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 using liquefied natural gas (“LNG”) to multiple end markets across North America.
The Company is a supplier of LNG 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 operates two LNG production facilities in George West, Texas and Port Allen, Louisiana to service customers in Texas and the greater Gulf Coast region.
The Company also provides electrical switch-gear, generator and instrumentation construction, installation and service to the marine, power generation, oil and gas, and broad industrial market segments in Brazil, and the Company builds power and control systems for the energy industry in China through its 40% owned Chinese joint venture, BOMAY Electric Industries, Inc (“BOMAY”).
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 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, 2021 included in the Company's Annual Report on Form 10-K, as filed on March 10, 2022.
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 operating losses and is subject to substantial 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.
These factors 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 positive working capital and has experienced increased revenue and has generated positive cash flows from operations for both the three months ended March 31, 2022 and for the years ended December 31, 2021 and 2020.
The Company has an advancing loan facility in the aggregate principal amount of up to $10.0 million, of which $8.0 million was drawn and outstanding as of March 31, 2022. The Company's management believes that the Company will continue to generate positive cash flows from operations and that its current working capital, access to its advancing loan facility and revenue growth of the business will generate sufficient cash to fund the business for twelve months following the date of issuance of these financial statements.
Reclassifications
The Company reclassified $0.5 million from selling, general and administrative expense to costs of rental, service and other within the Condensed Consolidated Statements of Operations for the three months ended March 31, 2021 within our LNG Segment to conform to current period presentation. Such reclassifications had no impact on the consolidated financial position, income from operations, net income or cash flows.
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 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.
Recent Accounting Pronouncements
Recently Issued Accounting Standards Not Yet Adopted
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.
In June 2016, the FASB issued ASU 2016-13, “Financial Instruments - Credit Losses - Measurement of Credit Losses on Financial Instruments,” which changes the way companies evaluate credit losses for most financial assets and certain other instruments. For receivables, and other short-term financial instruments, companies will be required to use a new forward-looking “expected loss” model to evaluate impairment, potentially resulting in earlier recognition of allowances for losses. The new standard also requires enhanced disclosures, including the requirement to disclose the information used to track credit quality by year of origination. ASU No. 2016-13 will be effective for the Company in the first quarter 2023. Early adoption of the new standard is permitted; however, Stabilis has not elected to early adopt the standard. We are currently evaluating the effect that the new standard will have on our consolidated financial statements, if any.
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. Amounts are billed upon completion of service or transfer of a product and are generally due within 30 days.
LNG Segment
Revenues from contracts with customers within our LNG Segment are disaggregated into (1) LNG product (2) rental, service, and (3) other.
LNG product revenue generated includes the revenue from the product and delivery of 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. 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 Segment
Power Delivery revenue is generated from time and material projects and consulting services. 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 over time. 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 and are generally due within thirty days from the receipt of the invoice.
Disaggregated Revenues
The table below presents revenue disaggregated by source, for the three months ended March 31, 2022 and 2021 (in thousands):
| | | | | | | | | | | | | | | |
| | | Three Months Ended March 31, |
Revenues: | | | | | 2022 | | 2021 |
LNG Product | | | | | $ | 16,785 | | | $ | 11,695 | |
Rental | | | | | 3,305 | | | 3,387 | |
Service | | | | | 76 | | | 242 | |
Power Delivery | | | | | 2,766 | | | 1,544 | |
Other | | | | | 101 | | | 796 | |
| | | | | $ | 23,033 | | | $ | 17,664 | |
The table below presents revenue disaggregated by geographic location, for the three months ended March 31, 2022 and 2021 (in thousands):
| | | | | | | | | | | | | | | |
| | | Three Months Ended March 31, |
Revenues: | | | | | 2022 | | 2021 |
Brazil | | | | | $ | 2,766 | | | $ | 1,544 | |
Mexico | | | | | 3,766 | | | 1,616 | |
United States | | | | | 16,501 | | | 14,504 | |
| | | | | $ | 23,033 | | | $ | 17,664 | |
See Note 3 below for additional disaggregation of revenue by segment.
Contract Assets and Liabilities
Revenue from certain of our contracts within our Power Delivery segment are recognized over time. Costs and estimated earnings recognized to date in excess of cumulative billings are recorded as contract assets and included within our prepaid expenses and other current assets in the accompanying Condensed Consolidated Financial Statements. The Company also recognizes contract liabilities upon receipt of payments for which the performance obligations have not been fulfilled at the reporting date. Contract liabilities are included in accrued liabilities in the accompanying unaudited Condensed Consolidated Balance Sheets. The table below presents changes in the Company’s contract liability balance from December 31, 2022 to March 31, 2022 (in thousands):
| | | | | | | | | | | |
| | | | | March 31, 2022 | | |
Balance at beginning of period | | | | | $ | 83 | | | |
Cash received, excluding amounts recognized as revenue | | | | | 315 | | | |
Amounts recognized as revenue | | | | | (83) | | | |
Balance at end of period | | | | | $ | 315 | | | |
Amounts recognized into revenue for the three months ended March 31, 2022 and 2021 from contract liabilities existing at December 31, 2022 and December 31, 2021 was $0.1 million and $0.3 million, respectively. The Company has no other material contract assets or liabilities and contract costs.
3. BUSINESS SEGMENTS
The Company’s revenues are derived from two 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. The tables below present operating results by segment for the three months ended March 31, 2022 and 2021 as well as their respective total assets at March 31, 2022 and December 31, 2021 (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| | | Three Months Ended March 31, 2022 |
| | | | | | | LNG | | Power Delivery | | Total |
Revenues | | | | | | | $ | 20,267 | | | $ | 2,766 | | | $ | 23,033 | |
Depreciation | | | | | | | 2,277 | | | 45 | | | 2,322 | |
Loss from operations before equity income | | | | | | | (295) | | | (97) | | | (392) | |
Net equity income from foreign joint ventures' operations | | | | | | | — | | | 87 | | | 87 | |
Loss from operations | | | | | | | (295) | | | (10) | | | (305) | |
Interest income (expense), net | | | | | | | (137) | | | (17) | | | (154) | |
Interest expense, net - related parties | | | | | | | (31) | | | — | | | (31) | |
Income tax expense (benefit) | | | | | | | (132) | | | 3 | | | (129) | |
Net loss | | | | | | | (376) | | | (30) | | | (406) | |
Total assets | | | | | | | 68,903 | | | 17,700 | | | 86,603 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| | | Three Months Ended March 31, 2021 |
| | | | | | | LNG | | Power Delivery | | Total |
Revenues | | | | | | | $ | 16,120 | | | $ | 1,544 | | | $ | 17,664 | |
Depreciation | | | | | | | 2,188 | | | 37 | | | 2,225 | |
Loss from operations before equity income | | | | | | | 268 | | | (267) | | | 1 | |
Net equity income from foreign joint ventures' operations | | | | | | | — | | | 354 | | | 354 | |
Income from operations | | | | | | | 268 | | | 87 | | | 355 | |
Interest expense, net | | | | | | | (7) | | | (10) | | | (17) | |
Interest expense, net - related parties | | | | | | | (173) | | | — | | | (173) | |
Income tax expense | | | | | | | 44 | | | 36 | | | 80 | |
Net income | | | | | | | 15 | | | 160 | | | 175 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| | | December 31, 2021 |
| | | | | | | LNG | | Power Delivery | | Total |
Total assets | | | | | | | $ | 70,735 | | | $ | 16,601 | | | $ | 87,336 | |
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.
4. PREPAID EXPENSES AND OTHER CURRENT ASSETS
The Company’s prepaid expenses and other current assets at March 31, 2022 and December 31, 2021 consisted of the following (in thousands):
| | | | | | | | | | | |
| March 31, 2022 | | December 31, 2021 |
Prepaid LNG | $ | — | | | $ | 92 | |
Prepaid insurance | 692 | | | 1,024 | |
Prepaid supplier expenses | 324 | | | 252 | |
Other receivables and contract assets | 2,064 | | | 946 | |
Deposits | 300 | | | 253 | |
Other | 243 | | | 197 | |
Total prepaid expenses and other current assets | $ | 3,623 | | | $ | 2,764 | |
5. PROPERTY, PLANT AND EQUIPMENT
The Company’s property, plant and equipment at March 31, 2022 and December 31, 2021 consisted of the following (in thousands):
| | | | | | | | | | | | | |
| | | March 31, 2022 | | December 31, 2021 |
Liquefaction plants and systems | | | $ | 47,590 | | | $ | 47,235 | |
Real property and buildings | | | 2,558 | | | 2,348 | |
Vehicles and tanker trailers and equipment | | | 50,309 | | | 50,027 | |
Computer and office equipment | | | 739 | | | 691 | |
Construction in progress | | | 2,180 | | | 1,495 | |
Leasehold improvements | | | 31 | | | 31 | |
| | | 103,407 | | | 101,827 | |
Less: accumulated depreciation | | | (49,515) | | | (47,140) | |
| | | $ | 53,892 | | | $ | 54,687 | |
Depreciation expense for the three months ended March 31, 2022 and 2021 totaled $2.3 million and $2.2 million respectively, all of which is included in the Condensed Consolidated Statements of Operations as a separate line item.
6. INVESTMENT IN FOREIGN JOINT VENTURE
The Company holds a 40% interest in BOMAY Electric Industries Company, Ltd. (“BOMAY”), which builds electrical systems for sale in China. The majority partner in this foreign joint venture is Baoji Oilfield Machinery Co., Ltd. (a subsidiary of China National Petroleum Corporation), which owns 51%. The remaining 9% is owned by AA Energies, Inc. The Company made no sales to its joint venture during the three months ended March 31, 2022 and 2021.
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.
The tables below present a summary of BOMAY's assets and liabilities and equity at March 31, 2022 and December 31, 2021, and its operational results for the three months ended March 31, 2022 and 2021 in U.S. dollars (in thousands, unaudited):
| | | | | | | | | | | |
| March 31, 2022 | | December 31, 2021 |
Assets: | | | |
Total current assets | $ | 83,964 | | | $ | 75,249 | |
Total non-current assets | 3,487 | | | 3,544 | |
Total assets | $ | 87,451 | | | $ | 78,793 | |
Liabilities and equity: | | | |
Total liabilities | $ | 53,426 | | | $ | 45,253 | |
Total joint ventures’ equity | 34,025 | | | 33,540 | |
Total liabilities and equity | $ | 87,451 | | | $ | 78,793 | |
| | | | | | | | | | | | | | | |
| | | Three Months Ended March 31, |
| | | | | 2022 | | 2021 |
Revenue | | | | | $ | 10,079 | | | $ | 14,216 | |
Gross Profit | | | | | 1,609 | | | 2,233 | |
Earnings | | | | | 323 | | | 970 | |
The table below presents a summary of activity in our investment in BOMAY for the three months ended March 31, 2022 in U.S. dollars (in thousands, unaudited):
| | | | | |
| March 31, 2022 |
Initial Investment in BOMAY (1)(2) | $ | 9,333 | |
Undistributed earnings: | |
Balance at the beginning of the period | 1,965 | |
Equity in earnings | 162 | |
Dividend distributions | — | |
Undistributed earnings at March 31, 2022 | 2,127 | |
Cumulative foreign currency translation: | |
Balance at the beginning of the period | 1,027 | |
Change during the period | 37 | |
Cumulative foreign currency translation at March 31, 2022 | 1,064 | |
Investment in BOMAY at end of period | $ | 12,524 | |
_______________
(1)Accumulated statutory reserves in equity method investments of $2.66 million at March 31, 2022 and December 31, 2021 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 40% share of BOMAY’s equity as a result of applying fair value accounting pursuant to ASC 805. The basis difference is being accreted over eight years (the expected life of the joint venture). The Company's accretion during the three months ended March 31, 2022 and 2021 totaled approximately $32 thousand and $32 thousand, respectively, and is included in income from equity investments in foreign joint ventures in the accompanying Consolidated Statement of Operations. The remaining basis difference, net of accumulated accretion at March 31, 2022 and December 31, 2021 is summarized in the following table (amounts in thousands):
| | | | | | | | | | | |
| March 31, 2022 | | December 31, 2021 |
Original basis difference | $ | 1,165 | | | $ | 1,165 | |
Less accumulated accretion | (346) | | | (314) | |
Net remaining basis difference, net at end of period | $ | 819 | | | $ | 851 | |
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 March 31, 2022.
7. ACCRUED LIABILITIES
The Company’s accrued liabilities at March 31, 2022 and December 31, 2021 consisted of the following (in thousands):
| | | | | | | | | | | |
| March 31, 2022 | | December 31, 2021 |
Compensation and benefits | $ | 3,669 | | | $ | 3,489 | |
Professional fees | 297 | | | 223 | |
LNG fuel and transportation | 2,283 | | | 2,788 | |
Accrued interest | 29 | | | 53 | |
Contract liabilities | 315 | | | 83 | |
Other taxes payable | 573 | | | 717 | |
Other accrued liabilities | 245 | | | 260 | |
Total accrued liabilities | $ | 7,411 | | | $ | 7,613 | |
8. DEBT
The Company’s carrying value of debt, net of debt issuance costs at March 31, 2022 and December 31, 2021 consisted of the following (in thousands):
| | | | | | | | | | | |
| March 31, 2022 | | December 31, 2021 |
Secured term note, net of debt issuance costs | $ | 7,619 | | | $ | 7,608 | |
Secured promissory note - related party | 2,942 | | | 3,603 | |
Insurance and other notes payable | 1,052 | | | 1,108 | |
Less: amounts due within one year | (1,986) | | | (2,131) | |
Total long-term debt | $ | 9,627 | | | $ | 10,188 | |
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 $10.0 million (the “AmeriState Loan”), of which $8.0 million was drawn and outstanding as of March 31, 2022. The AmeriState Loan, which is in the form of a term loan facility, matures on April 8, 2031 and bears interest at 5.75% per annum through April 8, 2026, and the U.S. prime lending rate plus 2.5% per annum thereafter. 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.
Secured Promissory Note - Related Party
On August 16, 2019, the Company issued a secured promissory note to M/G Finance Co., Ltd., a related party, in the principal amount of $5.0 million, at an interest rate per annum of 6.0% until December 10, 2020, and 12.0% thereafter, maturing in December 2022. The secured promissory note was subsequently amended on September 20, 2021, and on March 9, 2022 to defer scheduled debt and interest payments, reduce the interest rate and extend the maturity date. Payments under the secured promissory note, as amended, resume in October 2022 and will be in equal monthly installments through December 2023. The secured promissory note, as amended, bears interest at 6.0%. The debt is secured by certain equipment of the Company.
Insurance and Other Notes Payable
(a) Insurance Notes Payable
The Company finances its annual commercial insurance premiums for its business and operations with a finance company. The dollar amount financed was $1.3 million for the 2021 to 2022 policy. The outstanding principal balance on the premium finance note was $0.5 million at March 31, 2022 and $0.9 million at December 31, 2021. The Company makes equal monthly payments of principal and interest over the term of the notes which are generally 10 months or 11 months in term. The interest rate for the 2020 to 2021 insurance policy was 5.45%. The interest rate for the 2021 to 2022 insurance policy is 3.95%.
(b) Unsecured Term Notes Payable - Brazil
The Company also has short-term financing arrangements between M&I Brazil and two, third-party financial institutions to finance project expenditures and working capital. At March 31, 2022 and December 31, 2021, the outstanding balance of these two notes was $0.2 million and $0.3 million, respectively. The notes mature at various dates through December 2024, with interest rates ranging from 7.60% plus the Brazilian Interbank certificate of deposit rate (11.7% at March 31, 2022) to 13.62%.
Interest Expense
During the three months ended March 31, 2022 and 2021, the Company recorded interest expense on debt as follows (in thousands):
| | | | | | | | | | | |
| March 31, 2022 | | March 31, 2021 |
Secured term note | $ | 126 | | | $ | 10 | |
Secured promissory note - related party | 31 | | | 154 | |
Insurance and other notes payable | 26 | | | 14 | |
Total interest expense on debt | $ | 183 | | | $ | 178 | |
Certain of the agreements governing our outstanding debt have certain covenants with which we must comply. As of March 31, 2022, we were in compliance with all of these covenants.
9. RELATED PARTY TRANSACTIONS
Other Purchases and Sales
Applied Cryo Technologies, Inc. (“ACT”), is a company that was owned 51% by Crenshaw Family Holdings, LP (“Crenshaw Family Holdings”). Crenshaw Family Holdings sold its interest in ACT on November 22, 2021. During the three months ended March 31, 2021, the Company paid Applied Cryo Technologies, Inc. (“ACT”) $0.4 million for equipment, repairs and services, and had $2 thousand due from ACT included in accounts receivable on the unaudited Condensed Consolidated Balance Sheets at December 31, 2021. As of March 31, 2022 and December 31, 2021, the Company had $4 thousand and $0.1 million, respectively, due to ACT included in accounts payable on the unaudited Condensed Consolidated Balance Sheets.
The Company purchases supplies and services from a subsidiary of The Modern Group. Casey Crenshaw is the beneficial owner of 25% of The Modern Group and is deemed to jointly control The Modern Group with family members. During the three months ended March 31, 2022 and 2021, the Company made purchases of supplies and services from a subsidiary of The Modern Group totaling $48 thousand and $0.5 million, respectively. The Company had no sales to The Modern Group during either the
three months ended March 31, 2022 or 2021. The Company had no receivable due from The Modern Group at March 31, 2022 or at December 31, 2021. As of March 31, 2022 and December 31, 2021, the Company had $0.7 million and $0.9 million, 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 8.1% of our outstanding common stock at March 31, 2022, and was party to a Secured Term Note Payable with the Company prior to its repayment by the Company during 2021. The Company purchases services from Chart E&C. During the three months ended March 31, 2022 and 2021, purchases from Chart E&C totaled $45 thousand and $43 thousand, respectively. As of March 31, 2022 and December 31, 2021, the Company had $42 thousand and $19 thousand, respectively, due to Chart E&C included in accounts payable on the unaudited Condensed Consolidated Balance Sheets.
Secured Promissory Note - Related Party
The Company has a secured promissory note payable with M/G Finance Co., Ltd, a related party. See additional discussion in Note 8.
10. COMMITMENTS 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.
11. STOCKHOLDERS’ EQUITY AND STOCK-BASED COMPENSATION
Issuances of Common Stock
The Company is authorized to issue up to 37,500,000 shares of common stock, $0.001 par value per share.
During the three months ended March 31, 2022, the Company issued 500,000 shares of common stock, to its former chief executive officer pursuant to the terms of his separation and release agreement. The restricted stock units (RSU's) were expensed during the third quarter 2021. In addition, during the three months ended March 31, 2022, 1,334 shares of common stock were issued to other employees upon vesting of RSU's issued under the Company's long term incentive plan.
Amended and Restated 2019 Long Term Incentive Plan
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 4,000,000 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 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.
Stock-Based Compensation and Awards
During the three months ended March 31, 2022, the Company issued a total of 40,764 restricted stock units ("RSU’s") and 774,505 stock options pursuant to the Amended and Restated Plan. The RSU’s were valued at $0.2 million based upon the closing price of $4.11 on the date of grant and will vest over three years. The Company has estimated the value of the options issued using a valuation model. The full aggregate fair value determined was $1.5 million using observable inputs from trading values of the Company's shares of stock. Assumptions used in determining the valuation of the options included the following:
•A strike price of $6.00 per share with 3-year vesting terms and the closing price of the common stock of $4.11 at date of grant.
•The risk free rate assumed the return of a U.S. Treasury bill of 3 years (the vesting period), which was approximately 1.7% at the date of grant.
•$0 dividends as we have not historically paid dividends.
•A term of 6.5 years, which was determined as the midpoint between the vesting period of 3 years with an anticipated expiration date of 10 years.
•Volatility of approximately 58%.
The Company includes stock compensation expense within general and administrative expenses in the unaudited Condensed Consolidated Statements of Operations. During the three months ended March 31, 2022 and 2021, the Company recognized $0.5 million and $0.1 million of stock compensation expense, respectively. As of March 31, 2022, the Company had $1.3 million of unrecognized compensation costs related to 465,781 outstanding RSUs which is expected to be recognized over a weighted average period of less than two years and $4.0 million of unrecognized compensation costs related to 2,074,505 outstanding options which is expected to be recognized over a weighted average period of less than three years. All RSU's and options are expected to vest.