Business context and reporting period
This is American Electric Technologies, Inc.’s unaudited Form 10-Q for the quarter and six months ended June 30, 2019. It does not include Stabilis’s operating results: the share exchange with Stabilis Energy LLC closed on July 26, 2019, after the reporting period. On July 29, the registrant began operating as Stabilis Energy, Inc. and trading as SLNG; former Stabilis owners held 90% of the combined company. The filing does not identify the registrant as Stabilis Solutions, Inc.
Pre-transaction continuing operations comprised the Brazilian subsidiary, a 40% interest in Chinese joint venture BOMAY, and the corporate office. The U.S. electrical business had been sold in August 2018.
Financial performance and liquidity
Amounts below are in U.S. dollars; financial statement amounts are in thousands unless stated otherwise.
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Revenue | $1,955 | $2,075 | $3,171 | $3,951 |
| Gross profit (margin) | $418 (21%) | $509 (25%) | $588 (19%) | $837 (21%) |
| Operating expenses | $924 | $567 | $1,837 | $1,126 |
| Net income (loss) | $(17) | $(1,938) | $(511) | $(4,903) |
| Net loss attributable to common stockholders | $(108) | $(2,028) | $(693) | $(5,082) |
| Basic and diluted loss per share | $(0.09) | $(1.84) | $(0.59) | $(4.59) |
Q2 2019 included $396 of net equity income from BOMAY and $166 of total other income; six-month amounts were $608 and $203, respectively. The six-month tax provision was $73. The 2018 comparisons include discontinued U.S. operations’ losses of $1,979 for Q2 and $4,838 for the six months; there were no discontinued-operation results in 2019.
For the six months, operating cash flow was $(1,048), versus $1,477 provided in 2018; investing cash use was $117, and financing provided $127. Cash declined from $2,124 at year-end to $1,080 at June 30. Working capital was $751, the current ratio 1.2:1, and debt as a percentage of total capitalization 5%. Short-term notes payable totaled $338, including a $200 Brazil loan at 10% and approximately $200 of Santander borrowing at 11.88% (the filing’s rounded component amounts do not reconcile exactly to the balance-sheet total). Lease liabilities totaled $147, including $63 current and $84 long-term.
Material changes, outlook, and risks
- Q2 revenue decreased 6% year over year and six-month revenue fell 20%, primarily because a large Brazil project was completed in the prior-year period. Gross margins also declined; management attributed Q2 margin pressure primarily to higher project costs.
- General and administrative costs rose 67% in both the quarter and six-month comparison, primarily due to financial, legal, and advisory costs related to the Stabilis transaction. Selling costs increased with added Brazil personnel. BOMAY equity income rose, primarily due to a rig order for a major Chinese customer.
- Management reported losses and negative operating cash flows in recent years and identified working capital, capital spending, and general corporate needs as liquidity uses. No numerical forward guidance is provided. Management expected to optimize the Brazil service business and China joint venture.
- A dispute with the buyer of the former U.S. business concerns a proposed $4.3 million working-capital purchase-price adjustment. The company said it lacked documentation sufficient to support the buyer’s calculation and had not recorded an adjustment; the amount and outcome remain uncertain.
- After quarter-end, Stabilis agreed to exchange up to $7.0 million of subsidiary indebtedness owed to Chart Energy & Chemicals for common shares, subject to closing conditions. The filing said the transaction was expected to close within 30 days.
- Disclosure controls were deemed ineffective as of June 30 because of a material weakness in internal control over financial reporting, associated with reduced accounting staffing and insufficient segregation of duties and oversight. Management said remediation was ongoing and expected testing to be completed by year-end 2019.
- Risks include cyclical, oil-and-gas-sensitive customer demand, foreign-exchange exposure, and copper, steel, and aluminum price increases that may not be recoverable from customers. A 10% adverse currency move was estimated to reduce non-U.S.-dollar working capital by about $70.
Important facts for investors to verify
- How the $4.3 million working-capital dispute is resolved, including any purchase-price adjustment, arbitration, or legal costs.
- Completion and terms of the proposed Chart debt-for-equity exchange, and its effect on debt and dilution.
- Post-merger Stabilis operating performance, liquidity, and financing needs, which are not reflected in this quarter’s historical financial statements.
- Whether management’s internal-control remediation was completed and independently tested as expected.
- The sustainability of Brazil revenue and margins, BOMAY earnings and cash distributions, and the company’s ability to fund operations given the cash decline and negative operating cash flow.