AETI American Electric Technologies Inc

Notes to Condensed Consolidated Financial Statements (Unaudited)

1. Overview and Basis of Presentation

American Electric Technologies, Inc. and its subsidiaries (the “Company”, “AETI”, “our”, “us” or “we”) consists of American Electric Technologies, Inc., which owns 100% of M&I Electric Industries, Inc., including its wholly-owned subsidiary, South Coast Electric Systems, LLC (“SCES”) and M&I Electric Brazil Sistemas e Servicios em Energia LTDA (“M&I Brazil”). The operations of AETI consisted of our Brazilian subsidiary, our interest in our Chinese joint venture and our corporate office in Bellaire, Texas.

As previously announced, on July 26, 2019, the proposed share exchange transaction (the “Transaction”) with Stabilis Energy LLC (“Stabilis”) and its subsidiaries was completed.  The Transaction and its related proposals, which included a company name change and a reverse stock split, were approved by our stockholders at a Special Meeting of Stockholders on July 17, 2019. On July 29, 2019, the company began operating under the name Stabilis Energy, Inc. and our common stock began trading on the Nasdaq Capital Market under the ticker symbol “SLNG”.  In addition, the company’s shares outstanding now reflect a one-for-eight reverse split. Unless otherwise noted, any share or per share amounts in the accompanying unaudited condensed consolidated financial statements and related notes give retroactive effect to the reverse stock split. For further information regarding this Transaction, see Note 11.

These financial statements reflect AETI’s operations prior to the Transaction because the Transaction was consummated after the period covered by these financial statements. Accordingly, the historical financial information included in this Form 10-Q is that of AETI prior to the Transaction. All subsequent quarterly and annual filings will present the current and historical financial statements of Stabilis’ operations post-transaction . The accompanying unaudited condensed consolidated financial statements of AETI have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and the rules of the Securities and Exchange Commission (“SEC”) for interim financial information and include all adjustments which, in the opinion of management, are necessary for fair financial statement presentation.   All adjustments are of a normal recurring nature. In the opinion of management, all adjustments, consisting only of normal recurring adjustments, necessary to fairly state the financial position, results of operations and cash flows with respect to the interim condensed consolidated financial statements have been included. The results of operations for the interim periods are not necessarily indicative of the results for the entire fiscal year. We believe that these financial statements contain all adjustments necessary so that they are not misleading. These unaudited condensed financial statements should be read in conjunction with the Company’s consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2018, which was filed on April 16, 2019.

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2. Summary of Certain Significant Accounting Policies

For a detailed list of our critical accounting policies, please see our Annual Report on Form 10-K for the year ended December 31, 2018, which was filed on April 16, 2019.

Use of Estimates

The preparation of condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the condensed consolidated financial statements and accompanying footnotes. The most significant estimates used in our condensed consolidated financial statements affect revenue recognition and estimated cost recognition on our customer contracts and income taxes. The amounts recorded for warranties, legal, income taxes, impairment of long-lived assets (when applicable) and other contingent liabilities require judgments regarding the amount of expenses that will ultimately be incurred. We base our estimates on historical experience and on various other assumptions, as well as the specific circumstances surrounding these contingent liabilities, in evaluating the amount of liability that should be recorded. Additionally, the recognition of deferred tax assets requires estimates related to future income and other assumptions regarding timing and future profitability because the ultimate realization of net deferred tax assets is dependent on the generation of future taxable income during the periods in which temporary differences become deductible. Estimates routinely change as new events occur, additional information becomes available or operating environments change. Actual results may differ from our prior estimates.

New Accounting Standards

In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-02, Leases, which requires lessees to  recognize the following for all leases (with the exception of short-term leases) at the commencement date: (1) a lease liability, which is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis; and (2) a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. Under ASU No. 2016-02, lessor accounting is largely unchanged. ASU No. 2016-02 is effective for fiscal years beginning after December 15, 2018 with early application permitted. Lessees and lessors must apply a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. The modified retrospective approach would not require any transition accounting for leases expiring before the earliest comparative period presented. Lessees and lessors may not apply a full retrospective transition approach. ASU 2016-02 was subsequently amended by ASU No. 2018-01, Land Easement Practical Expedient for Transition to Topic 842; ASU No. 2018-10, Codification Improvements to Topic 842; ASU No. 2018-11, Leases (Topic 842) - Targeted Improvements; ASU No. 2018-20, Narrow-Scope Improvements for Lessors; and ASU No. 2019-01, Leases (Topic 842) - Codification Improvements. ASU No. 2018-11 provides an additional transition method allowing entities to initially apply the new lease standard at the adoption date and recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption.

We adopted the new standard effective January 1, 2019 using the optional transition method in ASU No. 2018-11. Under this method, we have not adjusted our comparative period financial statements for the effects of the new standard or made the new, expanded required disclosures for periods prior to the effective date. We elected the package of practical expedients permitted under the transition guidance in ASU 2016-02 to not reassess prior conclusions related to contracts containing leases, lease classification and initial direct costs. We also elected the practical expedient not to separate the non-lease components of a contract from the lease component to which they relate.

The adoption of the new lease standard resulted in the recognition of lease liabilities and corresponding right-of-use assets of $0.2 million, on the condensed consolidated balance sheet as of January 1, 2019 for real and personal property operating leases. The adoption of ASU 2016-02 did not have a material impact on our consolidated results of operations and cash flows.

In January 2017, the FASB issued ASU No. 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business. ASU No. 2017-01 clarifies the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of a business or as acquisitions (or disposals) of assets. ASU No. 2017-01 is effective for annual periods beginning after December 15, 2018, with early adoption permitted under certain circumstances. The amendments of ASU No. 2017-01 should be applied prospectively as of the beginning of the period of adoption. The Company adopted ASU No. 2017-01 on January 1, 2019. The adoption of this standard had no impact on our consolidated financial position or results of operations, as the adoption is applied on a prospective basis.

Reclassifications

Certain amounts in the prior period financial statements have been reclassified to conform to the current period presentation. Such reclassifications had no effect on the Company’s financial position, results of operations or cashflows.

3 . Revenue Recognition

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Revenue is measured as consideration specified in a contract with a customer and excludes any sales incentives and amounts collected on behalf of third parties. The Company recognizes revenue when it satisfies a performance obligation by transferring control over a product or service to a customer. Amounts are billed upon completion of service or transfer of a product and are generally due within 30 days.

Revenues from contracts with customers are disaggregated into the following primary sources: services and products.

Service revenue is generated from time and material projects and consulting services. The Company generally establishes a master services agreement with each customer and provides associated services on a work order basis, generally by the hour for services performed. The majority of the Company’s contracts with customers are short-term in nature and are recognized as the services are performed, as the transfer of control to the customer and the Company’s right to payment corresponds directly to the services performed to date, at all times throughout completion of the contract.

Product revenue is generated from the resale of electrical and instrumentation equipment. Product contracts are established by agreeing on a sales price or transaction price for the related item. Payment terms for product contracts are generally thirty days from the receipt of the invoice. 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.

All outstanding accounts receivable, net of allowance, on the consolidated balance sheet are typically due and collected within the next 12 months. Additionally, each month end the Company records unbilled revenue (a contract asset) based upon completed and partially completed performance obligations through month end providing the Company an unconditional right to payment for the services performed or products sold for the related period. The Company has no other material contract assets or liabilities and contract costs.

Taxes assessed by a governmental authority that are directly imposed on revenue-producing transactions between the Company and its customers, such as sales, use and value-added taxes, are excluded from revenue.

The table below presents revenue disaggregated by source, for the three and six months ended June 30, 2019 and 2018 (in thousands):

4. Investments 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). The Company made an initial investment of $1.0 million in 2006 when BOMAY was formed, then a second investment of $1.0 million in 2007.

The Company made no sales to its joint venture in the six months ended June 30, 2019 and 2018.   

Below is summary financial information for BOMAY at June 30, 2019 and December 31, 2018 and operational results for the three and six months ended June 30, 2019 and 2018 in U.S. dollars (in thousands, unaudited):

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The following is a summary of activity in investments in foreign joint ventures for the six months ended June 30, 2019 in U.S. dollars (in thousands, unaudited):

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 consolidated statements of operations as equity income (loss) from foreign joint ventures operations. Joint venture income increases the carrying value of the joint ventures and joint venture losses reduce the carrying value. Dividends received from the joint venture reduce the carrying value. 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 adjustment is necessary at June 30, 2019.

5 . Notes Payable

On June 6, 2017, the Company’s subsidiary, M&I Brazil, entered into a Loan Agreement with the former chairman of AETI. The Loan Agreement provides the Company with a $0.30 million loan facility of which $0.20 million is drawn and is outstanding as of June 30, 2019.  All outstanding amounts, including accrued but unpaid interested, are due in June 2020. Under the loan agreement, the interest rate on the loan facility is 10.0%, per annum, payable each quarter. The loan facility is secured by the assets held by M&I Brazil.

In March 2019, Brazil financed project expenditures with short-term financing of approximately $0.2 million from Santander bank. The loan is due March 2020, with an interest rate of 11.88%.

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6 . Leases

M&I Brazil leases offices and facilities in three cities in Brazil that are under operating lease agreements.  The leases expire at various dates through January 2022.  Our operating leases are included in right-of-use assets, current and long-term liabilities in the accompanying Condensed Consolidated Balance Sheet. The assets and liabilities are recognized at the commencement date based on the present value of remaining lease payments based on Brazil’s General Market Price Index rate.  Brazil also has multiple short-term equipment leases which are less than twelve months and have no cancellation penalties, therefore they are not recorded in the balance sheet.

Lease expense for operating leases is recognized on a straight-line basis over the lease term.  Lease expense is recognized in the period for which the obligation for those payments is incurred and is included in general and administrative expense in the Condensed Consolidated Statement of Operations.

An initial right-of-use asset of approximately $0.2 million was recognized as a non-cash asset addition with the adoption of the new lease standard. Operating lease costs were less than $50,000 for the three and six months ended June 30, 2019.  The weighted-average remaining lease term is 2 years and the weighted-average discount rate is 6.75%.

Maturities of our operating lease liabilities as of June 30, 2019 are as follows (in thousands):

7. Income Taxes

The tax provision for the three and six months ended June 30, 2019 and 2018 reflects the provision from taxes on our earnings from our Brazilian subsidiary and dividends received from BOMAY. The Company has established a valuation allowance on its deferred tax assets due to uncertainty regarding future realization.

8. Commitments and Contingencies

The Company received notification of a potential liability of $4.3 million associated with the asset purchase agreement completed in August 2018.  Please see Note 10 for further explanation of this possible obligation.

9 . Redeemable Convertible Preferred Stock

In conjunction with the issuance of 1,000,000 shares of Redeemable Convertible Preferred Stock, Series A in May 2012, warrants to purchase 325,000 shares of our common stock (the “Warrants”) were issued. Discount accretion was approximately $30,000 for both the six months ended June 30, 2019 and 2018.

The Series A Convertible Preferred Stock accrued cumulative dividends at a rate of 6% per annum payable quarterly in cash or in shares of Common Stock, at the option of the Company. At June 30, 2019 and December 31, 2018, the company had accrued but unpaid dividends totaling $0.08 million which is included in accounts payable and other accrued expenses in the condensed consolidated balance sheets. During the six months ended June 30, 2019 and 2018, the Company issued 21,506 and 22,753 shares of common stock as payment of dividends, respectively.

Prior to the completion of the Share Exchange discussed in Note 11, the holders of the Series A Convertible Preferred Stock elected to convert all 1,000,000 shares outstanding into 276,549 shares of common stock (includes effect of 1-for-8 stock split) .

10. Discontinued Operations

  On August 12, 2018 the Company sold substantially all of the U.S. business assets and operations of M&I Electric (“M&I) to a newly formed subsidiary of Myers Power Products, Inc. (“Buyer”). The newly formed subsidiary was established by the Buyer to

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acquire the assets of M&I pursuant to the Asset Purchase Agreement (the “Transaction”) between the Company and the Buyer. The Transaction included a total purchase price of approximately $18.5 million based on $10.1 million of cash consideration plus debt assumed by the buyer of $8.4 million .   

The contractual terms of the Transaction include a provision for true-up of the net working capital, estimated as of the date of closing, to actual working capital as calculated by the Buyer and agreed to by the Seller. Any difference in the actual (conclusive) net working capital in relation to the estimated working capital at closing results in an adjustment to the purchase price.  In October 2018, the Company received notification from the Buyer of their actual working capital calculation. In the notification, the Buyer has communicated a decrease of approximately $4.3 million dollars in net working capital, in comparison to the estimated working capital used at contract closing. The contractual terms of the Transaction provide that in the event the Buyer and Seller cannot agree to a conclusive net working capital adjustment, then all items remaining in dispute shall be submitted by either one of the parties within thirty (30) calendar days after the expiration of the resolution period to a national or regional independent accounting firm mutually acceptable to Buyer and Seller (the "Neutral Arbitrator"). The Neutral Arbitrator shall act as an arbitrator to determine the conclusive net working capital.  The conclusive net working capital, once determined, may result in a purchase price adjustment due to the Buyer or to the Company as Seller.

The Company and the Buyer of M&I Electric currently have a significant disagreement with regard to the working capital adjustment calculation and the Company has not received documentation sufficient to support the Buyer’s position. As such, no adjustments have been made in determining the gain on the sale of assets reported at December 31, 2018.  Any purchase price adjustment related to the conclusive determination of the net working capital adjustment, if any, will be reflected at the date of such determination. Any legal fees incurred related to this disagreement will be expensed as incurred.

At June 30, 2018, the related operating results were reflected as discontinued operations in the Company’s Condensed Statement of Operations.  Summary financial results for the three and six months ended June 30, 2018 are as follows (in thousands, except per share data):

Cash provided by operating activities of discontinued operations for the six months ended June 30, 2018 was $0.4 million. Cash used in investing activities of discontinued operations for the six months ended June 30, 2018 was $0.2 million.

11. Subsequent Events

On July 26, 2019, the share exchange transaction (the “Transaction”) with Stabilis Energy LLC (“Stabilis”) and its subsidiaries was completed.  The Transaction and its related proposals, including a company name change and a reverse stock split, were approved by our stockholders at a Special Meeting of Stockholders on July 17, 2019. On July 29, 2019, the company began operating under the name Stabilis Energy, Inc. and our common stock began trading on the Nasdaq Capital Market under the ticker symbol “SLNG”.  In addition, the company’s shares outstanding will reflect a one-for-eight reverse split.

As a result of the reverse stock split, every eight shares of American Electric common stock outstanding immediately prior to the reverse stock split were combined into one share of Stabilis Energy, Inc. common stock. No fractional shares were issued. In lieu of fractional shares, cash was issued based on the closing price of American Electric common stock on the Nasdaq Capital Market on July 26, 2019. Unless otherwise noted, any share or per share amounts in the accompanying unaudited condensed consolidated financial statements and related notes give retroactive effect to both the transaction and the reverse stock split.

As a result of the completion of the share exchange, the former holders of Stabilis and its subsidiaries own 90% of the combined company and the former American Electric stockholders own 10% of the combined company. Approximately 14,645,917 shares of Stabilis Energy, Inc. common stock were issued and outstanding as a result of the completion of the share exchange and reverse stock split.

Stabilis is a vertically integrated provider of small-scale liquefied natural gas (“LNG”) production, distribution and fueling services to multiple end markets in North America. Stabilis has safely delivered over 200 million gallons of LNG through more than 20,000 truck deliveries during its 15-year operating history, which it believes makes it one of the largest and most experienced small-scale LNG providers in North America. Stabilis’ customers use LNG as a fuel source in a variety of applications in the industrial, energy, mining, utilities and pipelines, commercial, and high horsepower transportation markets. Stabilis’ customers use LNG as an

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alternative to trad itional fuel sources, such as distillate fuel oil and propane, to lower fuel costs and reduce harmful environmental emissions.  Stabilis’ customers also use LNG as a “virtual pipeline” solution when natural gas pipelines are not available or are curtailed.   Stabilis is headquartered in Houston, Texas.

On August 5, 2019, the Company entered into an exchange agreement with Chart Energy & Chemicals, Inc., a Delaware corporation and subsidiary of Chart Industries, Inc. for the exchange of indebtedness of Stabilis LNG, a Company subsidiary, to Chart E&C in the principal amount of up to $7.0 million owed pursuant to a secured promissory note issued by Stabilis LNG to Chart E&C in September 2013, for shares of Common Stock in Stabilis Energy, Inc. This transaction is expected to close within 30 days, subject to both parties meeting certain closing conditions.  

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