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2: EX-10.6 Material Contract HTML 36K
3: EX-31.1 Certification -- §302 - SOA'02 HTML 24K
4: EX-31.2 Certification -- §302 - SOA'02 HTML 24K
5: EX-32.1 Certification -- §906 - SOA'02 HTML 23K
12: R1 Cover Page HTML 75K
13: R2 Condensed Consolidated Balance Sheets HTML 146K
14: R3 Condensed Consolidated Balance Sheets HTML 38K
(Parenthetical)
15: R4 Condensed Consolidated Statements of Operations HTML 123K
16: R5 Condensed Consolidated Statements of Comprehensive HTML 38K
Income (Loss)
17: R6 Condensed Consolidated Statements of Stockholders' HTML 88K
Equity
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23: R12 Prepaid Expenses and Other Current Assets HTML 31K
24: R13 Property, Plant and Equipment HTML 36K
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26: R15 Accrued Liabilities HTML 32K
27: R16 Debt HTML 50K
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29: R18 Related Party Transactions HTML 27K
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32: R21 Stock-Based Compensation HTML 30K
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48: R37 Prepaid Expenses and Other Current Assets HTML 36K
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Information Related To Leases (Details)
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(Address of principal executive offices, including zip code)
(i832)
i456-6500
(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
iCommon Stock, $.001 par value
iSLNG
iThe
Nasdaq Stock Market LLC
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. iYes☒ 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). iYes☒ 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
☐
iNon-accelerated
filer
☒
Smaller reporting company
i☒
Emerging
growth company
i☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether
the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes i☐ No ☒
As of November 10, 2021, there were i17,691,268
outstanding shares of our common stock, par value $.001 per share.
This document includes statements that constitute forward-looking statements within the meaning of the federal securities laws. These statements are subject to risks and uncertainties. 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, our recent business combination, 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 necessarily estimates reflecting the best judgment of senior management, not guarantees of future performance. They are subject to a number of assumptions, risks and uncertainties that could cause actual results to differ materially from those expressed or implied in the forward-looking statements. When considering forward-looking statements, you should keep in mind the risk factors and other cautionary statements described in Part II. “Item 1A. Risk Factors” in this document.
Forward-looking statements represent intentions, plans, expectations, assumptions and beliefs about future events and are subject to risks, uncertainties and other factors. Many of those factors are outside of our control and could cause actual results to differ materially from the results expressed or
implied by those forward-looking statements. In addition to the risk factors and other cautionary statements described in Part II. “Item 1A. Risk Factors” in this document, the factors include:
•our ability to execute our business strategy;
•our limited operating history;
•our ability to satisfy our liquidity needs, including our ability to generate sufficient liquidity or cash flow from operations and our ability to obtain additional financing to affect our strategy;
•loss of one or more of our customers;
•credit and performance risk of our customers and contractual counterparties;
•cyclical
or other changes in the demand for and price of LNG and natural gas;
•operational, regulatory, environmental, political, legal and economic risks pertaining to the construction and operation of our facilities;
•the effects of current and future worldwide economic conditions and demand for oil and natural gas and power system equipment and services;
•hurricanes or other natural or man-made disasters;
•public health crises, such as the ongoing COVID-19 outbreak, which could further deteriorate economic conditions;
•dependence on contractors for successful completions of our energy related infrastructure;
•reliance
on third party engineers;
•competition from third parties in our business;
•failure of LNG to be a competitive source of energy in the markets in which we operate, and seek to operate;
•increased labor costs, and the unavailability of skilled workers or our failure to attract and retain qualified personnel;
•major health and safety incidents relating to our business;
•failure to obtain and maintain approvals and permits from governmental and regulatory agencies;
•changes to health and safety, environmental and similar laws and governmental regulations that
are adverse to our operations;
•changes in regulatory, geopolitical, social, economic, tax or monetary policies and other factors resulting from the transition to the Biden administration and Democratic control of Congress;
•volatility of the market price of our common stock;
•our ability to successfully integrate acquisitions; and
•future benefits to be derived from our investments in technologies, joint ventures and acquired companies.
Should one or more of these risks or uncertainties materialize, or should any of our assumptions prove incorrect, actual results may vary in material respects from those projected in the forward-looking statements contained
herein. 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 Quarterly Report on Form 10-Q, 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.
Current
portion of notes payable - related parties
i2,580
i3,351
Current
portion of finance lease obligation
i16
i—
Current
portion of finance lease obligation - related parties
i—
i648
Current
portion of operating lease obligations
i206
i362
Accrued
liabilities
i7,432
i4,361
Accounts
payable
i5,163
i4,395
Total
current liabilities
i16,776
i14,229
Long-term
notes payable, net of current portion
i6,772
i682
Long-term
notes payable, net of current portion - related parties
i919
i2,726
Long-term
portion of finance lease obligations
i68
i—
Long-term
portion of operating lease obligations
i314
i490
Other
noncurrent liabilities
i98
i156
Total
liabilities
i24,947
i18,283
Commitments
and contingencies (Note 12)
i
i
Stockholders’ Equity:
Preferred
Stock; $ii0.001/ par value, ii1,000,000/
shares authorized, iiiino///
shares issued and outstanding at September 30, 2021 and December 31, 2020, respectively
i—
i—
Common
stock; $ii0.001/ par value, ii37,500,000/
shares authorized, ii17,691,268/ and ii16,896,626/
shares issued and outstanding at September 30, 2021 and December 31, 2020, respectively
i18
i17
Additional
paid-in capital
i97,373
i91,278
Accumulated
other comprehensive income
i172
i122
Accumulated
deficit
(i34,841)
(i29,387)
Total
stockholders’ equity
i62,722
i62,030
Total
liabilities and stockholders’ equity
$
i87,669
$
i80,313
The
accompanying notes are an integral part of the Condensed Consolidated Financial Statements.
Notes to Condensed Consolidated Financial Statements (Unaudited)
1. iOverview
and Basis of Presentation
iOverview
Stabilis Solutions, Inc. and its subsidiaries (the “Company”, “Stabilis”, “our”, “us” or “we”) produce, provide turnkey clean energy production, storage, transportation and fueling solutions using liquefied natural gas (“LNG”) and hydrogen to multiple end markets across North America. The
Company also distributes LNG and hydrogen from third parties and provides services, transportation, and equipment to customers.
The Company is a supplier of LNG and hydrogen solutions to customers in diverse end markets, including aerospace, agriculture, industrial, utility, pipeline, mining, energy, remote clean power, and high horsepower transportation markets in North America and provides turnkey fuel solutions to help industrial users of propane, diesel and other crude-based fuel products convert to LNG, which may result in reduced fuel costs and an improved environmental footprint. Stabilis is vertically integrated from LNG production through distribution including cryogenic equipment rental and field services. Stabilis opened its i100,000
gallons per day (“gpd”) LNG production facility in George West, Texas in January 2015 to service industrial and oilfield customers in Texas and the greater Gulf Coast region. The Company owns a second liquefaction plant capable of producing i25,000 gpd that is currently not in operation.
On June 1, 2021the
Company acquired a third LNG production facility in Port Allen, Louisiana. The plant is capable of producing i30,000 gpd.
The Company also provides power delivery equipment and services through its subsidiary in Brazil, M&I Electric Brazil Sistemas e Servicios em Energia LTDA (“M&I Brazil”) and its i40%
interest in a joint venture in China, BOMAY Electric Industries Co., Ltd. (“BOMAY”).
i
Basis of Presentation
The accompanying unaudited, interim condensed consolidated financial statements ("Condensed Consolidated Financial Statements") include our accounts and those of our subsidiaries and, have been prepared pursuant to the rules and regulations of the Securities
and Exchange Commission (“SEC”). Accordingly, certain information and disclosures normally included in the notes to consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States of America ("U.S. GAAP") have been condensed or omitted. We believe that the presentation and disclosures herein are adequate to prevent the information presented herein from being misleading. The Condensed Consolidated Financial Statements reflect all adjustments (consisting of normal recurring adjustments) for a fair presentation of the interim periods. The results of operations for the interim periods presented are not necessarily indicative of the results of operations to be expected for the full year. The accompanying Condensed Consolidated Financial Statements should be read in conjunction with the audited consolidated financial statements as of and for the year ended December 31,
2020 included in the Company's Annual Report on Form 10-K, as filed on March 16, 2021.
All intercompany accounts and transactions have been eliminated in consolidation. In the Notes to Condensed Consolidated Financial Statements, all dollar amounts in tabulations are in thousands, unless otherwise indicated.
The accompanying Condensed Consolidated Financial Statements have been prepared assuming that the Company will continue as a going concern, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The Company
is required to make certain disclosures if it concludes that there is substantial doubt about the entity’s ability to continue as a going concern within one year from the date of the issuance of these financial statements. The Company has incurred recurring operating losses, and the Company is subject to business risks and uncertainties inherent in the current LNG industry. There is no assurance that the Company will be able to generate sufficient revenues in the future to sustain itself or to support future growth.
The Company's working capital and business risks within the LNG industry
were reviewed by management to determine if there was substantial doubt as to the Company’s ability to continue as a going concern. Management concluded that its plan to address the Company’s liquidity issues would allow it to continue as a going concern. The Company has recently experienced its highest ever year-to-date revenue, including a resumption of activity with existing customers as well as new revenue opportunities, particularly in Mexico and with power generation customers. On April 8, 2021, the Company obtained a new advancing loan facility, pursuant to the United States
Department of Agriculture, Business & Industry Loan Program, in the aggregate principal amount of up to $i10.0 million, of which $i7.0
million was drawn and outstanding as of September 30, 2021.
/
9
The Company's management believes that current working capital, access to its advancing loan facility and revenue growth of the business will generate sufficient cash flows to fund the business for the next 12 months.
Reclassifications
Presentation of certain prior year amounts have been condensed on the Condensed Consolidated Balance
Sheets and Condensed Consolidated Statements of Cash Flows herein to conform to current period presentation. Such reclassifications had no impact on the consolidated financial position, results of operations or cash flows.
i
Use of Estimates
The preparation of the Condensed Consolidated Financial Statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during
the reporting period. Significant items subject to such estimates include the carrying amount of contingencies, valuation allowances for receivables, inventories, and deferred income tax assets, valuations assigned to assets and liabilities in business combinations, and impairments of long-lived assets. Actual results could differ from those estimates, and these differences could be material to the Condensed Consolidated Financial Statements.
iIncome Taxes
The
Company records income taxes for interim periods based on an estimated annual effective tax rate. The estimated annual effective tax rate is recomputed on a quarterly basis and may fluctuate due to changes in forecasted annual operating income, positive or negative changes to the valuation allowance for net deferred tax assets, the timing of distributions on foreign investments from which foreign taxes are withheld, and changes to actual or forecasted permanent book to tax differences.
The Company’s effective tax rate for the nine months ended September 30, 2021 and 2020 was i7.0%
and i3.9%, respectively. The 2021 rate reflects state and foreign income taxes. No U.S. federal income tax benefit was recorded for the periods presented 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.
2.
iiRecent Accounting Pronouncements/
Recently
Adopted Accounting Standards
In December 2019, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2019-12, “Simplifying the Accounting for Income Taxes” (“ASU No. 2019-12”), which simplifies the accounting for income taxes by removing certain exceptions to the general principles of Topic 740, Income Taxes and also improves consistent application by clarifying and amending existing guidance. ASU No. 2019-12 was adopted by the Company effective January 1, 2021. The adoption of this standard had no impact on our unaudited interim condensed consolidated financial position or results of operations.
Recently Issued Accounting Standards
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. We are currently evaluating the impact of
ASU No. 2020-04 on our consolidated financial position and results of operations.
10
3. iRevenue Recognition
Disaggregated Revenues
i
The
table below presents revenue disaggregated by source, for the three and nine months ended September 30, 2021 and 2020 (in thousands):
Three Months Ended September 30,
Nine Months Ended September 30,
Revenues
2021
2020
2021
2020
LNG
Product
$
i14,420
$
i6,594
$
i37,927
$
i18,609
Rental
i2,712
i737
i8,039
i4,012
Service
i334
i187
i957
i593
Power
Delivery
i1,925
i1,352
i5,129
i3,638
Other
i313
i149
i1,368
i1,008
$
i19,704
$
i9,019
$
i53,420
$
i27,860
The
table below presents revenue disaggregated by geographic location, for the three and nine months ended September 30, 2021 and 2020 (in thousands):
Three
Months Ended September 30,
Nine Months Ended September 30,
Revenues
2021
2020
2021
2020
Brazil
$
i1,925
$
i1,352
$
i5,129
$
i3,638
Mexico
i3,501
i2,729
i7,198
i2,778
United
States
i14,278
i4,938
i41,093
i21,444
$
i19,704
$
i9,019
$
i53,420
$
i27,860
/
See
Note 4—Business Segments, below, for additional disaggregation of revenue.
The Company recognizes contract liabilities upon receipt of payments for which the performance obligations have not been fulfilled at the reporting date, resulting in deferred revenue. Contract liabilities are included in accrued liabilities in the accompanying unaudited condensed consolidated balance sheets. iThe
table below presents the changes in the Company’s contract liabilities for the nine months ended September 30, 2021 and December 31, 2020 (in thousands):
The
Company’s revenues are derived from itwo operating segments: LNG and Power Delivery. The LNG segment 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 Power Delivery segment provides power delivery equipment and services in Brazil and through our BOMAY joint venture in China. iThe
tables below present operating results by segment for the three and nine months ended September 30, 2021 and 2020 as well as their respective total assets at September 30, 2021 and December 31, 2020 (in thousands):
Our
operating segments offer different products and services and are managed separately as business units. Cash, cash equivalents and investments are not managed centrally, so the gains and losses on foreign currency remeasurement, and interest and dividend income, are included in the segments’ results.
Depreciation
expense for the nine months ended September 30, 2021 and 2020 both totaled $ii6.8/ million
respectively, of which all is included in the unaudited Condensed Consolidated Statements of Operations as its own and separate line item.
On June 1, 2021the Company closed on the purchase of an LNG production facility in Port Allen, Louisiana. The acquisition included the LNG liquefaction facility, the related assets and real property. The Company paid consideration of $i5.0 million
in cash and i500,000 shares of Company common stock, subject to a registration rights agreement, which shares were valued at $i3.8 million.
7.
iInvestments in Foreign Joint Ventures
The Company holds a i40%
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), which owns i51%. The remaining i9%
is owned by AA Energies, Inc. The Company made iiiino///
sales to its joint venture during the three and nine months ended September 30, 2021 and 2020.
The Company accounts for its investment in BOMAY using the equity method of accounting. Under the equity method, the Company’s share of the joint venture operations earnings or losses is recognized in the condensed consolidated statements of operations as equity income (loss) from foreign joint venture operations. Joint venture income increases the carrying value of the joint venture and joint venture losses reduce the carrying value. Dividends received from the joint venture reduce the carrying value. The
Company considers dividend distributions received from its equity method investments which do not exceed cumulative equity in earnings subsequent to the date of investment to be a return on investment and classifies these distributions as operating activities in the accompanying Condensed Consolidated Statements of Cash flows.
13
i
The tables below present a summary of BOMAY's assets and liabilities and equity at September 30,
2021 and December 31, 2020, and its operational results for the three and nine months ended September 30, 2021 and 2020 in U.S. dollars (in thousands, unaudited):
The
table below presents a summary of activity in our investment in BOMAY for the periods ended September 30, 2021 and December 31, 2020 in U.S. dollars (in thousands, unaudited):
(1)Accumulated
statutory reserves in equity method investments of $ii2.66/
million at September 30, 2021 and December 31, 2020 is included in our investment in BOMAY. In accordance with the People’s Republic of China, (“PRC”) regulations on enterprises with foreign ownership, an enterprise established in the PRC with foreign ownership is required to provide for certain statutory reserves, namely (i) General Reserve Fund, (ii) Enterprise Expansion Fund and (iii) Staff Welfare and Bonus Fund, which are appropriated from net profit as reported in the enterprise’s PRC statutory accounts. A non-wholly-owned foreign invested enterprise is permitted to provide for the above allocation at the discretion of its board of directors. The aforementioned reserves can only be used for specific purposes and are not distributable as cash dividends.
(2)The
Company’s initial investment in BOMAY differed from the Company’s i40% share of BOMAY’s equity as a result of applying fair value accounting pursuant to ASC 805. The basis difference of approximately $i1.2
million will be accreted over the remaining iseven year life of the joint venture. The Company accreted $i97
thousand for both the nine months ended September 30, 2021 and 2020, which is included in income from equity investments in foreign joint ventures in the accompanying unaudited interim condensed consolidated statements of operations. As of September 30, 2021 and December 31, 2020, accumulated accretion totaled $i280
thousand and $i183 thousand, respectively.
/
14
In accordance with our long-lived asset policy, when events or circumstances indicate
the carrying amount of an asset may not be recoverable, management tests long-lived assets for impairment. If the estimated future cash flows are projected to be less than the carrying amount, an impairment write-down (representing the carrying amount of the long-lived asset which exceeds the present value of estimated expected future cash flows) would be recorded as a period expense. In making this evaluation, a variety of quantitative and qualitative factors are considered including national and local economic, political and market conditions, industry trends and prospects, liquidity and capital resources and other pertinent factors. Based on this evaluation for this reporting period, the Company does not believe an impairment of our investment in BOMAY is necessary for the period ending September 30, 2021.
During 2020, the Company received loan proceeds of $i1.1 million (the “PPP Loan”) pursuant to the Paycheck Protection Program (the “PPP”) under the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”). Under the terms of the PPP, all or a portion of the principal may be forgiven if the PPP Loan proceeds are used for qualifying expenses as described in the CARES Act, such as payroll costs, benefits,
rent, and utilities. In June 2021, the forgiveness of the PPP Loan was approved by the Small Business Administration in full and the PPP Loan has been forgiven. The Company recognized a gain on forgiveness of debt in the amount of $i1.1 million which is included in other income (expense) in the accompanying unaudited interim condensed consolidated statements of operations.
15
Secured
Term Note
On April 8, 2021, the Company entered into a loan agreement (the “Loan Agreement”) with AmeriState Bank (“Lender”), as lender, pursuant to the United States Department of Agriculture, Business & Industry Loan Program, to provide for an advancing loan facility in the aggregate principal amount of up to $i10.0 million (the “AmeriState
Loan”), of which $i7.0 million was drawn and outstanding as of September 30, 2021. The AmeriState Loan, which is in the form of a term loan facility, matures on April 8, 2031 and bears interest at i5.75%
per annum through April 8, 2026, and the U.S. prime lending rate plus i2.5% per annum thereafter. The AmeriState Loan provides that proceeds from borrowings may be used for working capital purposes at the Company’s liquefaction plant in George West, Texas and related fees and costs associated with the AmeriState Loan.
Upon an Event of Default (as defined in the Loan Agreement), the Lender
may (i) terminate its commitment, (ii) declare the outstanding principal amount of the Advancing Notes (as defined in the Loan Agreement) due and payable, or (iii) exercise all rights and remedies available to Lender under the Loan Agreement.
On April 8, 2021, Mile High LNG LLC, Stabilis GDS, Inc., Stabilis LNG Eagle Ford LLC and Stabilis Energy Services, LLC, each a wholly owned subsidiary of the Company (collectively, “Debtor”), entered into a Security Agreement and Assignment (the “Security Agreement”) in favor of the Lender. The Security Agreement grants to Lender a first priority security interest in the collateral identified therein, which includes specific equipment collateral owned by the
Company.
Repayment of Secured Term Note Payable - Related Party
The Company had a Secured Term Note Payable, as amended, with Chart Energy & Chemicals, Inc. (“Chart E&C”), who beneficially owns approximately i8.3% of our outstanding common stock. The note contained various covenants that limited the
Company's ability to grant certain liens, incur additional indebtedness, guarantee or become contingently liable for obligations of any person except for those allowed by Chart E&C, merge or consolidate into or with a third party or engage in certain asset dispositions and acquisitions, pay dividends or make distributions, transact with affiliates, prepay indebtedness, and issue additional equity interests. Borrowings incurred interest on the outstanding principal at the rate of i3.0% plus the London interbank offered rate (i3.15%
at December 31, 2020). During the three months ended September 30, 2021, the Company repaid this debt in full totaling approximately $i1.1 million.
Amendment of Secured Promissory Note - Related Party
On September 20, 2021, the
Company amended its secured promissory note with M/G Finance Co., Ltd, a related party, to defer scheduled debt and interest payments for September through December 2021 for a period of ione year, such payments to be included with the scheduled payments for September through December 2022. The secured promissory note is secured by certain equipment of the Company.
Certain
of the agreements governing our outstanding debt have certain covenants with which we must comply. As of September 30, 2021, we were in compliance with all of these covenants.
10. iiLeases/
On
July 30, 2021, the Company terminated its office lease with Millenium-Windfall Partners, Ltd for a fixed settlement of $i0.4 million, payable in i43
monthly payments. In accordance with the termination, the Company was released from all future rights and obligations under the lease. In accordance with the termination of the lease, the Company recorded an impairment charge of $i0.4 million related to its remaining right-of-use asset for this lease for the three and nine months ended September 30,
16
2021.
The Company also remeasured the lease obligation as of July 30, 2021 and the remaining obligation of $i0.4 million under the termination settlement is included in the Company's liabilities at September 30, 2021. iThe
table below summarizes the supplemental balance sheet information related to lease assets and lease liabilities as of September 30, 2021 and December 31, 2020 (in thousands):
On
January 25, 2021, the Company entered into ithree finance lease agreements for vehicles. Under the terms of the lease agreements, the Company has total monthly principal and interest payments of $i2 thousand
for a i36-month period at an annual rate of i10.7%. The leases include purchase options, which are reasonably certain to occur.
In December 2019, the
Company refinanced its lease agreement with a subsidiary of The Modern Group, Ltd. (“The Modern Group”) for equipment purchases totaling approximately $i3.2 million. Under the terms of the lease agreement, the Company exercised its purchase option and the remaining outstanding lease obligation of approximately $i648 thousand
became due on January 25, 2021. These assets are included in the Company's property, plant and equipment, net on the Condensed Consolidated Balance Sheets and the purchase had no effect on the net book value of these assets.
17
i
The
schedule below presents the future minimum lease payments for our operating and finance lease obligations at September 30, 2021 (in thousands):
Operating Leases
Finance Leases
Total
Remainder 2021
$
i85
$
i6
$
i91
2022
i181
i25
i206
2023
i147
i25
i172
2024
i131
i41
i172
2025
i21
i—
i21
Thereafter
i—
i—
i—
Total
lease payments
i565
i97
i662
Less:
Interest
(i45)
(i13)
(i58)
Present
value of lease liabilities
$
i520
$
i84
$
i604
/i
Lease
term and discount rates for our operating and finance lease obligations are as follows:
The
table below summarizes the supplemental cash flow information related to leases for the nine months ended September 30, 2021 and 2020 (in thousands):
Cash
paid for amounts included in the measurement of lease liabilities
Operating cash flows from operating leases
$
i250
$
i287
Financing
cash flows from finance leases
i668
i2,640
Interest
paid
i35
i400
Noncash
activities from right-of-use assets obtained in exchange for lease obligations:
Operating leases
$
i—
$
i1,163
/
11.
iRelated Party Transactions
Other Purchases and Sales
During the nine months ended September 30, 2021 and 2020, the Company paid Applied Cryo Technologies, Inc. (“ACT”), a company owned ii51/%
by Crenshaw Family Holdings, LP (“Crenshaw Family Holdings”), $i530 thousand and $i109 thousand, respectively, for equipment, repairs and services.
Casey Crenshaw, the Company's controlling shareholder, is the beneficial owner of i25% of Crenshaw Family Holdings and is deemed to jointly control Crenshaw Family Holdings with family members. During the three months ended September 30, 2021 and 2020, the
Company paid ACT $i32 thousand and $i36 thousand, respectively, for equipment repairs and services. The
Company had $ii30/
thousand of sales to ACT during the three and nine months ended September 30, 2021. The Company had iino/
sales to ACT during the three and nine months ended September 30, 2020. The Company had $i30 thousand and $i2
thousand due from ACT included in accounts receivable on the unaudited condensed consolidated balance sheets at September 30, 2021 and December 31, 2020, respectively. As of September 30, 2021 and December 31, 2020, the Company had $i15 thousand and $i121
thousand, respectively, due to ACT included in accounts payable on the unaudited condensed consolidated balance sheets.
18
The Company purchases supplies and services from a subsidiary of The Modern Group. Casey Crenshaw is the beneficial owner of i25% of The Modern Group and is deemed to jointly
control The Modern Group with family members. During the nine months ended September 30, 2021 and 2020, the Company made purchases of supplies and services from a subsidiary of The Modern Group totaling $i848 thousand and $i213
thousand, respectively. During the three months ended September 30, 2021 and 2020, the Company made purchases of supplies and services totaling $i127 thousand and $i18
thousand, respectively. The Company had $ii13/ thousand
of sales to The Modern Group during the three and nine months ended September 30, 2021 with iino/
sales during the same period of 2020. The Company had an $i11 thousand receivable due from The Modern Group at September 30, 2021. There was ino
receivable due from The Modern Group at December 31, 2020. As of September 30, 2021 and December 31, 2020, the Company had $i548 thousand and $i582
thousand, respectively, due to a subsidiary of The Modern Group included in accounts payable on the unaudited condensed consolidated balance sheets.
Chart E&C beneficially owns i8.3% of our outstanding common stock and was party to a Secured Term Note Payable with the Company prior to its repayment by the Company during the three and nine months ended September 30,
2021. The Company purchases services from Chart E&C. During the nine months ended September 30, 2021 and 2020, purchases from Chart E&C totaled $i137 thousand and $i22
thousand, respectively. During the three months ended September 30, 2021 and 2020, purchases from Chart E&C totaled $i59 thousand and $i2
thousand. As of September 30, 2021 and December 31, 2020, the Company had $i58 thousand and $i14
thousand, respectively, due to Chart E&C included in accounts payable on the unaudited condensed consolidated balance sheets.
Secured Promissory Note - Related Party
On September 20, 2021, the Company amended its secured promissory note with M/G Finance Co., Ltd, a related party, to defer scheduled debt and interest payments for September through December 2021. See additional discussion in Note 9 - Debt.
12. iCommitments
and Contingencies
Environmental Matters
The Company is subject to federal, state and local environmental laws and regulations. The Company does not anticipate any expenditures to comply with such laws and regulations that would have a material impact on the Company’s condensed consolidated financial position, results of operations or liquidity. The Company believes that its operations comply, in all material respects, with applicable federal, state and local environmental laws and regulations.
Litigation,
Claims and Contingencies
The Company may become party to various legal actions that arise in the ordinary course of its business. The Company is also subject to audit by tax and other authorities for varying periods in various federal, state and local jurisdictions, and disputes may arise during the course of these audits. It is impossible to determine the ultimate liabilities that the Company may incur resulting from any of these lawsuits, claims, proceedings, audits, commitments, contingencies and related matters or the timing of these liabilities, if any. If these matters were to ultimately be resolved unfavorably, it is possible that such an outcome could have a
material adverse effect upon the Company’s consolidated financial position, results of operations, or liquidity. The Company does not, however, anticipate such an outcome and it believes the ultimate resolution of these matters will not have a material adverse effect on the Company’s consolidated financial position, results of operations, or liquidity. Additionally, the Company currently expenses all legal costs as they are incurred.
In October 2018, American Electric Technologies, Inc., a predecessor in interest to the
Company (“American Electric”) received notification of a potential liability of $i4.3 million associated with an asset purchase agreement to sell substantially all of its U.S. business assets and operations to Myers Power Products, Inc. (“Myers”). The contractual terms of the agreement included a provision for true-up of the net working capital, estimated as of the date of closing, to actual working capital as calculated by Myers and agreed to by American Electric. Any difference in the actual (conclusive) net working
capital in relation to the estimated working capital at closing results in an adjustment to the purchase price. In response, American Electric disputed Myers’ claim and Myers’ working capital calculation. On November 5, 2020, the Company filed a petition in Harris County, Texas requesting a declaratory judgment in favor of the Company. During the nine months ended September 30, 2021, the parties reached an amicable resolution of their differences and all claims regarding the net working capital were mutually released and the lawsuit was dismissed with prejudice to refiling same.
19
13.
iStockholders’ Equity
Issuances of Common Stock
The Company is authorized to issue up to i37,500,000
shares of common stock, $i0.001 par value per share.
During the nine months ended September 30, 2021, the Company issued i500,000
shares of common stock, valued at $i3.8 million, as partial consideration for the purchase of an LNG production facility in Port Allen, Louisiana. See Note 6—Property, Plant and Equipment, above, for additional information.
In addition, during the nine months ended September 30, 2021, the Company issued a net i294,642
shares of common stock upon vesting of the Restricted Stock Units under its 2019 Long Term Incentive Plan. See Note 14—Stock-Based Compensation, below, for additional information.
Issuances of Warrants
i
As of September 30, 2021, the Company had
outstanding Warrants to purchase i62,500 shares of our common stock as follows:
In
July 2021, the Company's Board of Directors approved the Amended and Restated 2019 Long Term Incentive Plan (the “Amended and Restated Plan”), which was subsequently approved by the Company's shareholders on September 14, 2021. Under the Amended and Restated Plan, the maximum number of shares of common stock available for issuance was increased from i1,675,000
shares to i4,000,000 shares.
Awards under the Amended and Restated Plan may be granted to employees, officers and directors of the Company and affiliates, and any other person who provides services to the Company and its affiliates
(including independent contractors and consultants of the Company and its subsidiaries). Awards may be granted in the form of stock options, stock appreciation rights, restricted stock, restricted stock units, performance awards, dividend equivalents, substitute awards, other stock-based awards, cash awards and/or any combination of the foregoing. No participant may receive a grant covering more than i2,000,000
shares of our common stock in any year and a non-employee member of the Board may not be granted more than i100,000 shares in any year.
Restricted Stock Units
The Company granted i500,000
Restricted Stock Units ("RSUs") under the 2019 Plan during the nine months ended September 30, 2021 as outlined below.
On August 22, 2021, the Company entered into a separation and release agreement with James C. Reddinger (formerly the Company's chief executive officer) pursuant to which Mr. Reddinger voluntarily resigned from his employment with the Company and as a member of the Company’s Board of Directors. Under the separation and release agreement, the
Company agreed that Mr. Reddinger’s i500,000 RSUs granted under the Company's 2019 Long Term Incentive Plan would fully vest as of August 22, 2021, subject to Mr. Reddinger agreeing to hold the shares through December
31, 2022, and his continued compliance with his obligations in his separation and release agreement. In accordance with the 2019 Long Term Incentive Plan, the RSUs will be settled upon the earlier of (i) Mr. Reddinger's death or (ii) the date that is isix months after his separation from service.
On August 23, 2021, the
Company appointed Westervelt T. “Westy” Ballard, Jr., age 49, as its president and chief executive officer. In connection with Mr. Ballard's appointment, the Company granted Mr. Ballard i500,000 RSUs, of which i250,000
RSUs vested immediately on August 23, 2021. The remaining ii250,000/
will vest over a itwo-year period in itwo
equal tranches on August 23, 2022, and August 23, 2023, conditioned on Mr. Ballard remaining continuously employed through each vesting date.
20
Stock Options
The Company also agreed to grant Mr. Ballard i1,300,000
options to purchase the Company’s common stock, subject to Board approval with a strike price equal to $i10.00 per share, which will vest (i) i442,000
options on August 23, 2022, (ii) i429,000 options on August 23, 2023, and (iii) i429,000
options on August 23, 2024, conditioned on Mr. Ballard remaining continuously employed through each vesting date. The Company anticipates entering into an award agreement with Mr. Ballard with respect to such options during the fourth quarter of 2021.
The Company includes stock compensation expense within general and administrative expenses in the unaudited interim condensed consolidated statements of operations. During the nine months ended September 30, 2021, the Company recognized $i2.7
million of stock compensation expense which included $i0.5 million and $i1.7 million related to the immediate vesting
of Mr. Reddinger's and Mr. Ballard's RSUs, respectively. During the nine months ended September 30, 2020, the Company recognized $i249 thousand in stock-based compensation costs related to RSUs. The Company recognized $i2.4 million
and $i148 thousand in stock-based compensation costs related to RSUs during the three months ended September 30, 2021 and 2020, respectively. During the nine months ended September 30, 2021, a net i294,642
share awards vested and were issued.
As of September 30, 2021, the Company had $i1.7 million of unrecognized compensation costs related to i430,688
outstanding RSUs, which is expected to be recognized over a weighted average period of less than itwo years. All units are expected to vest.
Restricted Stock Awards
In February 2020, independent directors received i50%
of their retainer fee as Restricted Stock Awards (“RSAs”). The i34,706 RSAs were issued immediately upon grant and were subject to a ione
year vesting period and other restrictions under the Company's 2019 Long Term Incentive Plan (the “2019 Plan”). During the nine months ended September 30, 2021, the i34,706 RSAs vested.
The
Company granted i61,308 RSAs under the 2019 Plan to independent directors in April 2020. The Company recognized $i17
thousand and $i95 thousand in stock-based compensation costs related to RSAs for the nine months ended September 30, 2021 and 2020, respectively, which is included in general and administrative expenses in the unaudited condensed consolidated statements of operations. The Company recognized $i38
thousand in stock-based compensation costs related to RSAs during the three months ended September 30, 2020. The Company did not recognize stock-based compensation expense for the three months ended September 30, 2021. As of September 30, 2021, the Company had ino
unrecognized compensation costs related to grants of RSAs.
15. iConcentration of Credit Risk
As of September 30, 2021 and December 31, 2020, two customers comprised i42%
and i47% of our net accounts receivable balance, respectively. During the three months ended September 30, 2021, revenues from two customers represented i39% of total revenues. During
the three months ended September 30, 2020, revenues from one customer represented i26% of total revenues. During the nine months ended September 30, 2021 revenues from two customers represented i38%
of our total revenues. During the nine months ended September 30, 2020, revenues from one customer represented i12% of our total revenues.
As of September 30, 2021, two vendors comprised i33%
of our net accounts payable balance. As of December 31, 2020, one vendor comprised i15% of our net accounts payable balance. For the three months ended September 30, 2021 and September 30, 2020, cost of revenues from one vendor represented i17%
and i23% of our total cost of revenues, respectively. During the nine months ended September 30, 2021, cost of revenues from one vendor represented i13% of our total cost of
revenues. During the nine months ended September 30, 2020, cost of revenues from two vendors represented i23% of our total cost of revenues.
21
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
The
following discussion should be read in conjunction with the Condensed Consolidated Financial Statements and notes thereto included elsewhere in this Form 10-Q and the consolidated financial statements included in the 2020 Annual Report on Form 10-K filed on March 16, 2021. Historical results and percentage relationships set forth in the condensed consolidated statements of operations and cash flows, including trends that might appear, are not necessarily indicative of future operations or cash flows.
Overview
Stabilis is an energy transition company that provides turnkey clean energy production, storage, transportation and fueling solutions including providing natural gas and hydrogen to multiple end markets in North
America. Our diverse customer base utilizes LNG and hydrogen solutions as a fuel source in a variety of applications in the aerospace, industrial, utilities and pipelines, mining, energy, remote clean power and high horsepower transportation markets. Our customers use LNG as a partner fuel for renewable energy and as an alternative to traditional fuel sources, such as diesel, fuel oil, and propane, to reduce harmful environmental emissions and to lower fuel costs. Our customers also use LNG as a “virtual pipeline” solution when natural gas pipelines are not available or are curtailed.
Stabilis seeks to provide our customers with safe, reliable and cost effective LNG and hydrogen fueling solutions and power delivery equipment and services. We provide multiple products and services to our customers, including:
LNG Production, LNG and Hydrogen Sales—Stabilis
builds and operates cryogenic natural gas processing facilities, called “liquefiers”, which convert natural gas into LNG through a multiple stage cooling process. We currently own and operate a liquefier that can produce up to 100,000 LNG gallons (379 cubic meters) per day. In June 2021 the Company purchased another LNG production facility that can produce 30,000 LNG gallons (114 cubic meters) per day. We also purchase LNG from third-party production sources which allows us to support customers in markets where we do not own liquefiers.
Transportation and Logistics Services—Stabilis offers our customers a “virtual natural gas pipeline” by providing them with turnkey LNG transportation and logistics services in North America. We deliver LNG to our customers’ work sites from both our own production facility
and our network of approximately 25 third-party production sources located throughout North America. We own a fleet of LNG fueled trucks and cryogenic trailers to transport and deliver LNG. We also outsource similar equipment and transportation services for both LNG and hydrogen from qualified third-party providers as required to support our customer base.
Cryogenic Equipment Rental—Stabilis owns and operates a rental fleet of approximately 150 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.
Engineering and Field Support Services—Stabilis has experience in the safe, cost effective, and reliable use of LNG and hydrogen in multiple customer applications. We have also developed many processes and procedures that we believe improve our customers’ use of LNG and hydrogen in their operations. Our engineers help our customers design and integrate LNG and hydrogen into their fueling operations and our field service technicians help our customers mobilize, commission and reliably operate on the job site.
Stabilis generates revenue by selling and delivering LNG and hydrogen to our customers. We also generate revenue by renting cryogenic equipment and providing engineering and field support services.
We sell our products and services separately or as a bundle depending on the customer’s needs. LNG pricing depends on market pricing for natural gas and competing fuel sources (such as diesel, fuel oil, and propane among others), as well as the customer’s purchased volume, contract duration and credit profile.
Stabilis’ customers use LNG and hydrogen in their operations for multiple reasons, including lower and more stable fuel costs, reduced environmental emissions, and improved operating performance. We believe that LNG and hydrogen consumption will continue to increase in the future.
22
Power Delivery—Stabilis
provides power delivery equipment and services for the oil and gas, marine, power generation and broad industrial market segments in Brazil, and builds electrical systems for sale in China through our 40% interest in BOMAY.
Recent Developments
Appointment of Westy Ballard as CEO and resignation of James Reddinger—On August 23, 2021, the Company appointed Westervelt T. “Westy” Ballard, Jr., as its president and chief executive officer. The Company entered into a three-year employment agreement with Mr. Ballard effective as of August 23, 2021, subject to successive one-year extensions.
The Company's Board of Directors also appointed Mr. Ballard as a director of the Company's Board of Directors, following which he was subsequently elected as a director by the Company's shareholders at the Company's annual stockholder meeting. In connection with Mr. Ballard's appointment, the Company granted Mr. Ballard RSUs, and agreed to grant Mr. Ballard options to purchase the Company’s common stock as further discussed in Note 14 of the Notes to Condensed
Consolidated Financial Statements. On August 22, 2021, the Company entered into a separation and release agreement with James C. Reddinger, the Company's prior president and chief executive officer. Under the separation and release agreement, the Company agreed to pay Mr. Reddinger’s base salary through December 31, 2022. Additionally, the Company agreed that Mr. Reddinger’s RSUs granted under the 2019 Long Term Incentive Plan as of August 22, 2021, would fully vest subject to Mr.
Reddinger's agreement to hold the shares through December 31, 2022, and his continued compliance with his obligations in his separation and release agreement. In accordance with the 2019 Long Term Incentive Plan, the RSUs will be settled upon the earlier of (i) Mr. Reddinger's death or (ii) the date that is six months after his separation from service.
Acquisition of additional LNG facilities—On June 1, 2021the Company acquired an LNG production facility in Port Allen, Louisiana. The plant is capable of producing 30,000 gpd of LNG. The facility is strategically located and will support some of Stabilis' largest customers. The facility increases the
Company's total production capacity by 30%.
Post-COVID 19 demand and increasing prices—The COVID-19 pandemic, in general, resulted in a period of depressed demand and uncertainty across many markets including our business, customers and suppliers. Roll-out, availability and access to vaccines has resulted in relaxing many of the COVID 19 restrictions creating a post-COVID-19 period of recovery in economic growth and demand in recent months. However, increases in economic growth and demand have been limited by supplies of natural gas, labor and transportation resources within our markets resulting a period of increasing costs. Further, natural gas inventories and production, which decreased during the COVID 19 pandemic, have been slow to respond. During the third quarter of 2021, we experienced higher than normal natural gas prices. Natural gas futures continue to trade at multi-year highs (in excess
of $6.00 at certain times). We expect high natural gas price trends to continue in the near-term as winter approaches further pushing up demand in the physical market; however, no assurances can be made about price trends.
Limited labor resources have also resulted in a shortage of drivers to transport our product to our customers and 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.
As post-COVID-19 pandemic demand continues to evolve, the economy, commodity prices, demand for our products and our cost of operations and share price may all be impacted. 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.
23
Results of Operations
The Company’s revenues are derived from two operating segments. The Company's LNG Segmentsupplies 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
Company's Power Delivery Segment provides power delivery equipment and services in Brazil and through our BOMAY joint venture in China. The Company evaluates the performance of its segments based primarily on segment operating income. See also Note 4 to our Notes to Condensed Consolidated Financial Statements for further discussion of our segments.
The comparative tables below reflect our consolidated operating results as well as the operating results of our two operating segments for the three months ended September 30, 2021 (the “Current
Quarter”) as compared to the three months ended September 30, 2020 (the “Prior Year Quarter”) (unaudited, amounts in thousands, except for percentages).
Consolidated
Three Months Ended September 30,
$
Change
% Change
2021
2020
Revenue:
LNG product
$
14,420
$
6,594
$
7,826
118.7
%
Rental,
service and other
3,359
1,073
2,286
213.0
Power delivery
1,925
1,352
573
42.4
Total revenues
19,704
9,019
10,685
118.5
Operating
expenses:
Costs of LNG product
11,988
5,044
6,944
137.7
Costs
of rental, service and other
1,917
808
1,109
137.3
Costs of power delivery
1,542
996
546
54.8
Selling,
general and administrative
6,155
2,338
3,817
163.3
Depreciation
2,324
2,266
58
2.6
Impairment
of right-of-use lease asset
376
—
376
n/a
Total operating expenses
24,302
11,452
12,850
112.2
Loss from operations
before equity income
(4,598)
(2,433)
(2,165)
89.0
Net
equity income from foreign joint ventures' operations
246
573
(327)
(57.1)
Loss from operations
(4,352)
(1,860)
(2,492)
134.0
Other
income (expense):
Interest expense, net
(130)
(2)
(128)
98.5
Interest
expense, net - related parties
(120)
(199)
79
(39.7)
Other income (expense)
70
(31)
101
(325.8)
Total
other income (expense)
(180)
(232)
52
(22.4)
Loss before income tax expense
(4,532)
(2,092)
(2,440)
116.6
Income
tax expense
93
41
52
126.8
Net loss
$
(4,625)
$
(2,133)
$
(2,492)
116.8
%
24
Segment
Results
LNG Segment
Three Months Ended September 30,
$ Change
% Change
2021
2020
Revenue:
LNG
product
$
14,420
$
6,594
$
7,826
118.7
%
Rental, service and other
3,359
1,073
2,286
213.0
Total
revenues
17,779
7,667
10,112
131.9
Operating expenses:
Costs
of LNG product
11,988
5,044
6,944
137.7
Costs of rental, service and other
1,917
808
1,109
137.3
Selling,
general and administrative
5,655
1,757
3,898
221.9
Depreciation
2,284
2,237
47
2.1
Impairment
of right-of-use lease asset
376
—
376
n/a
Total operating expenses
22,220
9,846
12,374
125.7
Loss from operations
$
(4,441)
$
(2,179)
$
(2,262)
103.8
%
Power
Delivery Segment
Three Months Ended September 30,
$ Change
% Change
2021
2020
Revenue:
Power
delivery
$
1,925
$
1,352
$
573
42.4
%
Operating expenses:
Costs
of power delivery
1,542
996
546
54.8
Selling, general and administrative
500
581
(81)
(13.9)
Depreciation
40
29
11
37.9
Total
operating expenses
2,082
1,606
476
29.6
Loss from operations before equity income
(157)
(254)
97
(38.2)
Net
equity income from foreign joint ventures' operations
246
573
(327)
(57.1)
Income from operations
$
89
$
319
$
(230)
(72.1)
%
Revenue
LNG
product revenue. During the Current Quarter, LNG product revenue increased $7.8 million or 119% versus the Prior Year Quarter primarily related to:
•An increase of 6.8 million LNG gallons delivered during the Current Quarter compared to the Prior Year Quarter particularly with power generation customers; and
•Increased natural gas prices compared to the Prior Year Quarter.
Rental, service, and other revenue. Rental, service and other revenue increased by $2.3 million or 213% in the Current Quarter relative to the Prior Year Quarter due to the economic recovery and a higher concentration of current projects with additional equipment and labor revenues from projects in Mexico and power generation customers.
Power
delivery. Power delivery revenue increased by $0.6 million or 42% in the Current Quarter due to new contracts.
Operating Expenses
Costs of LNG product. Cost of product in the Current Quarter increased $6.9 million or 138%. As a percentage of LNG product revenue, these costs increase from 76% from the prior year quarter to 83% in the Current Quarter. The increased costs were attributable to:
25
•Inflationary pressures including increased costs from higher natural gas prices, increased transportation costs and increased liquefaction
costs; and
•Additional LNG gallons delivered.
Costs of rental, service, and other. Costs increased $1.1 million or 137% in the Current Quarter primarily related to increased labor and equipment rentals, maintenance and travel costs to support the increase in rental, service and other revenues.
Costs of power delivery. Costs increased $0.5 million or 55% in the Current Quarter due to higher activity levels associated with new contracts.
Selling, general and administrative. Selling, general and administrative expense increased $3.8 million or 163% during the Current Quarter due to higher compensation costs
primarily related to the executive transition and vesting of incentives. During the Current Quarter, we recorded $2.2 million related to the immediate vesting of restricted stock units associated with our executive transition and an additional $0.8 million of severance and legal expenses. The remaining increase is primarily related to increased headcount for sales and business development personnel, commissions and travel.
Depreciation. Depreciation expense increased 3% during the Current Quarter as compared to the Prior Year Quarter due to the acquisition of our Port Allen facility on June 1, 2021, partially offset by decreases from other assets reaching the end of their depreciable lives.
Impairment of right-of-use lease asset. During the Current Quarter, we recorded an impairment
of $0.4 million related to the settlement and release of our Houston office lease. See Note 10 of the Notes to Condensed 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. Income from investments in foreign joint ventures decreased $0.3 million during the Current Quarter due to stronger than normal sales in the Prior Year Quarter.
Other Income (Expense)
Interest expense, net. Interest expense increased $0.1 million during the Current Quarter as compared to the Prior Year Quarter primarily related to interest on the Company's
advancing loan with AmeriState Bank.
Interest expense, net - related parties. Related party interest expense decreased $0.1 million during the Current Quarter as compared to the Prior Year Quarter primarily related to repayment of the short-term note payable - related party of $1.1 million as further discussed in Note 9 of the Notes to condensed consolidated financial Statements and the maturity of capital leases in 2020 and January of 2021, partially offset by a scheduled increase in interest rates.
Other income (expense). Other income was $0.1 million during the Current Quarter compared to other expense of $31 thousand in the Prior Year Quarter.
Income tax expense.The Company
incurred state and foreign income tax expense of $0.1 million during the Current Quarter compared to $41 thousand during the Prior Year Quarter. No U.S. federal income tax benefit was recorded for the Current Quarter or Prior Quarter as any net U.S. deferred tax assets generated from operating losses were offset by a change in the Company's valuation allowance on net deferred tax assets.
The
following comparative tables below reflect our consolidated operating results as well as the operating results of our two operating segments for the nine months ended September 30, 2021 (the “Current Year”) as compared to the nine months ended September 30, 2020 (the “Prior Year”) (unaudited, amounts in thousands, except for percentages):
Consolidated
Nine
Months Ended September 30,
$ Change
% Change
2021
2020
Revenue:
LNG product
$
37,927
$
18,609
$
19,318
103.8
%
Rental,
service and other
10,364
5,613
4,751
84.6
Power delivery
5,129
3,638
1,491
41.0
Total
revenues
53,420
27,860
25,560
91.7
Operating expenses:
Costs
of LNG product
30,154
13,692
16,462
120.2
Costs of rental, service and other
5,649
3,381
2,268
67.1
Costs
of power delivery
3,994
3,131
863
27.6
Selling, general and administrative
13,195
7,892
5,303
67.2
Gain
from disposal of fixed assets
(24)
(11)
(13)
118.2
Depreciation
6,767
6,802
(35)
(0.5)
Impairment
of right-of-use lease asset
376
—
376
n/a
Total operating expenses
60,111
34,887
25,224
72.3
Loss from operations
before equity income
(6,691)
(7,027)
336
(4.8)
Net
equity income from foreign joint ventures' operations
1,075
1,347
(272)
(20.2)
Loss from operations
(5,616)
(5,680)
64
(1.1)
Other
income (expense):
Interest expense, net
(224)
(28)
(196)
700.0
Interest
expense, net - related parties
(441)
(681)
240
(35.2)
Other income
1,183
(6)
1,189
n/a
Total
other income (expense)
518
(715)
1,233
(172.4)
Loss before income tax expense
(5,098)
(6,395)
1,297
(20.3)
Income
tax expense
356
251
105
41.8
Net loss
$
(5,454)
$
(6,646)
$
1,192
(17.9)
%
27
Segment
Results
LNG Segment
Nine Months Ended September 30,
$ Change
% Change
2021
2020
Revenue:
LNG
product
$
37,927
$
18,609
$
19,318
103.8
%
Rental, service and other
10,364
5,613
4,751
84.6
Total
revenues
48,291
24,222
24,069
99.4
Operating expenses:
Costs
of LNG product
30,154
13,692
16,462
120.2
Costs of rental, service and other
5,649
3,381
2,268
67.1
Selling,
general and administrative
11,496
6,352
5,144
81.0
Gain from disposal of fixed assets
(24)
(11)
(13)
118.2
Depreciation
6,653
6,706
(53)
(0.8)
Impairment
of right-of-use lease asset
376
—
376
n/a
Total operating expenses
54,304
30,120
24,184
80.3
Loss from operations
before equity income
$
(6,013)
$
(5,898)
$
(115)
(1.9)
%
Power
Delivery Segment
Nine Months Ended September 30,
$ Change
% Change
2021
2020
Revenue:
Power
delivery
$
5,129
$
3,638
$
1,491
41.0
%
Operating Expenses:
Costs
of power delivery
3,994
3,131
863
27.6
Selling, general and administrative
1,699
1,540
159
10.3
Depreciation
114
96
18
18.8
Total
operating expenses
5,807
4,767
1,040
21.8
Loss from operations before equity income
(678)
(1,129)
451
(39.9)
Net
equity income from foreign joint ventures' operations
1,075
1,347
(272)
(20.2)
Income (loss) from operations
$
397
$
218
$
179
82.1
%
Revenue
LNG product revenue. During the Current, Year LNG product revenues increased $19.3 million or 104% versus the Prior Year primarily related to:
•An increase of 20.9 million LNG gallons delivered compared to the Prior Year particularly with power generation customers; and
•Increased natural gas prices compared to the Prior Year.
Rental, service, and other revenue. Rental, service and other revenues increased by $4.8 million or 85% in the Current Year compared to Prior Year primarily related to the economic recovery and a higher concentration of current projects with additional equipment and labor revenues from projects in Mexico and power generation customers.
Power
delivery revenue. Power delivery revenue increased by $1.5 million or 41% in the Current Year due to new contracts.
28
Operating Expenses
Cost of LNG product. Cost of LNG product in the Current Year increased $16.5 million or 120%. As a percentage of LNG product revenue, these costs increased from 74% in the Prior Year to 80% in the Current Year. The increased costs were attributable to:
•Inflationary pressure including increased costs from higher natural gas prices, increased transportation costs and increased liquefaction
costs; and
•Additional LNG gallons delivered.
Cost of rental, service, and other. This cost increased $2.3 million or 67% in the Current Year primarily related to increased labor and equipment rentals to support the increase in rental, service and other revenues.
Costs of power delivery. Costs increased $0.9 million or 28% in the Current Year due to costs associated with new contracts.
Selling, general and administrative. Selling, general and administrative expense in the Current Year increased by $5.3 million or 67% from the Prior Year primarily due to the executive transition and vesting of incentives occurring
in the Current Year. During the Current Year, we recorded $2.2 million related to the immediate vesting of restricted stock units associated with our executive transition and an additional $0.8 million of severance and legal expenses. The remaining increase is primarily related to higher compensation costs related to increased headcount for sales and business development personnel, commissions and travel.
Depreciation. Depreciation expense essentially remained the same, slightly decreaseing by 1% during the Current Year as compared to the Prior Year due to assets reaching the end of their depreciable lives, offset by additional depreciation expense on our Port Allen facility which was acquired on June 1, 2021.
Impairment of right-of-use lease asset. During the Current Year, we recorded
an impairment of $0.4 million related to the settlement and release of our Houston office lease. See Note 10 of our Notes to Condensed 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. Income from investments in foreign joint ventures decreased $0.3 million from the Prior Year due to stronger sales in the Prior Year.
Other Income (Expense)
Interest expense, net. Interest expense in the Current Year increased $0.2 million primarily due to interest associated with the Company's advancing loan with AmeriState Bank.
Interest
expense, net - related parties. Related party interest expense decreased $0.2 million during the Current Year primarily related to repayment of the short-term note payable - related party of $1.1 million as further discussed in Note 9 of the Notes to Condensed Consolidated Financial Statements and the maturity of capital leases in 2020 and January of 2021, partially offset by a scheduled increase in interest rates in the Current Year.
Other income (expense). Other income was $1.2 million in the Current Year compared to expense of $6 thousand in the Prior Year. Current Year income related to the Paycheck Protection Program loan forgiveness and the release of escrow funds from the Myers transaction settlement.
Gain on the disposal of fixed assets. The gain from disposal of rolling stock was $11 thousand in the
Prior Year compared to $24 thousand in the Current Year.
Income tax expense. The Company incurred foreign tax expense of $0.4 million during the Current Year compared to $0.3 million during the Prior Year. No U.S. federal income tax benefit was recorded for the Current Year or Prior Year as any net U.S. deferred tax assets generated from operating losses were offset by a change in the Company's valuation allowance on net deferred tax assets.
29
Liquidity
and Capital Resources
Overview
The Company is subject to substantial business risks and uncertainties inherent in the LNG industry. There is no assurance that the Company will be able to generate sufficient cash flows in the future to sustain itself or to support future growth.
Historically, our principal sources of liquidity have consisted of cash on hand, cash provided by our operations, and distributions from our BOMAY joint venture. Additionally, the Company obtained equipment financing from MG Finance, a related party. During the Current Year, our principal sources of
liquidity were cash provided by our operations and an advancing loan facility with AmeriState Bank in the aggregate principal amount of up to $10.0 million. We have used a portion of our cash flows generated from operations to invest in fixed assets to support growth as well as to pay interest and principal amounts outstanding under our borrowings and increased working capital needs generated from organic growth.
As of September 30, 2021, we had $2.9 million in cash and cash equivalents on hand and $11.7 million in outstanding debt (net of debt issuance costs) and finance lease obligations (of which $4.0 million is due in the next twelve months). Future availability under the advancing loan facility at September 30, 2021, was $3.0 million.
The
Company has experienced a recent increase in activity and additional revenue opportunities. Accordingly, management believes the business will generate sufficient cash flows from its operations along with availability under our advancing loan facility that is sufficient to fund the business for the next 12 months. As we continue to grow, the Company continues to evaluate additional financing alternatives, however, there is no guarantee that additional financing will be available or available at terms that would be beneficial to shareholders.
Cash Flows
Cash flows provided by (used in) our operating, investing and financing activities are summarized below (unaudited, in thousands):
Net increase (decrease) in cash and cash equivalents
1,124
(569)
Operating
Activities
Net cash provided by operating activities totaled $5.5 million for the nine months ended September 30, 2021 compared to $2.5 million for the same period 2020. The increase in net cash provided by operating activities of $3.1 million as compared to the Prior Year was primarily attributable to increased revenues and changes in working capital, partially offset by a reduced distribution from our BOMAY joint venture.
Investing Activities
Net cash used in investing activities totaled $6.7 million and $0.3 million for the nine months ended September 30, 2021 and 2020, respectively. The increase 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.
Financing Activities
Net cash provided by financing activities totaled $2.5 million for the nine months ended September 30, 2021, compared to net cash used in financing activities totaling $2.6 million for the Prior Year. The change compared to Prior Year was primarily attributable to proceeds from the AmeriState Bank loan facility.
30
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, support of legislative and regulatory initiatives, and other general corporate purposes. While we believe we have sufficient liquidity and capital resources to fund our operations and repay our debt, we may elect to pursue additional financing activities such as refinancing existing debt, 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.
Debt Level and Debt Compliance
We
had total indebtedness of $12.1 million in principal as of September 30, 2021 with the expected maturities as follows (in thousands).
Total long-term debt, including current maturities
$
11,650
We expect our total interest payment obligations relating to our indebtedness to be approximately $0.6 million for the full year ending December 31, 2021. Certain of the agreements governing our outstanding debt have certain covenants with which we must comply. As of September 30, 2021, we were in compliance with all of these covenants.
Off-Balance Sheet Arrangements
As
of September 30, 2021, we had no transactions that met the definition of off-balance sheet arrangements that may have a current or future material effect on our consolidated financial position or operating results.
NEW ACCOUNTING STANDARDS
See Note 2—Recent Accounting Pronouncements to the Notes to Condensed Consolidated Financial Statements included elsewhere in this report for information on new accounting standards.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The discussion and analysis of our financial condition
and results of operations are based on our Condensed Consolidated Financial Statements, which have been prepared in accordance with U.S. GAAP. The preparation of these Condensed 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 Condensed Consolidated Financial Statements and the reported amounts of revenues and expenses during the reporting period. We evaluate our estimates on an ongoing basis, based on historical experience and on various other assumptions that are believed to be reasonable under the circumstances. There can be no assurance that actual results will not differ from those estimates.
31
Critical
Accounting Policies
Revenue Recognition
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.
Revenues from contracts with customers are disaggregated into (1) LNG product, (2) rental, service, and other, and (3) power delivery.
LNG product revenue generated includes the revenue from the product and delivery of the LNG to our customer’s location. 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. Product contracts are established by agreeing on a sales price or transaction price for the related item. Revenue is recognized when the customer has taken control of the product. 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.
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 power delivery equipment 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. 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.
Power Delivery revenue is 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.
All outstanding accounts receivable, net of allowance, on the consolidated balance sheet are typically due and collected within the next 30 days for our LNG business and 12 months for our power delivery business.
32
Impairment of Long-Lived Assets and Goodwill
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.
Income Taxes
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
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:
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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
As a “smaller reporting company,”the Company is not required to provide this information.
33
ITEM 4. CONTROLS
AND PROCEDURES.
Evaluation of Disclosure Controls and Procedures
As required by Rule 13a-15(b) of the Exchange Act, we have evaluated, under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this report. Our disclosure controls and procedures are designed to provide reasonable assurance that the information required to be disclosed by us in reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure and is recorded,
processed, summarized and reported within the time periods specified in the rules and forms of the SEC. Based upon the evaluation, our principal executive officer and principal financial officer have concluded that our disclosure controls and procedures were effective at September 30, 2021.
Changes in Internal Control over Financial Reporting
There have been no changes in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) that occurred during our last fiscal quarter that have materially affected or are reasonably likely to materially affect our internal control over financial reporting.
34
PART
II. OTHER INFORMATION
ITEM 1. 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.
ITEM 1A. RISK FACTORS.
Our operations and financial results are subject to various risks and uncertainties, including those described in the Part I. “Item 1A. Risk Factors”
section of our Annual Report on Form 10-K for the year ended December 31, 2020 filed with the Securities and Exchange Commission on March 16, 2021 (“Form 10-K”), which could adversely affect our business, financial condition, results of operations, cash flows, and the trading price of our common stock. Except as set forth below, there have been no material changes in our risk factors disclosed in our 2020 Form 10-K.
As post-COVID-19 pandemic demand continues to evolve, continued periods of increasing costs could decrease our margins and adversely impact our future results and operating cash flows.
The COVID-19 pandemic, in general, resulted in a period of depressed demand and uncertainty across many markets including our business, customers and suppliers. Roll-out, availability
and access to vaccines has resulted in relaxing many of the COVID-19 restrictions creating a post-COVID-19 period of recovery in economic growth and demand in recent months. However, increases in economic growth and demand have been limited by supplies of natural gas, labor and transportation resources within our markets resulting a period of increasing costs. Further, natural gas inventories and production, which decreased during the COVID-19 pandemic, have been slow to respond. During the third quarter of 2021, we experienced higher than normal natural gas prices. Natural gas futures continue to trade at multi-year highs (in excess of $6.00 at certain times). We expect high natural gas price trends to continue in the near-term as winter approaches further pushing up demand in the physical market; however, no assurances can be made about price trends.
Limited labor resources have also resulted in a shortage of drivers to
transport our product to our customers and 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.
As post-COVID-19 pandemic demand continues to evolve, the economy, commodity prices, demand for our products and our cost of operations and share price may all be impacted. 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.
Pursuant to the requirements of
the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.