Stabilis Solutions, Inc. quarterly report, Q3 FY2019

Business context and reporting period

Stabilis Energy, Inc. (ticker SLNG; identified in the request as Stabilis Solutions, Inc.) filed this unaudited Form 10-Q for the quarter ended September 30, 2019. The company produces, distributes and sells LNG, rents related equipment, and provides services; following its July 26, 2019 share exchange with American Electric, it also reports power-delivery operations in Brazil and an equity-method investment in China. The transaction is accounted for as a reverse acquisition: pre-transaction results are principally Stabilis’s, while American Electric is included from July 26, 2019. Diversenergy was acquired August 20, 2019.

Financial performance and position

Metric	Q3 2019	Q3 2018	Nine months 2019	Nine months 2018
Revenue	$10.514 million	$8.001 million	$34.584 million	$26.566 million
Operating loss	$3.254 million	$2.015 million	$4.180 million	$5.196 million
Net loss	$3.355 million	$3.217 million	$4.952 million	$8.164 million
Net loss attributable to controlling interests	$3.355 million	$3.087 million	$5.159 million	$8.080 million
Operating cash flow	—	$3.721 million	$(1.470) million

Q3 revenue increased 31.4%; nine-month revenue increased 30.2%. LNG product revenue was $7.919 million in Q3 and $26.872 million for nine months. Rental, service and other revenue included $1.371 million from the acquired power-delivery business after the share exchange.
Gross profit, calculated as revenue less the two reported cost-of-revenue lines, was approximately $2.887 million (27.5% margin) in Q3 and $10.749 million (31.1%) for nine months. These comparisons include acquisitions only after their closing dates.
Nine-month basic and diluted loss per share was $0.37, versus $2.14 in 2018; the weighted-average share count rose to 13.816 million from 3.768 million, reflecting the transaction and share issuances.
At September 30, cash was $4.516 million; current assets were $13.199 million and current liabilities $16.526 million, implying negative working capital of about $3.327 million. Total assets were $91.448 million and total liabilities $23.288 million.
Management reported $7.9 million of debt principal and $12.6 million of debt plus finance-lease obligations; $6.5 million of the latter was due within 12 months. Debt maturities disclosed were $0.231 million for the remainder of 2019, $1.600 million in 2020, $3.430 million in 2021 and $2.647 million in 2022. The company said it complied with applicable debt covenants.
Nine-month investing cash outflow was $3.243 million, including equipment purchases and acquisitions; financing cash inflow was $2.791 million. Cash increased $3.269 million from year-end 2018.

Material changes versus prior comparable periods

Q3 operating loss widened by $1.239 million as operating expenses grew 37.5%, outpacing revenue growth. SG&A rose $2.227 million, including transaction-related audit, legal and consulting costs and costs of the acquired business.
For nine months, operating loss improved by $1.016 million and net loss by $3.212 million. Lower interest expense, reflecting prior debt conversion to equity and debt repayment, contributed to the improvement.
Management attributed LNG product growth to plant sales for sand-drying customers and increased demand from existing customers in Mexico. Higher liquefaction-plant utilization and lower gas prices reduced plant product costs as a share of LNG product revenue from 78% to 58% for the nine-month comparison.
The July share exchange added American Electric’s Brazil power-delivery operations and 40% interest in China’s BOMAY. The company also acquired Diversenergy, expanding distributed LNG/CNG activity in Mexico, and formed a 50%-owned Mexican joint venture, Energía Superior.
On August 30, $7 million of Chart debt was exchanged for 1,470,807 shares. In August, the company also issued a $5 million secured related-party note. Common shares outstanding were 16,800,612 at September 30, versus 13,178,750 at December 31, 2018.

Outlook, risks and unusual items

No formal revenue, earnings or capital-spending guidance is provided. Management said it expected operations to generate sufficient cash flow for the next 12 months, citing higher sales volumes, lower operating costs as a percentage of sales, the 2018 conversion of $48.7 million of related-party debt to equity, and the 2019 Chart debt exchange.
The filing notes recurring operating losses, negative working capital, substantial LNG-industry risks and no assurance of sufficient future revenue. Management concluded its plans supported going-concern status, but that assessment depends on projected cash flows and debt reduction.
An unresolved dispute with Myers Power Products concerns a potential $4.3 million purchase-price adjustment from American Electric’s 2018 asset sale, based on a working-capital true-up. The company was working with counsel; the ultimate liability and timing were uncertain.
Related-party matters include the $5 million secured note from M/G Finance, whose president is the company’s Executive Chairman, and equipment finance leases with a Modern Group subsidiary linked to company directors. Investors should assess the terms, security and governance safeguards.
Disclosure controls and procedures were deemed ineffective at September 30. Management identified an internal-control material weakness involving insufficient accounting staffing, segregation of duties and review; remediation was ongoing, with completion and testing expected by year-end 2019.
Other risks include LNG and competing-fuel price changes, customer concentration or loss, project and operating risks, foreign currency exposure, and execution and integration of acquisitions. Foreign-currency translation produced a $530,000 accumulated loss. The company reported no off-balance-sheet arrangements with a material current or future effect.

Most important facts to verify

Whether operating cash generation and management’s 12-month liquidity assumptions materialized, particularly given negative working capital and near-term debt and lease payments.
The final resolution and any payment obligation arising from the Myers $4.3 million working-capital dispute.
Debt and related-party financing terms, collateral, repayment schedules, and any subsequent borrowing or refinancing.
Progress on remediating the material weakness and improving disclosure controls.
Post-acquisition performance of American Electric and Diversenergy, and whether LNG plant utilization, margins and Mexico demand are sustainable.
Share-count changes and potential dilution following the debt exchange, acquisitions, warrants and other equity issuances.