day for six liquefaction trains at full build-out. Gas sales agreements for the supply of these volumes could entail negotiations with multiple parties for firm and interruptible gas supply and transportation services to the Pipeline header system, as well as pipeline interconnects and ancillary operational agreements in time for operational start-up as early as 2023. Delays caused by third parties in the course of negotiating agreements and constructing the required interconnects could delay the start of commercial operations for the Terminal.

 

Unethical conduct and non-compliance with applicable laws could have a significant adverse effect on our business. 

 

Incidents of unethical behavior, fraudulent activity, corruption or non-compliance with applicable laws and regulations could be damaging to our operations and reputation and may subject us to criminal and civil penalties or loss of operating licenses. We have implemented an anti-corruption policy which applies to all employees and contractors without exception and we are a member of TRACE International, an internationally recognized anti-bribery compliance organization. Our legal team screens potential partners, agents and advisors in multiple databases to which it has access and regularly conducts due diligence interviews with potential counterparties. Due to the global nature of the LNG business and the diversity of jurisdictions in which our customers operate, it is possible that a prospective counterparty could be accused of behavior that falls short of our expectations in this regard, leading to reputational damage and potential legal liabilities, notwithstanding our best efforts to prevent such behaviors.

 

Our common stock could be delisted from Nasdaq. 

 

Our common stock is currently listed on Nasdaq. However, we cannot assure you that we will be able to comply with the continued listing standards of Nasdaq. If we fail to comply with the continued listing standards of Nasdaq, our common stock may become subject to delisting. If Nasdaq delists our common stock from trading on its exchange for failure to meet the continued listing standards, we and our stockholders could face significant material adverse consequences including:

 

 

a limited availability of market quotations for our securities;

 

 

a limited amount of analyst coverage; and

 

 

a decreased ability for us to issue additional securities or obtain additional financing in the future.

 

 

The market price of our common stock has fluctuated in the past and is likely to fluctuate in the future. Holders of our common stock could lose all or part of their investment. 

 

The securities markets in general and our common stock have experienced significant price and volume volatility. The market price and trading volume of our common stock may continue to experience significant fluctuations due not only to general stock market conditions but also to a change in sentiment in the market regarding our operations, business prospects or those of companies in our industry. In addition to the other risk factors discussed in this section, the price and volume volatility of our common stock may be affected by:

 

 

domestic and worldwide supply of and demand for natural gas and corresponding fluctuations in the price of natural gas;

 

 

fluctuations in our quarterly or annual financial results or those of other companies in our industry;

 

 

issuance of additional equity securities which causes further dilution to stockholders;

 

 

sales of a high volume of shares of our common stock by our stockholders;

 

 

operating and stock price performance of companies that investors deem comparable to us;

 

 

events affecting other companies that the market deems comparable to us;

 

 

changes in government regulation or proposals applicable to us;

 

 

actual or potential non-performance by any customer or a counterparty under any agreement;

 

 

announcements made by us or our competitors of significant contracts;

 

 

changes in accounting standards, policies, guidance, interpretations or principles;

 

 

general conditions in the industries in which we operate;

 

 

general economic conditions; and

 

 

the failure of securities analysts to cover our common stock or changes in financial or other estimates by analysts.

 

The stock prices of companies in the LNG industry have experienced wide fluctuations that have often been unrelated to the operating performance of these companies. Following periods of volatility in the market price of a company’s securities, securities class action litigation often has been initiated against a company. If any class action litigation is initiated against us, we may incur substantial costs and our management’s attention may be diverted from our operations, which could materially adversely affect our business and financial condition.

 

Raising additional capital may cause dilution to existing stockholders, restrict our operations or require us to relinquish rights. Additionally, sales of a substantial number of shares of our common stock or other securities in the public market could cause our stock price to fall. 

 

We may seek the additional capital necessary to fund our operations through public or private equity offerings and debt financings. To the extent that we raise additional capital through the sale of equity or convertible debt securities, existing stockholders’ ownership interests will be diluted, and the terms may include liquidation or other preferences that adversely affect their rights as a stockholder. Debt financing, if available, may involve agreements that include covenants limiting or restricting our ability to take specific actions such as incurring additional debt, making capital expenditures or declaring dividends. In addition, sales of a substantial number of shares of our common stock or other securities in the public market could occur at any time. These sales, or the perception in the market that the holders of a large number of shares intend to sell shares, could reduce the market price of our common stock.

 

 

Our Second Amended and Restated Certificate of Incorporation grants our board of directors the power to designate and issue additional shares of common and/or preferred stock.

 

Our authorized capital consists of 480,000,000 shares of common stock and 1,000,000 shares of preferred stock. Our preferred stock may be designated into series pursuant to authority granted by our Second Amended and Restated Certificate of Incorporation (the “Certificate of Incorporation”), and on approval from our board of directors. 166,364 shares of preferred stock have been designated as Series A Convertible Preferred Stock, par value $0.0001 per share (the “Series   A Preferred Stock”), and 166,364 shares of preferred stock have been designated as Series B Convertible Preferred Stock, par value $0.0001 per share (the “Series B Preferred Stock” and together with the Series A Preferred Stock, the “Convertible Preferred Stock”), in each case which are convertible into shares of common stock upon the occurrence of certain events. The board of directors, without any action by our stockholders, may designate and issue additional shares of preferred stock in such classes or series as it deems appropriate and establish the rights, preferences and privileges of such shares, including dividends, liquidation and voting rights. The rights of holders of other classes or series of stock that may be issued could be superior to the rights of holders of our common stock. The designation and issuance of shares of capital stock having preferential rights could adversely affect other rights appurtenant to shares of our common stock.

 

The dividend, liquidation, and redemption rights of the holders of the Convertible Preferred Stock may adversely affect our financial position and the rights of the holders of our common stock.

 

At December 31, 2019, we had 58,197 shares of Series A Preferred Stock and 55,645 shares of Series B Preferred Stock outstanding. The shares of Convertible Preferred Stock bear dividends at a rate of 12% per annum, which are cumulative and accrue daily from the date of issuance on the $1,000 stated value.  Such dividends are payable quarterly and may be paid in cash or in-kind. No dividends may be paid to holders of our common stock while accumulated dividends remain unpaid on the Convertible Preferred Stock.

 

Further, we are required, on the earlier of (i) ten (10) business days following a FID Event (as defined in the certificates of designations of the Convertible Preferred Stock) and (ii) the date that is the tenth (10th) anniversary of the closings of the issuances of the Convertible Preferred Stock, as applicable, to convert all of the Convertible Preferred Stock into shares of Company common stock at a strike price of $7.34 per share of Company common stock. The conversion of the Convertible Preferred Stock would directly dilute the holders of our common stock. In the event we are liquidated while shares of Convertible Preferred Stock are outstanding, holders of Convertible Preferred Stock will be entitled to receive a preferred liquidation distribution, plus any accumulated and unpaid dividends, before holders of our common stock receive any distributions.

 

Holders of the Convertible Preferred Stock have certain voting and other rights that may adversely affect holders of our common stock, and the holders of Convertible Preferred Stock may have different interests from and vote their shares in a manner deemed adverse to, holders of our common stock.

 

The holders of Convertible Preferred Stock vote on an “as-converted” basis with the holders of our common stock on all matters brought before the holders of our common stock. In addition, prior to the conversion of the Convertible Preferred Stock, the consent of the holders of at least a majority of each of the Series A Preferred Stock and the Series B Preferred Stock then outstanding, in each case voting together as a single class, will be required for the Company to take certain actions, including, among others, (i) authorizing, creating or approving the issuance of any shares, or of any security convertible into, or convertible or exchangeable for shares of, senior to the Convertible Preferred Stock; (ii) authorizing, creating or approving the issuance of any shares of, or of any security convertible into, or convertible or exchangeable for shares of, Parity Stock (as defined in the certificates of designations of the Convertible Preferred Stock), subject to certain exceptions; (iii) adversely affecting the rights, preferences or privileges of the Convertible Preferred Stock, as applicable, subject to certain exceptions; (iv) amending, altering or repealing any of the provisions of the Certificate of Incorporation in a manner that would adversely affect the powers, designations, preferences or rights of the Convertible Preferred Stock, as applicable; or (v) amending, altering or repealing any of the provisions of the certificates of designations of the Convertible Preferred Stock, as applicable.

 

The holders of Convertible Preferred Stock may have different interests from the holders of our common stock and could vote their shares in a manner deemed adverse to the holders of our common stock. 

 

 

Exercise of warrants may have a dilutive effect on our common stock.

 

As of December 31, 2019, outstanding IPO Warrants to purchase an aggregate of 12,081,895 shares of our common stock were exercisable in accordance with the terms of the warrant agreement governing such warrants. These warrants will expire at 5:00 p.m., New York time, on July 24, 2022 or earlier upon redemption or liquidation. The exercise price of these warrants is $11.50 per one full share of our common stock, subject to certain adjustments.

 

In addition, we issued warrants together with the Series A Preferred Stock and the Series B Preferred Stock. The warrants issued together with the Series A Preferred Stock (the “Series A Warrants”) represent the right to acquire in the aggregate a number of shares of common stock equal to approximately 71 basis points (0.71%) of all outstanding shares of Company common stock, measured on a fully diluted basis, on the exercise date with a strike price of $0.01 per share. The warrants issued together with the Series B Preferred Stock (the “Series B Warrants” and, together with the Series A Warrants, the “Common Stock Warrants”) represent the right to acquire in the aggregate a number of shares of common stock equal to approximately 71 basis points (0.71%) of all outstanding shares of Company common stock, measured on a fully diluted basis, on the exercise date with a strike price of $0.01 per share.

 

The Common Stock Warrants have a fixed three-year term commencing on the closings of the issuances of the associated Convertible Preferred Stock. The Common Stock Warrants may only be exercised by holders of the Common Stock Warrants at the expiration of such three-year term, except that the Company can force the exercise of the Common Stock Warrants prior to expiration of such term if the volume weighted average trading price of shares of common stock for each trading day during any 60 of the prior 90 trading days is equal to or greater than 175% of the conversion price of the applicable Convertible Preferred Stock and, with respect to the Series B Warrants, the Company simultaneously elects to force a mandatory exercise of all other warrants then outstanding and un-exercised and held by any holder of parity stock.

 

To the extent the IPO Warrants are exercised, or the warrants issued together with the Convertible Preferred Stock are exercised, additional shares of our common stock will be issued, which will result in dilution to the holders of our common stock and increase the number of shares eligible for resale in the public market. Sales of substantial numbers of such shares in the public market or the fact that such warrants may be exercised could adversely affect the market price of our common stock.

 

Provisions of our charter documents or Delaware law could discourage, delay or prevent us from being acquired even if being acquired would be beneficial to our stockholders and could make it more difficult to change management.

 

Provisions of the Certificate of Incorporation and our Amended and Restated Bylaws (the “Bylaws”) may discourage, delay or prevent a merger, acquisition or other change in control that stockholders might otherwise consider favorable, including transactions in which stockholders might otherwise receive a premium for their shares. In addition, these provisions may frustrate or prevent any attempt by our stockholders to replace or remove our current management by making it more difficult to replace or remove our board of directors. Among other things, these provisions include:

 

 

elimination of our stockholders’ ability to call special meetings of stockholders;

 

 

elimination of our stockholders’ ability to act by written consent;

 

 

an advance notice requirement for stockholder proposals and nominations for members of our board of directors;

 

 

a classified board of directors, the members of which serve staggered three-year terms;

 

 

the express authority of our board of directors to make, alter or repeal the Bylaws;

 

 

the authority of our board of directors to determine the number of director seats on our board of directors; and

 

 

the authority of our board of directors to issue preferred stock with such terms as it may determine.

 

In addition, the Certificate of Incorporation provides, subject to limited exceptions, that the Court of Chancery of the State of Delaware will, to the fullest extent permitted by law, be the sole and exclusive forum for any claims, including (i) any derivative actions or proceedings brought on our behalf, (ii) any action asserting a claim of a breach of a fiduciary duty owed by, or any wrongdoing by, a director, officer or employee or (iii) any action asserting a claim pursuant to any provision of the Delaware General Corporation Law, the Certificate of Incorporation or the Bylaws, (iv) any action to interpret, apply, enforce or determine the validity of the Certificate of Incorporation or the Bylaws or (v) any action asserting a claim governed by the internal affairs doctrine. Any person or entity purchasing or otherwise acquiring any interest in shares of our capital stock shall be deemed to have notice of and to have consented to the provisions described above. This choice of forum provision may limit a stockholder’s ability to bring a claim in a judicial forum that it finds favorable for disputes with us or any of our directors, officers, other employees or stockholders which may discourage lawsuits with respect to such claims. Alternatively, if a court were to find the choice of forum provision that is contained in the Certificate of Incorporation to be inapplicable or unenforceable in an action, we may incur additional costs associated with resolving such action in other jurisdictions, which could adversely affect our business, operating results and financial condition.

 

 

 

Item 1B. Unresolved Staff Comments

 

None.

 

 

Item 2. Properties

 

We currently lease approximately 38,300 square feet of office space for general and administrative purposes in Houston, Texas under a lease agreement that expires on September 30, 2020.

 

In January 2017, NextDecade LLC executed surface lease agreements with the City of Texas City and the State of Texas for a 994-acre site for the Galveston Bay Terminal (collectively, the “Galveston Bay Leases”). The Galveston Bay Leases expire on December 31, 2020.  

 

On March 6, 2019, we entered into the Rio Grande Site Lease.

 

We do not own or lease any other real property that is materially important to our business. We believe that our current properties are adequate for our current needs and that additional space will be available when and as needed.

 

Item 3.   Legal Proceedings

 

None.

 

Item 4.   Mine Safety Disclosures

 

Not applicable.

 

 

PART II 

 

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

 

Market Information, Holders and Dividends

 

Our common stock trades on Nasdaq under the symbol “NEXT.” The IPO Warrants traded on the OTC Pink Market under the symbol “NEXTW.”

 

As of February 28, 2020, we had 120.8 million shares of Company common stock outstanding held by approximately 69 record owners. All shares of Company common stock held in street name are recorded in our stock register as being held by one stockholder.

 

We currently intend to retain earnings to finance the growth and development of our business and do not anticipate paying any cash dividends on Company common stock in the foreseeable future. Any future change in our dividend policy will be made at the discretion of our board of directors in light of our financial condition, capital requirements, earnings, prospects and any restrictions under any financing agreements, as well as other factors it deems relevant.

 

Purchase of Equity Securities by the Issuer

 

The following table summarizes stock repurchases for the three months ended December 31, 2019:

 

Period

 

Total Number of Shares Purchased (1)

 

Average Price Paid Per Share (2)

 

Total Number of Shares Purchased as a Part of Publicly Announced Plans

 

Maximum Number of Units That May Yet Be Purchased Under the Plans

October 2019

        $              

November 2019

    79     $ 6.34              

December 2019

        $              

 

(1)

Represents shares of Company common stock surrendered to us by participants in our 2017 Omnibus Incentive Plan (the “2017 Plan”) to settle the participants’ personal tax liabilities that resulted from the lapsing of restrictions on shares awarded to the participants under the 2017 Plan.

(2)

The price paid per share of Company common stock was based on the closing trading price of Company common stock on the dates on which we repurchased shares of Company common stock from the participants under the 2017 Plan.

 

Item 6. Selected Financial Data

 

We are a smaller reporting company as defined by Rule 12b-2 of the Securities Exchange Act of 1934 and are not required to provide the information under this item.

 

 

 

 

 

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

 

Introduction

 

The following discussion and analysis presents management’s view of our business, financial condition and overall performance and should be read in conjunction with our Consolidated Financial Statements and the accompanying notes in “Financial Statements and Supplementary Data.” This information is intended to provide investors with an understanding of our past performance, current financial condition and outlook for the future. Our discussion and analysis include the following subjects:

 

 

Overview of Business

 

 

Overview of Significant Events

 

 

Liquidity and Capital Resources

 

 

Contractual Obligations

 

 

Results of Operations

 

 

Off-Balance Sheet Arrangements

 

 

Summary of Critical Accounting Estimates

 

 

Recent Accounting Standards

 

Overview of Business

 

We are a LNG development company focused on LNG export projects in the State of Texas. We have focused and continue to focus our development activities on the Terminal and have undertaken and continue to undertake various initiatives to evaluate, design and engineer the Terminal that we expect will result in demand for contracted capacity at the Terminal, which would allow us to seek construction financing to develop the Terminal. We believe the Terminal possesses competitive advantages in several important areas, including, engineering, commercial, regulatory, and gas supply. We submitted a pre-filing request for the Terminal and the Pipeline (as described below) to the FERC in March 2015 and filed a formal application with the FERC in May 2016. In November 2019, the FERC issued an order authorizing the siting, construction and operation of the Terminal and the Pipeline.  We also believe we have robust commercial offtake and gas supply strategies in place and we estimate that the Terminal could commence commercial operations as early as 2023.

  

Overview of Significant Events

 

LNG Sale and Purchase Agreement

 

In March 2019, we entered into the SPA with Shell for the supply of two million tonnes per annum of liquefied natural gas from the Terminal. Pursuant to the SPA, Shell will purchase LNG on a free-on-board basis starting from the commercial operation date of the Terminal, currently expected in 2023, with approximately three-quarters of the purchased LNG volume indexed to Brent and the remaining volume indexed to domestic United States gas indices, including Henry Hub.

 

The Shell SPA becomes effective upon the satisfaction of certain conditions precedent, which include a positive FID in the Terminal.  

 

Rio Grande Site Lease

 

On March 6, 2019, Rio Grande entered into the Rio Grande Site Lease with BND pursuant to which we have agreed to lease the Leased Premises for the purposes of constructing, operating and maintaining the Terminal and gas treatment and gas pipeline facilities. The initial term of the Rio Grande Site Lease is for 30 years, which will commence on the date specified in a written notice by us to BND. We have the option to renew and extend the term of the Rio Grande Site Lease beyond the Primary Term for up to two consecutive renewal periods of ten years each provided that it has not caused an event of default under the Rio Grande Site Lease.

 

 

Engineering, Procurement, and Construction Contract

 

During the third quarter of 2018, we initiated a competitive engineering, procurement and construction (“EPC”) bid process. We received expressions of interest (the “EOIs”) from multiple EPC contractors to participate in the EPC process. We reviewed the EOIs against a series of selection criteria and issued formal invitations to bid to Bechtel Oil, Gas and Chemicals, Inc. ("Bechtel”), Fluor Enterprises, Inc. (“Fluor”) and McDermott International, Inc. In December 2018, each of the EPC bidders provided us with an endorsement of the Terminal’s front-end engineering and design (“FEED”), which indicates the bidders’ confirmation that the Terminal is technically feasible and can be further designed, engineered, permitted, constructed, commissioned and safely placed into operations.

 

On April 22, 2019, we received EPC bid packages from each of Bechtel and Fluor, two of the global LNG market’s leading EPC contractors. The technical and commercial bid packages, which were received on-schedule, were for fully wrapped lump- sum separated turnkey (“LSTK”) EPC contracts for the Terminal.

 

On May 24, 2019, Rio Grande entered into two LSTK EPC agreements with Bechtel for the construction of (i) two LNG trains with expected aggregate production capacity up to approximately 11.74 million tonnes per annum (“mtpa”), two 180,000m3 full containment LNG tanks, one marine loading berth, related utilities and facilities, and all related appurtenances thereto, together with certain additional work options (the “Trains 1 and 2 EPC Agreement”) and (ii) an LNG train with expected production capacity of up   to approximately 5.87 mtpa, related utilities and facilities, and all related appurtenances thereto (the “Train 3 EPC Agreement” and together with the Trains 1 and 2 EPC Agreement, the “EPC Agreements”). We agreed to pay to Bechtel a contract price of $7.042 billion for the work under the Trains 1 and 2 EPC Agreement and a contract price of $2.323 billion for the work under the Train 3 EPC Agreement. During 2019, we issued two limited notices to proceed to Bechtel under the Trains 1 and 2 EPC Agreement.

 

On October 1, 2019, we issued 2,119,728 shares of Company common stock to BDC Oil and Gas Holdings, LLC, an affiliate of Bechtel.  The shares of Company common stock were issued in lieu of a cash payment of $15 million for amounts invoiced by Bechtel pursuant to the Trains 1 and 2 EPC Agreement.

 

Series B Convertible Preferred Stock Offering

 

On May 24, 2019, we sold an aggregate of 20,945 shares of Series B Preferred Stock at $1,000.00 per share for an aggregate purchase price of $20.945 million to (i) York Tactical Energy Fund, L.P. and York Tactical Energy Fund PIV-AN, L.P. (the “York Tactical Funds”), (ii) First Series of HDML Fund I, LLC, Bardin Hill Event Driven Master Fund, LP, and HCN LP (the “Bardin Hill Funds”), (iii) Valinor Capital Partners, L.P. and Valinor Capital Partners Offshore Master Fund, L.P. (the “Valinor Funds”) and (iv) HGC NEXT INV LLC (“HGC”) and issued Series B Warrants. 

 

Receipt of Final Environmental Impact Statement

 

On April 26, 2019, we received our final environmental impact statement (“FEIS”) from the FERC for the Terminal and the Pipeline. The FEIS was prepared in compliance with the requirements of the National Environmental Policy Act (“NEPA”), the Council on Environmental Quality regulations for implementing NEPA, and FERC regulations. 

 

U.S. Fish and Wildlife Service Final Biological Opinion

 

On October 1, 2019, the U.S. Fish and Wildlife Service issued the final biological opinion to the FERC, concluding that the construction of the Terminal will not likely jeopardize the continued existence of the ocelot or the Gulf coast jaguarundi.

 

Common stock Offering

 

On October 24, 2019, we sold an aggregate of 7,974,482 shares of Company common stock at $6.27 per share for an aggregate purchase price of $50.0 million to Ninteenth Investment Company LLC, an affiliate of Mubadala Investment Company PJSC ( “Mubadala”).

 

FERC Order for Rio Grande LNG Terminal and Pipeline

 

On November 22, 2019, FERC issued an order authorizing the siting, construction and operation of the Terminal.  Following receipt of the Final Order from FERC two requests for re-hearing were filed. One of those requests for rehearing also requested that the FERC stay its Final Order. On January 22, 2020, the FERC issued an order extending the time by which it would respond to these requests for rehearing. On January 23, 2020, the FERC issued its Order on Rehearing and Stay, by which FERC denied all re-hearings and requests for stay.

 

Export of LNG to Non-FTA countries 

 

On September 7, 2016, Rio Grande obtained an authorization for export of LNG to countries with which the U.S. has a FTA on our own behalf and as an agent for others for a term of 30 years. On February 10, 2020, the DOE issued an order granting authorization to export LNG from the Terminal to non-FTA countries.

 

Definitive Agreement Regarding Rio Bravo

 

On February 13, 2020, NextDecade LLC entered into an Omnibus Agreement (the “Omnibus Agreement”) with Spectra Energy Transmission II, LLC, a wholly owned subsidiary of Enbridge Inc. (“Buyer”), pursuant to which NextDecade LLC agreed to sell, and Buyer agreed to purchase, one hundred percent of the equity interests (the “Equity Interests”) in Rio Bravo. The purchase price for the Equity Interests (the “Purchase Price”) will be the sum of (i) approximately $17.4 million plus (ii) the amount of direct and indirect costs incurred by Rio Bravo, the Company or any of its other affiliates in respect of the Pipeline from October 1, 2019 through closing of the sale of the Equity Interests (the “Closing”), provided, however, that the Purchase Price may not exceed $25 million. At the Closing, Buyer will pay NextDecade LLC $15 million of the Purchase Price.  The remainder of the Purchase Price is to be paid within five business days after the date that Rio Grande has received, after a final positive investment decision, the initial funding for the development, construction and operation of the Terminal.  Additionally, the Omnibus Agreement provides that at the Closing, Rio Bravo and an indirect wholly owned subsidiary of the Company will enter into a precedent agreement in a form negotiated by Buyer and NextDecade LLC pursuant to which the Company will retain its rights to the natural gas firm transportation capacity on the Pipeline for a term of at least twenty years and Rio Bravo will provide firm pipeline transportation service to the Company in order to supply natural gas to the Terminal.

 

On March 2, 2020, Closing occurred and NextDecade LLC received proceeds of $15 million and Buyer received the Equity Interests in Rio Bravo.  In addition, Rio Grande LNG Gas Supply LLC ("Rio Grande Gas Supply"), an indirect wholly owned subsidiary of the Company, entered into precedent agreements with Rio Bravo and Valley Crossing Pipeline, LLC (“VCP”), pursuant to which Rio Grande Gas Supply will retain its rights to the natural gas firm transportation capacity on the Pipeline for a term of at least twenty years and Rio Bravo and VCP, will provide firm pipeline transportation service to Rio Grande Gas Supply in order to supply natural gas to the Terminal.  VCP and, as of the Closing, Rio Bravo are wholly owned subsidiaries of Enbridge, Inc.

 

 

Liquidity and Capital Resources

 

Capital Resources

 

We have funded and continue to fund the development of the Terminal and general working capital needs through our cash on hand and proceeds from the issuances of equity and equity-based securities. Since January 2018, capital raising events have included the following:

 

In August 2018, we sold an aggregate of 50,000 shares of Series A Preferred Stock at $1,000.00 per share for an aggregate purchase price of $50 million and we issued an additional 1,000 shares of Series A Preferred Stock in aggregate as origination fees to (i) York Capital Management Global Advisors, LLC, severally on behalf of certain funds or accounts managed by it or its affiliates (“York”), (ii) Valinor Management, L.P., severally on behalf of certain funds or accounts for which it is investment manager (“Valinor”), (iii) Bardin Hill Investment Partners LP (formerly known as Halcyon Capital Management LP), severally on behalf of certain funds or accounts managed by it or its affiliates (“Bardin Hill,” and together with York and Valinor, the “Fund Purchasers”) and (iv) HGC. Series A Warrants were issued together with such shares of Series A Preferred Stock.

 

In September 2018, we sold an aggregate of 29,055 shares of Series B Preferred Stock at $1,000.00 per share for an aggregate purchase price of $29.055 million and issued an additional 581 shares of Series B Preferred Stock in aggregate as origination fees to certain funds managed by BlackRock.  Series B Warrants were issued together with such shares of Series B Preferred Stock.

 

In May 2019, we sold an aggregate of 20,945 shares of Series B Preferred Stock at $1,000.00 per share for an aggregate purchase price of $20.945 million to the York Funds, the Bardin Hill Funds, the Valinor Funds and HGC.  Series B Warrants were issued together with such shares of Series B Preferred Stock.

 

In October 2019, we sold an aggregate of 7,974,482 shares of Company common stock at $6.27 per share for an aggregate purchase price of $50.0 million to Mubadala.

 

Sources and Uses of Cash

 

The following table summarizes the sources and uses of our cash for the periods presented (in thousands):

 

   

Year Ended

   

December 31,

   

2019

 

2018

Operating cash flows

  $ (40,700 )   $ (23,285 )

Investing cash flows

    (16,693 )     (86,161 )

Financing cash flows

    69,960       76,912  
                 

Net increase (decrease) in cash and cash equivalents

    12,567       (32,534 )

Cash and cash equivalents – beginning of period

    3,169       35,703  

Cash and cash equivalents – end of period

  $ 15,736     $ 3,169  

 

Operating Cash Flows

 

Operating cash outflows during the years ended December 31, 2019 and 2018 were $40.7 million and $23.3 million, respectively. The increase in operating cash outflows in 2019 compared to 2018 was primarily related to additional employees and travel costs, invitation to bid contract costs, increased professional fees and increased marketing and conference sponsorship costs.

 

Investing Cash Flows

 

Investing cash outflows during the years ended December 31, 2019 and 2018 were $16.7 million and $86.2 million, respectively. The investing cash outflows in 2019 were the result of cash used in the development of the Terminal and the Pipeline of $27.2 million and a net redemption of $10.5 million in investment securities. The investing cash outflows in 2018 were the result of cash used in the development of the Terminal and the Pipeline of $18.7 million and a net investment of $67.5 million in investment securities.

 

Financing Cash Flows

 

Financing cash inflows during the years ended December 31, 2019 and 2018 were $70.0 million and $76.9 million, respectively. Financing cash inflows in 2019 was the result of $70.9 million of proceeds from the issuance of preferred equity offset by $0.3 million of equity issuance costs and $0.7 million of shares repurchased related to share based compensation. Financing cash inflows in 2018 was the result of $79.1 million of proceeds from the issuance of common stock and preferred equity offset by $2.1 million of equity issuance costs.

 

Capital Development Activities

 

We are primarily engaged in developing theTerminal, which may require additional capital to support further project development, engineering, regulatory approvals and compliance, and commercial activities in advance of a FID made to finance and construct the Terminal. Even if successfully completed, the Terminal will not begin to operate and generate significant cash flows until at least several years from now, which management currently estimates being as early as 2023. Construction of the Terminal would not begin until, among other requirements for project financing, all required federal, state and local permits have been obtained. We estimate that we will receive all regulatory approvals and begin construction to support the commencement of commercial operations as early as 2023. As a result, our business success will depend, to a significant extent, upon our ability to obtain the funding necessary to construct the Terminal, to bring it into operation on a commercially viable basis and to finance our staffing, operating and expansion costs during that process.

 

We have engaged Macquarie Capital (USA) Inc. to advise and assist us in raising capital for post-FID construction activities.

 

We currently expect that the long-term capital requirements for the Terminal will be financed predominately through project financing and proceeds from future debt and equity offerings by us. There can be no assurance that we will succeed in securing additional debt and/or equity financing in the future to complete the Terminal or, if successful, that the capital we raise will not be expensive or dilutive to stockholders. Additionally, if these types of financing are not available, we will be required to seek alternative sources of financing, which may not be available on terms acceptable to us, if at all.

 

 

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 thousands) in place as of December 31, 2019:

 

   

Total

 

2020

  2021-2022   2023-2024  

Thereafter

Operating lease obligations

  $ 3,045     $ 3,045     $     $     $  
Permitting costs     5,513       5,513                    
Other     118       43       75              

Total

  $ 8,676     $ 8,601     $ 75     $     $  

 


 

Operating lease obligations primarily relate to our Rio Grande Site Lease and office space in Houston, Texas.

 

A discussion of these obligations can be found at — Note 6 Leases and Note 13 – Commitments and Contingencies of our Notes to Consolidated Financial Statements.

 

Results of Operations

 

The following table summarizes costs, expenses and other income for the year ended December 31, 2019 and 2018 (in thousands):

 

   

Year Ended

 
   

December 31,

 
   

2019

   

2018

   

Change

 

Revenues

  $     $     $  

General and administrative expenses

    22,548       35,182       (12,634 )

Invitation to Bid Contract Costs

    10,163       6,563       3,600  

Land option and lease expenses

    2,039       1,099       940  

Depreciation expense

    251       171       80  

Operating loss

    (35,001 )     (43,015 )     8,014  

(Loss) gain on Common Stock Warrant Liabilities

    (2,657 )     164       (2,821 )

Interest income, net

    1,718       1,019       699  

Other

    69       (128 )     197  

Net loss attributable to NextDecade Corporation

    (35,871 )     (41,960 )     6,089  

Preferred stock dividends

    (11,164 )     (724 )     (10,440 )

Deemed dividends on Series A Convertible Preferred Stock

    (1,517 )     (822 )     (695 )

Net loss attributable to common stockholders

  $ (48,552 )   $ (43,506 )   $ (5,046 )

 

Our consolidated net loss was $35.9 million, or $0.45 per common share (basic and diluted), for the year ended December 31, 2019 compared to a net loss of $42.0 million, or $0.41 per common share (basic and diluted), for the year ended December 31, 2018. This $6.1 million decrease in net loss was primarily a result of decreased general and administrative expenses and increased interest income partially offset by an increase in invitation to bid contract costs and increased land option and lease expense discussed separately below.

 

General and administrative expenses during the year ended December 31, 2019 decreased $12.6 million compared to the year ended December 31, 2018, due primarily to (i) a decrease in share-based compensation expense of $26.5 million partially offset by, (ii) an increase in the number of employees which resulted in increased salaries and employee benefits, office expenses, travel, and professional fees of $9.2 million, (ii) increased marketing and promotion costs, insurance, taxes and license fees of $2.1 million, and (iii) an increase in information technology and communication costs of $2.6 million.  The decrease in share-based compensation expense is primarily a result of forfeitures of restricted stock during the year ended December 31, 2019.

 

As of December 31, 2019, we incurred approximately $10.2 million of invitation to bid contract costs compared to approximately $6.6 million incurred during the year ended December 31, 2018.  The increase in invitation to bid contract costs is primarily due to the conclusion of the competitive EPC bid process and submission of lump-sum EPC prices by Bechtel and Fluor.

 

Land option and lease expenses during the year ended December 31, 2019 increased $0.9 million compared to the year ended December 31, 2018, due primarily to new leases entered into for our corporate headquarters in September 2018 and June 2019, resulting in additional expense in 2019.

 

The loss on Common Stock Warrant Liabilities of approximately $2.8 million in 2019 was primarily due to an increase in the number of shares of common stock outstanding and an increase in the price of common stock from $5.40 per share at December 31, 2018 to $6.14 per share at December 31, 2019.

 

Interest income, net during the year ended December 31, 2019 increased $0.7 million compared to the year ended December 31, 2018 due to increased yield and higher average balances maintained in our cash accounts and investment securities.

 

Preferred stock dividends of $11.2 million in 2019 were paid-in-kind with the issuance of an additional 11,164 shares of Series A Preferred Stock compared to preferred stock dividends of $0.7 million in 2018 that were paid-in-kind with the issuance of an additional 720 shares of Series A Preferred.

 

Deemed dividends on the Series A Preferred Stock for the year ended December 31, 2019 and December 31, 2018 represents the accretion of the beneficial conversion feature associated with the Series A Preferred Stock issued in 2018. Due to the price of our common stock as of the closing date of the Series B Preferred Stock, the Series B Preferred Stock does not have a beneficial conversion feature.

 

 

Off-Balance Sheet Arrangements

 

We did not have any off-balance sheet arrangements as of December 31, 2019.

 

Summary of Critical Accounting Estimates

 

The preparation of our Condensed Consolidated Financial Statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”) requires management to make certain estimates and assumptions that affect the amounts reported in the Consolidated Financial Statements and the accompanying notes. Management evaluates its estimates and related assumptions regularly, including those related to the value of properties, plant, and equipment, share-based compensation, Common Stock Warrant liabilities, and income taxes. Changes in facts and circumstances or additional information may result in revised estimates, and actual results may differ from these estimates. Management considers the following to be its most critical accounting estimates that involve significant judgment.

 

Impairment of Long-Lived Assets

 

A long-lived asset, including an intangible asset, is evaluated for potential impairment whenever events or changes in circumstances indicate that its carrying value may not be recoverable. Recoverability generally is determined by comparing the carrying value of 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. We use a variety of fair value measurement techniques when market information for the same or similar assets does not exist. Projections of future operating results and cash flows may vary significantly from results. Management reviews its estimates of cash flows on an ongoing basis using historical experience and other factors, including the current economic and commodity price environment.

 

Share-based Compensation

 

The assumptions used in calculating the fair value of share-based payment awards represent our best estimates, but these estimates involve inherent uncertainties and the application of management’s judgment. As a result, if factors change and we use different assumptions, our share-based compensation expense could be materially different in the future.

 

For additional information regarding our share-based compensation, see Note 11 – Share-based Compensation of our Notes to Consolidated Financial Statements.

 

Valuation of Common Stock Warrant Liabilities

 

The fair value of Common Stock Warrant liabilities is determined using a Monte Carlo valuation model. Determining the appropriate fair value model and calculating the fair value of Common Stock Warrant requires considerable judgment. Any change in the estimates used may cause the value to be higher or lower than that reported. The estimated volatility of our common stock at the date of issuance, and at each subsequent reporting period, is based on our historical volatility. The risk-free interest rate is based on rates published by the government for bonds with maturity similar to the expected remaining life of the Common Stock Warrants at the valuation date. The expected life of the Common Stock Warrants is assumed to be equivalent to their remaining contractual term.

 

The Common Stock Warrants are not traded in an active market and the fair value is determined using valuation techniques. The estimates may be significantly different from those recorded in the consolidated financial statements because of the use of judgment and the inherent uncertainty in estimating the fair value of these instruments that are not quoted in an active market. All changes in the fair value are recorded in the consolidated statement of operations each reporting period.

 

For additional information regarding the valuation of Common Stock Warrant liabilities, see Note 9 – Preferred Stock and Common Stock Warrants of our Notes to Consolidated Financial Statements.

 

Income Taxes

 

Provisions for income taxes are based on taxes payable or refundable for the current year and deferred taxes on temporary differences between the tax basis of assets and liabilities and their reported amounts in the Consolidated Financial Statements. Deferred tax assets and liabilities are included in the Consolidated Financial Statements at currently enacted income tax rates applicable to the period in which the deferred tax assets and liabilities are expected to be realized or settled. As changes in tax laws or rates are enacted, deferred tax assets and liabilities are adjusted through the current period’s provision for income taxes. We routinely assess our deferred tax assets and reduce such assets by a valuation allowance if we deem it is more likely than not that some portion or all of the deferred tax assets will not be realized. This assessment requires significant judgment and is based upon our assessment of our ability to generate future taxable income among other factors.

 

Recent Accounting Standards

 

For descriptions of recently issued accounting standards, see Note 14 – Recent Accounting Pronouncements of our Notes to Consolidated Financial Statements.

 

 

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

 

We are a smaller reporting company as defined by Rule 12b-2 of the Securities Exchange Act of 1934, as amended, and are not required to provide the information under this item.

 

 

Item 8. Financial Statements and Supplementary Data

 

Index to Consolidated Financial Statements

 

NextDecade Corporation and Subsidiaries

 

 

Page

Report of Independent Registered Public Accounting Firm

29

Consolidated Balance Sheets

30

Consolidated Statements of Operations

31

Consolidated Statements of Stockholders’ Equity, Series A and Series B Convertible Preferred Stock

32

Consolidated Statements of Cash Flows

33

Notes to Consolidated Financial Statements

34

Supplemental Information to Consolidated Financial Statements – Summarized Quarterly Financial Data

48

 

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

 

Board of Directors and Stockholders

 

NextDecade Corporation

 

Opinion on the financial statements

We have audited the accompanying consolidated balance sheets of NextDecade Corporation (a Delaware corporation) and subsidiaries (the “Company”) as of December 31, 2019 and 2018, the related consolidated statements of operations, stockholders’ equity, series A and series B convertible preferred stock, and cash flows for the years then ended, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2019 and 2018, and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.

 

Change in accounting principle

As discussed in Note 6 to the consolidated financial statements, the Company has changed its method of accounting for leases as of January 1, 2019 due to the adoption of Accounting Standards Codification Topic 842, Leases.

 

Basis for opinion

These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

 

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.

 

Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provides a reasonable basis for our opinion.

 

 

/s/ GRANT THORNTON LLP

 

 

We have served as the Company’s auditor since 2018.

 

Houston, Texas

March 3, 2020

 

 

 

 

NextDecade Corporation and Subsidiaries

Consolidated Balance Sheets

(in thousands, except share data)

 

   

December 31,

   

December 31,

 
   

2019

   

2018

 

Assets

               

Current assets

               

Cash and cash equivalents

  $ 15,736     $ 3,169  

Investment securities

    62,207       72,453  

Prepaid expenses and other current assets

    859       1,310  

Total current assets

    78,802       76,932  

Property, plant and equipment, net

    134,591       92,070  

Operating lease right-of-use assets, net

    1,054        

Other non current assets

    6,748        

Total assets

  $ 221,195     $ 169,002  
                 

Liabilities, Series A and Series B Convertible Preferred Stock and Stockholders’ Equity

               

Current liabilities

               

Accounts payable

  $ 11,912     $ 719  

Share-based compensation liability

    182       3,018  

Accrued liabilities and other current liabilities

    8,751       8,353  

Current operating lease liabilities

    698        

Total current liabilities

    21,543       12,090  

Non-current Common Stock Warrant liabilities

    12,034       7,441  

Non-current operating lease liabilities

    3        

Total liabilities

    33,580       19,531  
                 

Commitments and contingencies (Note 13)

               
                 

Series A Convertible Preferred Stock, $1,000 per share liquidation preference, Issued and outstanding: 58,197 shares and 51,720 shares at December 31, 2019 and December 31, 2018, respectively

    48,084       40,091  

Series B Convertible Preferred Stock, $1,000 per share liquidation preference, Issued and outstanding: 55,645 shares and 29,636 shares at December 31, 2019 and December 31, 2018, respectively

    49,814       26,159  
                 

Stockholders’ equity

               

Common stock, $0.0001 par value Authorized: 480.0 million shares at December 31, 2019 and December 31, 2018, Issued and outstanding: 117.3 million shares and 106.9 million shares at December 31, 2019 and December 31, 2018, respectively

    12       11  

Treasury stock: 137,860 shares and 6,425 shares at December 31, 2019 and December 31, 2018, respectively, at cost

    (685 )     (35 )

Preferred stock, $0.0001 par value Authorized: 0.9 million, after designation of the Series A and Series B Convertible Preferred Stock, Issued and outstanding: none at December 31, 2019 and December 31, 2018, respectively

           

Additional paid-in-capital

    224,091       180,862  

Accumulated deficit

    (133,701 )     (97,617 )

Total stockholders’ equity

    89,717       83,221  

Total liabilities, Series A and Series B Convertible Preferred Stock and stockholders’ equity

  $ 221,195     $ 169,002  

 

The accompanying notes are an integral part of these Consolidated Financial Statements.

 

 

 

NextDecade Corporation and Subsidiaries

Consolidated Statements of Operations 

(in thousands, except per share data)

 

   

Year Ended

 
   

December 31,

 
   

2019

   

2018

 

Revenues

  $     $  

Operating Expenses

               

General and administrative expenses

    22,548       35,182  

Invitation to Bid Contract Costs

    10,163       6,563  

Land option and lease expenses

    2,039       1,099  

Depreciation expense

    251       171  

Total operating expenses

    35,001       43,015  

Total operating loss

    (35,001 )     (43,015 )

Other income (expense)

               

(Loss) gain on Common Stock Warrant liabilities

    (2,657 )     164  

Interest income, net

    1,718       1,019  

Other

    69       (128 )

Total other income

    (870 )     1,055  

Net loss attributable to NextDecade Corporation

    (35,871 )     (41,960 )

Preferred stock dividends

    (11,164 )     (724 )

Deemed dividends on Series A Convertible Preferred Stock

    (1,517 )     (822 )

Net loss attributable to common stockholders

  $ (48,552 )   $ (43,506 )
                 

Net loss per common share - basic and diluted

  $ (0.45 )   $ (0.41 )
                 

Weighted average shares outstanding - basic and diluted

    109,057       106,564  
                 

 

The accompanying notes are an integral part of these Consolidated Financial Statements.

 

 

 

NextDecade Corporation and Subsidiaries

Consolidated Statements of Stockholders’ Equity, Series A and Series B Convertible Preferred Stock

(in thousands)

 

   

Common Stock

 

Treasury Stock

                 

Accumulated

                       
           

Par

                 

Additional

         

Other

 

Total

 

Series A

 

Series B

           

Value

                 

Paid-in

 

Accumulated

 

Comprehensive

 

Stockholders’

 

Convertible

 

Convertible

   

Shares

 

Amount

 

Shares

 

Amount

 

Capital

 

Deficit

 

Loss

 

Equity

 

Preferred Stock

 

Preferred Stock

Balance at January 1, 2018

    106,275     $ 11           $     $ 158,738     $ (55,617 )   $ (40 )   $ 103,092     $     $  

Adoption of ASU 2016-01

                                  (40 )     40                    

Share-based compensation

                            19,032                   19,032              

Restricted stock vesting

    173                                                        

Shares repurchased related to share-based compensation

    (6 )           6       (35 )                       (35 )            

Issuance of Series A preferred stock

    414                         4,638                   4,638       38,549        

Issuance of Series B preferred stock

                                                          26,159  

Preferred stock dividends

                            (724 )                 (724 )     720        

Deemed dividends - accretion of beneficial conversion feature

                            (822 )                 (822 )     822        

Net loss

                                  (41,960 )           (41,960 )            

Balance at December 31, 2018

    106,856     $ 11       6     $ (35 )   $ 180,862     $ (97,617 )   $     $ 83,221     $ 40,091     $ 26,159  

Adoption of ASC Topic 842

                                  (213 )           (213 )            

Adoption of ASU 2018-07

                            2,116                   2,116              

Share-based compensation

                            (8,525 )                 (8,525 )            

Restricted stock vesting

    510                         495                   495              

Issuance of common stock net of equity issuance costs

    10,094       1                   61,824                   61,825              

Shares repurchased related to share-based compensation

    (131 )           131       (650 )                       (650 )            

Issuance of Series B preferred stock

                                                          19,009  

Preferred stock dividends

                            (11,164 )                 (11,164 )     6,476       4,646  

Deemed dividends - accretion of beneficial conversion feature

                            (1,517 )                 (1,517 )     1,517        

Net Loss

                                  (35,871 )           (35,871 )            

Balance at December 31, 2019

    117,329     $ 12       137     $ (685 )   $ 224,091     $ (133,701 )   $     $ 89,717     $ 48,084     $ 49,814  

 

The accompanying notes are an integral part of these Consolidated Financial Statements.

 

 

 

NextDecade Corporation and Subsidiaries

Consolidated Statements of Cash Flows

(in thousands)

 

   

Year Ended

 
   

December 31,

 
   

2019

   

2018

 

Operating activities:

               

Net loss attributable to NextDecade Corporation

  $ (35,871 )   $ (41,960 )

Adjustment to reconcile net loss to net cash used in operating activities

               

Depreciation

    251       171  

Share-based compensation expense

    (9,646 )     16,840  

Loss (gain) on Common Stock Warrant liabilities

    2,657       (164 )

(Gain) loss on investment securities

    (100 )     114  
Realized gain on investment securities     (138 )      
Amortization of right-of-use assets     955        
Amortization of other non-current assets     127        

Changes in operating assets and liabilities:

               

Prepaid expenses

    573       440  

Other current assets

          349  

Accounts payable

    207       124  
Operating lease liabilities     (1,624 )      

Accrued expenses and other liabilities

    1,909       801  

Net cash used in operating activities

    (40,700 )     (23,285 )

Investing activities:

               

Acquisition of property, plant and equipment

    (20,303 )     (18,658 )

Proceeds from sale of investment securities

    77,000       17,113  

Purchase of investment securities

    (66,515 )     (84,616 )
Acquisition of other non-current assets     (6,875 )      

Net cash used in investing activities

    (16,693 )     (86,161 )

Financing activities:

               

Proceeds from equity issuance

    70,945       79,055  
Preferred stock dividends     (42 )     (4 )

Equity issuance costs

    (293 )     (2,104 )

Shares repurchased related to share-based compensation

    (650 )     (35 )

Net cash provided by financing activities

    69,960       76,912  

Net increase (decrease) in cash and cash equivalents

    12,567       (32,534 )

Cash and cash equivalents – beginning of period

    3,169       35,703  

Cash and cash equivalents – end of period

  $ 15,736     $ 3,169  
                 

Non-cash investing activities:

               

Accounts payable for acquisition of property, plant and equipment

  $ 11,351     $ 367  

Accrued liabilities for acquisition of property, plant and equipment

    2,503       4,014  
Common stock issued in lieu of cash     12,082        

Non-cash financing activities:

               

Paid-in-kind dividends on Series A Convertible Preferred Stock

    11,122       720  

Accretion of deemed dividends on Series A Convertible Preferred Stock

    1,517       822  

 

The accompanying notes are an integral part of these Consolidated Financial Statements.

 

 

NextDecade Corporation and Subsidiaries

Notes to Consolidated Financial Statements

 

 

Note 1 — Background and Basis of Presentation

 

NextDecade Corporation engages in development activities related to the liquefaction and sale of liquefied natural gas (“LNG”). We have focused and continue to focus our development activities on the Rio Grande LNG terminal facility at the Port of Brownsville in southern Texas (the “Terminal”) and an associated 137-mile Rio Bravo pipeline to supply natural gas to the Terminal (the “Pipeline”). We also lease a 994-acre site near Texas City, Texas for another potential LNG terminal (the “Galveston Bay Terminal”) that expires December 31, 2020.

 

Our Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). All intercompany accounts and transactions have been eliminated in consolidation.

 

Certain reclassifications have been made to conform prior period information to the current presentation.  The reclassifications did not have a material effect on our consolidated financial position, results of operations or cash flows.

 

 

Note 2 Summary of Significant Accounting Policies

 

Use of Estimates

 

The preparation of Consolidated Financial Statements in conformity with GAAP requires management to make certain estimates and assumptions that affect the amounts reported in the Consolidated Financial Statements and the accompanying notes. Management evaluates its estimates and related assumptions regularly, including those related to the value of property, plant and equipment, income taxes including valuation allowances for net deferred tax assets, share-based compensation and fair value measurements. Changes in facts and circumstances or additional information may result in revised estimates, and actual results may differ from these estimates.

 

Concentrations of Credit Risk

 

Financial instruments that potentially subject us to a concentration of credit risk consist principally of cash and cash equivalents. We maintain cash balances with a single financial institution, which may at times be in excess of federally insured levels. We have not incurred losses related to these cash and cash equivalent balances to date.

 

 

Cash Equivalents

 

We consider all highly liquid investments with an original maturity of three months or less when purchased to be cash equivalents.

 

 Investment Securities

 

We define investment securities as investments in marketable securities that can be readily converted to cash. We determine the appropriate classification of investment securities at the time of purchase and reevaluate such classification at each balance sheet date. Investment securities are initially recorded at cost and remeasured to fair value, with changes presented in other income in our Consolidated Statements of Operations.

 

Property, Plant and Equipment

 

Generally, we begin to capitalize the costs of our development projects once construction of the individual project is probable. This assessment includes the following criteria:

 

 

funding for design and permitting has been identified and is expected in the near-term;

 

 

key vendors for development activities have been identified, and we expect to engage them at commercially reasonable terms;

 

 

we have committed to commencing development activities;

 

 

regulatory approval is probable;

 

 

construction financing is expected to be available at the time of a final investment decision (“FID”);

 

 

prospective customers have been identified and the FID is probable; and

 

 

receipt of customary local tax incentives, as needed for project viability, is probable.

 

Prior to meeting the criteria above, costs associated with a project are expensed as incurred. Expenditures for normal repairs and maintenance are expensed as incurred.

 

When assets are retired or disposed, the cost and accumulated depreciation are eliminated from the accounts and any gain or loss is reflected in our Consolidated Statements of Operations.

 

Property, plant and equipment is carried at historical cost and depreciated using the straight-line method over their estimated useful lives.

 

Leasehold improvements are depreciated over the lesser of the economic life of the leasehold improvement or the term of the lease, without regard to extension/renewal rights.

 

Management tests property, plant and equipment for impairment whenever events or changes in circumstances have indicated that the carrying amount of property, plant and equipment might not be recoverable. Assets are grouped at the lowest level for which there are identifiable cash flows that are largely independent of the cash flows of other groups of assets for purposes of assessing recoverability. Recoverability generally is determined by comparing the carrying value of 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.

 

 

Warrants

 

The Company determines the accounting classification of warrants that are issued, as either liability or equity, by first assessing whether the warrants meet liability classification in accordance with Accounting Standards Codification (“ASC”) 480 Distinguishing Liabilities from Equity (“ASC 480”), and then in accordance with ASC 815-40, Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock (“ASC 815-40”). Under ASC 480, warrants are considered liability classified if the warrants are mandatorily redeemable, obligate the issuer to settle the warrants or the underlying shares by paying cash or other assets, or warrants that must or may require settlement by issuing a variable number of shares.

 

If warrants do not meet liability classification under ASC 480, the Company assesses the requirements under ASC 815-40, which states that contracts that require or may require the issuer to settle the contract for cash or a variable number of shares are liabilities recorded at fair value, irrespective of the likelihood of the transaction occurring that triggers the net cash settlement feature. If the warrants do not require liability classification under ASC 815-40, in order to conclude equity classification, the Company assesses whether the warrants are indexed to our common stock and whether the warrants are classified as equity under ASC 815-40 or other applicable GAAP. After all relevant assessments are made, the Company concludes whether the warrants are classified as liability or equity. Liability classified warrants are required to be accounted for at fair value both on the date of issuance and on subsequent accounting period ending dates, with all changes in fair value after the issuance date recorded in the statements of operations as a gain or loss. Equity classified warrants are accounted for at fair value on the issuance date with no changes in fair value recognized after the issuance date.

 

Fair Value of Financial Instruments

 

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. Hierarchy Levels 1, 2 and 3 are terms for the priority of inputs to valuation techniques used to measure fair value. Hierarchy Level 1 inputs are quoted prices in active markets for identical assets or liabilities. Hierarchy Level 2 inputs are inputs other than quoted prices included within Level 1 that are directly or indirectly observable for the asset or liability. Hierarchy Level 3 inputs are inputs that are not observable in the market. In determining fair value, we use observable market data when available, or models that incorporate observable market data. In addition to market information, we incorporate transaction-specific details that, in management’s judgment, market participants would take into account in measuring fair value. We maximize the use of observable inputs and minimize our use of unobservable inputs in arriving at fair value estimates. Recurring fair-value measurements are performed for investment securities as disclosed in Note 4 – Investment Securities and for Common Stock Warrant liabilities as disclosed in Note 9 Preferred Stock and Common Stock Warrants. The carrying amount of cash and cash equivalents and accounts payable reported on the Consolidated Balance Sheets approximates fair value due to their short-term maturities.

 

Treasury Stock

 

Treasury stock is recorded at cost. Issuance of treasury stock is accounted for on a weighted average cost basis. Differences between the cost of treasury stock and the re-issuance proceeds are charged to additional paid-in capital.

 

Net Loss Per Share

 

Net loss per share (“EPS”) is computed in accordance with GAAP. Basic EPS excludes dilution and is computed by dividing net income (loss) by the weighted average number of common shares outstanding during the period. Diluted EPS reflects potential dilution and is computed by dividing net income (loss) by the weighted average number of common shares outstanding during the period increased by the number of additional common shares that would have been outstanding if the potential common shares had been issued and were dilutive. The dilutive effect of unvested stock and warrants is calculated using the treasury-stock method and the dilutive effect of convertible securities is calculated using the if-converted method. Basic and diluted EPS for all periods presented are the same since the effect of our potentially dilutive securities are anti-dilutive to our net loss per share, as disclosed in Note 10 – Net Loss Per Share Attributable to Common Stockholders.

 

Share-based Compensation

 

We recognize share-based compensation at fair value on the date of grant. The fair value is recognized as expense (net of any capitalization) over the requisite service period. For equity-classified share-based compensation awards, compensation cost is recognized based on the grant-date fair value using the quoted market price of our common stock and not subsequently remeasured. The fair value is recognized as expense, net of any capitalization, using the straight-line basis for awards that vest based on service conditions and using the graded-vesting attribution method for awards that vest based on performance conditions. We estimate the service periods for performance awards utilizing a probability assessment based on when we expect to achieve the performance conditions. For liability classified share-based compensation awards, compensation cost is initially recognized on the grant date using estimated payout levels. Compensation cost is subsequently adjusted quarterly to reflect the updated estimated payout levels based on the changes in our stock price. We account for forfeitures as they occur.

 

 

Income Taxes

 

Provisions for income taxes are based on taxes payable or refundable for the current year and deferred taxes on temporary differences between the tax basis of assets and liabilities and their reported amounts in the Consolidated Financial Statements. Deferred tax assets and liabilities are included in the Consolidated Financial Statements at currently enacted income tax rates applicable to the period in which the deferred tax assets and liabilities are expected to be realized or settled. As changes in tax laws or rates are enacted, deferred tax assets and liabilities are adjusted through the current period’s provision for income taxes. A valuation allowance is recorded to reduce the carrying value of our net deferred tax assets when it is more likely than not that a portion or all of the deferred tax assets will expire before realization of the benefit or future deductibility is not probable. We recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the tax position.

 

Emerging Growth Company and Smaller Reporting Company

 

The Company is an “emerging growth company,” as defined in Section 2(a) of the Securities Act of 1933, as amended (the “Securities Act”), as modified by the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”). An “emerging growth company” may take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not emerging growth companies including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act of 2002, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved. We may take advantage of these reporting exemptions until we are no longer an emerging growth company.

 

Further, section 102(b)(1) of the JOBS Act exempts emerging growth companies from being required to comply with new or revised financial accounting standards until such time as those standards apply to private companies. The Company has elected to “opt-out” of this exemption and, therefore, will be subject to the same new or revised accounting standards as other public companies that are not emerging growth companies.

 

Additionally, under Rule 12b-2 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), the Company qualifies as a “smaller reporting company” because the value of its common stock held by non-affiliates as of the end of its most recently completed second fiscal quarter was less than $250 million. For as long as the Company remains a smaller reporting company, it may take advantage of certain exemptions from the SEC’s reporting requirements that are otherwise applicable to public companies that are not smaller reporting companies.

 

 

 

Note 3 — Prepaid Expenses and Other Current Assets

 

Prepaid expenses and other current assets consisted of the following (in thousands):

 

   

December 31,

   

December 31,

 
   

2019

   

2018

 

Rio Grande LNG site option

  $     $ 486  

Prepaid subscriptions

    161        

Prepaid insurance

    292       233  

Prepaid marketing and sponsorships

    25       242  

Other

    381       349  

Total prepaid expenses and other current assets

  $ 859     $ 1,310  

 

During the years ended December 31, 2019 and 2018, we recognized $486 thousand and $572 thousand, respectively, of lease option expense related to the Rio Grande LNG site option which expired November 5, 2019.

 

 

 

Note 4 — Investment Securities

 

We have invested in Class L shares of the JPMorgan Managed Income Fund. The JPMorgan Managed Income Fund has an average maturity of approximately one year, duration of approximately six months, and approximately 24% of such fund’s holdings are AAA-rated with 0% non-investment grade rated.

 

Investment securities are included in Level 1 of the fair value hierarchy and consisted of the following (in thousands):

 

   

December 31,

   

December 31,

 
   

2019

   

2018

 
   

Fair value

   

Cost

   

Fair value

   

Cost

 

JPMorgan Managed Income Fund

  $ 62,207     $ 62,178     $ 72,453     $ 72,567  

 

 

Note 5 — Property, Plant and Equipment

 

Property, plant and equipment consisted of the following (in thousands):

 

   

December 31,

   

December 31,

 
   

2019

   

2018

 

Fixed Assets

               

Computers

  $ 487     $ 164  

Furniture, fixtures, and equipment

    471       316  

Leasehold improvements

    547       420  

Total fixed assets

    1,505       900  

Less: accumulated depreciation

    (793 )     (542 )

Total fixed assets, net

    712       358  

Terminal and Pipeline assets (not placed in service)

               

Terminal

    121,081       80,407  

Pipeline

    12,798       11,305  

Total Terminal and Pipeline assets

    133,879       91,712  

Total property, plant and equipment, net

  $ 134,591     $ 92,070  

 

Depreciation expense for the years ended December 31, 2019 and 2018 was $251 thousand and $171 thousand, respectively.

 

 

 

Note 6 — Leases

 

We currently lease approximately 38,300 square feet of office space for general and administrative purposes in Houston, Texas under a lease agreement that expires on September 30, 2020.

 

In January 2017, NextDecade LLC executed surface lease agreements with the City of Texas City and the State of Texas for a 994-acre site for the Galveston Bay Terminal (collectively, the “Galveston Bay Leases”). The term of the Galveston Bay Leases is 36 months with an option to extend for an additional 12 months.  Such option was included in the measurement of Operating lease right-of-use assets and Operating lease liabilities and was exercised in the fourth quarter of 2019.

 

On March 6, 2019, Rio Grande entered into a lease agreement (the “Rio Grande Site Lease”) with the Brownsville Navigation District of Cameron County, Texas (“BND”) pursuant to which it has agreed to lease approximately 984 acres of land situated in Brownsville, Cameron County, Texas for the purposes of constructing, operating, and maintaining the Terminal and gas treatment and gas pipeline facilities.

 

The initial term of the Rio Grande Site Lease is for 30 years (the “Primary Term”), which will commence on the date specified in a written notice by Rio Grande to BND (the “Effective Date Notice”), if given, confirming that Rio Grande or a Rio Grande affiliate has made a positive FID for the first phase of the Terminal. Under the Rio Grande Site Lease, the Effective Date Notice was to be delivered no later than November 6, 2019 (the “Outside Effective Date”) unless Rio Grande was unable to deliver the Effective Date Notice prior to the Outside Effective Date due to reasons unrelated to its own acts or omissions or its inability to secure one or more of the required permits for the Terminal. In such a case, the Outside Effective Date would be automatically extended on a month-to-month basis (the “Effective Date Notice Extension Period”). Rio Grande has the option to renew and extend the term of the Rio Grande Site Lease beyond the Primary Term for up to two consecutive renewal periods of ten years each provided that Rio Grande has not caused an event of default under the Rio Grande Site Lease. Rio Grande did not deliver the Effective Date Notice prior to the Outside Effective Date due to not having obtained the required permits for the Terminal prior to the Outside Effective Date and, therefore, the Outside Effective Date has been automatically extended on a month-to-month basis.

 

In adopting Topic 842, the Company has elected the “package of practical expedients,” which permits it not to reassess under the new standard its prior conclusions about lease identification, lease classification and initial direct costs. The Company also elected the use-of-hindsight and the practical expedient pertaining to land easements. The Company elected not to apply Topic 842 to arrangements with original lease terms of 12 months or less. At lease commencement date, the Company estimated the lease liability and the right-of-use assets at present value, at inception, of $2.3 million. On January 1, 2019, upon adoption of Topic 842, the Company recorded right-of-use assets of $1.6 million, lease liabilities of $1.9 million, eliminated deferred rent of $0.1 million and recorded a cumulative-effect adjustment of $0.2 million.

 

The Company determines if a contractual arrangement represents or contains a lease at inception. Operating leases with lease terms greater than twelve months are included in Operating lease right-of-use assets and Operating lease liabilities in the Consolidated Balance Sheets. 

 

Operating lease right-of-use assets and lease liabilities are recognized at the commencement date based on the present value of the future lease payments over the lease term. The Company utilizes its incremental borrowing rate in determining the present value of the future lease payments. The incremental borrowing rate is derived from information available at the lease commencement date and represents the rate of interest that the Company would have to pay to borrow on a collateralized basis over a similar term and amount equal to the lease payments in a similar economic environment. The right-of-use assets and lease liabilities may include options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option. The Company has lease arrangements that include both lease and non-lease components. The Company accounts for non-lease components separately from the lease component.

 

Operating lease right-of-use assets as of December 31, 2019 are as follows (in thousands):

 

Office leases

  $ 610  

Land leases

    444  

Total operating lease right-of-use assets, net

  $ 1,054  

 

Operating lease liabilities as of December 31, 2019 are as follows (in thousands):

 

Office leases

  $ 698  

Land leases

     

Total current lease liabilities

    698  

Non-current office leases

    3  

Non-current land leases

     

Total lease liabilities

  $ 701  

 

Operating lease expense for the year ended December 31, 2019 is as follows (in thousands):

 

Office leases

  $ 719  

Land leases

    456  

Total operating lease expense

    1,175  

Short-term lease expense

    321  

Land option expense

    543  

Total land option and lease expense

  $ 2,039  

 

Maturity of operating lease liabilities as of December 31, 2019 are as follows (in thousands):

 

2020

  $ 744  

2021

    3  

2022

     

2023

     
2024      

Thereafter

     

Total undiscounted lease payments

    747  

Discount to present value

    (46 )

Present value of lease liabilities

  $ 701  

 

Other information related to our operating leases as of December 31, 2019 is as follows (in thousands):

 

Cash paid for amounts included in the measurement of operating lease liabilities:

       

Cash flows from operating activities

  $ 1,844  

Noncash right-of-use assets recorded for operating lease liabilities:

       

Adoption of Topic 842

    1,562  

In exchange for new operating lease liabilities during the period

    443  

 

 

 

Note 7 — Other Non-Current Assets

 

Other non-current assets consisted of the following (in thousands):

 

December 31,

   

December 31,

 
   

2019

   

2018

 

Permitting costs(1)

  $ 2,621     $  

Enterprise resource planning system

    3,181        
Rio Grande Site Lease initial direct costs     946          
Total other non-current assets   $ 6,748     $  

 

(1)

Permitting costs primarily represent costs incurred in connection with our permit applications to the United States Army Corps of Engineers and the U.S. Fish and Wildlife Service for wetlands and habitat mitigation measures that may be caused by the construction of the Terminal and the Pipeline.

 

 

Note 8 — Accrued Liabilities and Other Current Liabilities

 

Accrued expenses and other current liabilities consisted of the following (in thousands):

 

   

December 31,

   

December 31,

 
   

2019

   

2018

 

Employee compensation expense

  $ 4,221     $ 3,130  

Terminal and Pipeline asset costs

    2,503       2,014  

Valve installation incentive(1)

          2,000  

Accrued legal services

    1,060       313  

Other accrued liabilities

    967       896  

Total accrued liabilities and other current liabilities

  $ 8,751     $ 8,353  

 

(1)

In April 2018, we entered into an agreement with an intrastate pipeline company with assets near the Terminal which incentivizes the pipeline company to procure, permit and install a valve on an intrastate pipeline near the Terminal. We agreed that, upon the later of (i) March 31, 2019 and (ii) thirty days after the date on which the valve was installed, we would reimburse the pipeline company a cash amount equal to 50% of the costs incurred in connection with the valve, up to a maximum payment of $2.0 million.. Such valve was installed in 2018 and we reimbursed the pipeline company $2.0 million in the first quarter of 2019.

 

 

 

 

Note 9 — Preferred Stock and Common Stock Warrants

 

Preferred Stock

 

In August 2018, we sold an aggregate of 50,000 shares of Series A Convertible Preferred Stock, par value $0.0001 per share (the “Series A Preferred Stock), at $1,000 per share for an aggregate purchase price of $50 million and we issued an additional 1,000 shares of Series A Preferred Stock in aggregate as origination fees to (i) York Capital Management Global Advisors, LLC, severally on behalf of certain funds or accounts managed by it or its affiliates (“York”), (ii) Valinor Management, L.P., severally on behalf of certain funds or accounts for which it is investment manager (“Valinor”), (iii) Bardin Hill Investment Partners LP (formerly known as Halcyon Capital Management LP), severally on behalf of certain funds or accounts managed by it or its affiliates (“Bardin Hill,” and together with York and Valinor, the “Fund Purchasers”) and (iv) HGC NEXT INV LLC (“HGC” and, together with the Fund Purchasers, the “Series A Preferred Stock Purchasers”). Warrants were issued together with the shares of Series A Preferred Stock (the “Series A Warrants”). 

 

In connection with the issuance of Series A Preferred Stock and pursuant to backstop commitment agreements with the Fund Purchasers dated April 11, 2018, as subsequently amended on August 3, 2018 (as amended, the “Backstop Agreements”), we also issued a total of 413,658 shares of Company common stock as fees to the Fund Purchasers.  Each Fund Purchaser is a Company stockholder and, pursuant to that certain Agreement and Plan of Merger, dated as of April 17, 2017, by and among the Company, each Fund Purchaser and/or one or more of its affiliates, and the other parties named therein, three individuals, two individuals, and one individual from York, Valinor, and Bardin Hill, respectively, were appointed to the Company’s board of directors. 

 

In September 2018, we sold an aggregate of 29,055 shares of Series B Convertible Preferred Stock, par value $0.0001 per share (the “Series B Preferred Stock” and, together with the Series A Preferred Stock, the “Convertible Preferred Stock”), at $1,000 per share for an aggregate purchase price of $29.055 million and we issued an additional 581 shares of Series B Preferred Stock in aggregate as origination fees to certain funds managed by BlackRock (“BlackRock”).

 

  In May 2019, we sold an aggregate of 20,945 shares of Series B Preferred Stock, at $1,000 per share for an aggregate purchase price of $20.945 million and we issued an additional 418 shares of Series B Preferred Stock in aggregate as origination fees to York Tactical Energy Fund, L.P. and York Tactical Energy Fund PIV-AN, L.P. (the “York Tactical Funds” and, together with BlackRock, Bardin Hill, Valinor and HGC, the “Series B Preferred Stock Purchasers”), (ii) Bardin Hill, (iii) Valinor and (iv) HGC. Warrants were issued together with the shares of Series B Preferred Stock (the “Series B Warrants” and, together with the Series A Warrants, the “Common Stock Warrants”).

 

The Company has the option to convert all, but not less than all, of the Convertible Preferred Stock into shares of Company common stock at a strike price of $7.34 per share of Company common stock (the “Conversion Price”) on any date on which the volume weighted average trading price of shares of Company common stock for each trading day during any 60 of the prior 90 trading days is equal to or greater than 175% of the Conversion Price, in each case subject to certain terms and conditions. Furthermore, the Company must convert all of the Convertible Preferred Stock into shares of Company common stock at the Conversion Price on the earlier of (i) ten (10) business days following a FID Event (as defined in the certificates of designations of the Convertible Preferred Stock) and (ii) the date that is the tenth (10th) anniversary of the closings of the issuances of the Convertible Preferred Stock, as applicable.

 

The shares of Convertible Preferred Stock bear dividends at a rate of 12% per annum, which are cumulative and accrue daily from the date of issuance on the $1,000 stated value. Such dividends are payable quarterly and may be paid in cash or in-kind. During 2019, the Company paid-in-kind $11.2 million of dividends to holders of the Convertible Preferred Stock. On January 9, 2020, the Company declared dividends to holders of the Convertible Preferred Stock as of the close of business on December 15, 2019. On January 15, 2020, the Company paid-in-kind $3.4 million of dividends to holders of the Convertible Preferred Stock.

 

The holders of Convertible Preferred Stock vote on an “as-converted” basis with the holders of the Company common stock on all matters brought before the holders of Company common stock. In addition, the holders of Convertible Preferred Stock have separate class voting rights with respect to certain matters affecting their rights.

 

The Convertible Preferred Stock do not qualify as liability instruments under ASC 480, because they are not mandatorily redeemable. However, as SEC Regulation S-X, Rule 5-02-27 does not permit a probability assessment for a change of control provision, the Convertible Preferred Stock must be presented as mezzanine equity between liabilities and stockholders’ equity in our Consolidated Balance Sheets because a change of control event, although not considered probable, could force the Company to redeem the Convertible Preferred Stock for cash or assets of the Company. At each balance sheet date, we must re-evaluate whether the Convertible Preferred Stock continue to qualify for equity classification.

 

 

Common Stock Warrants

 

The Series A Warrants issued to the Series A Preferred Stock Purchasers represent the right to acquire in the aggregate a number of shares of common stock equal to approximately 71 basis points (0.71%) of all outstanding shares of Company common stock, measured on a fully-diluted basis, on the exercise date with a strike price of $0.01 per share. The Series B Warrants issued to the Series B Preferred Stock Purchasers represent the right to acquire in the aggregate a number of shares of common stock equal to approximately 71 basis points (0.71%) of all outstanding shares of Company common stock, measured on a fully diluted basis on the exercise date with a strike price of $0.01 per share.

 

The Common Stock Warrants have a fixed three-year term commencing on the closings of the issuances of the associated Convertible Preferred Stock. The Common Stock Warrants may only be exercised by holders of the Common Stock Warrants at the expiration of such three-year term, except that the Company can force the exercise of the Common Stock Warrants prior to expiration of such term if the volume weighted average trading price of shares of Common Stock for each trading day during any 60 of the prior 90 trading days is equal to or greater than 175% of the of the applicable Convertible Preferred Stock conversion price and, with respect to the Series B Warrants, the Company simultaneously elects to force a mandatory exercise of all other warrants then outstanding and un-exercised and held by any holder of parity stock. Pursuant to ASC 815-40, the fair value of the Common Stock Warrants was recorded as a non-current liability on our Consolidated Balance Sheet on the issuance dates. The Company revalues the Common Stock Warrants at each balance sheet date and recognized a  loss of $2.7 million and a gain of $0.2 million as of December 31, 2019 and 2018, respectively. The Common Stock Warrant liabilities are included in Level 3 of the fair value hierarchy.

 

The assumptions used in the Monte Carlo simulation to estimate the fair value of the Common Stock Warrants as of December 31, 2019 are as follows:

 

   

December 31,

   

December 31,

 
   

2019

   

2018

 

Stock price

  $ 6.14     $ 5.40  

Exercise price

  $ 0.01     $ 0.01  

Risk-free rate

    1.6 %     2.5 %

Volatility

    27.6 %     33.1 %

Term (years)

    1.8       2.7  

 

Initial Fair Value Allocation

 

Net proceeds in 2019 were allocated on a fair value basis to the Series B Warrants and on a relative fair value basis to the Series B Preferred Stock.  The allocation of net cash proceeds from the sale of Series B Preferred Stock in 2019 is as follows (in thousands):

 

           

Year Ended December 31, 2019

 
                   

Series B

 
           

Series B

   

Convertible

 
           

Warrants

   

Preferred

 

Gross proceeds

  $ 20,945                  

Equity issuance costs

                     

Net proceeds - Initial Fair Value Allocation

  $ 20,945     $ 1,936     $ 19,009  

Per balance sheet upon issuance

          $ 1,936     $ 19,009  

 

Net cash proceeds in 2018 were allocated on a fair value basis to the Series A Warrants and the Series B Warrants and on a relative fair value basis to the Company common stock, the Series A Preferred Stock and the Series B Preferred Stock. As described below, $2.5 million of the $41.1 million allocated to the Series A Preferred Stock was allocated to additional paid-in capital to give effect to the intrinsic value of a beneficial conversion feature (“BCF”).  The allocation of net cash proceeds from the sale of Series A Preferred Stock and Series B Preferred Stock in 2018 is as follows (in thousands):

 

           

Year Ended December 31, 2018

 
                                           

Additional Paid-in Capital

 
                           

Series A

   

Series B

           

Beneficial

 
           

Series A

   

Series B

   

Convertible

   

Convertible

   

Common

   

Conversion

 
           

Warrants

   

Warrants

   

Preferred

   

Preferred

   

Stock

   

Feature

 

Gross proceeds

  $ 79,055                                                  

Equity issuance costs

    (2,104 )                                                

Net proceeds - Initial Fair Value Allocation

  $ 76,951     $ 4,859     $ 2,746     $