Stabilis Solutions Inc

STABILIS SOLUTIONS, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited)

1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION

Description of Business

Stabilis Solutions, Inc. and its subsidiaries (the “Company”, “Stabilis”, “our”, “us” or “we”) is an energy transition company that provides turnkey clean energy production, storage, transportation and fueling solutions primarily using liquefied natural gas (“LNG”) to multiple end markets.

The Company serves customers in diverse end markets, including aerospace, agriculture, energy, industrial, marine bunkering, mining, pipeline, remote power and utility markets. LNG can be used to deliver natural gas to locations where pipeline service is unavailable, has been interrupted, or needs to be supplemented. Additionally, LNG can be used as a partner fuel for renewable energy, and as an alternative to traditional fuel sources, such as distillate fuel oil (including diesel fuel and other fuel oils) and propane, among others to provide both environmental and economic benefits. Increasingly, LNG is being utilized as a transportation fuel in the marine industry and as a propellant in the private rocket launch sector. We believe that these fuel markets are large and provide significant opportunities for LNG usage.

The Company also builds power and control systems for the energy industry in China through its 40% owned Chinese joint venture, BOMAY Electric Industries, Inc (“BOMAY”). BOMAY is accounted for as an equity investment.

Basis of Presentation and Consolidation

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 arenot 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, 2023* included in the Company's Annual Report on Form10-K, as filed on* March 7,*2024.

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.

Use of Estimates in the Preparation of the Consolidated Financial Statements

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 fair value of natural gas derivatives, 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.

Reclassifications

The Company reclassified $4.2 million from accrued expenses to accounts payable at* December 31, 2023,to conform to current presentation resulting inno* effect to results of operations or cash flows.

Derivative Instruments

The Company had certain natural gas derivative instruments as of* March 31, 2024* and* December 31, 2023*. At both* March 31, 2024* and* December 31, 2023*, the fair value of the Company's derivatives was $0. The accounting for changes in the fair value of a derivative instrument depends on whether it qualifies for and has been designated as a hedge as well as the type of hedge. The Company hasnot designated its derivatives as hedges under U.S. GAAP. The Company didnot enter into any derivative transactions for speculative purposes. Periodically, the Company enters into forward sales contracts for the delivery of LNG to its customers. Certain of these sales contracts contain provisions that* maymeet the criteria of a derivative in the event delivery isnot* made. These contracts are accounted for under the normal purchase normal sales exclusion under U.S. GAAP and arenot measured at fair value each reporting period.

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2. REVENUE RECOGNITION

We recognize revenues when the transfer of promised goods or services are delivered to our customers in accordance with the applicable customer contract and we are entitled to be paid by the customer. Revenues are measured as consideration specified in the contract and exclude any sales incentives and amounts collected on behalf ofthird parties. Certain contracts* may*include multiple goods or services such as the usage of equipment and delivery of field support services that are bundled into an all-in price to the customer for each gallon of LNG delivered. Revenue recognition under these contracts requires significant judgment by the Company in order to determine the appropriate accounting for these transactions, including whether performance obligations should be accounted for separately versus together, how the price should be allocated among the performance obligations, and when to recognize revenue for each performance obligation. The Company has determined that these contacts have multiple performance obligations and the Company allocates the contract price to each performance obligation using its best estimates of the respective standalone selling price of each distinct good or service at the time the contract was negotiated.

Revenues from contracts with customers are disaggregated into (1) LNG Product (2) rental (3) service and (4) other.

LNG Product revenues

LNG Product revenues represent the sale of LNG from both produced and purchased sources as well as the transportation performed to deliver the LNG to our customers' locations. LNG Product revenues are recognized upon delivery of the LNG to the customer, at which point the customer controls the product and the Company has an unconditional right to payment. The Company acts as a principal when using* third party transportation companies and therefore recognizes the gross revenue for the supply of LNG. The Company doesnot differentiate between the revenue from the sale of LNG production and purchased LNG as the criteria for revenue recognition are identical. Some of our contracts contain minimum take-or-pay amounts where a customer has agreed to source a minimum volume of LNG under the contract. Take or pay revenues are only recognized when the customer has failed to take the minimum contracted volumes upon completion of the time period specified within the contract and the Company has the unconditional right to receive payment for the take or pay amount. Certain of our sales contracts contain provisions that maymeet the criteria of a derivative in the event delivery isnot* made. These contracts are accounted for under the normal purchase normal sales exclusion under U.S. GAAP and arenot measured at fair value each reporting period. Our LNG contracts are generallyone to24 months in duration.

Rental revenues

Rental revenues are generated from the rental of cryogenic equipment to our customers. Revenues related to rental of equipment are recognized under Topic606 andnot ASC842: Leases, as the Company maintains control of the equipment that the customer uses and can replace the rented equipment with similar equipment should the rented equipment become inoperable or the Company chooses to replace the equipment for maintenance purposes. Rental revenues based upon day rates or monthly rates for the use of equipment as specifically established within the contract are 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. Performance obligations for rental revenue are considered to be satisfied as the rental period is completed based upon the terms of the related contract. Rental revenues from contracts with bundled pricing are based upon the fair value of the pricing components at the time the contract was negotiated and recognized when the performance obligation has been satisfied in accordance with the contract. The stated rental rates within each contract are representative of the stand-alone rental rates at the time the contract was negotiated.

Service revenues

Service revenues are generated from engineering and field support services and represent the human resources provided to the customer to support the use of LNG at the customer’s job site. These include support and costs for mobilization and demobilization of equipment at customer sites as well as onsite technical support while customers are consuming LNG. Service revenues that arenot dependent upon the gallons delivered or rental period but based upon the specific contractual terms and can be based on an event (i.e. mobilization or demobilization) or an hourly rate as specifically established within the contract and are recognized as the event is completed or work is done. Service revenues from contracts with bundled pricing are based upon the fair value of the pricing components at the time the contract was negotiated and recognized when the performance obligation has been satisfied in accordance with the contract. The stated hourly labor rates in each contract are representative of the stand-alone hourly rates at the time the contract was negotiated.

Other revenues

Other revenues* *are items that, due to their nature, are disaggregated from the categories mentioned above such as expenses incurred by the Company on behalf of the customer that we contractually rebill to our customers on a cost-plus basis.

Disaggregated revenues

The table below presents revenue disaggregated by source, for thethree months ended* March 31, 2024and2023* (in thousands):

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The table below presents revenue disaggregated by geographic location, for thethree months ended* March 31, 2024and2023* (in thousands):

Variable and other Revenue Components

Certain of our contracts* mayinclude rental or service components at stated rates within the contract that vary depending on customer demand and are satisfied as the work is authorized by the customer and performed by the Company. Additionally, LNG product sales agreements may*include both fixed and variable fees per gallon of LNG but are representative of the stand-alone selling price for LNG at the time the contract was negotiated. We have concluded that the variable LNG fees meet the exception for allocating variable consideration to specific parts of the contract. As such, the variable consideration for these contracts is allocated to each distinct gallon of LNG and recognized when that distinct gallon of LNG is delivered to the customer.

Taxes assessed by a governmental authority that are directly imposed on revenue-producing transactions between the Company and its customers, such as sales, use and value-added taxes, are excluded from revenue.

During thefourth quarter of2023, the Company entered into atwo-year marine bunkering contract with a new customer which represented approximately 30% of the Company's revenue for thethree months ended* March 31, 2024.*

3. PREPAID EXPENSES AND OTHER CURRENT ASSETS

The Company’s prepaid expenses and other current assets at* March 31, 2024* and* December 31, 2023* consisted of the following (in thousands):

4. PROPERTY, PLANT AND EQUIPMENT

The Company’s property, plant and equipment at* March 31, 2024* and* December 31, 2023* consisted of the following (in thousands):

Depreciation expense totaled $1.8 million and $2.0 million for thethree months ended* March 31, 2024and2023*, respectively, all of which is included in the Condensed Consolidated Statements of Operations as a separate line item.

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5. INVESTMENT IN FOREIGN JOINT VENTURE

The Company holds a 40% interest in BOMAY, which builds electrical systems. The majority partner in this foreign joint venture is Baoji Oilfield Machinery Co., Ltd. (a subsidiary of China National Petroleum Corporation), which owns 51%. The remaining 9% is owned by AA Energies, Inc. The Company madeno sales to its joint venture during thethree months ended* March 31, 2024and2023*.

The tables below present a summary of BOMAY's assets, liabilities and equity at* March 31, 2024* and* December 31, 2023*, and its operational results for thethree months ended* March 31, 2024and2023* in U.S. dollars (in thousands):

The table below presents the components of our investment in BOMAY and a summary of the activity within those components for thethree months ended* March 31, 2024* in U.S. dollars (in thousands):

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 doesnot believe an impairment of our investment in BOMAY is necessary for the period ending* March 31, 2024*.

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6. ACCRUED LIABILITIES

The Company’s accrued liabilities at* March 31, 2024* and* December 31, 2023* consisted of the following (in thousands):

Accrued liabilities of $4.2 million at* December 31, 2023*were reclassified from accrued liabilities to accounts payable, to conform to current presentation.

7. DEBT

The Company’s carrying value of debt, net of debt issuance costs at* March 31, 2024* and* December 31, 2023* consisted of the following (in thousands):

Total interest expense was $0.1 million and $0.2 million during thethree months ended* March 31, 2024* and2023, respectively. During thethree months ended* March 31, 2024and2023*, the Company capitalized interest of $0.1 million and $0, respectively.

Revolving Credit Facility

On* June 9, 2023,the Company, along with its subsidiaries, Stabilis LNG Eagle Ford LLC, Stabilis GDS, Inc. and Stabilis LNG Port Allen, LLC (collectively, the “Borrowers”) entered into athree*-year loan agreement (the “Revolving Credit Facility”) with Cadence Bank. The Revolving Credit Facility provides for a maximum aggregate amount of $10.0 million, subject to a borrowing base of80% of eligible accounts receivable. The Company* mayrequest an increase in the maximum aggregate amount under the Revolving Credit Facility by up to $5.0 million, subject to the approval of Cadence Bank. All borrowings under the Revolving Credit Facility are secured by the Company’s accounts receivable and deposit accounts. Borrowings under the Revolving Credit Facility incur interest at the Prime Rate published by the Wall Street Journal. Any unused portion is subject to a quarterly unused commitment fee of 0.5% per annum. As of March 31, 2024*,no amounts have been drawn under the Revolving Credit Facility. The Revolving Credit Facility matures on* June 9, 2026.*

The Revolving Credit Facility contains various restrictions and covenants. Among other requirements, the Borrowers must maintain a consolidated net worth of at least $50 million as of* March 31, 2024*, increasing by 50% of the Borrowers’ net income as of the end of each year ended* December 31,and must maintain a minimum Fixed Charge Coverage Ratio of 1.2 to1.0* on a consolidated basis, as defined in the Revolving Credit Facility, as of the last day of each fiscal quarter, on a trailingtwelve (12) months basis. The Revolving Credit Facility also contains customary events of default. If an event of default under the Revolving Credit Facility occurs and is continuing, then Cadence Bank* maydeclare any outstanding obligations under the Loan Agreement to be immediately due and payable. In addition, if any of the Borrowers become the subject of voluntary or involuntary proceedings under any bankruptcy, insolvency or similar law, then any outstanding obligations under the Loan Agreement will automatically become immediately due and payable. As of March 31, 2024*, the Company was in compliance with all its covenants related to the Revolving Credit Facility.

Secured Term Note

On* April 8, 2021,the Company entered into a loan agreement (the “Loan Agreement”) with AmeriState Bank (“Lender”), to provide for an advancing loan facility in the aggregate principal amount of up to $10.0 million (the “AmeriState Loan”). The Loan Agreement is secured by specific equipment owned by the Company. On September 19, 2023,the Loan Agreement was amended (the "First Amendment"), for the purpose of substituting certain items of collateral under the Loan Agreement. The AmeriState Loan is a term loan facility, matures on April 8, 2031and bears interest at 5.75% per annum through April 8, 2026,and the U.S. prime lending rate plus 2.5% per annum thereafter. The AmeriState Loan provides that proceeds from borrowings maybe 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. As of March 31, 2024*, $9.0 million was drawn and outstanding.

The Loan Agreement requires the Company to meet certain financial covenants which include a debt-to-net-worth ratio ofnot more than 9.1 to1.0 and a debt service coverage ratio ofnot less than 1.2 to1.0 on an annual basis beginning* December 31, 2023*. The Company was in compliance with all of its debt covenants as of* March 31, 2024*. 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.

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Insurance Notes Payable

The Company finances its annual commercial insurance premiums for its business and operations. For the2023-2024 policies, the amount financed was $1.1 million. The outstanding principal balance on the premium finance note was $0.5 million at* March 31, 2024*. The Company makes equal monthly payments of principal and interest over the term of the note. The interest rate for the insurance financing is 7.95%. At* December 31, 2023*, the note's outstanding principal balance was $0.8 million.

8. RELATED PARTY TRANSACTIONS

Casey Crenshaw (our Chairman of the Board) is the beneficial owner of 50% of The Modern Group and is deemed to jointly control The Modern Group with family members. The Company purchases supplies and services from subsidiaries of The Modern Group. In addition, the Company leases office space from The Modern Group. The Company had total purchases and lease payments of $0.1 million for both thethree months ended* March 31, 2024and2023*. The Company hadno sales to The Modern Group during thethree months ended* March 31, 2024* and2023. As of* March 31, 2024* and* December 31, 2023*, the Company hadno accounts receivable due from The Modern Group and accounts payable due to the Modern Group were immaterial.

Chart Energy and Chemicals, Inc. ("Chart E&C") beneficially owns 7.9% of our outstanding common stock at* March 31, 2024*. The Company made purchases from Chart E&C of $0.1 million for thethree months ended* March 31, 2024* and madeno purchases for thethree months ended* March 31, 2023*. The Company hadno sales during thethree months ended* March 31, 2024and2023* andno accounts receivable due from Chart E&C at* March 31, 2024* and* December 31, 2023*. Accounts payable due to Chart E&C at* March 31, 2024* and* December 31, 2023*were immaterial.

9. COMMITMENTS AND CONTINGENCIES

Environmental Matters* *

The Company is subject to federal, state and local environmental laws and regulations. The Company doesnot 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* maybecome 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 mayarise during the course of these audits. It is impossible to determine the ultimate liabilities that the Company mayincur 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 condensed consolidated financial position, results of operations, or liquidity. The Company doesnot,* however, anticipate such an outcome and it believes the ultimate resolution of these matters willnot have a material adverse effect on the Company’s condensed consolidated financial position, results of operations, or liquidity.

10. STOCKHOLDERS’** EQUITY AND STOCK-BASED COMPENSATION**

Stock-based Compensation

The Company includes stock compensation expense within general and administrative expenses in the Condensed Consolidated Statements of Operations. During thethree months ended* March 31, 2024and2023*, the Company recognized $0.4 million and $0.6 million of stock compensation expense, respectively.

Issuance of Stock-based Awards

The Company has a long-term incentive plan (the “Amended and Restated Plan”) which provides for a maximum number of shares of common stock available for issuance of 5,500,000 shares. The plan was amended in2023 to increase the maximum number of shares from 4,000,000 to 5,500,000, as approved by shareholders. Awards under the Amended and Restated Plan* maybe 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 maybe 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 mayreceive a grant covering more than 2,000,000 shares of our common stock in any year and a non-employee member of the Board may**not* be granted more than 100,000 shares in any year.

The Company madeno stock-based awards during thethree months ended* March 31, 2024.*

Issuances of Common Stock

During thethree months ended* March 31, 2024*, and2023, shares of common stock were issued upon vesting of restricted stock units, net of withholding shares for tax payments, totaling 11,623 shares and 13,587 shares, respectively. There wereno stock options or stock appreciation rights exercised during thethree months ended* March 31, 2024* or2023.

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11. NET INCOME PER SHARE

The calculation of net income per common share for thethree months ended* March 31, 2024and2023* are presented below. Dilutive securities consist of unvested restricted stock units ("RSUs") deemed outstanding using the treasury method. RSUs excluded from dilutive securities under the treasury method were 11,953 shares and 105,843 shares at* March 31, 2024* and2023, respectively. In addition, stock options of 2,074,505 and stock appreciation rights of 658,437 were excluded from diluted securities, as the exercise price exceeds the market price and inclusion would have had an anti-dilutive effect at both* March 31, 2024and2023*.

12. SUPPLEMENTAL CASH FLOW INFORMATION

The Company's supplemental disclosure of cash flow information for thethree months ended* March 31, 2024and2023* is as follows (in thousands):

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