Stabilis Solutions, Inc. quarterly report, Q1 FY2019

Business context and reporting period

American Electric Technologies, Inc. (AETI; Nasdaq: AETI) filed this unaudited Form 10-Q for the quarter ended March 31, 2019. The filing predates the proposed combination with Stabilis Energy, LLC; AETI reported that it had entered into a share exchange agreement in December 2018 and amended it on May 8, 2019. Following the 2018 sale of its U.S. operating business, continuing operations consisted primarily of its Brazilian subsidiary, corporate activities, and a 40% equity-method interest in China-based BOMAY.

Financial performance and liquidity

Unless otherwise indicated, amounts are in U.S. dollars; financial statement amounts below are in millions.

BOMAY contributed $0.265 million of equity income, net of $0.054 million in related expenses, versus $0.110 million net equity income a year earlier. BOMAY reported Q1 2019 revenue of $11.5 million and earnings of $0.662 million; AETI recorded no dividend distributions from the venture during the quarter.

At March 31, cash was $1.006 million, total current assets were $2.930 million, and current liabilities were $2.697 million. Working capital was $0.233 million and the current ratio was 1.1:1, down from $1.201 million and 1.4:1 at year-end 2018. Debt was $0.536 million, versus $0.202 million at year-end; debt was 7% of total capitalization versus 3%. The company reported total liabilities of $2.950 million and redeemable convertible preferred stock of $4.514 million. Lease liabilities totaled approximately $0.185 million.

Material changes versus the prior comparable period

• Revenue fell 26%, mainly because a large Brazilian project had been completed in the prior-year quarter. The 2018 comparison also included $6.413 million of revenue and a $2.859 million loss from the U.S. business, which was sold in August 2018 and reported as discontinued operations. As a result, total-company comparisons are not directly like-for-like.
• Gross margin improved to 33.7% from 17.5%, which management attributed to the prior-year project’s lower margins.
• General and administrative expense rose to $1.083 million from $0.467 million, primarily due to financial, legal, and advisory fees related to the Stabilis transaction.
• Net equity income from BOMAY increased, which management attributed primarily to a rig order for a major Chinese customer.
• Cash declined by $1.118 million during the quarter, from $2.124 million to $1.006 million. Operating cash use was partly offset by $0.334 million of short-term borrowing.

Outlook, risks, contingencies, and unusual items

The filing provides no specific financial guidance. Management said it was monitoring liquidity closely, intended to optimize international operations, expand Brazilian services, and diversify BOMAY’s operations. It said up to $1.4 million in funding had been arranged, including a BOMAY dividend and up to $0.6 million from Stabilis for transaction expenses; the filing does not detail the timing or conditions of all funding sources. Management also reported several years of losses and negative operating cash flows.

• Sale-related dispute: The buyer of the former U.S. business asserted a roughly $4.3 million reduction to purchase price based on its working-capital calculation. AETI disputed the calculation and said it had not received sufficient supporting documentation. No adjustment had been recorded as of March 31, 2019; the agreement provides for independent arbitration if the parties cannot agree.
• Borrowings: A $0.2 million loan from AETI’s former chairman was due in June 2019, carried 10% annual interest, and was secured by M&I Brazil assets. Brazil also obtained approximately $0.2 million in Santander short-term financing, due March 2020 at 11.88% interest.
• Preferred stock: Series A preferred stock carries a 6% cumulative dividend. AETI issued 85,559 common shares to pay preferred dividends in the quarter. A majority of preferred holders may require redemption; the stated redemption price was $5.00 per share, with payment in 36 monthly installments plus interest if exercised.
• Controls and filing delay: Management concluded disclosure controls were effective, but acknowledged the 10-Q was not filed on time. It also reported prior internal-control weaknesses and said additional accounting staff and a new accounting system were implemented; implementation, training, and testing delayed quarter-end reporting.
• Market risks: Demand is exposed to oil and gas customer investment cycles; currency movements affect Brazilian and Chinese exposures. Copper, steel, and aluminum price increases could pressure margins if not recovered from customers.

Important facts for investors to verify

• Current status and terms of the Stabilis share exchange, including the May 2019 amendment and funding referenced in the filing.
• Resolution of the $4.3 million working-capital purchase-price dispute, including any arbitration, settlement, or resulting cash obligation.
• Subsequent liquidity, cash burn, availability of the anticipated funding, and repayment status of the June 2019 former-chairman loan.
• Any preferred-stock redemption demand, accrued dividends, and continuing dilution from payment of dividends in common shares.
• Progress in remediating internal-control weaknesses and whether late reporting or accounting-system implementation issues recur.

The filing states operating lease costs for the quarter in a way that does not provide a clear value; investors should consult the filed financial statements or subsequent disclosures for clarification.