Business context and reporting period
This is the unaudited Form 10-Q for the quarter ended September 30, 2017. The filing identifies the registrant as American Electric Technologies, Inc. (AETI), not Stabilis Solutions, Inc.; verify that this is the intended filing. AETI supplies electrical power distribution, conversion, automation and related services, principally to oil and gas, power generation, marine and industrial markets.
Financial performance and position
Amounts are in millions of dollars unless otherwise stated.
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Revenue | $13.27 | $8.67 | $34.26 | $28.42 |
| Gross profit (loss) | $1.08 | $(0.45) | $1.34 | $0.87 |
| Gross margin | 8% | (5%) | 4% | 3% |
| Operating loss | $(0.75) | $(2.65) | $(3.97) | $(5.67) |
| Net loss attributable to common stockholders | $(1.13) | $(2.71) | $(4.86) | $(5.62) |
| Loss per share, basic and diluted | $(0.13) | $(0.33) | $(0.57) | $(0.68) |
- Q3 revenue rose 53% year over year; nine-month revenue rose 21%. Oil and gas generated $12.23 million of Q3 revenue and $26.66 million for the nine-month period.
- Operating expenses fell to $1.83 million in Q3 and $5.31 million for nine months, from $2.20 million and $6.54 million, respectively. Nine-month EBITDA, a non-GAAP measure, was a loss of $3.42 million versus a loss of $4.47 million.
- Operating cash flow was negative $2.08 million for the first nine months, compared with negative $5.56 million a year earlier. Investing activities provided $1.02 million and financing activities provided $0.53 million.
- At September 30, cash was $1.10 million; working capital was $1.89 million and the current ratio was 1.1-to-1. Total debt was $6.37 million. The company reported no availability for additional borrowing under its credit agreements.
- Total assets were $36.69 million, total liabilities $25.12 million, redeemable preferred stock $4.42 million and stockholders’ equity $7.14 million. The preferred stock carries a 6% cumulative dividend.
Material changes and notable items
- Q3 gross profit improved from a loss to a profit, while common-stockholder losses narrowed. For the nine months, revenue and gross profit increased, and losses narrowed; results nevertheless remained unprofitable.
- Hurricane Harvey temporarily idled Beaumont operations and delayed projects. Management estimated a $2.45 million Q3 revenue impact and a $0.49 million gross-profit impact; a business-interruption insurance claim had been filed, with any proceeds expected to be recorded no earlier than Q4 2017.
- The company issued a $7.0 million senior secured term note in March 2017 at 11.5% interest, repaid $0.5 million of principal, and used proceeds in part to repay and terminate its prior revolving credit facilities. Nine-month interest paid was $0.61 million, versus $0.16 million in 2016.
- At September 30, AETI was out of compliance with the note’s minimum monthly EBITDA covenant but had received a waiver for the period. On November 13, 2017, after quarter-end, the lender modified the loan, waived current covenant noncompliance, revised financial covenants and required $30,000 monthly principal reductions beginning April 2018. AETI also issued the lender warrants for 500,000 shares at $2.26 per share.
- The company’s $23.53 million backlog at quarter-end was up $0.86 million from June 30 and $10.03 million from December 31, 2016; management expected recognition during the rest of 2017 and 2018. No specific revenue or earnings guidance was provided.
Outlook, risks and contingencies
Management cited potential opportunities from U.S. natural-gas-fired power generation and related infrastructure, IntelliSafe switchgear, and improved oil-price stability. It expected China energy markets to remain flat into 2018 and noted continuing uncertainty in Brazil. The company said it may seek additional debt or equity financing, with no assurance funding will be available on favorable terms.
Key risks include future covenant compliance and the possibility of acceleration or other lender remedies if defaults are not waived; limited liquidity; cyclical, oil-and-gas-sensitive customer demand; and raw-material price exposure, particularly copper, steel and aluminum. BOMAY, in which AETI holds 40%, had a joint-venture term set to expire in 2018; the company was working with partners on an extension. Management reported no indication the venture would not be extended. MIEFE had suspended operations and its investment had previously been written down to zero, excluding currency translation. Management said ordinary-course legal matters were not expected to materially affect financial position or results.
Important facts for investors to verify
- Confirm that the AETI filing, rather than a Stabilis Solutions filing, is the intended document.
- Review the amended loan documents, revised covenant definitions and ongoing waiver status, including the lender’s remedies and amortization requirements.
- Assess near-term cash needs and the feasibility and terms of any additional financing, given negative operating cash flow, low cash and covenant constraints.
- Track collection and cash conversion of contract assets, customer advances and the reported backlog, as well as the timing and recoverability of the Hurricane Harvey insurance claim.
- Verify the status and terms of the BOMAY joint-venture extension and the potential dilution from lender and preferred-stock warrants or conversion rights.