UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |||||
For the Fiscal Year Ended December 31 , 2022
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |||||
For the transition period from to
Commission file number 001-40364
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(Exact name of registrant as specified in its charter)
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| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | ||||
(Address of principal executive offices, including zip code)
(832 ) 456-6500
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol | Name of each exchange on which registered | ||||||
Securities registered pursuant to Section 12(g) of the Act: None
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 15(d) of the 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, a 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 Act:
| Large accelerated filer | ☐ | 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 has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☐
If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction of an error to previously issued financial statements. ☐
Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant’s executive officers during the relevant recovery period pursuant to §240.10D-1(b). ☐
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 common stock held by non-affiliates of the registrant on June 30, 2022 was $19,322,795 based on the closing sale price, as reported by The Nasdaq Stock Market LLC.
As of March 9, 2023, there were 18,433,655 outstanding shares of our common stock, par value $.001 per share.
Documents Incorporated by Reference: None
STABILIS SOLUTIONS, INC. AND SUBSIDIARIES
ANNUAL REPORT ON FORM 10-K
For the Fiscal Year Ended December 31, 2022
TABLE OF CONTENTS
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CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
This document includes statements that constitute forward-looking statements within the meaning of the federal securities laws. Forward-looking statements represent intentions, plans, expectations, assumptions and beliefs about future events and are subject to risks and uncertainties and other factors. These statements may relate to, but are not limited to, information or assumptions about us, our capital and other expenditures, dividends, financing plans, capital structure, cash flow, pending legal and regulatory proceedings and claims, including environmental matters, future economic performance, operating income, cost savings, and management’s plans, strategies, goals and objectives for future operations and growth. These forward-looking statements generally are accompanied by words such as “intend,” “anticipate,” “believe,” “estimate,” “expect,” “should,” “seek,” “project,” “plan” or similar expressions. Any statement that is not a historical fact is a forward-looking statement. It should be understood that these forward-looking statements are necessary estimates reflecting the best judgment of senior management, not guarantees of future performance. Many of the factors that impact forward-looking statements are outside of our control and could cause actual results to differ materially from the results expressed or implied by those forward-looking statements. When considering forward-looking statements, you should keep in mind the risk factors as further described in Part I. “Item 1A. Risk Factors” in this document.
We undertake no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as may be required under applicable securities laws. All forward-looking statements included in this document are expressly qualified in their entirety by the cautionary statements contained or referred to in this section. This cautionary statement should also be considered in connection with any subsequent written or oral forward-looking statements that we or persons acting on our behalf may issue.
In this Annual Report on Form 10-K, we may rely on and refer to information from market research reports, analyst reports and other publicly available information. Although we believe that this information is reliable, we cannot guarantee the accuracy and completeness of this information, and we have not independently verified it.
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PART I
ITEM 1. BUSINESS
OVERVIEW
Our Company
Stabilis Solutions, Inc. and its subsidiaries (the “Company”, “Stabilis”, “our”, “us” or “we”) is an energy transition company that provides turnkey clean energy production, storage, transportation and fueling solutions primarily using liquefied natural gas (“LNG”) to multiple end markets. We have safely delivered over 420 million gallons of LNG through more than 43,000 truck deliveries during our 18-year operating history, which we believe makes us one of the largest and most experienced small-scale LNG providers in North America. We define “small-scale” LNG production to include liquefiers that produce less than 1.0 million LNG gallons per day and “small-scale” LNG distribution to include distribution by trailer or tank container up to 10,000 LNG gallons or marine vessels that carry less than 8.0 million LNG gallons (30,000 cubic meters of LNG). The Company provides LNG solutions to customers in diverse end markets, including aerospace, agriculture, energy, industrial, marine bunkering, mining, pipeline, remote power and utility markets.
The Company also builds power and control systems for the energy industry in China through its 40% owned Chinese joint venture, BOMAY Electric Industries, Inc (“BOMAY”). BOMAY is accounted for as an equity investment.
Our Industry
LNG can be used to deliver natural gas to locations where pipeline service is unavailable, has been interrupted, or needs to be supplemented. LNG can also be used to replace a variety of alternative fuels, including distillate fuel oil and propane, among others, to provide environmental and economic benefits. Increasingly, LNG is being utilized as a transportation fuel in the marine industry and as a propellant in the private rocket launch sector. We believe that these fuel markets are large and provide significant opportunities for LNG usage.
We believe that LNG as well as other clean energy solutions will provide an important balance between environmental sustainability, security and accessibility, and economic viability when compared to both renewables and other traditional hydrocarbon-based fuels and will play a key role in the energy transition.
OUR BUSINESS
The Company generates revenue by selling and delivering LNG to our customers, renting cryogenic equipment and providing engineering and field support services. We sell our products and services separately or as a bundle depending on the customer’s needs. Pricing depends on market pricing for natural gas and competing fuel sources (such as diesel, fuel oil, and propane among others), as well as the customer’s purchased volume, contract duration and credit profile.
LNG Production and Sales—Stabilis builds and operates cryogenic natural gas processing facilities, called “liquefiers,” which convert natural gas into LNG through a purification and multiple stage cooling process. We currently own and operate a liquefier that can produce up to 100,000 LNG gallons per day in George West, Texas and a liquefier that can produce up to 30,000 LNG gallons per day in Port Allen, Louisiana. We also purchase LNG from third-party production sources which allows us to support customers in markets where we do not own liquefiers. We make the determination of LNG and transportation supply sources based on the cost of LNG, the transportation cost to deliver to regional customer locations, and the reliability of the supply source.
Transportation and Logistics Services—Stabilis offers its customers a “virtual natural gas pipeline” by providing turnkey LNG transportation and logistics services in North America. We deliver LNG to our customers’ work sites from both our own production facilities and our network of approximately 30 third-party production sources located throughout North America. We own a fleet of cryogenic trailers to transport and deliver LNG. We also outsource similar equipment and transportation services for LNG from qualified third-party providers as required to support our customer base.
Cryogenic Equipment Rental—Stabilis operates a fleet of approximately 205 mobile LNG storage and vaporization assets, including: transportation trailers, electric and gas-fired vaporizers, ambient vaporizers, storage tanks, and mobile vehicle fuelers. We also own several stationary storage and regasification assets. We believe this is one of the largest fleets of small-scale LNG equipment in North America. Our fleet consists primarily of trailer-mounted mobile assets, making delivery to and between customer locations more efficient. We deploy these assets on job sites to provide our customers with the equipment required to transport, store, and consume LNG in their fueling operations. Our equipment is designed specifically for use in small-scale LNG applications and includes the safety and operational features that our customers and our regulators require.
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Engineering and Field Support Services—Stabilis has experience in the safe, cost effective, and reliable use of LNG in multiple customer applications. We have also developed many processes and procedures that we believe improve our customers’ use of LNG in their operations. Our engineers help our customers design and integrate LNG into their fueling operations and our field service technicians help our customers mobilize, commission and reliably operate on the job site.
Stabilis believes that our extensive operating experience positions us to be a leader in the North American small-scale LNG markets. We plan to leverage this experience to grow our business by investing in new production and distribution assets throughout North America.
Market for Small-Scale LNG in North America
LNG can serve as a partner fuel for renewable energy sources and provides an important balance between environmental sustainability, security and access, and economic viability as a source of fuel. LNG can also be used to deliver natural gas to locations where pipeline service is unavailable, has been interrupted, or needs to be supplemented and to replace a variety of other carbon-based fuels. We believe that the current and future markets for LNG are significant and will continue to grow for a number of years.
We believe that the following factors could drive significant small-scale LNG market growth in North America over the next decade:
New and Expanding Markets for LNG such as Marine Bunkering and Rocket Propulsion. Demand for LNG as a marine fuel continues to grow. While LNG bunkering infrastructure is more developed in other regions such as Europe, there is limited LNG bunkering infrastructure currently available in the U.S. The marine industry is expected to drive additional demand for domestically produced LNG in the coming years. Additionally, liquefied methane is increasingly becoming the fuel of choice for reusable rocket propulsion systems due to its higher energy density, reduced risk of explosion and ease and cost to produce. The commercial satellite industry is expected to drive a significant increase in launches and demand for liquid methane in the form of LNG to support this growth.
Lower Emissions than Alternative Fossil Fuels. Natural gas contains less carbon than most other fossil fuels and, as a result, produces fewer carbon dioxide emissions when burned. The National Energy Technology Laboratory indicates that new natural gas power plants emit between 50% and 60% less carbon dioxide compared with emissions from a typical coal plant. The Argonne National Laboratory indicates that natural gas vehicles produce between 13% and 21% fewer greenhouse gas emissions than comparable gasoline and diesel fueled vehicles. Additional studies indicate that natural gas also produces lower particulate matter and sulfur emissions than other fossil fuels. We believe the relative environmental benefits of natural gas as a fuel is becoming increasingly important as our customers expand their corporate sustainability mandates to lower greenhouse gas emissions and increase decarbonization initiatives.
Less Expensive than Other Traditional Fuels. The cost of natural gas compared to other energy sources is a significant driver for the future demand for natural gas and LNG. Technological advances in natural gas production have unlocked significant new gas reserves in North America. We believe that these proven, abundant and growing reserves of natural gas have the potential to produce among the highest volumes of natural gas in the world. This abundant supply of natural gas has supported relatively low natural gas prices in North America. The cost of natural gas in the United States and Canada currently is less than the cost of crude oil on an energy equivalent basis. In addition, because the price of the natural gas commodity makes up a smaller portion of the total cost of LNG relative to the commodity portion of competing fuels, the price of LNG is less sensitive to variations in the underlying commodity cost. These factors have made LNG more economical than competing fuel sources, and we believe that LNG will maintain this cost advantage into the foreseeable future.
The following chart illustrates the lower cost and decreased price sensitivity of LNG by comparing the historical wholesale price of Propane, Ultra-Low No. 2 Diesel, Indicative Liquefied Natural Gas and Natural Gas (Henry Hub).
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ULSD, Propane & LNG pricing- December 31, 2012 to December 31, 2022
Better Safety than Alternative Fuels. The physical characteristics of LNG make it a safer and more environmentally friendly fuel when compared to diesel and propane because it boils and dissipates rapidly into the air when spilled instead of pooling on or near the ground. If released, LNG is also less combustible than diesel and propane because it ignites at relatively high temperatures and within a narrow flammability range when mixed with air. In addition, LNG fuel tanks and systems used in natural gas applications are subjected to a number of federal and state required safety tests, such as fire, environmental hazard, burst pressure and crash testing that ensure their safety.
Established LNG Production and Distribution Technology. Small-scale LNG production and distribution technologies have been proven and are now widely available from multiple vendors. Small-scale liquefiers are available in modular formats from several vendors and many of them have established track records of reliable and safe operating performance. LNG transport trailers, storage vessels, and vaporization equipment are also available from multiple vendors, and most of this equipment also comes with an established operating track record. We believe that the availability of proven small-scale LNG production and distribution technologies reduces the technology risk in growing the industry, but it also places a premium on the owner’s or operator’s construction and operating capabilities.
Our Customers
Stabilis serves customers in a variety of end markets, including aerospace, agriculture, energy, industrial, marine bunkering, mining, pipeline, remote power and utility markets within North America. We believe these customer markets are well suited to use LNG because they consume relatively high volumes of fuel, operate in mobile, temporary or off-pipeline locations, have limited access to alternative fuel sources, and/or are facing increasingly stringent emissions or other environmental requirements. We currently serve approximately 50 customers. For the year ended December 31, 2022, Aggreko Plc and Minera Penmont each accounted for more than 10% of our revenues. During such period, no other purchaser accounted for 10% or more of our revenue.
Aerospace. The Aerospace industry utilizes LNG as a propellant for rocket propulsion systems and LNG provides an economical, clean burning, and easily stored fuel for rockets engines. Aerospace firms may also utilize LNG for power generation at remote facilities. Consumption of LNG at aerospace facilities vary significantly by project type.
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Agriculture. The Agriculture industry utilizes LNG to power high horsepower engines and also when food processing utilizes heat such as in drying operations as LNG has a clean and consistent burn that makes heating operations more predictable.
Energy. Energy producers use high horsepower engines to power their drilling and pressure pumping operations. LNG displaces some of the total diesel fuel consumption in these applications using dual-fuel engine technology. We believe that energy producers can use LNG to reduce fuel costs and to meet environmental emissions requirements. Based on our experience, dual-fuel drill rigs can consume 1,000 to 5,000 LNG gallons per day and dual-fuel pressure pumping spreads can consume 10,000 to 20,000 LNG gallons per day. Energy producers use the field gas being produced in their operations to fuel the turbine engines that power their pressure pumping spreads. While turbines can burn field gas, they often require significant amounts of LNG for primary or back-up fuel supply because field gas often varies widely in volume, composition, and pressure. Based on our experience, turbine driven pressure pumping operations can consume 30,000 to 60,000 LNG gallons per day when using LNG as the primary fuel.
Industrial. Industrial applications for LNG include sand and aggregate producers, asphalt plants, greenhouses, food processers, paper mills, agricultural dryers, and general manufacturing facilities. Remote sand producers and mobile asphalt plants that use LNG to produce heat for their processing and drying operation are among our largest customers. LNG often replaces propane, fuel oil, or diesel fuel in these applications. These customers often cannot justify the cost of new pipeline infrastructure and using LNG requires minimal up-front costs, regulatory approvals, and lead time requirements. We believe LNG is optimal for these applications because it is cost-effective with stable pricing, offers consistent supply without curtailments, provides an energy density that minimizes storage requirements, and has a clean and consistent burn that makes heating operations more predictable. Based on our experience, sand production facilities can consume 10,000 to 20,000 LNG gallons per day, and asphalt plants can use 5,000 to 10,000 LNG gallons per day.
Marine Bunkering of LNG. We believe that opportunities to provide LNG as a fuel source to the marine transportation industry represents a significant opportunity for us. As shipping and marine transportation companies expand the use of LNG as a fuel source, we believe that we are positioned to capitalize on future growth. The International Maritime Organization (“IMO”) has imposed a global sulfur cap of 0.5% on ships trading outside of established emission control areas starting in January 2020, a level that could be difficult to achieve using common marine fuels, such as heavy fuel oil, but could be achieved using LNG. Large marine vessels can take several hundred thousand gallons of LNG in a single fuel bunkering event.
Mining. Mines, including those producing metals, rare earth materials, and coal, are often located in remote locations that are off the electrical grid and do not have natural gas pipeline access. Mines use LNG to fuel electrical generators and to produce heat for their processing activities. Several mines have also tested using LNG as a fuel for their mine trucks and other high horsepower engine equipment. In addition to fuel cost benefits, LNG can help reduce emissions at mines that are often located in environmentally sensitive areas. Based on our experience, power generation and heating applications at mines can consume 10,000 to 100,000 LNG gallons per day.
Pipeline and Utilities. LNG usage in utility and pipeline applications varies by project type. North America has an expansive network of pipelines that, based on age and increasingly more stringent regulations, require routine testing and maintenance. During such events LNG fueling solutions can provide flow assurance to address natural gas supply interruptions during pipeline hydrostatic testing, repairs, gas distribution system curtailments, or unplanned outages. Such solutions can also provide a bridge for large industrial or utility customers before permanent pipelines are installed. LNG is becoming more predominant in regions where natural gas demand is growing and utilities and pipelines are required to continue to meet critical peak gas demand. LNG can provide an economic solution to support these supply requirements during peak weather conditions, gas curtailments and/or pipeline repairs. In addition, utilities and other power providers can also utilize LNG to provide clean distributed power when access to an electrical grid is limited, additional power is needed during times of peak load, or power infrastructure is damaged due to storms such as hurricanes or wildfires.
China. Through our 40% interest in BOMAY, we provide power and control systems for the land drilling and production market in China.
Competitive Strengths
Stabilis believes that we are well positioned to execute our business strategies based on the following competitive strengths:
LNG is an economically and environmentally attractive product. Stabilis believes that many of our customers use LNG because it can significantly reduce harmful carbon dioxide, nitrogen oxide, sulfur, particulate matter, and other emissions as compared to other hydrocarbon-based fuels. LNG is also an important partner fuel for renewables such as solar and wind power
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and will be a key component of the energy transition to more sustainable sources of energy. We also believe that the combination of cost and environmental benefits makes LNG a compelling fuel source for many energy consumers. We believe that LNG can be delivered to customers at prices that are lower and more stable than what they would pay for distillate fuels or propane. In addition, several of our customers have reported that LNG as a fuel decreases their operating costs by reducing equipment maintenance requirements and providing more consistent burn characteristics.
Demonstrated ability to execute LNG projects safely and cost effectively. Stabilis has produced and delivered over 420 million gallons of LNG to our customers throughout our 18-year operating history. Our experience includes building and operating LNG production facilities, delivering LNG from third-party sources to our customers, and designing and executing a wide-variety of turnkey LNG fueling solutions for our customers using our cryogenic equipment fleet supported by our field service team. We have experience serving customers in multiple end markets including aerospace, industrial, utilities and pipelines, mining, energy, remote clean power, and transportation. We also have experience exporting LNG to Mexico and Canada. Finally, we believe our team is among the most experienced in the small-scale LNG industry. We believe that we can leverage this proven LNG execution experience to grow our business in existing markets and expand our business into new markets.
Comprehensive provider of “virtual natural gas pipeline” solutions throughout North America. Stabilis offers our customers a comprehensive off-pipeline natural gas solution by providing the supply infrastructure, transportation and logistics, and field service support necessary to deliver LNG to them in a program that is tailored to their consumption needs. We believe we own one of the largest fleets of cryogenic transportation, storage, and vaporization equipment in North America. We can provide our customers LNG and related services for a wide variety of applications almost anywhere in the United States, Canada and Mexico. We believe that our ability to be a “one stop shop” for all of our customers’ off-pipeline natural gas requirements throughout North America is unique among LNG providers.
Ability to leverage existing LNG production and delivery capabilities into new markets. Stabilis believes that our experience producing and distributing LNG can be leveraged to grow into new geographic and service end markets. Since our founding we have expanded our service area across the United States, northern Mexico, and western Canada. We have also expanded our industry coverage to include multiple new end markets and customers. We accomplished this expansion into new markets by leveraging our LNG production and distribution expertise, in combination with our cryogenic engineering and project development capabilities, to meet new customer needs.
Competition
The market for natural gas is highly competitive and we have multiple competitors for natural gas fuel. Stabilis believes the biggest competition for LNG in these applications are distillate fuels and propane as they power the majority of engines and generators in our target markets. We also compete with other fuel sources including pipeline natural gas and compressed natural gas ("CNG").
Stabilis competes with other natural gas companies, as well as other fossil fuel sources, based on a variety of factors, including, among others, cost, supply, availability, quality, emissions, and safety of the fuel. Location is often a primary competitive factor as transportation costs limit the distance LNG can be hauled at competitive prices. We believe we compare favorably with many of our competitors on the basis of these factors. However, some of our competitors have longer operating histories and market-based experience, larger customer bases, more expansive brand recognition, deeper market penetration and substantially greater financial, marketing and other resources than our business. As a result, they may be able to respond more quickly to changes in customer preferences, legal requirements or other industry or regulatory trends, devote greater resources to the development, promotion and sale of their products, adopt more aggressive pricing policies, dedicate more effort to infrastructure and systems development in support of their business or product development activities and exert more influence on the regulatory landscape that impacts the natural gas fuel market. Additionally, utilities and their affiliates typically have unique competitive advantages, including a lower cost of capital, substantial and predictable cash flows, long-standing customer relationships, greater brand awareness, and large sales and marketing organizations.
Stabilis does not believe that we compete with mid-scale and world-scale LNG liquefiers that produce more than 1,000,000 LNG gallons per day. These large LNG production facilities typically are designed and permitted to fill large marine vessels that deliver cargos of 26.5 million LNG gallons or more to large import terminals in foreign markets. We do not believe that any of them currently have or plan to have truck loading facilities that would be required to supply LNG to small-scale LNG customers. We also do not believe that any mid-scale or large-scale liquefiers currently have plans to install LNG loading capabilities for marine vessels smaller than 7.9 million LNG gallons.
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Sales and Marketing
Stabilis markets our products and services primarily through our direct sales force, which includes sales representatives covering all of our major geographic and customer markets, as well as attendance at trade shows and participation in industry conferences and events. Our technical, sales and marketing teams also work closely with federal, state and local government agencies to provide education about the value of natural gas as a fuel and to keep abreast of proposed and newly adopted regulations that affect our industry.
Seasonality
We did not experience significant seasonal variations in volume of LNG delivered to our customers during 2022, and we do not expect future volumes to be significantly impacted by seasonal variations. However, our revenues are susceptible to variations due to changes in the price of natural gas as we pass this cost onto our customer. The price of natural gas can fluctuate at any time during the year due to isolated factors, but on average, natural gas prices tend to be higher in peak winter and peak summer months when heating and cooling demand is seasonally higher.
Government Regulation and Environmental Matters
Stabilis is subject to a variety of federal, international, state, provincial and local laws and regulations relating to the environment, health and safety, labor and employment, building codes and construction, zoning and land use, public reporting and taxation, among others. Any changes to existing laws or regulations, the adoption of new laws or regulations, or failure by us to comply with applicable laws or regulations could result in significant additional expense to us or our customers or a variety of administrative, civil and criminal enforcement measures, any of which could have a material adverse effect on our business, reputation, financial condition and results of operations. Regulations that significantly affect our operating activities are described below. Compliance with these regulations has not had a material effect on our capital expenditures, earnings or competitive position to date, but new laws or regulations or amendments to existing laws or regulations to make them more stringent could have such an effect in the future. We cannot estimate the costs that may be required for us to comply with potential new laws or changes to existing laws, and these unknown costs are not contemplated by our existing customer agreements or our budgets and cost estimates. We believe that we are in compliance with all environmental and other governmental regulations. Our compliance has, to date, had no material effect on our capital expenditures, earnings, or competitive position.
Construction and Operation of LNG Liquefaction Plants. To build and operate LNG liquefaction plants, Stabilis must apply for facility permits or licenses that address many factors, including storm water and wastewater discharges, waste handling, and air emissions related to production activities and equipment operation. The construction of LNG plants must also be approved by local planning boards and fire departments.
Transportation of LNG. Federal and state safety standards require that LNG is moved by qualified drivers in cryogenic containers designed for LNG transportation. Drivers are subject to U.S. Department of Transportation (“USDOT”) regulations, such as Federal Motor Carrier Safety Administration (“FMCSA”), Hazardous Materials Regulations, and state certification requirements, such as certifications by the Alternative Energy Division of the Railroad Commission of Texas. Cryogenic containers have to undergo annual USDOT visual inspections and periodic pressure tests. Motor vehicles equipped with an LNG container or other motor vehicles used principally for transporting LNG in portable containers in Texas have to be registered with the Railroad Commission of Texas.
Transfer of LNG. Transfer of LNG occurs between transport trailers, permanent and temporary facilities as well as marine facilities and vessels. Marine transfers can occur on the shore side to or from a vessel or from vessel to vessel. International, Federal, State and local safety standards and operational regulations require the transfer of LNG, hydrogen, CNG and other fuels to be conducted in accordance with specific written safety standards and operational procedures. These procedures require that trained, qualified personnel be in attendance and manage all transfer operations. These procedures must be implemented at each transfer site location and copies of the procedures be available to site personnel. Minimum safety signage that meets governing regulations must be displayed and visible at each site and on appropriate equipment.
Storage and Vaporization of LNG at Customer Sites. To install and operate both temporary and permanent storage and vaporization equipment, Stabilis may apply for permits or licenses that address many factors, including waste handling and air emissions related to onsite storage and equipment operation or consult with customers so they may apply for needed permits. The operation and siting of storage and vaporization of LNG may also require approval by local planning boards and fire departments.
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Import & Export of LNG. Stabilis has the ability to import or export LNG from the United States to Mexico and Canada via truck. In support of our business in Mexico, we maintain an export license from the United States Department of Energy (“DOE”) and maintain import permits to bring the LNG into the country. In support of our business in Canada, Stabilis maintains an import and export license from the “DOE” and from the National Energy Board of Canada (“NEB”). We also maintain an Emergency Response Action Plan (“ERAP”) with Transport Canada.
During the third quarter of 2022, Stabilis received authorization from the DOE to export domestically produced LNG to all free trade and non-free trade countries, including Asian, European, and Latin American importing nations for up to 51.75 billion cubic feet per year. The authorization is for a term of 28 years. Stabilis has not made any exports under this approval during the year ended December 31, 2022.
Human Capital Resources
Stabilis believes that one of its key assets is the collective expertise, experience and diversity of its workforce. The Company depends on all of its employees, including its executive officers and senior management, to successfully operate its businesses and to successfully execute its strategy going forward. As of December 31, 2022, Stabilis had 100 employees, 99 of whom were full-time employees. We believe our relations with employees are satisfactory. None of our employees are currently subject to a collective bargaining agreement.
Stabilis seeks to attract and retain its employees by offering competitive compensation packages including base and incentive compensation, attractive benefits and opportunities for advancement and rewarding careers. The Company periodically reviews and adjusts, if needed, its employees’ compensation to ensure that it is competitive within the industry and is consistent with their level of performance. Stabilis considers employee benefits to be an important part of employee total compensation. For this reason, the Company’s benefits include medical, dental, and vision and insurance, short- and long-term disability insurance, accidental death and disability insurance, travel and accident insurance, as well as a 401(k) contribution retirement plan. The Company’s ability to attract employees is also significantly influenced by our efforts to create a culture founded on opportunity, personal growth, respect, collaboration and its ability to value the diverse backgrounds, skills and contributions that its employees offer.
Stabilis strives to provide its people with all of the tools and support necessary for them to succeed and safely perform their duties. The safety of its employees, contractors, customers and communities is paramount to the Company’s success. To ensure safe, reliable and efficient operations in a highly regulated environment, the Company supports and utilizes various employee training, educational programs as well as safety programs with detailed safety and health related procedures that all are required to follow.
Intellectual Property
The intellectual property portfolio of Stabilis and its subsidiaries includes patents and trademarks. The Company has a patent in both US and Canada for the use of natural gas for well enhancement. The Company has one pending application in Mexico for the use of natural gas for well enhancement. The Company has two patents for rotary fluid processing systems and a US patent for a gas processing system. The last patent to expire in the U.S. will expire in July 2038, absent any adjustments or extensions. The Company has ten U.S. trademark registrations and one foreign trademark registration (Canada). The Company has no pending trademark applications.
Available Information
Stabilis’ principal executive office is located at 11750 Katy Freeway, Suite 900, Houston, Texas 77079. Our telephone number is 832-456-6500 and our website address is www.stabilis-solutions.com. We make our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, amendments to those reports and other information filed with or furnished to the SEC available, free of charge, through our website, as soon as reasonably practicable after those reports and other information are electronically filed with or furnished to the SEC. The reference to Stabilis’ website is not intended to incorporate the information on the website into this report or any of our filings with the SEC. In addition, the SEC maintains a website that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC at http://www.sec.gov. This annual report on Form 10-K, including all exhibits and amendments, has been filed electronically with the SEC.
ITEM 1A. RISK FACTORS
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Investing in shares of our common stock involves a high degree of risk. You should carefully consider the risks described below with all of the other information included in this report in evaluating an investment in our common stock. If any of the following risks were to occur, our business, financial condition, results of operations, and cash flows could be materially adversely affected. In that case, the trading price of our common stock could decline and you could lose all or part of your investment. Additional risks not presently known to us or that we currently deem immaterial may also impair our business operations.
Risks Related to Our Business
Our ability to implement our business strategy may be materially and adversely affected by many known and unknown factors.
Our business strategy relies upon our future ability to successfully market natural gas to end-users, develop and maintain cost-effective logistics in our supply chain and construct, develop and operate energy-related infrastructure in North America. Our business strategy assumes that we will be able to expand our operations further in North America, enter into strategic, long-term purchase and supply contracts with end-users, power utilities, LNG providers, transportation companies, financing counterparties and other partners, acquire and transport LNG at attractive prices, and continue to develop our logistics infrastructure into efficient and profitable operations, obtain approvals from all relevant federal, international, state and local authorities, as needed, for the construction and operation of these projects, and obtain long-term capital appreciation and liquidity with respect to such investments. These assumptions are subject to significant economic, competitive, regulatory and operational uncertainties, contingencies and risks, many of which are beyond our control. We may also acquire operating businesses or other assets in the future to further our business strategy. Any such acquisitions would be subject to significant risks and contingencies, including the risk of integration, and we may not be able to realize the benefits of any such acquisitions.
Our future ability to execute our business strategy is uncertain, and it can be expected that one or more of our assumptions will prove to be incorrect and that we will face unanticipated events and circumstances that may adversely affect our business. Any one or more of the following factors may adversely affect our financial condition, results of operations and ability to execute our business strategy:
• failure to win new bids or contracts;
• failure to manage expanding operations in the projected time frame;
• inability to structure innovative and profitable energy-related transactions, maintain cost-effective logistics solutions and to optimally manage performance and counterparty risks;
• inability to attract and retain personnel in a timely and cost-effective manner as we are highly dependent on principal members of our management team and certain of our other employees. The loss of which could disrupt our operations, adversely impact the achievement of our objectives and increase our exposure to the other risks described herein;
• failure of investments in technology and machinery, such as liquefaction technology or LNG tank truck technology, to perform as expected;
• failure to maintain important pre-existing third-party relationships;
• increases in competition which could increase costs and undermine profits;
• inability to source LNG in sufficient quantities and/or at economically attractive prices;
• failure to anticipate and adapt to new trends in the energy sector in North America and elsewhere;
• increases in operating costs, including the need for capital improvements, insurance premiums, general taxes, real estate taxes and utilities, affecting our profit margins;
• inability to raise significant additional debt and equity capital in the future to implement our business strategy as well as to operate and expand our business;
• inflation, depreciation of the currencies of the countries in which we operate and fluctuations in interest rates;
• failure to obtain approvals from governmental regulators and relevant local authorities for the construction and operation of potential future projects and other relevant approvals;
• existing and future governmental laws and regulations as well as potential changes in regulatory, geopolitical, social, economic, tax or monetary policies and other factors within the areas we operate or intend to operate; or
• inability, or failure, of a significant customer to perform its contractual obligations for any reason, including nonpayment and nonperformance.
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Any failure to perform by our counterparties under agreements may adversely affect our operating results, liquidity and access to financing.
Our business involves our entering into various purchase and sale, hedging and other transactions with numerous third parties (commonly referred to as “counterparties”). In such arrangements, we are exposed to the performance and credit risks of our counterparties, including the risk that one or more counterparties fails to perform its obligation to make deliveries of commodities and/or to make payments. These risks may increase during periods of commodity price volatility. Defaults by suppliers and other counterparties may adversely affect our operating results, liquidity and access to financing.
Cyclical or other changes in the demand for and price of LNG and natural gas may adversely affect our business and the performance of our customers which could have a material adverse effect on our business, contracts, financial condition, operating results, cash flows, liquidity and ability to execute our strategy.
Our business generally is based on assumptions about the future availability and price of natural gas and LNG markets. Natural gas and LNG prices have at various times been and may become volatile due to one or more of the following factors:
• changes in supplies of, demand for, and prices for, alternative energy sources such as coal, oil, nuclear, hydroelectric, wind and solar energy, which may reduce the demand for natural gas;
• weather conditions and natural disasters;
• reduced demand and lower prices for natural gas;
• increased natural gas production deliverable by pipelines, which could suppress demand for LNG;
• decreased oil and natural gas exploration activities, which may decrease the production of natural gas, or decrease the demand for LNG used in the oil and gas exploration and production process;
• changes in regulatory, tax or other governmental policies or requirements regarding imported or exported LNG, natural gas or alternative energy sources, which may reduce the demand for imported or exported LNG and/or natural gas;
• political conditions in natural gas producing regions; and
• imposition of tariffs by other countries on imports of LNG from the United States.
Adverse trends or developments affecting any of these factors could result in decreases in the prices at which we are able to sell LNG and natural gas and related services or increases in the prices we have to pay for natural gas or LNG, which could materially and adversely affect the performance of our customers, and could have a material adverse effect on our business, contracts, financial condition, operating results, cash flows, liquidity and ability to execute our strategy.
Operation and/or construction of our LNG infrastructure, liquefaction and other facilities involves significant risks.
The operation of our LNG infrastructure, liquefaction and other facilities involve particular, significant risks that could involve interruption of our operations, including, among others: performing below expected levels of efficiency, breakdowns or failures of equipment, operational errors by trucks, operational errors by us or any contracted facility operator, industrial accidents, labor disputes and weather-related or natural disasters. Additional risks include, but are not limited to: failure to maintain the required license(s) or other permits required to operate our plants; failure in health and safety performance and management of health and safety risks; failure to comply with applicable laws and regulations, including environmental laws and regulations; failure to properly manage environmental risks, including pollution, contamination, and exposure to hazardous materials; the inability, or failure, of any counterparty to any plant-related agreements to perform their contractual obligations to us and planned and unplanned power outages due to maintenance, expansion and refurbishment. We cannot assure you that future occurrences of any of the events listed above or any other events of a similar or dissimilar nature would not significantly decrease or eliminate the revenues from, or significantly increase the costs of operating expenses related to our LNG infrastructure, liquefaction or other operation which could have a material adverse effect on our business, contracts, financial condition, operating results, cash flow, liquidity and ability to execute of our strategy.
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Any failure in health and safety performance from our operations may result in an event that causes personal harm or injury to our employees, other persons, and/or the environment, as well as the imposition of injunctive relief and/or penalties for non-compliance with relevant regulatory requirements or litigation. Such a failure, or a similar failure elsewhere in the energy industry (including, in particular, LNG liquefaction, storage, transportation or regasification operations), could generate public concern, which may lead to new laws and/or regulations that would impose more stringent requirements on our operations, have a corresponding impact on our ability to obtain permits and approvals, and otherwise jeopardize our reputation or the reputation of our industry as well as our relationships with relevant regulatory agencies and local communities. Individually or collectively, these developments could have a material adverse effect on our business, contracts, financial condition, operating results, cash flow, liquidity and ability to execute our strategy.
The construction of energy-related infrastructure, including liquefaction facilities, as well as other future projects, involves numerous operational, regulatory, environmental, political, legal and economic risks beyond our control and may require the expenditure of significant amounts of capital during construction and thereafter. These potential risks include, among other things, the following:
• we may be unable to complete construction projects on schedule or at the budgeted cost due to the unavailability of required construction personnel or materials, inability obtain key permits or land use approvals including those required under environmental laws, occurrence of accidents or weather conditions, changes in regulatory requirements or challenges by citizens groups or non-governmental organizations, including those opposed to fossil fuel energy sources;
• we will not receive any material increase in operating cash flows until a project is completed, even though we may have expended considerable funds during the construction phase, which may be prolonged;
• we may construct facilities to capture anticipated future energy consumption growth in a region in which such growth does not materialize; and
• the completion or success of our construction project may depend on the completion of a third-party construction project that we do not control and that may be subject to numerous additional potential risks, delays and complexities.
Our insurance may be insufficient to cover losses that may occur to our property or result from our operations.
Our current operations and future projects are subject to the inherent risks associated with the operation of LNG infrastructure as well as liquefaction and other facilities including explosions, pollution, release of toxic substances, fires, seismic events, 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 our facilities and assets or damage to persons and property. In addition, such operations and the modes of transport of third parties on which our current operations and future projects may be dependent face possible risks associated with acts of aggression or terrorism. Some of the regions in which we operate are affected by hurricanes or tropical storms. We do not, nor do we intend to, maintain insurance against all of these risks and losses. In particular, we do not carry business interruption insurance for hurricanes and other natural disasters. Therefore, the occurrence of one or more significant events not fully insured or indemnified against could create significant liabilities and losses which could have a material adverse effect on our business, contracts, financial condition, operating results, cash flow, liquidity and ability to execute our strategy. In addition, our insurance may be voidable by the insurers as a result of certain of our actions.
We maintain insurance against certain risks and losses; however, the occurrence of a significant event that is either uninsured or not fully insured or indemnified against could have a material adverse effect on our business, contracts, financial condition, operating results, cash flow, liquidity and ability to execute our strategy. Further, we may be unable to procure adequate insurance coverage at commercially reasonable rates in the future.
The design, construction and operation of energy-related infrastructure, including existing and proposed facilities, the import and export of LNG and the transportation of natural gas, are highly regulated activities at the federal, state and local levels.
The Pipeline Hazardous Materials Safety Administration (“PHMSA”) has promulgated detailed regulations governing LNG facilities under its jurisdiction to address LNG facility siting, design, construction, equipment, operations, maintenance, personnel qualifications and training, fire protection and security. State and local regulators can impose similar siting, design, construction and operational requirements. Additional approvals of the Department of Energy (“DOE”) under Section 3 of the Natural Gas Act (“NGA”), as well as several other material governmental and regulatory permits, approvals and authorizations, including under the Clean Air Act (“CAA”) and the Clean Water Act (“CWA”) and their state analogues, may be required in order to construct and operate an LNG facility and export LNG. Certain federal permitting processes may trigger the requirements of the National
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Environmental Policy Act (“NEPA”), which requires federal agencies to evaluate major agency actions that have the potential to significantly impact the environment. We also must comply with foreign regulations regarding to the extent we transport LNG within Canada and Mexico.
We cannot control the outcome of any review and approval process, including whether or when any such permits, approvals and authorizations will be obtained, the terms of their issuance, or possible appeals or other potential interventions by third parties, that could interfere with our ability to obtain and maintain such permits, approvals and authorizations or the terms thereof. Accordingly, there is no assurance that we will timely obtain and maintain these governmental permits, approvals and authorizations on favorable terms, or at all. Failure to obtain and maintain any of these permits, approvals or authorizations could have a material adverse effect on our business, financial condition, operating results, cash flows and ability to execute our strategy.
Existing and future environmental, health and safety laws and regulations could result in increased compliance costs or additional operating costs or construction costs and restrictions.
Our business is now and will in the future be subject to extensive federal, international, state and local laws and regulations both in the United States and in other jurisdictions where we operate that regulate and restrict, among other things, the siting and design of our facilities, discharges to air, land and water, the handling, storage and disposal of hazardous materials, and remediation associated with the release of hazardous substances. Many of the federal and state laws with respect to these impose liability, without regard to fault or the lawfulness of the original conduct. As the owner and operator of our facilities and as generators of and arrangers for the transport and disposal of regulated wastes, we could be liable for the costs of cleaning up any such hazardous substances that may be released into the environment at or from our facilities or facilities to which wastes or hazardous substances were transported or disposed, for resulting damage to natural resources, and for certain health studies. We are also subject to laws and regulations, including, but not limited to:
The Clean Air Act (“CAA”) and Clean Water Act (“CWA”), and analogous state laws and regulations that restrict or prohibit the types, quantities and concentration of substances that can be emitted or discharged into the environment in connection with the construction and operation of our facilities which may also require us to obtain and maintain permits and provide governmental authorities with access to our facilities for inspection and reports related to compliance.
The Resource Conservation and Recovery Act (“RCRA”) and analogous state laws which may impose detailed requirements for the generation, handling, storage, processing, treatment and disposal of nonhazardous and hazardous solid wastes. Wastes listed as hazardous wastes or that have hazardous characteristics are subject to more stringent requirements than those considered nonhazardous.
The Occupational Safety and Health Act (“OSHA”) and comparable state statutes whose purpose is to protect the health and safety of workers.
The Emergency Planning and Community Right-to-Know Act, the general duty clause and Risk Management Planning regulations promulgated under section 112(r) of the CAA and comparable state statutes and any implementing regulations that require recordkeeping and disclosure of information about hazardous materials used or produced in our operations and require that this information be provided to employees, state and local governmental authorities and citizens. These laws also require the development of risk management plans for certain facilities to prevent accidental releases of extremely hazardous substances and to minimize the consequences of such releases should they occur.
Greenhouse Gases/Climate Change. From time to time, there may be federal and state regulatory and policy initiatives to reduce green house ("GHG") emissions in the United States from a variety of sources. Other federal and state initiatives are being considered or may be considered in the future to address GHG emissions through, for example, United States treaty commitments or other international agreements, direct regulation, a carbon emissions tax, or cap-and-trade programs. For example, the U.S. recommitted to the Paris Agreement, an international treaty with the goal of limiting global warming to below 2 degrees Celsius as compared to pre-industrial levels. The Environmental Protection Agency (“EPA”) has adopted regulations for reporting and controlling GHG emissions from certain air emissions sources under its existing authority under the CAA, and may adopt more stringent regulations in the future. In addition, some states and foreign jurisdictions have individually or in regional cooperation, imposed restrictions on GHG emissions under various policies and approaches, including establishing a cap on emissions, requiring efficiency measures, or providing incentives for pollution reduction, use of renewable energy sources, or use of replacement fuels with lower carbon content.
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The adoption and implementation of any U.S. federal, state or local regulations or foreign regulations imposing obligations on, or limiting emissions of GHGs from, our equipment and operations could require us to incur significant costs to reduce emissions of GHGs associated with our operations or could adversely affect demand for natural gas and natural gas products. The potential increase in our operating costs could include new costs to operate and maintain our facilities, permit our facilities, install new emission controls on our facilities, acquire allowances to authorize our GHG emissions, pay taxes related to our GHG emissions, and administer and manage a GHG emissions program. We may not be able to recover such increased costs through increases in customer prices or rates. In addition, changes in regulatory policies that result in a reduction in the demand for hydrocarbon products that are deemed to contribute to GHGs, or restrict their use, may reduce volumes available to us for processing, transportation, marketing and storage. These developments could have a material adverse effect on our financial position, results of operations and cash flows.
Fossil Fuels. Our business activities depend upon a sufficient and reliable supply of natural gas feedstock, and are therefore subject to concerns in certain sectors of the public about the exploration, production and transportation of natural gas and other fossil fuels and the consumption of fossil fuels more generally. Legislative and regulatory action, and possible litigation, in response to such public concerns may also adversely affect our operations. We may be subject to future laws, regulations, or actions to address such public concern with fossil fuel generation, distribution and combustion, GHGs and the effects of global climate change. Our customers may also move away from using fossil fuels such as LNG for their power generation needs for reputational or perceived risk-related reasons. These matters represent uncertainties in the operation and management of our business, and could have a material adverse effect on our financial position, results of operations and cash flows.
Failure to comply with any of the above laws and regulations or any other future legislation and regulations could lead to substantial liabilities, fines and penalties or capital expenditures related to pollution control equipment and restrictions or curtailment of operations, which could have a material adverse effect on our business, contracts, financial condition, operating results, cash flow, and ability to execute our strategy.
Global climate change may in the future increase the frequency and severity of weather events and the losses resulting therefrom, which could have a material adverse effect on the economies in the markets in which we operate or plan to operate in the future and therefore on our business.
Over the past several years, changing weather patterns and climatic conditions have added to the unpredictability and frequency of natural disasters in certain parts of the world, including the markets in which we operate and intend to operate, and have created additional uncertainty as to future trends. There is a growing consensus today that climate change increases the frequency and severity of extreme weather events and, in recent years, the frequency of major weather events appears to have increased. We cannot predict whether or to what extent damage that may be caused by natural events, such as severe tropical storms and hurricanes, will affect our operations or the economies in our current or future market areas, but the increased frequency and severity of such weather events could increase the negative impacts to economic conditions in these regions and result in a decline in the value or the destruction of our liquefiers and downstream facilities or affect our ability to transport LNG. In particular, if one of the regions in which we operate is impacted by such a natural catastrophe in the future, it could have a material adverse effect on our business. Further, the economies of such impacted areas may require significant time to recover and there is no assurance that a full recovery will occur. Even the threat of a severe weather event could impact our business, financial condition or the price of our common stock.
Other natural or man-made disasters could result in an interruption of our operations, a delay in the completion of future facilities, higher construction costs or the deferral of the dates on which payments are due under our customer contracts, all of which could adversely affect us.
Other disasters such as explosions, fires, seismic events, floods or accidents, could result in damage to, or interruption of operations in our supply chain, including at our facilities or related infrastructure, as well as delays or cost increases in the construction and the development of our proposed facilities or other infrastructure.
If one or more trailers, terminals, pipelines, facilities, equipment or electronic systems that we own, lease or operate or that deliver products to us or that supply our facilities and our customers’ facilities are damaged by a natural or other disaster, accident, catastrophe, terrorist or cyber-attack or event, our operations could be significantly interrupted. These delays and interruptions could involve significant damage to people, property or the environment, and repairs could take a week or less for a minor incident to six months or more for a major interruption. Any event that interrupts the revenues generated by our operations, or that causes us to make significant expenditures not covered by insurance, could have a material adverse effect on our business, contracts, financial condition, operating results, cash flow, liquidity and ability to execute our strategy.
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We expect to be dependent on contractors for the successful completion of our energy-related infrastructure.
Timely and cost-effective completion of energy-related infrastructure, including liquefaction facilities, as well as future projects, in compliance with agreed specifications is central to our business strategy and is highly dependent on the performance of our contractors. The ability of our contractors to perform successfully under their agreements with us is dependent on a number of factors, including the contractor’s ability to:
• design and engineer each of our facilities to operate in accordance with specifications;
• engage and retain third-party subcontractors and procure equipment and supplies;
• respond to difficulties such as equipment failure, delivery delays, schedule changes and failures to perform by subcontractors, some of which are beyond their control;
• attract, develop and retain skilled personnel, including engineers;
• post required construction bonds and comply with the terms thereof;
• manage the construction process generally, including coordinating with other contractors and regulatory agencies; and
• maintain their own financial condition, including adequate working capital.
Until we have entered into an Engineering, Procurement and Construction (“EPC”) contract for a particular project, in which the EPC contractor agrees to meet our planned schedule and projected total costs for a project, we are subject to potential fluctuations in construction costs and other related project costs. Although some agreements may provide for liquidated damages if the contractor fails to perform in the manner required with respect to certain of its obligations, the events that trigger a requirement to pay liquidated damages may delay or impair the operation of the applicable facility, and any liquidated damages that we receive may be delayed or insufficient to cover the damages that we suffer as a result of any such delay or impairment. The obligations of our primary building contractor and other contractors to pay liquidated damages under their agreements with us are subject to caps on liability, as set forth therein. Furthermore, we may have disagreements with our contractors about different elements of the construction process, which could lead to the assertion of rights and remedies under our contracts and increase the cost of the applicable facility or result in a contractor’s unwillingness to perform further work. If any contractor is unable or unwilling to perform according to the negotiated terms and timetable of its respective agreement for any reason or terminates its agreement for any reason, we would be required to engage a substitute contractor, which could be particularly difficult in certain of the markets in which we operate or plan to operate. This would likely result in significant project delays and increased costs, which could have a material adverse effect on our business, contracts, financial condition, operating results, cash flow, liquidity and ability to execute our strategy. Additionally, in certain instances, we may be jointly and severally liable for our contractor's actions or contract performance.
We may not be able to purchase or receive physical delivery of natural gas in sufficient quantities and/or quality or at economically attractive prices to satisfy our delivery obligations under our commercial agreements, which could have a material adverse effect on our business.
We may not be able to purchase or receive physical delivery of sufficient quantities and/or quality of LNG or natural gas to satisfy delivery obligations either for our own liquefaction facilities or third party LNG suppliers, or both, which may provide customers with the right to terminate our commercial agreements. In addition, price fluctuations in natural gas and LNG may make it expensive or uneconomical for us to acquire adequate supply of these items. If LNG were to become unavailable for current or future volumes of natural gas due to repairs or damage to supplier facilities or pipelines, lack of capacity or any other reason, our ability to continue delivering natural gas to end-users could be restricted, thereby reducing revenues. Any permanent interruption at any key LNG supply chains that causes a material reduction in volumes could have a material adverse effect on our business, financial condition, operating results, cash flow, liquidity and ability to execute our strategy.
We face competition based upon market price for LNG or natural gas.
Our business is subject to the risk of natural gas and LNG price competition. Factors relating to competition may prevent us from entering into new or replacement customer contracts on economically comparable terms to existing customer contracts, or at all which could have a material adverse effect on our business, contracts, financial condition, operating results, cash flow, liquidity and ability to execute our strategy. Factors which may negatively affect potential demand for natural gas from our business are diverse and include, among others:
• increases in worldwide LNG production capacity and availability of LNG for market supply;
• increases or decreases in the cost of LNG;
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• decreases in the cost of competing sources of natural gas, LNG or alternate fuels such as coal, heavy fuel oil and diesel; and
• displacement of LNG or fossil fuels more broadly by alternate fuels or energy sources or technologies (including but not limited to nuclear, wind, solar, biofuels and batteries) in locations where access to these energy sources is not currently available or prevalent.
Decreased demand for natural gas may result in significant price competition and decrease the prices we are able to charge, which would have a material adverse effect on our results of operations, financial condition and ability to execute our strategy.
Technological innovation may render our processes obsolete.
The success of our current operations and future projects will depend in part on our ability to create and maintain a competitive position in the natural gas liquefaction industry. Although we plan to utilize proven technologies such as those currently in operation at our George West and Port Allen liquefiers, we do not have any exclusive rights to any of these technologies. In addition, such technologies may be rendered obsolete or uneconomical by legal or regulatory requirements, technological advances, more efficient and cost-effective processes or entirely different approaches developed by one or more of our competitors or others. Failure to keep up with the pace of technological innovation could materially and adversely affect our business, ability to realize benefits from future projects, results of operations, financial condition, liquidity and ability to execute our strategy.
Changes in legislation and regulations could have a material adverse impact on our business, results of operations, financial condition, liquidity and ability to execute our strategy.
Our business is subject to governmental laws, rules, and regulations, and requires permits that impose various restrictions and obligations that may have material effects on our results of operations. 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, exportation, or importation 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, results of operations, financial condition, liquidity and execution of our strategy.
We use transportation systems that include trucks that we own and operate as well as use third party LNG transportation providers. To a large degree, intrastate motor carrier operations are subject to state and/or local safety regulations that mirror federal regulations but also regulate the weight and size dimensions of loads. Applicable regulatory requirements and limitations is subject to change, either through new regulations enacted on the federal, state or local level, or by new or modified regulations that may be implemented under existing law. The nature and extent of any changes in these laws, rules, regulations and permits may be unpredictable and may have material effects on our business.
Such operations are also subject to various trucking safety regulations, including those which are enacted, reviewed and amended by the Federal Motor Carrier Safety Administration (“FMCSA”). These regulatory authorities exercise broad powers, governing activities such as the authorization to engage in motor carrier operations, driver licensing, insurance requirements, financial reporting and review of certain mergers, consolidations and acquisitions, and transportation of hazardous materials. All federally regulated carriers’ safety ratings are measured through a program implemented by the FMCSA known as the Compliance Safety Accountability (“CSA”) program which measures a carrier’s safety performance. The quantity and severity of any violations are compared to a peer group of companies of comparable size and annual mileage. If a company rises above a threshold established by the FMCSA, it is subject to action from the FMCSA and ultimately revocation of the company’s operating authority if the issues are not corrected. Any changes in trucking operations due to changes in regulations or loss of a LNG transportation provider could have an adverse effect on our business, results of operations, financial condition, liquidity and execution of our strategy.
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Some of our competitors have greater financial, technological and other resources than we currently possess.
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. Some of these competitors have longer operating histories, have secured access to, or are pursuing development or acquisition of LNG facilities in North America, have more development experience, greater name recognition, larger staffs and substantially greater financial, technical and marketing resources than we currently possess. We also face competition for the contractors needed to build our facilities. 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, ability to realize benefits from future projects, results of operations, financial condition, liquidity and ability to execute our strategy.
Failure of LNG to be a competitive source of energy in the markets in which we operate, and seek to operate, could adversely affect our expansion strategy.
Natural gas competes with other sources of energy, including coal, oil, nuclear, hydroelectric, wind and solar energy, which may become available at a lower cost in certain markets. Our operations are, and will be, dependent upon LNG being a competitive source of energy in the markets in which we operate. In the United States, imported LNG has not developed into a significant energy source. The success of the domestic liquefaction component of our business plan is dependent, in part, on the extent to which natural gas can, for significant periods and in significant volumes, be produced in the United States at a lower cost than the cost to produce some domestic supplies of other alternative energy sources, and that it can be transported at reasonable rates through appropriately-scaled infrastructure. The failure of natural gas to be a competitive supply alternative to oil and other alternative energy sources could adversely affect our ability to deliver LNG or natural gas to our customers in North America or other locations on a commercial basis.
Our risk management strategies cannot eliminate all LNG price and supply risks. In addition, any non-compliance with our risk management strategies could result in significant financial losses.
Our strategy is to maintain a manageable risk balance between LNG purchases and sales or future delivery obligations. Through these transactions, we seek to earn a margin for the LNG purchased by selling LNG for physical delivery to third-party users. These strategies cannot, however, eliminate all price risks. For example, any event that disrupts our anticipated supply chain could expose us to risk of loss resulting from price changes if we are required to obtain alternative supplies to cover these transactions. We are also exposed to basis risks when LNG is purchased against one pricing index and sold against a different index. In addition, our marketing operations involve the risk of non-compliance with our risk management policies. We cannot assure you that our processes and procedures will detect and prevent all violations of our risk management strategies, particularly if deception or other intentional misconduct is involved. If we were to incur a material loss related to commodity price risks, including non-compliance with our risk management strategies, it could have a material adverse effect on our financial position, results of operations and cash flows.
We may experience increased labor costs, and the unavailability of skilled workers or failure to attract and retain qualified personnel could adversely affect us.
We are dependent upon the available labor pool of skilled employees, including truck drivers. 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 energy-related infrastructure and to provide our customers with the highest quality service. In addition, the tightening labor market may affect our ability to hire and retain skilled labor and require us to pay increased wages.
In addition, we, and our subsidiaries in the United States who hire personnel, are also subject to the Fair Labor Standards Act, which governs such matters as minimum wage, overtime and other working conditions. We are also subject to applicable labor regulations in the other jurisdictions in which we operate, including Mexico. We may face challenges and costs in hiring, retaining and managing our employee base. A shortage in the labor pool of skilled workers 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 ability to execute our strategy.
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We may incur impairments to goodwill or long-lived assets.
We test our long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of these assets may not be recoverable. We test goodwill for impairment annually, or more frequently as circumstances dictate. Significant negative industry or economic trends, and decline of market capitalization, reduced estimates of future cash flows for business segments or disruptions to business could lead to an impairment charge of the long-lived assets, including our goodwill. Our valuation methodology for assessing impairment requires management to make judgments and assumptions based on historical experience and to rely heavily on projections of future operating performance. Projections of future operating results and cash flows may vary significantly from actual results. In addition, if our analysis results in an impairment to our goodwill or long-lived assets, we may be required to record a charge to earnings in our consolidated financial statements during a period in which such impairment is determined to exist, which may negatively impact our operating results.
Environmental, social, and governance (“ESG”) goals, programs, and reporting are increasingly being identified by capital providers and investors as a priority for the energy industry, and access to capital and investors for companies not prioritizing ESG may become increasingly limited.
Spurred by increasing concerns regarding climate change, the energy industry faces growing demand for corporate transparency and a demonstrated commitment to sustainability goals. ESG goals and programs, which typically include extralegal targets related to environmental stewardship, social responsibility and corporate governance, have become an increasing focus of investors and shareholders across the industry. While reporting on ESG metrics remains voluntary, access to capital and investors is likely to favor companies with robust ESG programs in place. In addition, if ESG metrics and/or reporting become mandatory, our costs of planning, measuring, monitoring, and reporting on our operations could increase and could have a material adverse effect on our business, contracts, financial condition, operating results, cash flow, liquidity and ability to execute our strategy.
We have operations and investment in foreign countries and we could experience losses from weakening foreign economies as well as unforeseen or unexpected operating, financial, political or cultural factors in these countries.
We have operations in Mexico and in China. We also can deliver LNG in Canada. We could experience losses resulting from weakening foreign economies (including foreign exchange losses), as well as unforeseen or unexpected operating, financial, political or cultural factors in these countries. Strained diplomatic and political relationships between the United States and these foreign countries, along with weaker legal systems, could also adversely affect our investment and business opportunities in these countries. See Note 8 of the Notes to Consolidated Financial Statements regarding the value of our assets in foreign countries.
Risks Inherent in an Investment in Us
Investment in us is speculative.
We will continue to incur significant capital and operating expenditures while we develop infrastructure for our supply chain and other future projects. We will need to invest significant amounts of additional capital to implement our strategy. We could experience delays beyond the expected development period, which could increase the level of operating losses and negative operating cash flows. Our future liquidity may also be affected by the timing of construction financing availability in relation to the incurrence of construction costs and other outflows and by the timing of receipt of cash flows under our customer contracts in relation to the incurrence of project and operating expenses. Our strategy may not be successful, and if unsuccessful, we may be unable to modify it in a timely and successful manner.
We continue to develop and implement various policies and procedures including those related to data privacy and other matters. We cannot provide any assurance that we will be able to implement our strategy on a timely basis, if at all, or achieve our internal model or that our assumptions will be accurate. Accordingly, your investment in our company is speculative and subject to a high degree of risk, and you should understand that there is a possibility of the loss of your entire investment.
We may require additional funding from various sources, which may not be available or may only be available on unfavorable terms.
We have significant working capital requirements, primarily driven by the delay between the purchase of and payment for natural gas and the payment terms that we offer our customers. Differences between the date when we pay our LNG supply and service providers and the date when we receive payments from our customers may adversely affect our liquidity and our cash flows. Further, we expect our working capital needs to increase to fund capital expenditures as our operations increase, and our
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net working capital may not be sufficient to expand our operations in accordance with our strategy. In the future, we may pursue offerings of debt or equity securities or rely on future borrowings of debt to provide additional working capital.
If we are unable to secure additional funding, or if it is only available on terms that we determine are not acceptable, we may be forced to delay, reduce or eliminate parts of our business development efforts, or we may otherwise be unable to fully execute our business plan, and our business, financial condition or results of operations may be adversely affected. Our ability to raise additional capital will depend on financial, economic and market conditions and other factors, many of which are beyond our control. We cannot assure you that such additional funding will be available on acceptable terms, or at all. A variety of factors beyond our control could impact the availability or cost of capital, including domestic or international economic conditions, increases in key benchmark interest rates and/or credit spreads, the adoption of new or amended banking or capital market laws or regulations, the re-pricing of market risks and volatility in capital and financial markets, risks relating to the credit risk of our customers and the jurisdictions in which we operate, as well as general risks, including limitations on investment capital, applicable to the energy sector, which may not be available as needed, or may be available in more limited amounts or on more expensive or otherwise unfavorable terms. In the event any of the lenders under these potential debt instruments were unable to perform on its commitments, we may need to seek replacement financing.
If we do not have sufficient working capital, we may not be able to pursue our growth strategy, respond to competitive pressures or fund key strategic initiatives which, in turn, may harm our business, financial condition and results of operations.
We may continue to incur losses over the next several years and may never achieve or maintain profitability.
We may continue to incur significant expenses and operating losses for the foreseeable future. The net losses the Company incurs may fluctuate significantly from quarter to quarter. We anticipate that our expenses will increase substantially if and as we:
• seek to identify additional expansion of business operation opportunities;
• establish a sales, marketing and distribution infrastructure to commercialize our business and products; and
• add operational, financial and management information systems and personnel, including personnel to support our business development and planned future commercialization efforts.
To become and remain profitable, we must develop and execute our strategy which will require us to be successful in a range of challenging activities. We may never succeed in these activities and, even if we do, may never generate revenues that are significant or large enough to achieve profitability. Our failure to become and remain profitable would decrease the value of the Company and could impair our ability to raise capital, maintain our existing business operations and development efforts, expand our business or continue our operations and may require us to raise additional capital that may dilute the ownership interest of common stock holders.
Because we are currently dependent upon a limited number of customers, the loss of a significant customer or inability of a significant customer to perform under contract could adversely affect our operating results and ability to generate cash flows.
Our near term ability to generate cash is both dependent on the small number of customers’ continued willingness and ability to perform their obligations under their respective contracts. In the event one of our significant customer fails to perform its obligations under their contracts, our operating results, cash flow and liquidity could be materially and adversely affected, even if we were ultimately successful in seeking damages from any of these customers in the event of a breach of the contract. For the year ended December 31, 2022, Aggreko Plc and Minera Penmont each accounted for more than 10% of our revenues.
Any material nonpayment or nonperformance by our customers could have a materially adverse effect on our financial condition and results of operations. Risks of nonpayment and nonperformance by customers are a consideration in our businesses, and our credit procedures and policies may be inadequate to sufficiently eliminate customer credit risk. As part of our business strategy, we intend to target customers who have not been traditional purchasers of natural gas, including customers in developing countries, and these customers may have greater credit risk than typical natural gas purchasers. Therefore, we may request prepayments in advance for purchasing LNG or our services for certain customers that pose a greater customer credit risk than other companies in the industry. Further, adverse economic conditions in the energy industry increase the risk of nonpayment and nonperformance by customers, particularly customers that have sub-investment grade credit ratings or significant counterparty risks. Finally, we may be unable to collect amounts due or damages we are awarded from certain customers, and our efforts to collect such amounts may damage our customer relationships.
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Finally, our customer contracts contain various termination rights, including, without limitation:
• for no cause by giving notice as agreed in the contract;
• upon the occurrence of certain events of force majeure;
• if we fail to make available specified scheduled cargo quantities;
• upon the occurrence of certain uncured payment defaults;
• upon the occurrence of an insolvency event;
• upon the occurrence of certain uncured, material breaches; and
• if we fail to commence commercial operations within the agreed timeframes.
Contracts that we enter into in the future may contain similar provisions. If any of these current or future contracts with significant customers are terminated, such termination could have a material adverse effect on our business, contracts, financial condition, operating results, cash flows, liquidity and ability to execute our strategy.
Raising additional capital may cause dilution to our stockholders or restrict our operations.
We expect to finance our cash needs through a combination of equity offerings and debt financings. To the extent that we raise additional capital through the sale of equity or convertible debt securities, the ownership interest of common stock holders will be diluted, and the terms of these securities may include liquidation or other preferences that adversely affect the rights of common stockholders. Debt financing and preferred equity 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. We cannot be certain that additional funding will be available on acceptable terms, or at all. If we are unable to raise additional funds when needed, we may be required to delay, limit, reduce or terminate our product development or future commercialization efforts.
Our common stock is thinly traded with a limited market and volatile.
There is currently a limited public market for our common stock. Holders of our common stock may, therefore, have difficulty selling their shares, should they decide to do so. The market price of our shares may not necessarily bear any relationship to our book value, assets, past operating results, financial condition or any other established criteria of value, and may not be indicative of the market price for our common stock in the future. Further, the purchase or sale of relatively small common stock positions may result in disproportionately large increases or decreases in the price of our common stock. There can be no assurance that a more active market for our common stock will develop, or if one should develop, that it will be sustained. There can be no assurances that any shares which are purchased will be sold without incurring a loss.
In addition to being thinly traded, market prices for securities of energy producers, distributors and other businesses in the energy generation and distribution industry have been particularly volatile. Factors that may cause the market price of our common stock may to fluctuate include, but are not limited to:
• period-to-period fluctuations in our financial results from current and any future business operations;
• issues in developing and expanding our LNG infrastructure and facilities, and service and delivery operations;
• our ability to obtain regulatory approvals for LNG business expansions, and delays or failures to obtain such approvals;
• the entry into, or termination of, key agreements, including key commercial partner agreements;
• the initiation of, material developments in, or conclusion of litigation to enforce or defend any of our rights under our material contracts or defend against the rights of others;
• the introduction of technological innovations or new energy products or methods of distribution that compete with our potential products;
• the loss of key employees;
• changes in estimates or recommendations by securities analysts, if any, who cover our common stock;
•fluctuations in actual and anticipated future commodity prices; and
• general and industry-specific economic conditions that may affect our research and development expenditures.
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In the past, following periods of volatility in the market price of a company’s securities, stockholders have often instituted class action securities litigation against those companies. Such litigation, if instituted, could result in substantial costs and diversion of management attention and resources, which could significantly harm our profitability and reputation. Our insurance coverage may not be sufficient to cover all costs and damages.
We are a “smaller reporting company” and, as a result of the reduced disclosure and governance requirements applicable to smaller reporting companies, our common stock may be less attractive to investors.
We are a “smaller reporting company,” within the meaning of the Exchange Act. As a “smaller reporting company,” we are subject to lesser disclosure obligations in our SEC filings compared to other issuers. Specifically, “smaller reporting companies” are able to provide simplified executive compensation disclosures in their filings, are exempt from the provisions of Section 404(b) of the Sarbanes-Oxley Act requiring that independent registered public accounting firms provide an attestation report on the effectiveness of internal control over financial reporting, and have certain other decreased disclosure obligations in their SEC filings, including, among other things, only being required to provide two years of audited financial statements in annual reports. Decreased disclosures in our SEC filings due to our status a “smaller reporting company” may make it harder for investors to analyze our operating results and financial ability to execute our strategy and make our common stock less attractive to investors. If some investors find our common stock less attractive as a result, there may be a less active trading market for our common stock, and our stock price may be more volatile.
Casey Crenshaw has voting control over our Company.
As of December 31, 2022, Casey Crenshaw has beneficial ownership of 71.9% of the outstanding shares of our common stock. As a result, Mr. Crenshaw may control all matters that require stockholder approval, as well as our management and affairs. For example, Mr. Crenshaw may unilaterally approve the election of directors and any merger, consolidation or sale of all or substantially all of our assets. This concentration of ownership makes it unlikely that any other holder or group of holders of our common stock will be able to affect the way the Company is managed or the direction of its business. Mr. Crenshaw’s interests with respect to matters potentially or actually involving or affecting the Company, such as future acquisitions, financings and other corporate opportunities and attempts to acquire the Company, may conflict with the interests of our other stockholders. This concentration of ownership control may:
• delay, defer or prevent a change in control;
• entrench management;
• involve related party transactions we cannot assure you will be in the best interest of the stockholders;
• impede a merger, consolidation, takeover or other business combination involving the company that other stockholders may desire; or
•exempt us from certain corporate governance requirements that provide protection to stockholders of other public companies.
This concentration of stock ownership may adversely affect the trading price of our common stock to the extent investors perceive a disadvantage in owning stock of a company with a significant stockholder.
In addition to Mr. Crenshaw’s ability to control all matters that require stockholder approval, provisions in our corporate charter documents and under Florida law could make an acquisition of the Company, which may be beneficial to stockholders, more difficult and may prevent attempts by our stockholders to replace or remove our current management.
Provisions in our corporate charter and bylaws may discourage, delay or prevent a merger, acquisition or other change in control of our Company that stockholders may consider favorable, including transactions in which our stockholders might otherwise receive a premium for their shares. These provisions could also limit the price that investors might be willing to pay in the future for shares of our common stock, thereby depressing the market price of our common stock. In addition, because the Board of Directors is responsible for appointing the members of our management team, these provisions may frustrate or prevent
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any attempts by stockholders to replace or remove the current management by making it more difficult for stockholders to replace members of the Board of Directors. Among other things, these provisions:
• allow the authorized number of our directors to be fixed only by resolution of our Board of Directors;
• establish advance notice requirements for stockholder proposals that can be acted on at stockholder meetings and nominations to our Board of Directors;
• require that stockholder actions must be effected at a duly called stockholder meeting or by our stockholders by written consent of the holders of over 50% of the votes that all our stockholders would be entitled to cast;
• authorize our Board of Directors to issue preferred stock without stockholder approval, which could be used to institute a shareholder rights plan, or so-called “poison pill,” that would work to dilute the stock ownership of a potential hostile acquirer, effectively preventing acquisitions that have not been approved by our Board of Directors;
• require the proposal of our Board of Directors and the approval of the holders of over 50% of the votes that all our stockholders would be entitled to cast to amend our charter; and
• require the approval of the holders of over 50% of the votes that all our stockholders would be entitled to cast to amend our bylaws.
Moreover, because we are incorporated in Florida, we are governed by the provisions of Section 607.0901 and 607.0902 of the Florida Business Corporation Act. In general, Section 607.0901 regulates certain transactions between a corporation and an “interested shareholder,” one who beneficially owns more than ten percent of the corporation’s outstanding voting shares. The statute provides significant protection to minority shareholders by assuring that the transactions covered by the statute are either (a) procedurally fair (i.e., the transaction is approved by disinterested directors or disinterested shareholders) or (b) substantively fair (i.e., result in a fair price to the shareholders).
In general, Section 607.0902 focuses on the acquisition of “control shares” in an issuing public corporation. When control shares are acquired in a “control share acquisition,” the shares do not have voting rights. Voting rights may be restored only if the bidder files an acquiring person statement and requests a shareholder meeting to vote on whether the bidder’s shares should be accorded voting rights. Voting rights are restored only to the extent approved by the disinterested shareholders (which excludes both the bidder and management shareholders). Alternatively, the bidder’s shares will have voting rights if the acquisition is approved by the target company’s board of directors. As a result, mergers or other takeover or change in control attempts of us may be discouraged or prevented.
We do not anticipate that we will pay any cash dividends in the foreseeable future.
The current expectation is that for the foreseeable future, we will retain our future earnings to fund the development and growth of our business. Any payment of future dividends will be at the discretion of our Board of Directors and will depend on, among other things, our earnings, financial condition, capital requirements, level of indebtedness, statutory and contractual restrictions applying to the payment of dividends and other considerations that the Board of Directors deems relevant. As a result, capital appreciation, if any, of our common stock will be the sole source of gain, if any, for any stockholders for the foreseeable future.
Our Chinese joint venture, BOMAY, has a limited life and is subject to risk that it may not be renewed.
We hold a 40% interest in BOMAY Electric Industries Company, Ltd. (“BOMAY”), which builds electrical systems for sale in China. The majority partner in this foreign joint venture is Baoji Oilfield Machinery Co., Ltd. (a subsidiary of China National Petroleum Corporation), who owns 51%. The remaining 9% is owned by AA Energies, Inc. Our joint venture, BOMAY, has a finite life that is set to terminate in 2028. The joint venture may be terminated earlier for valid business reasons including force majeure. In the event the joint venture is to be terminated, either party may acquire the other parties’ interests and continue the operations of the joint venture. Additionally, the term of the joint venture may be extended upon agreement of all parties subject to approval from the relevant Chinese authority six months before expiration of the venture. At this time, Stabilis has no indication that the joint venture will not be extended; however, U.S. and Chinese political relations are strained and we can provide no assurance that such an extension will occur. The balance of our investment in BOMAY at December 31, 2022 was $11.6 million accounted for using the equity method of accounting and is subject to risk. See Note 8 of the Notes to Consolidated Financial Statements for further discussion or our investment in BOMAY.
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General Risk Factors
Weakened global macro-economic and geopolitical conditions may adversely affect our industry, ability to access capital, business and results of operations.
Our overall performance depends in part on worldwide macro-economic and geopolitical conditions. The United States has experienced cyclical downturns from time to time in which economic activity was impacted by falling demand for a variety of goods and services, restricted credit, poor liquidity, reduced corporate profitability, volatility in credit, equity and foreign exchange markets, bankruptcies and overall uncertainty with respect to the economy. These global macro-economic conditions can suddenly arise and the full impact of such conditions can remain uncertain. In addition, geopolitical developments, such as existing and potential trade wars and other events beyond our control, such as the COVID-19 pandemic, can increase levels of political and economic unpredictability globally and increase the volatility of global financial markets. Weakened global macro-economic conditions could cause the demand for and price of our products to decrease. In addition, restricted credit conditions could limit our ability to access capital on favorable terms, if at all. A deterioration in the macro-economic could have a material adverse effect on our business, financial position, results of operations and liquidity.
Increased inflation or periods of prolonged inflation may adversely impact the economy, our industry and results of operations.
The Company experienced higher than normal inflationary pressure during 2022 which we expect to continue into 2023. Specifically, costs for fuel, repairs, maintenance, electricity, wages for skilled labor and insurance continue to increase. Increases in economic growth and demand have been limited by skilled labor and transportation resources within our markets resulting in a period of increasing costs. While we pass a significant portion of the cost of natural gas and transportation on to our customers, we are not able to pass through all costs which has resulted in margin pressure and decreasing margins. No assurances can be made about future price trends, and the ultimate extent and effects of these impacts are difficult to estimate; however, continued periods of increasing costs could adversely impact our future results and operating cash flows.
The spread of a new contagious illness such as COVID-19 or resurgence of a COVID-19 variant, may adversely affect our business, operations and financial condition.
The responses of governmental authorities and companies across the world to reduce the spread of the COVID-19 pandemic significantly reduced global economic activity. Various containment measures, included business closures, work stoppages, work-from-home directives, shuttering of public spaces and events and/or severe restrictions of global and regional travel, among others, while aiding in the prevention of further spread of the virus, resulted in the slowing of economic growth, reduced demand for crude oil and natural gas and the disruption of global manufacturing supply chains. The impacts of a new contagious illness similar to COVID-19 or resurgence of a new COVID-19 variant remain unknown, but may include, among others:
•deterioration of worldwide, regional or national economic conditions and activity, which could further reduce or prolong the sustained low energy prices, or adversely affect global demand for LNG and natural gas;
•disruptions to our operations as a result of the potential health impact on our employees and crew, and on the workforces of our customers and business partners;
•potential reduced cash flows and financial condition, including potential liquidity constraints;
•negative impact on the credit worthiness of our customers and contractual counterparties;
•reduced access to capital, including the ability to refinance any existing obligations, as a result of any credit tightening generally or due to continued declines in global financial markets;
•disruptions, delays or cancellations in the construction of new LNG and natural gas projects, which could limit or adversely affect our ability to pursue future growth opportunities; and
•potential deterioration in the financial condition and ability to deliver LNG to our customers or joint venture partners, or attempts by customers or third parties to invoke force majeure contractual clauses as a result of delays or other disruptions.
Our facilities in George West, Texas and Port Allen, Louisiana, and our 40% interest in BOMAY are critical infrastructure and continued to operate during the COVID-19 pandemic. In the event another contagious illness similar to COVID-19 were to create another pandemic, we expect that we would continue to operate which means that we would be required to keep our employees who operate our facilities safe and minimize unnecessary risk of exposure to the illness. In the past, we have taken and continue to take certain precautionary measures to protect the continued safety and welfare of our employees who continue to
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work at our facilities which include the modification of certain business and workforce practices and work from home policies where appropriate. These measures were taken to prevent an outbreak at our facilities but may result in increased costs. Further, if a large number of our employees in those critical facilities were to contract a contagious disease at the same time, our operations could be adversely affected.
A cyber incident could result in information theft, data corruption, operational disruption, operational delays and/or financial loss.
Our business has become increasingly dependent on digital technologies to conduct day-to-day operations. We depend on digital technology to manage our operations and other business processes and to record financial, operating and other sensitive data. Our business partners, including vendors, customers and financial institutions, are also dependent on digital technology. Our technologies, systems networks, and those of our business partners, may become the target of cyber-attacks or information security breaches that could result in the disruption of our business operations. As cyber threats continue to evolve, we may be required to expend significant additional resources to continue to modify or enhance our protective measures or to investigate and remediate any cyber vulnerabilities. A cyber incident could lead to losses of sensitive information, critical infrastructure, personnel, or capabilities essential to our operations and could have a material adverse effect on our reputation, business, financial condition and results of operations.
From time to time, we may be involved in legal proceedings and may experience unfavorable outcomes.
In the future we may be subject to material legal proceedings in the course of our business, including, but not limited to, actions relating to contract disputes, business practices, intellectual property and other commercial and tax matters. Such legal proceedings may involve claims for substantial amounts of money or for other relief or might necessitate changes to our business or operations, and the defense of such actions may be both time consuming and expensive. Further, if any such proceedings were to result in an unfavorable outcome, it could have a material adverse effect on our business, financial position and results of operations.
We will continue to incur costs and demands upon management as a result of complying with the laws and regulations affecting public companies.
We incur and will continue to incur significant legal, accounting and other expenses that Stabilis Solutions, Inc. and its subsidiaries did not incur as private companies, including costs associated with public company reporting requirements. We also incur costs associated with corporate governance requirements, including requirements under the Sarbanes-Oxley Act and rules and regulations promulgated by the SEC. These rules and regulations increase our legal and financial compliance costs and make some activities more time-consuming and costly. These rules and regulations may also make it difficult and expensive for us to obtain directors’ and officers’ liability insurance. As a result, it may be more difficult to attract and retain qualified individuals to serve on our Board of Directors or as executive officers, which may adversely affect investor confidence in us and could cause our business or stock price to suffer.
If we fail to maintain proper and effective internal control over financial reporting, our operating results and our ability to operate our business could be harmed.
Ensuring that we have adequate internal financial and accounting controls and procedures in place so that we can produce accurate financial statements on a timely basis is a costly and time-consuming effort that needs to be re-evaluated frequently. Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements in accordance with U.S. GAAP.
In addition, we are required to be compliant with public company internal control requirements mandated under Section 302 and 906 of the Sarbanes-Oxley Act. We are implementing measures designed to improve our internal controls over financial reporting, including the hiring of accounting personnel and establishing new accounting and financial reporting procedures to establish an appropriate level of internal controls over financial reporting. Implementing any appropriate changes to our internal controls may distract our officers and employees, entail substantial costs to modify existing processes and take significant time to complete. These changes may not, however, be effective in maintaining the adequacy of our internal controls, and any failure to maintain that adequacy, or consequent inability to produce accurate financial statements on a timely basis, could increase operating costs and harm the business. In addition, investors’ perceptions that our internal controls are inadequate or that we are unable to produce accurate financial statements on a timely basis may harm our stock price.
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ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
The corporate headquarters of Stabilis are located at 11750 Katy Freeway, Suite 900, Houston, TX 77079. Stabilis leases its general office space at its corporate headquarters from a related party, on a month-to-month basis. On July 30, 2021, the Company terminated its former office lease for a fixed settlement, payable in 43 monthly payments. In accordance with the termination, the Company was released from all future rights and obligations under the lease.
Stabilis or its subsidiaries currently own or lease the following principal properties:
| Facility Location | Use | Size | Leased or Owned | Expiration of Lease | ||||||||||
| Houston, TX | Office | 13,000 sq. ft. | Leased | Month to month | ||||||||||
| Monterrey, Mexico | Office | 1,888 sq. ft. | Leased | August 14, 2024 | ||||||||||
| George West, TX | LNG Plant | 3,400 sq. ft. on 31.04 acres | Owned | N/A | ||||||||||
| Port Allen, LA | LNG Plant | 2,400 sq. ft. on 18.98 acres | Owned | N/A | ||||||||||
The Company also leases various trailer storage sites that are not material to the Company's operations on a short term basis in California, Colorado and Florida to support operations in those areas. We believe that our existing facilities are adequate for our operations and their locations allow us to efficiently serve our customers.
ITEM 3. LEGAL PROCEEDINGS
The Company becomes involved in various legal proceedings and claims in the normal course of business. In management’s opinion, the ultimate resolution of these matters will not have a material effect on our financial position or results of operations.
See Note 14 of the Notes to Consolidated Financial Statements for a discussion of our commitments and contingencies and any outstanding legal matters.
ITEM 4. MINE SAFETY DISCLOSURES
None.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.
Market Information
Our common stock trades under the symbol “SLNG” on The Nasdaq Stock Market LLC.
The Company did not declare or pay cash dividends on common shares in either fiscal year 2022 or 2021. The Company anticipates that, for the foreseeable future, it will retain any earnings for use in the operations of its business.
Holders
As of March 9, 2023, we had 23 holders of record of our common stock and 18,433,655 shares of common stock outstanding, based on information provided by our transfer agent.
Equity Compensation Plan
The information relating to the Company's equity compensation plans required by Item 5 is included in Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters contained herein.
Item 6. RESERVED
Not applicable.
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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the consolidated financial statements and notes thereto included in Item 8. Financial Statements and Supplementary Data of this Form 10-K. Historical results and percentage relationships set forth in the consolidated statements of operations and cash flows, including trends that might appear, are not necessarily indicative of future operations or cash flows.
OVERVIEW
Stabilis Solutions, Inc. and its subsidiaries is an energy transition company that provides turnkey clean energy production, storage, transportation and fueling solutions primarily using liquefied natural gas (“LNG”) to multiple end markets across North America. We provide LNG solutions to customers in diverse end markets, including aerospace, agriculture, energy, industrial, marine bunkering, mining, pipeline, remote power, and utility markets. LNG can be used to deliver natural gas to locations where pipeline service is unavailable, has been interrupted, or needs to be supplemented. LNG can also be used to replace a variety of alternative fuels, including distillate fuel oil and propane, among others, to provide environmental and economic benefits. Increasingly, LNG is being utilized as a transportation fuel in the marine industry and as a propellant in the private rocket launch sector. We believe that these fuel markets are large and provide significant opportunities for LNG usage.
We believe that LNG as well as other clean energy solutions will provide an important balance between environmental sustainability, security and accessibility, and economic viability when compared to both renewables and other traditional hydrocarbon-based fuels and will play a key role in the energy transition.
The Company generates revenue by selling and delivering LNG to our customers, renting cryogenic equipment and providing engineering and field support services. We sell our products and services separately or as a bundle depending on the customer’s needs. Pricing depends on market pricing for natural gas and competing fuel sources (such as diesel, fuel oil, and propane among others), as well as the customer’s purchased volume, contract duration and credit profile.
LNG Production and Sales—Stabilis builds and operates cryogenic natural gas processing facilities, called “liquefiers,” which convert natural gas into LNG through a purification and multiple stage cooling process. We currently own and operate a liquefier that can produce up to 100,000 LNG gallons per day in George West, Texas and a liquefier that can produce up to 30,000 LNG gallons per day in Port Allen, Louisiana. We also purchase LNG from third-party production sources which allows us to support customers in markets where we do not own liquefiers. We make the determination of LNG and transportation supply sources based on the cost of LNG, the transportation cost to deliver to regional customer locations, and the reliability of the supply source.
Transportation and Logistics Services—Stabilis offers our customers a “virtual natural gas pipeline” by providing turnkey LNG transportation and logistics services in North America. We deliver LNG to our customers’ work sites from both our own production facilities and our network of third-party production sources located throughout North America. We own a fleet of cryogenic trailers to transport and deliver LNG. We also outsource similar equipment and transportation services from qualified third-party providers as required to support our customer base.
Cryogenic Equipment Rental—Stabilis operates a fleet of mobile LNG storage and vaporization assets, including: transportation trailers, electric and gas-fired vaporizers, ambient vaporizers, storage tanks, and mobile vehicle fuelers. We also own several stationary storage and regasification assets. We believe this is one of the largest fleets of small-scale LNG equipment in North America. Our fleet consists primarily of trailer-mounted mobile assets, making delivery to and between customer locations more efficient. We deploy these assets on job sites to provide our customers with the equipment required to transport, store, and consume LNG in fueling operations. Our equipment is designed specifically for use in small-scale LNG applications and includes the safety and operational features that our customers and our regulators require.
Engineering and Field Support Services—Stabilis has experience in the safe, cost effective, and reliable use of LNG in multiple customer applications. We have also developed many processes and procedures that we believe improve our customers’ use of LNG in their operations. Our engineers help our customers design and integrate LNG into their fueling operations and our field service technicians help our customers mobilize, commission and reliably operate on the job site.
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Recent Developments:
U.S. Department of Energy ("DOE") Approval to Export LNG
During the third quarter of 2022, Stabilis received authorization from the DOE to export domestically produced LNG to all free trade and non-free trade countries, including Asian, European, and Latin American importing nations for up to 51.75 billion cubic feet per year of natural gas equivalent. The authorization is for a term of 28 years. Stabilis did not make any exports under this approval during the year ended December 31, 2022. This authorization supplements our ability to export LNG to Mexico and Canada via truck through an export licenses from the DOE and from the National Energy Board of Canada (“NEB”).
Sale of Brazil Operations and Discontinued Operations
On October 31, 2022, the Company entered into a sales agreement and closed on the sale of its operations in Brazil (the "Brazil Operations") to its Brazil management team for approximately $0.9 million which resulted in discontinued operations presentation of the Brazil Operations and an impairment charge of $1.4 million measured as the estimated fair value of $0.9 million (calculated as the estimated net proceeds that would be received in an orderly and timely sale of the operations) less the carrying value of the Brazil net assets. See also Note 2 in the Notes to Consolidated Financial Statements for further discussion of the Company's discontinued operations and sale of the Brazil Operations.
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RESULTS OF OPERATIONS
Stabilis supplies LNG to multiple end markets in North America and provides turnkey fuel solutions to help users of propane, diesel and other crude-based fuel products convert to LNG. The sale of the Brazil Operations represents all of the revenues and expenses previously reported within the Company's Power Delivery segment with the exception of the Company's equity method investment in BOMAY. Further, the Company also believes that the sale of the Brazil Operations meets the criteria to be reported as discontinued operations. As a result, the Company believes that it has one reporting segment and the operating results presented in the tables below have been recast to separately present the revenues and expenses related to the Brazil Operations as discontinued operations for all periods presented.
The comparative tables below reflect our consolidated operating results for the year ended December 31, 2022 (the “Current Year”) as compared to the year ended December 31, 2021 (the “Prior Year”) (amounts in thousands, except percentages). Corporate allocations of $0.1 million for the Prior Year that were previously reported within the Company's Power Delivery Segment have been reclassified to continuing operations. For the Prior Year, $1.9 million of expense previously classified as selling, general and administrative expense was reclassified to costs of revenues, and $0.3 million was reclassified from costs of LNG product to costs of rental, service and other to conform to Current Year presentation.
| Consolidated Results | Year Ended December 31, | Change | % Change | ||||||||||||||||||||
| 2022 | 2021 | ||||||||||||||||||||||
Revenue: | |||||||||||||||||||||||
| Revenues | $ | 98,823 | 69,171 | 29,652 | 42.9 | ||||||||||||||||||
Operating expenses: | |||||||||||||||||||||||
| Costs of revenues | 77,694 | 55,216 | 22,478 | 40.7 | |||||||||||||||||||
| Change in unrealized loss on natural gas derivatives | 878 | — | 878 | n/a | |||||||||||||||||||
| Selling, general and administrative | 13,191 | 13,792 | (601) | (4.4) | |||||||||||||||||||
| Gain on disposal of fixed assets | (34) | (24) | (10) | (41.7) | |||||||||||||||||||
| Depreciation | 8,664 | 8,894 | (230) | (2.6) | |||||||||||||||||||
| Impairment of right-of-use lease asset | — | 376 | (376) | n/a | |||||||||||||||||||
| Total operating expenses | 100,393 | 78,254 | 22,139 | 28.3 | |||||||||||||||||||
| Loss from operations before equity income | (1,570) | (9,083) | 7,513 | 82.7 | |||||||||||||||||||
| Net equity income from foreign joint ventures’ operations: | |||||||||||||||||||||||
Income from investments in foreign joint ventures | 1,881 | 2,146 | (265) | (12.3) | |||||||||||||||||||
| Foreign joint ventures' operations related expenses | (283) | (363) | 80 | 22.0 | |||||||||||||||||||
| Net equity income from foreign joint ventures’ operations | 1,598 | 1,783 | (185) | (10.4) | |||||||||||||||||||
| Income (loss) from operations | 28 | (7,300) | 7,328 | 100.4 | |||||||||||||||||||
Other income (expense): | |||||||||||||||||||||||
Interest expense, net | (591) | (324) | (267) | (82.4) | |||||||||||||||||||
Interest expense, net - related parties | (179) | (577) | 398 | 69.0 | |||||||||||||||||||
| Other income (expense) | (185) | 1,058 | (1,243) | 117.5 | |||||||||||||||||||
Total other income (expense) | (955) | 157 | (1,112) | n/a | |||||||||||||||||||
| Loss from continuing operations before income tax expense | (927) | (7,143) | 6,216 | 87.0 | |||||||||||||||||||
Income tax expense | 265 | 487 | (222) | (45.6) | |||||||||||||||||||
| Net loss from continuing operations | (1,192) | (7,630) | 6,438 | 84.4 | |||||||||||||||||||
| Loss from discontinued operations, net of income taxes of $149 and $321, respectively | (1,994) | (168) | (1,826) | n/a | |||||||||||||||||||
| Net loss | $ | (3,186) | $ | (7,798) | $ | 4,612 | 59.1 | % | |||||||||||||||
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Revenue
During the Current Year revenues increased $29.7 million, or 43%, compared to the Prior Year. The increase in revenues primarily related to:
•Additional LNG gallons delivered in the Current Year compared to the Prior Year;
•Increased natural gas prices during the Current Year compared to the Prior Year;
•Increased pricing charged to our customers in response to cost increases from inflationary pressures; and
•Increases in rental, service, and other revenue related to additional projects with equipment and higher labor revenues.
Operating Expenses
Costs of revenues. Cost of revenues increased $22.5 million, or 41%, in the Current Year compared to the Prior Year. The increase in cost of revenues was attributable to:
•Additional LNG gallons delivered during the Current Year compared to the Prior Year;
•Increased natural gas prices during the Current Year compared to the Prior Year;
•Inflationary pressures, including increased transportation costs and increased liquefaction costs, personnel, electricity and other higher costs; and
•Increased costs of rental, service, and other revenue primarily related to increased labor and equipment rentals to support the increase of additional projects (primarily for marine bunkering).
As a percentage of revenue, these costs decreased from 80% in the Prior Year to 79% in the Current Year.
Change in unrealized loss on natural gas derivatives. The Company incurred an unrealized loss of $0.9 million in the Current Year on its natural gas derivatives. The unrealized loss was due to lower future natural gas prices at December 31, 2022 as compared to when the natural gas derivatives were purchased. The Company had no derivatives in the Prior Year. See also Note 5 in the Notes to the Consolidated Financial Statements for a further discussion of our derivatives.
Selling, general and administrative. Selling, general and administrative expense decreased $0.6 million, or 4%, during the Current Year as compared to the Prior Year. During the Prior Year, we recorded $2.2 million for the immediate vesting of restricted stock as well as $0.8 million in severance and legal costs related to our executive transition; and $0.3 million related to an expense of previously capitalized engineering drawings. These savings were partially offset by Current Year increases in stock-based compensation, increased incentive compensation, increased headcount associated with revenue growth and increased legal and accounting fees associated with our registration statement filings during the Current Year.
Gain on the disposal of fixed assets. There were no significant gains or losses from disposal of fixed assets in the Current Year or the Prior Year. Gain on disposal of fixed assets in the Current Year was $34 thousand compared to $24 thousand in the Prior Year.
Depreciation. Depreciation expense in the Current Year was comparable to the Prior Year with a slight decrease in depreciation expense in the Current Year due to assets reaching the end of their depreciable lives, partially offset by a full year of depreciation expense related to our Port Allen facility in the Current Year as the facility was acquired on June 1, 2021.
Impairment of right-of-use lease asset. During the Prior Year, we recorded an impairment of $0.4 million related to the settlement and release of our Houston office lease. See Note 11 of the Notes to Consolidated Financial Statements for additional discussion of our lease settlement.
Net Equity Income From Foreign Joint Ventures' Operations. Income from investments in foreign joint ventures decreased by $0.2 million, or 10%, in the Current Year compared to the Prior Year primarily due to business contraction in China.
Other Income (Expense)
Interest expense, net. Interest expense increased by $0.3 million in the Current Year primarily due to interest on additional borrowings under the Company's advancing loan with AmeriState Bank.
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Interest expense, net - related parties. Related party interest expense decreased by $0.4 million during the Current Year as compared to the Prior Year primarily due to amendments to the MG Finance debt which lowered the interest rate from 12% to 6% as well as payments made on related-party debt.
Other income (expense). Other expense was $0.2 million in the Current Year compared to income of $1.1 million in the Prior Year. Prior Year income related to the Paycheck Protection Program loan forgiveness.
Income tax expense. The Company incurred state and foreign income tax expense of $0.3 million during the Current Year primarily related to foreign taxes paid in connection with the cash dividend received from our BOMAY joint venture and foreign taxes incurred from our operations in Mexico. The Company incurred state income and foreign tax expense of $0.5 million in the Prior Year. No U.S. federal income tax benefit was recorded for the Current Year or Prior Year as any net U.S. deferred tax assets generated from operating losses were offset by a change in the Company's valuation allowance on net deferred tax assets.
Discontinued Operations. Loss from discontinued operations, net of tax was $2.0 million and $0.2 million for the Current Year and the Prior Year, respectively. The Current Year included the impairment of $1.4 million recorded as a result of the sale of the Brazil Operations and reclassification of $0.6 million of cumulative foreign exchange losses into income, which was previously included within accumulated other comprehensive income. See Note 2 in the Notes to Consolidated Financial Statements for further discussion of the Company's discontinued operations.
SEASONALITY AND INFLATION
Seasonality
We did not experience significant variations in volume of LNG delivered to our customers resulting from seasonal variations during 2022. However, our revenues are susceptible to variations due to changes in the price of natural gas as we pass this cost onto our customer. The price of natural gas can fluctuate at any time during the year due to isolated factors, but on average, natural gas prices tend to be higher in peak winter and peak summer months when heating and cooling demand is seasonally higher.
Inflation
The Company experienced higher than normal inflationary pressure during 2022 which we expect to continue into 2023. Specifically, costs for fuel, repairs, maintenance, electricity, wages for skilled labor and insurance continue to increase. We have responded with increasing our pricing to our customers. While we pass a significant portion of the cost of natural gas and transportation on to our customers, we are not able to pass through all costs which has resulted in margin pressure. No assurances can be made about future price trends; the ultimate extent and effects of these impacts are difficult to estimate; however, continued periods of increasing costs could adversely impact our future results and operating cash flows.
LIQUIDITY AND CAPITAL RESOURCES
Historically, our principal sources of liquidity have consisted of cash on hand, cash provided by our operations, proceeds received from borrowings under the AmeriState Loan and distributions from our BOMAY joint venture. In prior years, the Company also obtained financing from MG Finance, a related party. During the Current Year, our principal sources of liquidity were cash provided by our operations, the advancing loan facility with AmeriState Bank, cash generated from sale of assets, including the sale of assets held for sale and the Brazil Operations, and deposits received from customers. We have used cash flows generated from operations to invest in fixed assets and increased working capital to support growth as well as to pay interest and principal amounts outstanding under our debt. The Company's sale of the Brazil Operations on October 31, 2022 is not anticipated to adversely impact the Company's future cash flows.
As of December 31, 2022, we had $11.5 million in cash and cash equivalents on hand and $12.3 million, in outstanding debt and finance lease obligations (of which $3.3 million is due in 2023). The Company has a $10.0 million loan facility with $1.0 million available for future draws under the loan facility at December 31, 2022. The Company has also filed a shelf registration statement (described below) which provides the Company the flexibility to raise capital to fund working capital requirements, repay debt and/or fund future transactions.
The Company is subject to substantial business risks and uncertainties inherent in the LNG industry. The Company has implemented a number of cost control measures and increased pricing to customers in response to inflationary costs; however, there is no assurance that the Company will be able to generate sufficient cash flows in the future to sustain itself or to support
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future growth. We have experienced a significant increase in sales since mid-2021. Accordingly, management believes the business will generate sufficient cash flows from its operations along with availability under our loan facility that is sufficient to fund the business for the next twelve months. As we continue to grow, management continues to evaluate additional financing alternatives, however, there is no guarantee that additional financing will be available or available at terms that would be beneficial to shareholders.
Cash Flows
Cash flows provided by (used in) our operating, investing and financing activities are summarized below (in thousands):
| Year Ended December 31, | |||||||||||
| 2022 | 2021 | ||||||||||
Net cash provided by (used in): | |||||||||||
Operating activities | $ | 14,697 | $ | 4,297 | |||||||
Investing activities | (1,917) | (7,520) | |||||||||
Financing activities | (2,253) | 3,012 | |||||||||
| Effect of exchange rate changes on cash | 14 | (119) | |||||||||
| Net increase (decrease) in cash and cash equivalents | 10,541 | (330) | |||||||||
Cash and cash equivalents, beginning of period | 910 | 1,240 | |||||||||
Cash and cash equivalents, end of period | $ | 11,451 | $ | 910 | |||||||
Operating Activities
Net cash provided by operating activities totaled $14.7 million and $4.3 million for the twelve months ended December 31, 2022 and 2021, respectively. The increase in net cash provided by operating activities of $10.4 million as compared to the Prior Year was primarily attributable to increased revenues and improved profitability when excluding noncash items such as stock-based compensation, depreciation and impairment charges.
Investing Activities
Net cash used in investing activities totaled $1.9 million and $7.5 million for the twelve months ended December 31, 2022 and 2021, respectively. The decrease in net cash used in the Current Year was primarily due to the acquisition of the LNG plant in Port Allen, Louisiana and purchases of vaporizers and other LNG equipment in the Prior Year. Additionally, the Company received proceeds of $2.0 million from the sale of certain CNG assets in Mexico and $0.2 million from the sale of the Brazil Operations.
Financing Activities
Net cash used in financing activities totaled $2.3 million for the twelve months ended December 31, 2022 compared to net cash provided by financing activities of $3.0 million for 2021. Cash used by financing activities in the Current Year was primarily attributable to the pay down of debt. Cash provided by financing activities for the Prior Year primarily related to proceeds received from the AmeriState Bank loan facility of $8.0 million, partially offset by payments made on notes payable including from related parties.
Shelf Registration Statement
On April 11, 2022, the Company filed a registration statement on Form S-3 (the "Shelf Registration") which was declared effective on April 26, 2022 and will permit the Company to issue up to $100.0 million in either common stock, preferred stock, warrants or a combination of the above, and gives the Company the flexibility to raise capital to fund working capital requirements, repay debt and/or fund future transactions. On December 16, 2022, the Company filed a prospectus supplement to the Shelf Registration that allows the Company to sell and issue shares of common stock directly to the public "at the market" as permitted in Rule 415 under the Securities Act in the aggregate amount of $16.3 million. As a smaller reporting company, we are subject to General Instruction I.B.6 of Form S-3, which limits the amounts that we may sell under the Shelf Registration to no more than one-third of our public float in any twelve month period as measured in accordance with such instruction. There is no assurance that we will be able to raise capital pursuant to the Shelf Registration on acceptable terms or at all. We made no issuances under the Shelf Registration during the year ended December 31, 2022.
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Future Cash Requirements
Uses of Liquidity and Capital Resources
We require cash to fund our operating expenses and working capital requirements, including costs associated with fuel sales, capital expenditures, debt repayments and repurchases, equipment purchases, maintenance of LNG production facilities, mergers and acquisitions (if any), pursuing market expansion, supporting sales and marketing activities and other general corporate purposes. While we believe we have sufficient liquidity and capital resources to fund our operations and repay our debt, we may elect to pursue additional financing activities such as refinancing existing debt, obtaining new debt, or debt or equity offerings to provide flexibility with our cash management. Certain of these alternatives may require the consent of current lenders or stockholders, and there is no assurance that we will be able to execute any of these alternatives on acceptable terms or at all.
Capital Expenditures
Future capital expenditures will be dependent upon accretive investment opportunities as well as the availability of additional capital at favorable terms which is difficult to predict. At December 31, 2022, we had open purchase orders with approximately $1.0 million remaining related to capital expenditures.
Debt Level and Debt Compliance
We had total indebtedness of $12.3 million (net of debt issuance costs of $0.3 million total indebtedness is $12.0 million) as of December 31, 2022. Expected maturities excluding debt issuance costs at December 31, 2022 are as follows (in thousands).
| 2023 | $ | 3,283 | |||
| 2024 | 857 | ||||
| 2025 | 1,285 | ||||
| 2026 | 1,285 | ||||
| 2027 | 1,285 | ||||
Thereafter | 4,285 | ||||
| Total long-term debt, including current maturities and excluding debt issuance costs | $ | 12,280 | |||
We expect our total interest payment obligations relating to our indebtedness to be approximately $0.6 million for the year ending December 31, 2023. Certain of the agreements governing our outstanding debt, which are discussed in Note 10 of our Consolidated Financial Statements, require compliance with certain financial covenants. As of December 31, 2022, we were in compliance with all of these covenants.
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CONTRACTUAL OBLIGATIONS
We are committed to make cash payments in the future pursuant to certain of our contracts. The following table summarizes certain contractual obligations in place as of December 31, 2022 (in thousands):
| Payments Due By Period | |||||||||||||||||||||||||||||||||||||||||
| Total | 2023 | 2024 | 2025 | 2026 | 2027 | Thereafter | |||||||||||||||||||||||||||||||||||
Term Loan to AmeriState Bank (1) | $ | 8,998 | $ | — | $ | 857 | $ | 1,285 | $ | 1,285 | $ | 1,285 | $ | 4,286 | |||||||||||||||||||||||||||
Interest - AmeriState Bank (1) | 2,558 | 525 | 511 | 440 | 365 | 290 | 427 | ||||||||||||||||||||||||||||||||||
| MG Finance note payable - related party | 2,435 | 2,435 | — | — | — | — | — | ||||||||||||||||||||||||||||||||||
Interest - MG Finance note payable (2) | 78 | 78 | — | — | — | — | — | ||||||||||||||||||||||||||||||||||
| Finance Lease Obligations | 61 | 19 | 42 | — | — | — | — | ||||||||||||||||||||||||||||||||||
| Interest - Finance lease obligations | 6 | 6 | — | — | — | — | — | ||||||||||||||||||||||||||||||||||
Operating Lease Obligations (3) | 255 | 114 | 120 | 21 | — | — | — | ||||||||||||||||||||||||||||||||||
| Insurance and other notes payable | 848 | 848 | — | — | — | — | — | ||||||||||||||||||||||||||||||||||
| Total | $ | 15,239 | $ | 4,025 | $ | 1,530 | $ | 1,746 | $ | 1,650 | $ | 1,575 | $ | 4,713 | |||||||||||||||||||||||||||
______________
(1)Obligation with AmeriState Bank to provide for an advancing term loan facility for working capital needs for our LNG liquefaction plant in Texas in the aggregate principal amount of up to $10.0 million. The term loan facility matures on April 8, 2031 and bears interest at 5.75% per annum through April 8, 2026, and the U.S. prime lending rate plus 2.5% per annum thereafter.
(2)Obligation is a secured promissory note payable to MG Finance, a related party. The note as amended bears interest at 6% and matures in December 2023. The debt is secured by certain equipment of the Company.
(3)The operating lease obligation relates to the former headquarters office space.
See additional discussion of our debt and lease obligations in Notes 10 and 11 of the Notes to Consolidated Financial Statements.
Contingencies
In the normal course of our business, we become involved in various litigation matters. In addition, from time to time we are involved in tax and other disputes with various government agencies. Management has used estimates in determining our potential exposure to these matters and has recorded reserves in our financial statements related thereto as appropriate. It is possible that a change in estimate related to these exposures could occur, but we do not expect such changes in the estimated costs would have a material effect on our business, consolidated financial position or results of operations. See Note 14 to the Notes to Consolidated Financial Statements for further discussion of our contingencies.
Off-Balance Sheet Arrangements
As of December 31, 2022, we had no transactions that met the definition of off-balance sheet arrangements that have or are reasonably likely to have a material current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, cash requirements or capital resources.
NEW ACCOUNTING STANDARDS
See Note 1 of the Notes to Consolidated Financial Statements for further information related to new accounting standards.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The discussion and analysis of our financial condition and results of operations are based on our consolidated financial statements, which have been prepared in accordance with U.S. GAAP. The preparation of these consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosures of contingent assets and liabilities known to exist at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Critical accounting policies are those policies that the Company believes are the most important to the portrayal of the Company's financial condition and results, and require difficult, subjective, or complex judgments, often as a result of the need to make estimates about the effects of matters that are inherently uncertain. We evaluate
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our estimates on an ongoing basis, based on historical experience and on various other assumptions that are believed to be reasonable under the circumstances. There can be no assurance that actual results will not differ from those estimates. The Company has identified the following critical accounting policies as they require significant judgments, estimates or are inherently complex.
Revenue Recognition
The Company recognizes revenue from our contracts in accordance with Accounting Standards Update (“ASU”) 2014-09, Topic 606 “Revenue from Contracts with Customers” (“Topic 606”). Topic 606 requires entities to recognize revenue in a way that depicts the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. Our contracts may contain multiple performance obligations dependent upon the customer. Revenues from contracts with customers are disaggregated into (1) LNG product (2) rental, service, and other, and (3) power delivery.
The Company recognizes revenue associated with the sale of LNG at the point in time when the customer obtains control of the asset. In evaluating when a customer has control of the asset, the Company primarily considers whether the transfer of legal title and physical delivery has occurred, whether the customer has significant risks and rewards of ownership, and whether the customer accepted delivery and a right of payment exists. Revenues from the providing of services, transportation and equipment to customers is recognized as the service is performed.
Revenue is measured as consideration specified in a contract with a customer and excludes any sales incentives and amounts collected on behalf of third parties. The Company recognizes revenue when it satisfies a performance obligation by transferring control over a product or service to a customer. Amounts are billed upon completion of service or transfer of a product and are generally due within 30 days.
LNG product revenue generated includes the revenue from the product and delivery of the LNG to our customer’s location. Product contracts are established by agreeing on a sales price or transaction price for the related item. Product revenue is recognized upon delivery of the related item to the customer, at which point the customer controls the product and the Company has an unconditional right to payment. Payment terms for product contracts are generally within thirty days from the receipt of the invoice. The Company acts as a principal when using third party transportation companies and therefore recognizes the gross revenue for the delivery of LNG. The Company enters into forward sales contracts for the delivery of LNG to its customers. Certain of these sales contracts contain provisions that may meet the criteria of a derivative in the event delivery is not made. These contracts are accounted for under the normal purchase normal sales exclusion under U.S. GAAP and are not measured at fair value each reporting period.
Rental, service and other revenue generated by the Company includes equipment and human resources provided to the customer to support the use of LNG and services in their application. Rental contracts are established by agreeing on a rental price or transaction price for the related piece of equipment and the rental period which is generally daily or monthly. Revenues related to rental of equipment are recognized under Topic 606 and not ASC 842: Leases as the Company maintains control of the equipment that the customer uses and can replace the rented equipment with similar equipment should the rented equipment become inoperable or the Company chooses to replace the equipment for maintenance purposes. Revenue is recognized as the rental period is completed and for periods that cross month end, revenue is recognized for the portion of the rental period that has been completed to date. Payment terms for rental contracts are generally within thirty days from the receipt of the invoice. Performance obligations for rental revenue are considered to be satisfied as the rental period is completed based upon the terms of the related contract. LNG service revenue generated by the Company consists of mobilization and demobilization of equipment and onsite technical support while customers are consuming LNG in their applications. Service revenue is billed based on contractual terms that can be based on an event (i.e. mobilization or demobilization) or an hourly rate. Revenue is recognized as the event is completed or work is done. Payment terms for service contracts are generally within thirty days from the receipt of the invoice. Performance obligations for service revenue are considered to be satisfied as the event is completed or work is done per the terms of the related contract.
Certain of our contracts may include rental or services that may vary upon the customer demands at stated rates within the contract and are satisfied as the work is authorized by the customer and performed by the Company. LNG product sales agreements may include both fixed and variable fees per gallon, but is representative of the stand-alone selling price for LNG at the time the contract was negotiated. We have concluded that the variable LNG fees meet the exception for allocating variable consideration to specific parts of the contract. As such, the variable consideration for these contracts is allocated to each distinct molecule of LNG and recognized when that distinct molecule of LNG is delivered to the customer.
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Power Delivery revenue prior to the sale of the Brazil Operations was generated from time and material projects, consulting services, and the resale of electrical and instrumentation equipment. Revenue is billed based on contractual terms that can be based on an event or an hourly rate. Revenue is recognized as the event is completed or work is done. Payment terms for service contracts are generally within thirty days from the receipt of the invoice. Performance obligations for service revenue are considered to be satisfied as the event is completed or work is done per the terms of the related contract. The resale of electrical and instrumentation equipment is billed upon delivery and are generally due within thirty days from the receipt of the invoice.
Impairment of Long-Lived Assets and Goodwill
The determination and calculation of impairment requires significant judgment regarding estimates of fair value and the projection of future cash flows.
LNG liquefaction facilities, and other long-lived assets held and used by the Company are reviewed periodically for potential impairment whenever events or changes in circumstances indicate that a particular asset’s carrying value may not be recoverable. Recoverability generally is determined by comparing the carrying value for the asset to the expected undiscounted future cash flows of the asset. If the carrying value of the asset is not recoverable, the amount of impairment loss is measured as the excess, if any, of the carrying value of the asset over its estimated fair value. The estimated undiscounted future cash flows are based on projections of future operating results; these projections contain estimates of the value of future contracts that have not yet been obtained, future commodity pricing and our future cost structure, among others. Projections of future operating results and cash flows may vary significantly from actual results. Management reviews its estimates of cash flows on an ongoing basis using historical experience, business plans, overall market conditions, and other factors.
Goodwill represents the excess of the cost of an acquired entity over the fair value of the identifiable assets acquired less liabilities assumed. Intangible assets are assets that lack physical substance (excluding financial assets). Goodwill acquired in a business combination and intangible assets with indefinite useful lives are not amortized, and intangible assets with finite useful lives are amortized. Goodwill and intangible assets not subject to amortization are tested for impairment annually or more frequently if events or changes in circumstances indicate the assets carrying value may not be recoverable. We currently test goodwill for impairment annually in the third quarter unless we determine that a triggering event has occurred requiring an earlier test. During 2022, the Company recorded $0.1 million of goodwill impairment related to the sale of the Brazil Operations which is included within loss from discontinued operations. We completed our annual assessment of goodwill during 2022 and 2021 and determined no additional impairment of goodwill was warranted.
Income Taxes
The calculation of income taxes is inherently complex. Additionally, the determination of the adequacy of any needed valuation allowance requires significant judgment. Deferred income taxes are accounted for under the asset-and-liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance is recorded when it is more likely than not that the deferred tax asset will not be realized.
The Company recognizes the effect of income tax positions only if those positions are more likely than not to be sustained. Recognized income tax positions are measured at the largest amount that is greater than 50% likely of being realized. Changes in recognition or measurement are reflected in the period in which the change in judgment occurs. The Company records interest related to unrecognized tax benefits in interest expense and penalties in selling, general and administrative expenses.
Fair Value Measurements
The determination of fair value requires significant judgements and estimates by management. The Company utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs to the extent possible. The Company determines fair value based on assumptions that market participants would use in pricing an asset or liability in the principal or most advantageous market. When considering market participant assumptions in the fair value measurements, the fair value hierarchy distinguishes between observable and unobservable inputs, which are categorized in one of the following levels in accordance with U.S. GAAP:
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Level 1 Inputs—Unadjusted quoted prices in active markets for identical assets or liabilities accessible to the reporting entity at the measurement date.
Level 2 Inputs—Other than quoted prices included in Level 1 inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the asset or liability.
Level 3 Inputs—Unobservable inputs for the asset or liability used to measure fair value to the extent that observable inputs are not available, thereby, allowing for situations in which there is little, if any, market activity for the asset or liability at the measurement date.
Derivatives
The Company had certain natural gas derivative instruments as of December 31, 2022. The Company recognizes all of its derivative instruments as either assets or liabilities which are recorded at fair value on its Consolidated Balance Sheet. The accounting for changes in the fair value of a derivative instrument depends on whether it qualifies for and has been designated as a hedge and the type of hedge. The Company has not designated its derivative instruments as hedges under U.S. GAAP and all resulting gains and losses from changes in the fair value of its derivative instruments are included within the Consolidated Statements of Operations. The Company determined the fair value of its natural gas derivatives at December 31, 2022 predominantly from broker quotes and are considered a level 2 fair value measurement. The Company did not enter into any derivative transactions for speculative purposes.
The Company enters into forward sales contracts for the delivery of LNG to its customers. Certain of these sales contracts contain provisions that may meet the criteria of a derivative in the event delivery is not made. These contracts are accounted for under the normal purchase normal sales exclusion under U.S. GAAP and are not measured at fair value each reporting period.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Quantitative and Qualitative Disclosures about Market Risk
In the normal course of business, the Company encounters several significant types of market risks including commodity and interest rate risks.
Commodity Price Risk
Due to the nature of the LNG distribution business, the Company has short term agreements with suppliers to contract for LNG purchases. These contracts extend for various period and minimums. The index rate pricing for natural gas may increase or decrease in the future based upon market conditions.
Commodity price risk is the risk of loss arising from adverse changes in market rates and prices. We are able to limit our exposure to fluctuations in natural gas prices by structuring our contract pricing with customers so that it mirrors the volatility in our supply cost with vendors. Our exposure to market risk associated with LNG price changes may adversely impact our business. The Company had certain natural gas derivative instruments as of December 31, 2022 to manage commodity price risk. The Company has not designated its derivative instruments as hedges under U.S. GAAP and all resulting gains and losses from changes in the fair value of its derivative instruments are included within the Consolidated Statements of Operations. See additional discussion in Note 5 of the Notes to Consolidated Financial statements regarding the Company's use of derivatives. The Company did not enter into any derivative transactions for speculative purposes.
Foreign Currency Exchange Rate Risk
We operate a subsidiary in Mexico and maintain an equity method investment in our Chinese joint venture, BOMAY. The functional currency of the Mexican subsidiary is the Mexican Peso. The functional currency of the Chinese joint venture is the Chinese Yuan. The assets and liabilities of the foreign equity investees and foreign subsidiary, denominated in foreign currency, are translated into United States dollars at exchange rates in effect at the Consolidated Balance Sheet date and net sales and expenses are translated at the average exchange rate for the period. The resulting cumulative translation adjustment totaling $0.1 million has been recorded as Accumulated Other Comprehensive Income (Loss), net of taxes, in our Consolidated Balance Sheet at December 31, 2022.
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As of December 31, 2022, we had a non-U.S. dollar denominated working capital balance of approximately $0.8 million. An adverse change of 10% in the underlying foreign currency exchange rate would reduce our working capital balance by approximately $0.1 million.
We do not currently have or intend to enter into any derivative arrangements to protect against such fluctuations.
Market Risk
The volatility in customer demand is greatly driven by the change in the price of oil and gas. These factors influence the release of new capital projects by our customers, which are traditionally awarded in competitive bid situations. Coordination of project start dates is matched to the customer requirements and projects may take a number of months to complete; schedules also may change during the course of any particular project.
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Stabilis Solutions, Inc. and Subsidiaries
| Consolidated Financial Statements | |||||
Report of Independent Registered Public Accounting Firm (Ham, Langston & Brezina, LLP, Houston, TX, Auditor ID: | |||||
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders
Stabilis Solutions, Inc.
Houston, Texas
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of Stabilis Solutions, Inc. and subsidiaries (the “Company”) as of December 31, 2022 and 2021, and the related consolidated statements of operations, comprehensive loss, stockholders’ equity and cash flows for each of the two years in the period ended December 31, 2022, and the related notes (collectively, referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2022 and 2021, and the results of their operations and their cash flows for each of the two years in the period ended December 31, 2022, in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These consolidated 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 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 consolidated 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 regarding the amounts and disclosures in the consolidated 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 provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matters are matters arising from the current-period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the consolidated financial statements and (2) represented especially challenging, subjective or complex judgments. We determined that there are no critical audit matters.
/s/ Ham, Langston & Brezina, L.L.P.
We have served as Stabilis Solutions, Inc.’s auditor since 2007.
March 9, 2023
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Stabilis Solutions, Inc. and Subsidiaries
Consolidated Balance Sheets
(in thousands, except share and per share data)
| December 31, 2022 | December 31, 2021 | ||||||||||
| Assets | |||||||||||
| Current assets: | |||||||||||
| Cash and cash equivalents | $ | $ | |||||||||
| Accounts receivable, net | |||||||||||
| Inventories, net | |||||||||||
| Prepaid expenses and other current assets | |||||||||||
| Assets held for sale | |||||||||||
| Assets of discontinued operations, current | |||||||||||
| Total current assets | |||||||||||
| Property, plant and equipment: | |||||||||||
| Cost | |||||||||||
| Less accumulated depreciation | ( | ( | |||||||||
| Property, plant and equipment, net | |||||||||||
| Goodwill | |||||||||||
| Investments in foreign joint ventures | |||||||||||
| Right-of-use assets and other noncurrent assets | |||||||||||
| Assets of discontinued operations, noncurrent | |||||||||||
| Total assets | $ | $ | |||||||||
| Liabilities and Stockholders' Equity | |||||||||||
| Current liabilities: | |||||||||||
| Accounts payable | $ | $ | |||||||||
| Accrued liabilities | |||||||||||
| Current portion of long-term notes payable | |||||||||||
| Current portion of long-term notes payable - related parties | |||||||||||
| Current portion of finance and operating lease obligations | |||||||||||
| Current liabilities of discontinued operations | |||||||||||
| Total current liabilities | |||||||||||
| Long-term notes payable, net of current portion and debt issuance costs | |||||||||||
| Long-term notes payable, net of current portion - related parties | |||||||||||
| Long-term portion of finance and operating lease obligations | |||||||||||
| Other noncurrent liabilities | |||||||||||
| Liabilities of discontinued operations, noncurrent | |||||||||||
| Total liabilities | |||||||||||
| Commitments and contingencies (Note 14) | |||||||||||
Stockholders’ Equity: | |||||||||||
Preferred stock; $ | |||||||||||
Common stock; $ | |||||||||||
| Additional paid-in capital | |||||||||||
| Accumulated other comprehensive income | |||||||||||
| Accumulated deficit | ( | ( | |||||||||
| Total stockholders' equity | |||||||||||
| Total liabilities and stockholders' equity | $ | $ | |||||||||
The accompanying notes are an integral part of the Consolidated Financial Statements.
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Stabilis Solutions, Inc. and Subsidiaries
Consolidated Statements of Operations
(in thousands, except share and per share data)
Year Ended December 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| Revenues: | |||||||||||
| Revenues | $ | $ | |||||||||
Operating expenses: | |||||||||||
| Costs of revenues | |||||||||||
| Change in unrealized loss on natural gas derivatives | |||||||||||
| Selling, general and administrative expenses | |||||||||||
| Gain from disposal of fixed assets | ( | ( | |||||||||
| Depreciation expense | |||||||||||
| Impairment of right-of-use lease asset | |||||||||||
Total operating expenses | |||||||||||
| Loss from operations before equity income | ( | ( | |||||||||
| Net equity income from foreign joint venture operations: | |||||||||||
| Income from equity investment in foreign joint venture | |||||||||||
| Foreign joint venture operating related expenses | ( | ( | |||||||||
| Net equity income from foreign joint venture operations | |||||||||||
| Income (loss) from operations | ( | ||||||||||
Other income (expense): | |||||||||||
Interest expense, net | ( | ( | |||||||||
Interest expense, net - related parties | ( | ( | |||||||||
| Other income (expense) | ( | ||||||||||
Total other income (expense) | ( | ||||||||||
| Loss from continuing operations before income tax expense | ( | ( | |||||||||
| Income tax expense | |||||||||||
| Net loss from continuing operations | ( | ( | |||||||||
Loss from discontinued operations, net of income taxes of $ | ( | ( | |||||||||
| Net loss | $ | ( | $ | ( | |||||||
| Net loss per common share: | |||||||||||
| Basic and diluted per common share from continuing operations | $ | ( | $ | ( | |||||||
| Basic and diluted per common share from discontinued operations | $ | ( | $ | ( | |||||||
| Basic and diluted per common share | $ | ( | $ | ( | |||||||
| Weighted average number of common shares outstanding: | |||||||||||
| Basic and diluted | |||||||||||
The accompanying notes are an integral part of the Consolidated Financial Statements.
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Stabilis Solutions, Inc. and Subsidiaries
Consolidated Statements of Comprehensive Loss
(in thousands)
| Year Ended December 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| Net loss | $ | ( | $ | ( | |||||||
| Foreign currency translation adjustment, net of tax | ( | ||||||||||
| Transfer of cumulative foreign currency translation adjustment to net loss upon sale | |||||||||||
| Total comprehensive loss | $ | ( | $ | ( | |||||||
The accompanying notes are an integral part of the Consolidated Financial Statements.
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Stabilis Solutions, Inc. and Subsidiaries
Consolidated Statements of Stockholders’ Equity
(in thousands, except share data)
| Common Stock | Additional Paid-in | Accumulated Other Comprehensive | Accumulated | ||||||||||||||||||||||||||||||||
| Shares | Amount | Capital | Income (Loss) | Deficit | Total | ||||||||||||||||||||||||||||||
| Balance at December 31, 2020 | $ | $ | $ | $ | ( | $ | |||||||||||||||||||||||||||||
| Common stock issued from vesting of stock-based awards | — | — | — | — | — | ||||||||||||||||||||||||||||||
| Common stock issued in asset acquisition | — | — | |||||||||||||||||||||||||||||||||
| Stock-based compensation | — | — | — | — | |||||||||||||||||||||||||||||||
| Employee tax payments from restricted stock withholdings | ( | — | ( | — | — | ( | |||||||||||||||||||||||||||||
| Net loss | — | — | — | — | ( | ( | |||||||||||||||||||||||||||||
| Other comprehensive income, net of tax | — | — | — | — | |||||||||||||||||||||||||||||||
| Balance at December 31, 2021 | ( | ||||||||||||||||||||||||||||||||||
| Common stock issued from vesting of stock-based awards | — | — | — | ||||||||||||||||||||||||||||||||
| Stock-based compensation | — | — | — | — | |||||||||||||||||||||||||||||||
| Employee tax payments from restricted stock withholdings | ( | — | ( | — | — | ( | |||||||||||||||||||||||||||||
| Net loss | — | — | — | — | ( | ( | |||||||||||||||||||||||||||||
| Transfer of cumulative foreign currency translation adjustment to net loss upon sale | — | — | — | — | |||||||||||||||||||||||||||||||
| Other comprehensive loss, net of tax | — | — | — | ( | — | ( | |||||||||||||||||||||||||||||
| Balance at December 31, 2022 | $ | $ | $ | $ | ( | $ | |||||||||||||||||||||||||||||
The accompanying notes are an integral part of the Consolidated Financial Statements.
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Stabilis Solutions, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(in thousands)
| Year Ended December 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| Cash flows from operating activities: | |||||||||||
| Net loss from continuing operations | $ | ( | $ | ( | |||||||
| Adjustments to reconcile net loss to net cash provided by operating activities: | |||||||||||
| Depreciation | |||||||||||
| Stock-based compensation expense | |||||||||||
| Gain on extinguishment of debt | ( | ||||||||||
| Income from equity investment in joint venture | ( | ( | |||||||||
| Distributions from equity investment in joint venture | |||||||||||
| Cash settlements from natural gas derivatives, net | ( | ||||||||||
| Realized and unrealized losses from natural gas derivatives, net | |||||||||||
| Impairment of right-of-use lease asset | |||||||||||
| Changes in operating assets and liabilities: | |||||||||||
| Accounts receivable | ( | ( | |||||||||
| Inventories | ( | ||||||||||
| Prepaid expenses and other current assets | |||||||||||
| Accounts payable and accrued liabilities | |||||||||||
| Other | ( | ||||||||||
| Net cash provided by operating activities from continuing operations | |||||||||||
| Net cash provided by (used in) operating activities from discontinued operations | ( | ||||||||||
| Net cash provided by operating activities | |||||||||||
| Cash flows from investing activities: | |||||||||||
| Acquisition of fixed assets | ( | ( | |||||||||
| Proceeds from sale of fixed assets | |||||||||||
| Proceeds from sale of assets held for sale | |||||||||||
| Proceeds from sale of the Brazil operations | |||||||||||
| Net cash used in investing activities from continuing operations | ( | ( | |||||||||
| Net cash used in investing activities from discontinued operations | ( | ( | |||||||||
| Net cash used in investing activities | ( | ( | |||||||||
| Cash flows from financing activities: | |||||||||||
| Proceeds on borrowings from short- and long-term notes payable | |||||||||||
| Payments on short and long-term notes payable | ( | ( | |||||||||
| Payments on notes payable and finance leases from related parties | ( | ( | |||||||||
| Payments of debt issuance costs | ( | ||||||||||
| Employee tax payments from restricted stock withholdings | ( | ( | |||||||||
| Net cash provided by (used in) financing activities from continuing operations | ( | ||||||||||
| Net cash provided by (used in) financing activities from discontinued operations | ( | ||||||||||
| Net cash provided by (used in) financing activities | ( | ||||||||||
| Effect of exchange rate changes on cash | ( | ||||||||||
| Net increase (decrease) in cash and cash equivalents | ( | ||||||||||
| Cash and cash equivalents, beginning of period | |||||||||||
| Cash and cash equivalents, end of period | $ | $ | |||||||||
The accompanying notes are an integral part of the Consolidated Financial Statements.
46
STABILIS SOLUTIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business
Stabilis Solutions, Inc. and its subsidiaries (the “Company”, “Stabilis”, “our”, “us” or “we”) is an energy transition company that provides turnkey clean energy production, storage, transportation and fueling solutions primarily using liquefied natural gas (“LNG”) to multiple end markets across North America.
The Company provides LNG solutions to customers in diverse end markets, including aerospace, agriculture, energy, industrial, marine bunkering, mining, pipeline, remote power and utility markets. LNG can be used to deliver natural gas to locations where pipeline service is not available, has been interrupted, or needs to be supplemented. Additionally, LNG can be used as a partner fuel for renewable energy, and as an alternative to traditional fuel sources, such as distillate fuel oil (including diesel fuel and other fuel oils) and propane, among others to provide both environmental and economic benefits. Stabilis operates two LNG production facilities in George West, Texas and Port Allen, Louisiana to service customers in Texas and the greater Gulf Coast region.
The Company also builds power and control systems for the energy industry in China through its 40 % owned Chinese joint venture, BOMAY Electric Industries, Inc (“BOMAY”). The BOMAY joint venture is accounted as an equity investment.
The Company previously provided electrical switch-gear, generator and instrumentation construction, installation and service to the marine, power generation, oil and gas, and broad industrial market segments in Brazil. At September 30, 2022, the Company agreed to exit its operations in Brazil (the "Brazil Operations") and on October 31, 2022, the Company entered into a sales agreement and closed on the sale of its Brazil Operations to the general manager of the Brazil Operations for approximately $0.9 million consisting of a cash payment of $0.2 million and a note receivable due in annual installments of $0.1 million, $0.1 million, $0.2 million and $0.3 million over the next four years. The Company has presented the Brazil Operations as discontinued operations in accordance with generally accepted accounting principles within the United States ("U.S. GAAP"). The Company did not record a gain or loss on the sale due to the impairment loss recorded during the year in discontinued operations. See also Note 2 for a further discussion of our discontinued operations.
Basis of Presentation and Consolidation
The accompanying consolidated financial statements ("Consolidated Financial Statements") include our accounts and those of our subsidiaries and, have been prepared in accordance with U.S. GAAP. and pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). All intercompany accounts and transactions have been eliminated in consolidation.
Discontinued Operations
The Company believes that the sale of the Brazil Operations meets the criteria for discontinued operations presentation at December 31, 2022. Accordingly, such assets and liabilities at December 31, 2022, results of operations and cash flows for the year ended December 31, 2022 have been classified as discontinued operations on our Consolidated Balance Sheet, Consolidated Statements of Operations and Consolidated Statements of Cash Flows, respectively. The classification of these assets, liabilities, results of operations and cash flows as discontinued operations requires retrospective application to financial information for all prior periods presented. Therefore, such assets and liabilities at December 31, 2021, and operating results and cash flows for the year ended December 31, 2021 have been recast on our Consolidated Balance Sheet, Consolidated Statement of Operations and Consolidated Statements of Cash Flows, respectively. Unless otherwise noted, the amounts presented throughout the notes to our Financial Statements relate to our continuing operations. See Note 2 for further discussion of the Company's discontinued operations.
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Reclassifications
The Company reclassified $1.9 million from selling, general and administrative expenses to costs of revenues and other within the Consolidated Statements of Operations for the year ended December 31, 2021 to conform to current period presentation. Such reclassifications had no impact on the consolidated financial position, income from operations, net income (loss) or cash flows. See Note 3 for a disaggregation of revenues as the Company presents revenues and cost of revenues in aggregate on its Consolidated Statements of Operations.
Summary of Significant Accounting Policies
(a) Use of Estimates in the Preparation of the Consolidated Financial Statements
(b) Cash and Cash Equivalents
(c) Accounts Receivable
(d) Inventories
(e) Derivative Instruments
48
(f) Property, Plant and Equipment
(g) Goodwill
(h) Leases
(i) Revenue Recognition
49
(j) Income Taxes
The Company recognizes income taxes under the asset-and-liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis and operating loss and tax credit carryforwards for each tax jurisdiction in which we operate. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance is recorded when it is more likely than not that the net deferred tax asset will not be realized.
The Company recognizes the effect of income tax positions only if those positions are more likely than not to be sustained. Recognized income tax positions are measured at the largest amount that is greater than 50% likely of being realized. Changes in recognition or measurement are reflected in the period in which the change in judgment occurs. The Company records interest related to unrecognized tax benefits in interest expense and penalties in selling, general and administrative expenses. As of December 31, 2022 and 2021, the Company had no uncertain tax positions that required recognition. See Note 13 for a further discussion of our accounting policy related to income taxes.
(k) Earnings Per Share (“EPS”)
(l) Commitments and Contingencies
(m) Fair Value Measurements
The Company utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs to the extent possible. The Company determines fair value based on assumptions that market participants would use in pricing an asset or liability in the principal or most advantageous market. When considering market participant assumptions in the fair value measurements, the following fair value hierarchy distinguishes between observable and unobservable inputs, which are categorized in one of the following levels in accordance with U.S. GAAP:
Level 1 Inputs —Unadjusted quoted prices in active markets for identical assets or liabilities accessible to the reporting entity at the measurement date.
Level 2 Inputs — Other than quoted prices included in Level 1 inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the asset or liability.
50
Level 3 Inputs — Unobservable inputs for the asset or liability used to measure fair value to the extent that observable inputs are not available, thereby, allowing for situations in which there is little, if any, market activity for the asset or liability at the measurement date.
The carrying value of cash and cash equivalents, accounts receivable, inventory, accounts payable and accrued liabilities approximate their respective fair values due to their relative short maturities. The Company estimated the fair value of its fixed and variable rate debt as $11.3 million compared to a carrying value of $12.0 million (see Note 10) at December 31, 2022. The Company’s estimate of fair value is subjective in nature and is dependent on a number of important assumptions, including discount rates. The fair value of our fixed and variable rate debt was estimated by discounting the future cash flows using the Company’s estimate of its incremental borrowing rate at December 31, 2022 (within Level 2 of the fair value hierarchy). Different market assumptions and estimation methodologies could result in different estimations of fair value.
(n) Foreign Currency Gains and Losses
(o) Stock-based Compensation
Recent Accounting Pronouncements
In March 2020, the FASB issued ASU No. 2020-04, “Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting” (“ASU No. 2020-04”), which provides guidance to alleviate the burden in accounting for reference rate reform by allowing certain expedients and exceptions in applying generally accepted accounting principles to contract modifications, hedging relationships, and other transactions impacted by reference rate reform. The provisions of ASU No. 2020-04 apply only to those transactions that reference LIBOR or another reference rate expected to be discontinued due to reference rate reform. Adoption of the provisions of ASU No. 2020-04 are optional and are effective from March 12, 2020 through December 31, 2022. Adoption of ASU No. 2020-04 did not have a material impact on the Company's Consolidated Financial Statements.
In June 2016, the FASB issued ASU 2016-13, “Financial Instruments - Credit Losses - Measurement of Credit Losses on Financial Instruments,” which changes the way companies evaluate credit losses for most financial assets and certain other instruments. For receivables, and other short-term financial instruments, companies will be required to use a new forward-looking “expected loss” model to evaluate impairment, potentially resulting in earlier recognition of allowances for losses. The new standard also requires enhanced disclosures, including the requirement to disclose the information used to track credit quality by year of origination. ASU No. 2016-13 will be effective for the Company in the first quarter 2023. Early adoption of the new standard is permitted; however, Stabilis has not elected to early adopt the standard. The Company believes that the impact of ASU 2016-13, if any, will be immaterial to our consolidated financial statements.
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2. DISCONTINUED OPERATIONS
On October 31, 2022, the Company entered into a sales agreement and closed on the sale of its Brazil Operations. The Company believes that the sale of the Brazil Operations meets the criteria for discontinued operations presentation within the Consolidated Financial Statements at December 31, 2022, as the decision to exit these operations represents a strategic shift of the future operations of the Company with separately reported financial information available as the Brazil Operations represent substantially all of the revenue and expenses of the Company's previously reported Power Delivery segment.
Accordingly, such assets and liabilities at December 31, 2022, results of operations for the year ended December 31, 2022 and cash flows for the year ended December 31, 2022 have been classified as discontinued operations on our Consolidated Balance Sheet, Consolidated Statements of Operations and Consolidated Statements of Cash Flows, respectively. The classification of these assets, liabilities, results of operations and cash flows as discontinued operations requires retrospective application to financial information for all prior periods presented. Accordingly, the Consolidated Financial Statements and related notes have been updated to separately state the assets and liabilities, revenues and expenses and cash flows between its continuing operations and the discontinued operations as of and for all periods presented.
Corporate allocations of and $0.1 million previously reported within the Company's Power Delivery segment have been excluded from discontinued operations for the year ended December 31, 2021. Included within the Company's net loss from discontinued operations for December 31, 2022 is $0.6 million of cumulative translation losses which were reclassified out of AOCI and into net loss upon sale of the Brazil Operations.
The following table summarizes the components of income (loss) from discontinued operations (in thousands):
| Year Ended December 31, | ||||||||||||||
| 2022 | 2021 | |||||||||||||
| Revenue | $ | $ | ||||||||||||
| Costs and expenses | ||||||||||||||
| Impairment | ||||||||||||||
| Cumulative foreign exchange loss | ||||||||||||||
| Other income and interest expense, net | ( | |||||||||||||
| Income (loss) from discontinued operations before income taxes | ( | |||||||||||||
| Income tax expense | ||||||||||||||
| Loss from discontinued operations, net of income taxes | $ | ( | $ | ( | ||||||||||
The following table summarizes the assets and liabilities of discontinued operations (in thousands):
| December 31, | ||||||||||||||
| 2022 | 2021 | |||||||||||||
| Assets | ||||||||||||||
| Cash and cash equivalents | $ | $ | ||||||||||||
| Accounts receivable, net | ||||||||||||||
| Contract assets and other current assets | ||||||||||||||
| Total cur | ||||||||||||||