Stabilis Solutions, Inc. annual report, FY2016

Business context and reporting period

This is American Electric Technologies, Inc. (AETI)’s audited Form 10-K for the fiscal year ended December 31, 2016, with 2015 comparisons. The request identifies Stabilis Solutions, Inc.; the filing itself is for AETI, so confirm the issuer before relying on this summary. AETI supplies custom power distribution, conversion, automation, and electrical services to energy, power generation, marine, and industrial markets.

Financial performance and liquidity

Revenue fell 23%, driven by lower demand and significant U.S. project cancellations and postponements. Gross profit declined 85%; management cited pricing pressure, reduced volume, and $1.20 million of cost overruns on a large power-generation project. Operating expenses were $8.385 million, down from $8.931 million, but the lower gross profit drove a substantially larger operating loss. EBITDA, as defined by the company, was negative $5.888 million versus negative $1.099 million.

By market, oil and gas sales were $17.783 million (2015: $39.876 million), power generation and distribution sales were $12.225 million (2015: $3.704 million), and marine and other industrial sales were $7.804 million (2015: $5.503 million). Corresponding 2016 gross margins were 7%, negative 7%, and 6%.

Year-end working capital was $3.302 million, down from $10.945 million; the current ratio fell to 1.3 from 2.3. Total debt was $5.700 million versus $5.543 million, and reported debt as a percentage of total capitalization rose to 34% from 23%. The company had no additional availability under its revolving facilities at year-end due to financial covenant noncompliance. Operating cash use reflected the net loss and increased contract costs and estimated earnings in excess of billings; accounts payable increased by $4.327 million.

Material changes, outlook, and risks

• On March 23, 2017, after year-end, AETI refinanced the Frost facilities with a $7.00 million senior secured term note at a fixed 11.5% interest rate. Proceeds repaid the facilities and provided approximately $1.00 million of additional working capital. The note requires $0.50 million principal repayment by June 30, 2017, with the balance due March 23, 2021; it is secured by substantially all company assets.
• Backlog declined to $13.5 million at December 31, 2016 from $19.0 million a year earlier. Management said it expected much of BOMAY’s $22.22 million of inventory and work in progress to be invoiced in 2017, subject to budgets and customer acceptance.
• For 2017, management cited potential opportunities in power generation, midstream and downstream oil and gas, LNG, storage, refining, petrochemicals, and IntelliSafe switchgear. It expected China markets to remain flat and saw possible improvement in Brazil. These are expectations, not quantified guidance.
• Oil and gas customers represented approximately 47% of 2016 sales, down from 81% in 2015. One customer accounted for approximately 19% of 2016 sales. The business remains exposed to energy-price cycles, project deferrals, fixed-price contract overruns, commodity costs, and customer concentration.
• The Singapore joint venture MIEFE suspended operations in 2016; its investment was written down to zero, excluding foreign-currency translation. AETI accrued approximately $0.27 million for its share of losses. Its 40%-owned China joint venture BOMAY remained profitable; its term was due to expire in 2018, and extension discussions were underway.
• The company sold the South Coast Electric Systems Bay St. Louis facility and related assets in June 2016, recording a $0.18 million gain. The filing also identifies $1.25 million of secured letters of credit for contract performance guarantees and ongoing medical-claims exposure subject to stated per-person and aggregate limits. Management considered ordinary-course legal proceedings not likely to have a material effect.
• Series A preferred stock carried cumulative 6% dividends and could become redeemable at the holders’ option after April 30, 2017, or upon a defined material default. AETI reported a $4.383 million carrying amount at year-end.
• The BOMAY audit was performed in China by a local audit firm not registered with the PCAOB; the filing warns that U.S. regulators may be unable to inspect the Chinese audit work papers. The independent auditor gave an unmodified opinion on the financial statements but did not attest to internal control. Management reported disclosure controls and internal control over financial reporting were effective.

Important facts for investors to verify

1. Confirm the issuer identity: this filing names American Electric Technologies, Inc., not Stabilis Solutions, Inc.
2. Review the subsequent $7.00 million refinancing, its 11.5% rate, near-term principal payment, collateral, and covenant requirements, including the effect on liquidity.
3. Assess whether operating cash burn, contract assets, accounts payable, and the reduced backlog support the company’s ability to fund operations and meet obligations.
4. Check the status of preferred-stock redemption rights and cumulative dividends, as well as any subsequent developments in the BOMAY extension and MIEFE wind-down.
5. Evaluate whether 2017 opportunities converted into awarded work and revenue, and whether project cost estimates and margins improved after the $1.20 million overrun.