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Edited Transcript of AETI earnings conference call or presentation 15-May-18 3:00pm GMT

Thomson Reuters StreetEvents

Q1 2018 American Electric Technologies Inc Earnings Call

HOUSTON May 28, 2018 (Thomson StreetEvents) -- Edited Transcript of American Electric Technologies Inc earnings conference call or presentation Tuesday, May 15, 2018 at 3:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Charles M. Dauber

American Electric Technologies, Inc - CEO, President & Director

* William Brod

American Electric Technologies, Inc - Senior VP, CFO & Secretary

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Conference Call Participants

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* William J. Dezellem

Tieton Capital Management, LLC - President, CIO and Chief Compliance Officer

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Presentation

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Operator [1]

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Good day, and welcome to the AETI to report the first quarter 2018 results call. Certain statements contained in this conference call that are not descriptions of historical fact are forward-looking statements as such term is defined in the Private Securities Litigation Reform Act of 1995. Because such statements include risks and uncertainties, actual results may differ materially from those expressed or implied by such forward-looking statements.

Factors that could cause results to differ materially from those expressed or implied by such forward-looking statements include, but are not limited to, those discussed in filings made by the company with the Securities and Exchange Commission. Many of the factors that will determine the company's future results are beyond the ability of management to control or predict. Listeners should not place undue reliance on forward-looking statements, which reflect management's views only as of the date hereof. The company undertakes no obligation to revise or update any forward-looking statements or to make any other forward-looking statements whether as a result of new information, future events or otherwise. As a reminder, today's call is being recorded.

At this time, I would like to turn the conference call over to Charles Dauber, President and CEO. Please go ahead.

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Charles M. Dauber, American Electric Technologies, Inc - CEO, President & Director [2]

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Thank you, and good morning, everyone. I'd like to welcome you all to the American Electric Technologies First Quarter 2018 Earnings Call.

Joining me this morning is our Senior Vice President and Chief Financial Officer, Bill Brod.

For our call today, I'm going to start with a review of our first quarter results, and Bill will walk you through some additional financial details, and then I'll come back and share my thoughts on where we are so far this year. We'll then move to a question-and-answer session coordinated by the moderator.

As you all saw from our earnings release this morning, AETI announced revenue for the quarter of $8.3 million, up 3% from the $8 million reported in Q1 last year, but down 36% with Q4. The drop in Q1 revenue versus Q4 is attributable to the reduced backlog entering the quarter from the company's North American oil and gas sector, which had orders delayed in Q4 due to Hurricane Harvey impacts on Houston-area companies, but was boosted by another record quarter from our Brazilian operations.

Company recorded -- reported quarter ending backlog growth of 32%, up from year ending backlog of $18.9 million to $24.9 million. This backlog increase includes a 30% increase in our oil and gas sector backlog, and a new multimillion dollar marine vessel project award that will be recognized as revenue beginning in the second quarter of 2018.

The company reported an EBITDA loss in the quarter of $2.5 million, down slightly versus Q1 last year and down by $2.5 million from Q4 due to the reduced revenue levels reported in the quarter.

During the quarter, the company also made progress on our long-term strategy with the announcement of a 10-year extension of our BOMAY joint venture in China. The company also announced a significant break-in win in the power generation sector in Brazil, which is a target market for our Brazilian growth plans.

Both of these significant announcement occurred just ahead of the company reporting our hiring of Oppenheimer & Co. to address our near-term liquidity needs and strengthen our balance sheet, including potential equity or debt offerings, the purchase or sale of assets, strategic mergers or other potential actions aimed at increasing shareholder value.

With that, I'll now turn the call over to Bill Brod for more financial details. We'll come back afterwards with more comments on the business.

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William Brod, American Electric Technologies, Inc - Senior VP, CFO & Secretary [3]

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Thanks, Charles, and good morning.

For the first quarter of this year, the company reported a net loss of $3.1 million, which is a $5.3 million decrease versus Q4 of 2017, and a decrease of $0.5 million from the loss of $2.6 million in Q1 of 2017.

If you recall, in the fourth quarter of this last year, the company recognized a onetime noncash benefit of $2.8 million resulting from the revaluation of our deferred tax liabilities related to the company's non-U. S. subsidiary and joint venture, and based on the Tax Act that was passed in December of last year.

The company reported a fully diluted loss per share of $0.35 for the first quarter versus a diluted loss of $0.31 per share reported in the first quarter of 2017, and a $0.26 per share gain in the fourth quarter of last year.

Consistent with last quarter, our quarterly fixed costs continue to run in the $3 million to $3.5 million range, which suggests we need to be in the $50 million to $60 million annualized run rate range, depending on revenue mix, for profitability.

Moving to the balance sheet. We ended the quarter with a cash position of $627,000, which is down from the $2.3 million reported at the end of last year. Total assets were down approximately $3.2 million from Q4, due primarily to a $2.2 million decrease in the cost and estimated earnings in excess of billings and uncompleted contracts, and the change in cash, offset by a $1 million dividend receivable that was declared during the first quarter by our joint venture in China, BOMAY.

Total debt at the end of the quarter was $6 million, down slightly $29,000 versus Q4. Total liabilities were reduced by $800,000 versus Q4, based on a $1.5 million reduction or paydown in accounts payable, and offset by $0.5 million increase in the billings in excess of cost and estimated earnings on uncompleted contracts during the quarter.

Working capital at the end of the year was -- at the end of the quarter, I should say, was $136,000 compared with $1 million at the end of last year. As stated last quarter, the company received an advance of $116,000 in January related to the business interruption resulting from Hurricane Harvey last year. And we still anticipate the claim being fully processed by the end of the second quarter with a potential for an additional $200,000 in net proceeds.

With that, I will turn it back over to Charles for some additional commentary and outlook on the business.

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Charles M. Dauber, American Electric Technologies, Inc - CEO, President & Director [4]

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Thanks, Bill. I'm going to begin with our sector review, starting with the oil and gas market sector. As we previously discussed, the majority of our focus here is in the midstream and downstream portions of the oil and gas sector, but there have been some new developments in the upstream market, that I'll discuss with you as well.

First, we knew that Q1 would be soft based on the reduced oil and gas backlog we had entering Q1, but we had a lot of projects to focus on booking that have slid out of Q4 due to Hurricane Harvey impact on Houston area oil and gas companies.

In Q1, oil and gas sector revenues were actually up 17% versus Q1 last year, but were down 55% from Q4.

The revenues are still coming from a mix of midstream and downstream oil and gas projects, and include revenue from turnkey solutions that incorporate our IntelliSafe Medium Voltage Arc-resistant switchgear and our PDC solutions.

Oil and gas sector bookings rebounded in Q1 and were up 30% to $14.5 million from $11.1 million at the end of Q4. We see many good opportunities for IntelliSafe Arc-resistant switchgear and our PDC projects with oil and gas-oriented EPC companies going forward.

We're also seeing progress of larger mid and downstream projects and have multiple opportunities in our sales pipeline of $10 million and up, that we look forward to sharing with you as they close.

Moving to the upstream part of our oil and gas sector, which is land and offshore drilling, power and control systems, we feel as good about that upstream part of our business today as we have felt in several years. We have multiple old customers coming back to us to help them get their land and offshore drilling rigs back up and running and multiple companies looking for upgrades and even new power and control system projects.

The Offshore Technology Conference was earlier this month and, although overall attendance was still down, oil prices above $70 gave everyone a bounce in their step and more projects were discussed at that show than in the prior several OTC shows. I look forward to sharing more updates with you on our new land and offshore drilling projects as soon as we are able.

Moving to BOMAY, our joint venture in China, which is 100% focused on the oil and gas markets. BOMAY reported Q1 revenues of $8.1 million, which was up 91% from the $4.2 million reported in the first quarter of last year, but down slightly compared to Q4 2017.

AETI recognized 40% of their profits as equity income, which was $171,000 for the quarter.

As I mentioned in my opening remarks, the company announced that we have extended our BOMAY joint venture for another 10 years. Since the joint venture was established, it has generated over $580 million of revenue, has generated $18 million of equity income and has delivered more than $11 million of dividends back to AETI.

BOMAY has seen an uptick in orders and are more optimistic for oil and gas opportunities, both domestically in China and in the other international markets that they serve. We are working with BOMAY to expand their business and look forward to another 10 years of successful partnership together.

I'll now move to our power generation and distribution sector. Q1 power generation sector revenues were $2 million, up from the $900,000 in Q4 last year, but down 31% from Q1.

Our increase versus Q4 was buoyed by our new distributed power generation project business; but versus Q1 last year, it was down due to lumpiness in the natural gas-based power plant construction projects. Quarter-ending backlog in the sector was $3.7 million. I do want to report that we are now seeing an increase in larger target EPC project opportunities that are expected to close in 2018, and we'll report further as those projects are awarded.

Moving to the marine and other industrial sector. Revenues were $1.7 million in the quarter, flat from Q4, but up slightly from $1.3 million in Q1 last year. Backlog in this sector is up 211%, due to the large marine vessel project award I mentioned earlier.

Let me now discuss M&I Electric in Brazil. M&I Brazil's revenue is split between the 3 sectors, oil and gas, power generation and marine and industrial.

In Q1, revenues in Brazil continued to set records at $1.9 million, which is up 54% from Q1 last year and up another 9% versus Q4. The M&I Electric Brazil team continues to execute on their strategy in all of their sectors. And they've successfully augmented their services business to begin delivering product-oriented projects for the industrial and energy market.

M&I Brazil is seeing opportunity growth in the offshore oil and gas market related to the stability of oil prices and the return of offshore drilling to Brazil. We also continue to make progress in the power generation market, as we announced a break-in win in Q1 and continue to progress with our industrial customers in Brazil as well. While the Brazilian macroeconomic environment remains challenging, we are very positive about the progress the team is making, and I look forward to sharing additional information with you about their progress as they proceed.

If I take a step back and look at where we are as a company, it is certainly an interesting time for us. We've managed to maintain our company and our operations during the very challenging oil price market which decimated our traditional land and offshore drilling businesses, both domestically and internationally. We are now seeing signs, and in fact, multiple signs of a global rebound in that business, but expect the recovery and growth to be choppy. Our focus in the last several years on the midstream, downstream and power generation markets with our IntelliSafe and power and distribution business has made great strides in a tough market environment against entrenched competitors.

We have a substantial set of satisfied customers who are gearing up for reorders in 2018, and we are well positioned for continued growth in those markets.

Our international businesses in Brazil and China that have been down due to their historical focus on upstream oil and gas, seem to be on the right track due to the aforementioned oil price increase, and we're positive about their opportunities in both markets going forward. To address our liquidity, we've hired Oppenheimer, and expect that we will be able to report back by next quarter's call how we think we can address our balance sheet challenges and maximize value for our shareholders.

Before we proceed with the Q&A session, I'd like to conclude the prepared portion of our comments by thanking our employees for their hard work, and thank our customers, suppliers and shareholders for their support.

This concludes the prepared portion of my comments, and I'll now turn the call over to Ashley for the Q&A session of the call.

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Questions and Answers

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Operator [1]

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(Operator Instructions) We'll take our first question.

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William J. Dezellem, Tieton Capital Management, LLC - President, CIO and Chief Compliance Officer [2]

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It's Bill Dezellem with Tieton Capital. I have a group of questions. First of all, let's start, if we could, with the multimillion dollar marine vessel award. Would you please discuss that in a little bit more detail, including the size and how that piece of business came about? And if it was one of these that had previously been delayed? Or I guess where it fits into the grand scheme of things, please?

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Charles M. Dauber, American Electric Technologies, Inc - CEO, President & Director [3]

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Yes. So size and what the project is about and was it delayed? So yes, this project is with a U.S. Gulf Coast marine vessel operator. It's a project that we've literally been working on for 2 years. It's been delayed for, versus originally expected progression, for over a year. And this is for a complete turnkey solution set for a vessel that's operating in the U.S. waters. It's on the order of $4 million to $5 million of value for the project. And we're not discussing specifics of that, but it's a large nice project for us. Traditional solution for us, including generator control, including vessel management, including low-voltage and medium-voltage switchgear, and we won against some very, very large competitors in the marketplace.

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William J. Dezellem, Tieton Capital Management, LLC - President, CIO and Chief Compliance Officer [4]

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Actually, Charles, I'd like to kind of take off from what you've just said. Why did you win versus these large competitors? What was it about your offering?

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Charles M. Dauber, American Electric Technologies, Inc - CEO, President & Director [5]

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This is a special marine vessel project. This is really going to be one of the most high-tech vessels that operate in U.S. waters. And what this particular customer really liked was that we were able to offer the turnkey solution set for their vessel, including Arc-resistant switchgear. And they're actually going to deploy our IntelliSafe explosion-proof switchgear on their vessel. They want to use this as the flagship of their fleet and we were able to come in and say look, we are the right partner for you with the right experience and the best technology and win against people that are 1,000x our size.

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William J. Dezellem, Tieton Capital Management, LLC - President, CIO and Chief Compliance Officer [6]

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Let's talk, if we could, just continue kind of down this path of projects. You'd mentioned in your opening remarks that you have -- I thought you said multiple $10-plus million projects in the pipeline. Maybe for point of reference, what's the largest piece of business that you have won historically? Just trying to gauge just how meaningful $10-plus million is. And how many of those contracts are there? What's the time line for decisions and your prognosis for success?

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Charles M. Dauber, American Electric Technologies, Inc - CEO, President & Director [7]

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So we haven't disclosed specific project values for most of our customer projects under our nondisclosure agreements with them. What I can say in general is that these $10 million projects would be the large-type projects for us, what we consider to be sort of at the high end of our range, historical range. But remember, part of what we did with the doubling of our manufacturing plant and getting into the power distribution center business and building the Arc-resistant switchgear product line was just for this. Our strategy has been, into these EPC firms, win the first project with them that may be $3 million to $4 million. Be successful in that project, then get more of those projects and be able to qualify for their larger projects, which may be $10 million, $15 million, $20 million, $25 million and even $30 million-sized projects. So all I can say is we've never had a project pipeline before of projects of this size that are sort of at this stage of the sales funnel. So we're exactly where we had hoped to be from a progress with these large projects when we set off on this path 3-plus years ago.

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William J. Dezellem, Tieton Capital Management, LLC - President, CIO and Chief Compliance Officer [8]

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And with that in mind, how many of these type projects -- I mean, are we talking a couple or 5 to 10 or more than 10?

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Charles M. Dauber, American Electric Technologies, Inc - CEO, President & Director [9]

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I'd just say multiple. How about that? Multiple.

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William J. Dezellem, Tieton Capital Management, LLC - President, CIO and Chief Compliance Officer [10]

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That's a good round number. Actually -- and how about timing? What's your view of the timing that some of these projects -- and maybe the range of timing, near end to far end, of the group that you're talking about?

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Charles M. Dauber, American Electric Technologies, Inc - CEO, President & Director [11]

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I think Q2, orders in Q2 and Q3 and on into Q4. But these are not years out. These are now.

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William J. Dezellem, Tieton Capital Management, LLC - President, CIO and Chief Compliance Officer [12]

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Great. And since Q2 is halfway over now, presumably you have a pretty good line of sight on whatever you're thinking about for the Q2 wins, or decisions, I should say.

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Charles M. Dauber, American Electric Technologies, Inc - CEO, President & Director [13]

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We have a lot of work to do to continue closing orders, let's just say that.

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William J. Dezellem, Tieton Capital Management, LLC - President, CIO and Chief Compliance Officer [14]

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I'm going to continue to push down this line, if I may, for just another moment. Do you have more than 1 that are $10-plus million that you believe you could close this quarter?

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Charles M. Dauber, American Electric Technologies, Inc - CEO, President & Director [15]

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Here's what I would say, is that I've been -- it's been hard to judge the actual timing of the projects in the midstream and downstream markets. And just like we had issues with this vessel project, where they said it was going to close a year from then and then it took an extra quarter and an extra quarter. We certainly have seen lots of slippages in the midstream market. And in fact, there's orders that we had expected to close in Q1 that slipped into Q2, and that's part of my calculus. So I think the way that I would say it is there are multiple projects that we are trying to close that the customers have said there's a close date in Q2, and we are trying to close everything that does actually close. But some of these things will just slide to the right based on customer timing and schedules and things like that. Yes, there are multiple things we're trying to close in Q2.

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William J. Dezellem, Tieton Capital Management, LLC - President, CIO and Chief Compliance Officer [16]

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That's helpful. And should -- just -- I'm sorry, I interrupted you. Go ahead.

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Charles M. Dauber, American Electric Technologies, Inc - CEO, President & Director [17]

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No, no, that's okay. You go ahead.

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William J. Dezellem, Tieton Capital Management, LLC - President, CIO and Chief Compliance Officer [18]

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So just to make sure that I am clear in hearing what you're saying, that if what the customers are saying comes to fruition and you win your fair share of those, you would have a meaningful increase in backlog at the end of Q2. I mean, potentially, a step-function jump versus the end of Q1. But at the same time, you're wanting to make it very clear that customers have not always been able to stick to the time lines that they've originally shared with you.

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Charles M. Dauber, American Electric Technologies, Inc - CEO, President & Director [19]

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Yes. If everything -- if all the customers were totally on schedule with everything, we would've already had a bigger backlog and a whole bunch of other stuff. And so there's a lot of "if" statements in there, but yes, that's correct, what you've said.

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Operator [20]

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(Operator Instructions). We'll take our next question.

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Unidentified Analyst, [21]

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Can you hear me?

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Charles M. Dauber, American Electric Technologies, Inc - CEO, President & Director [22]

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Yes.

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Unidentified Analyst, [23]

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Just as you contemplate the closing efforts, the pipeline, especially the larger orders, I'm wondering, are you potentially anticipating objections from any prospective customers, just regarding the financial muscle to complete these larger orders? I'm thinking maybe the Oppenheimer project is going to help with that. But I'm just thinking -- I mean, if I'm looking at the potentially large amounts of accounts payable, $600,000 in cash. Just wondering if that's a potential objection and how you're prepared to address that.

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Charles M. Dauber, American Electric Technologies, Inc - CEO, President & Director [24]

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Sure. And I didn't catch your name, just so I know who I can address.

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Unidentified Analyst, [25]

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Yes, this is [Bob Blaumeiser] from [Blaumeiser] Asset Management.

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Charles M. Dauber, American Electric Technologies, Inc - CEO, President & Director [26]

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Welcome. It's a good question. Look, we are -- so a couple of things, Bob. So one is, our projects normally get pretty darn close to cash flowing themselves. So every one of these projects that we have, we get milestone -- we get milestone payments throughout the project. We get them on placement of order. We get them all the way through the process, and so the projects generally cash flow themselves. We certainly have had discussions with customers because they want to make sure that we can finance the projects and that we can successfully execute them. But this is part of why we have engaged with Oppenheimer so we can assure them we have the liquidity and the balance sheet to be able to continue to execute the growth plan. And these are the exact sort of things that we're talking about.

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Unidentified Analyst, [27]

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Okay. That was the only question I had.

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Operator [28]

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And we'll take our next question.

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William J. Dezellem, Tieton Capital Management, LLC - President, CIO and Chief Compliance Officer [29]

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It's Bill Dezellem with Tieton Capital again. Let's jump, if we could, to the upstream market. You made reference to this -- looking the best -- the prospects are the best you've seen in years there. Can you talk in some more detail, please, about what you're seeing in those multiple signs of recovery?

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Charles M. Dauber, American Electric Technologies, Inc - CEO, President & Director [30]

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Sure. To start this conversation, Bill, it's been a terrible couple of years. So we're going for -- we're increasing from almost literally nothing and the companies have been -- and most of our customers have been really hurting for a long time. But if you think about it, our upstream business is a combination of domestic and international and services and products. So on the services business domestically, we started seeing a pickup in our drilling rig customers, getting their drilling rigs back online. So when the price of oil was at $40 or $30, they literally stopped drilling and put their drilling rigs into storage. In order to get them out of storage, you've got to go do maintenance work. And that, we started seeing about 2 quarters ago. Now what we started seeing in the services business in the U.S. is really upgrades and retrofits. So as these rigs are coming back online, they're enhancing the rigs and we see a lot more quoting opportunity in that side of the business. On the product side in the U.S., what's been fascinating is that we've now started seeing, in addition to upgrade opportunity with existing rigs, we have now started seeing quoting opportunities. People are saying, "Okay, I'm looking at building some new drilling rigs. I'm looking at 2 rigs for this project," and that's a sign we haven't seen in 3 years. Literally 3 years, I don't think we've seen a new land drilling rig opportunity in the United States. So again, back to our question -- our comment from earlier, timing is unclear, but these are the kind of signs that make me feel like our inquiry levels are up and our sales and our pipelines are up. And then when you're at the Offshore Technology Conference, it's a -- the Offshore Technology Conference is the biggest oil and gas conference in the world. We've been attending for, I don't know, 30 years or something like that. And it's really a chance to talk to all of the people in the industry that we know from all over the world. And their broad feedback is much more positive. Oil prices above $70 mean that all of them are talking about projects they're going after. It's a totally different dynamic today than it was 12 months ago, and 24 months ago and 36 months ago at the same exact conference. Internationally, I think they're seeing the exact same things. The Brazilian team is seeing a rebound in the drilling side of the business. So when oil went down, the Brazil offshore production stayed. They were still pumping the oil out, but they stopped looking for new oil. Now Petrobras has gotten new lease offerings. There's new people coming to Brazil, and there's now literally drilling rigs moving from storage. We've got our service techs sitting on a drilling rig as it's getting barged back to Brazil, doing all the servicing and the upgrading and the maintenance and whatever needs to happen so these drilling rigs can come back to work in Brazil. And then same thing in China, the China market is rebounding. Our joint venture team is seeing more opportunities for upgrades, newbuilds. There is a push in China for the shale drilling. Finally, they're trying to replace coal, as I think I mentioned in the last call, as their primary source of energy. So they're looking for natural gas, and shale-based natural gas in China is hard. So I think globally, we'd say we're seeing opportunities in all of our operating regions for the upstream part of our business.

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William J. Dezellem, Tieton Capital Management, LLC - President, CIO and Chief Compliance Officer [31]

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That's remarkable. The new rigs that you're hearing about here in the U.S., are those offshore or are those onshore? And then the same question for China.

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Charles M. Dauber, American Electric Technologies, Inc - CEO, President & Director [32]

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So U.S. is primarily land, but I can't tell you that there's not 1 or 2 offshore projects as well, which is very interesting. Brazil is all offshore. China is all land. Think about it like that.

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William J. Dezellem, Tieton Capital Management, LLC - President, CIO and Chief Compliance Officer [33]

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Great, that's helpful. And then I would like to ask one additional question, if I may, relative to power generation, that you have seen -- in your remarks, you said you have seen that business starting to show some life. Would you discuss why and what's leading to that, please?

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Charles M. Dauber, American Electric Technologies, Inc - CEO, President & Director [34]

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That's a good question, Bill. I think, look, when we used to talk about the power gen business last year and the year before, most of the business was for new power plant construction. It was we either worked with the engineering, procurement and construction firms that were building new plants or we worked with our OEM partners that were making the turbines that were actually the prime power source at these new power plants. And so they were all new power plant-based projects. And that business, as you know, has been very lumpy. The OEM part of the business is generally steadier, but the big EPC stuff is very lumpy. And the trends, in general, have not been positive for us in that market. There's just been a general flatness in the new power plant construction market for, we'll say, the last 12 months, maybe even more, something like that. So all of our business in the last quarter or so has been on this third leg, this new third leg, which is the distributed power generation which, as we talked about in the prior call, was really around smaller projects. We work directly with the developer and we develop custom solutions for their 1-megawatt, 4-megawatt, 10-megawatt projects versus a 700-megawatt combined cycle power plant type thing. So what we're seeing now is, in some ways, there's a rebound in opportunities on these larger EPC projects. And it may be because this is just a timing issue that these developers saw a new opportunity -- these projects are 1 year to 2 years or 3 years to turn up online. So it takes a while for them to get going through their permitting process. Or there may have just been a downgrade in the opportunities they had at that time. We're seeing some projects that are in international markets, so there are still drivers for international power that some of these projects are pursuing out of the U.S. And so I can't really talk too much about the drivers behind it other than to say that we're happy to see it, and it looks positive for the rest of this year.

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William J. Dezellem, Tieton Capital Management, LLC - President, CIO and Chief Compliance Officer [35]

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And you're talking about the larger plants, not the distributed power?

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Charles M. Dauber, American Electric Technologies, Inc - CEO, President & Director [36]

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Right, I'm talking about the -- the distributed power is consistent, we see lots of projects there, but they're smaller in nature. I'm talking about the larger things that we just haven't booked in a year.

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Operator [37]

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(Operator Instructions) We'll take our next question.

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Unidentified Analyst, [38]

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I guess, congratulations for a hopefully more stronger future second quarter report here. My questions pertain to a couple of items. The new stories lately out of West Texas- New Mexico, the Permian oil and gas area, indicate that there is lots and lots of takeaway problems with the increased oil and gas production, necessitating a lot of pipelines being built. I guess that would fall into your medium stream area. What kind of opportunities, if any, do you see there?

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Charles M. Dauber, American Electric Technologies, Inc - CEO, President & Director [39]

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Good morning, George, by the way. Well, you have it exactly right, right? So it's interesting because the oil price increase, the easy way to think about the impact of the oil price increase is not just that it's an increase in drilling in the upstream. But it turns out it's got just as much, and probably more, of an immediate impact on the pipelines out of our business which is the midstream. So right now, there's a mad rush for pipeline companies to build pipelines from West Texas to either Cushing, Oklahoma or to the Houston area. But basically trying to get that oil out of West Texas. And we've had a number of projects that have done that. We have more projects that we're working on. And that's a core part of the business, is pipelines from West Texas getting that oil out to somewhere it can be either processed or shipped or whatever else they're going to do with it. But yes, that's exactly right, George.

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Unidentified Analyst, [40]

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So if there are several thousand miles of new pipelines looking to be laid, your scope of work would essentially comprise the compressor stations that are necessary?

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Charles M. Dauber, American Electric Technologies, Inc - CEO, President & Director [41]

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Yes, so the way that it works on a pipeline is that there's normally an end, something at both ends, which is an electrical system that manages the pumping or the compressors. And then about every 100 miles, depending on the technology they're using, there's another booster station. And so yes, you could think about, if you have a 1,000-mile pipeline, you can have some piece of M&I Electric equipment at the initial compressor. And then every 100 miles, you have another version of that until it gets to the ending point and it lands either at the terminal or at the refinery or wherever else it goes. So our -- but if you think about what our business has been over the last several years, we've had a strong business in the midstream market, which is custom switchgear and motor control centers in the PDC, because that's how these guys like to ship. Then we started seeing a transition of that market, about 2 years ago, to the Arc-resistant market. And we've got 1 customer that's done that, and that's 1 of the major players in the industry. And we just are hoping that more continue along that path of increased safety for their pipeline project reliability.

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Unidentified Analyst, [42]

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Okay. So you're basically actively involved in all those projects, where new pipelines are being built, permitted in and out of the Permian basin. I understand there are some opportunities in the Eagle Ford Shale and then northeastern United States as well. With your capabilities in Beaumont, Texas, to ask like a general question, what kind of revenue would you be able to take in? Initial comments from your side were that you need about $50 million, $60 million a year to break even or turn a profit. Would it theoretically be capable -- or would you be capable to handle $75 million, $100 million, $120 million in revenues with the existing facilities, or is that why you hired Oppenheimer?

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Charles M. Dauber, American Electric Technologies, Inc - CEO, President & Director [43]

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So -- no, so the -- when we doubled the plant in Beaumont, the expectation was that, that plant, based on the revenue mix and project mix, would be able to support about $100 million of revenue out of that facility. And so no, there is operational capacity in that facility and that's to take on larger projects and more of these projects right now. And basically, you'd have to go scale up the direct labor force, which we certainly have done and are able to flex that up and down. So no, the expectation is that -- I don't have the breakdown numbers by subsegment, but I would tell you, 40% to 50% of our business is pipeline and midstream projects over the last several quarters. And a lot of those projects actually had -- it wasn't that the West Texas got impacted by Harvey, but the owners in Houston had issues, and those projects got delayed. And some of those started picking back up in Q1, and those will continue to get driven in Q2 and the rest of the year.

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Unidentified Analyst, [44]

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It seems like at the moment, at least, that time is of the essence for building new takeaway capacity out of the area, correct?

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Charles M. Dauber, American Electric Technologies, Inc - CEO, President & Director [45]

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You were breaking up a little bit, George, but I think you were saying time is of the essence to get the capacity out?

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Unidentified Analyst, [46]

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Yes.

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Charles M. Dauber, American Electric Technologies, Inc - CEO, President & Director [47]

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Yes, that's right. There's a rush to do that, and a number of companies are out pursuing that right now.

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Unidentified Analyst, [48]

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Okay. Then last question on your Brazilian operations. You went from joint venture to basically 100%-owned entity. You mentioned $1.9 million revenues this quarter. What is your, say, breakeven or profitability level that you would expect to achieve by the end of this year over there?

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Charles M. Dauber, American Electric Technologies, Inc - CEO, President & Director [49]

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So they're profitable right now. Is that what you're asking, George?

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Unidentified Analyst, [50]

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Yes.

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Charles M. Dauber, American Electric Technologies, Inc - CEO, President & Director [51]

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They're profitable right now.

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Unidentified Analyst, [52]

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Okay. And so any additional incremental work coming on there would increase their contribution to the bottom line for us as well?

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Charles M. Dauber, American Electric Technologies, Inc - CEO, President & Director [53]

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Yes, exactly. The nice thing about the Brazil business, it's still primarily service; and that's a nice, high margin. And even though they're in a tough market environment in Brazil, the team is doing very well. They're doing very well. So it's -- that's why in my prepared comments I said it's an interesting time, which is we had a tough Q1. We knew it was going to be tough with the backlog, but we think that there's a lot of interesting things that we've been working on and some things that are not in our control, like the price of oil, that it seemed like they may be heading in our direction now.

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Unidentified Analyst, [54]

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And I know that you receive about every year in, what is it, April, May or June, a dividend payment from China. Is that due this year also?

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Charles M. Dauber, American Electric Technologies, Inc - CEO, President & Director [55]

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Yes. Yes, we've been -- the joint venture has been -- every single year, we've gotten cash back out in the form of a dividend which, as you know, is highly unusual for an American company with a Chinese joint venture. And so the joint venture was still profitable last year and we're still expecting our dividend in June, actually which is next month -- in June.

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Unidentified Analyst, [56]

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Yes. Do you have any ballpark number how much you're expecting from them?

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Charles M. Dauber, American Electric Technologies, Inc - CEO, President & Director [57]

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I think that -- I think, as the numbers, as it progresses through the Chinese approval system and whatnot, we know what we think it is and it's above what it would have been last year, what it was last year; and significantly above. But I don't want to commit to that until it ultimately gets through and I know we've got the money in our hands.

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Unidentified Analyst, [58]

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Okay. And then you also indicated that their revenues, for the joint venture, were up almost 50% to almost, what was it, $8 million or $9 million this quarter. That trend has continued through the second quarter?

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Charles M. Dauber, American Electric Technologies, Inc - CEO, President & Director [59]

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We don't get a monthly -- we do get a monthly -- we haven't done any work to compare month -- or quarter-to-date versus last quarter. But we did spend a lot of time with them at the Offshore Technology Conference when they were in Houston. And as I said earlier, they're feeling much, much more positive now than they were a year ago. (inaudible) just the whole thing.

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Unidentified Analyst, [60]

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Okay. Last question. With the current market value of our company now essentially around $5 million, $6 million, the engagement of Oppenheimer, would it be fair to assume that we're looking maybe for a business combination with another company of similar size or larger size? Or what does the engagement entail?

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Charles M. Dauber, American Electric Technologies, Inc - CEO, President & Director [61]

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So I think, look, if you think about where we are as a company, we're -- it's been a tough last couple of years. We've made great progress in continuing everything that we're doing. And obviously, the expansions into the midstream, downstream and power gen market were critical for the company. So it's just a very interesting time for us. We've got to get some help on addressing our balance sheet right now and our liquidity, and that's a big part of why Oppenheimer is engaged. And then as part of that engagement, they will go looking, make recommendations on what are the other things that we can do to go continue our growth path that we're on and what are the things that we can go do that will execute that to make sure that we're delivering value to the shareholders because in the end, that's what we're here for, right?

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Unidentified Analyst, [62]

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Yes, yes. Okay, I will look forward to the next quarterly update then. And best of luck to you for the upcoming months and years.

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Operator [63]

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And we will take our last question.

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Unidentified Analyst, [64]

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This is [Brian]. I've got a couple of questions. Can you give any color on the -- like, the size of new Brazil project that you guys just won over later in the quarter? Regarding the mega plant?

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Charles M. Dauber, American Electric Technologies, Inc - CEO, President & Director [65]

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Sorry. Say again, Brian.

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Unidentified Analyst, [66]

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It was just regarding the Brazil new large power plant that you discussed that you had gotten a break-in win on.

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Charles M. Dauber, American Electric Technologies, Inc - CEO, President & Director [67]

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Yes, so the -- I don't think we disclosed exact values. This is a service project, so it's not projects. But it's all service. So what it was, is that was a break-in win. I would tell you it's on the order of USD 0.5 million, something like that, which for a service project is actually a nice, big project.

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Unidentified Analyst, [68]

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Okay. Another question I had is, when you were talking about the midstream, to kind of go on what George said, and taking advantage of that and that's a main part of your business. Is that something that goes into the backlog? Or is that something that's kind of like a constant rollover?

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Charles M. Dauber, American Electric Technologies, Inc - CEO, President & Director [69]

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No, that goes into backlog. So our -- a typical midstream project, let's just pretend it's 1 compressor station, I'll just give a round number. One compressor station could be a $1 million for that particular site, and that project is normally a 4-month, 5-month, 6-month-long project. So it goes into backlog. We recognize revenue over the period using the percent complete revenue recognition, and that's different from cash which is milestone billings. And so we get cash during the project and we recognize revenue through the project, so that would be considered part of backlog.

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Unidentified Analyst, [70]

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Okay. And then to kind of go on what he was asking about, Oppenheimer as well, is this something that you guys are looking at? I heard a comment that you thought you'd have kind of some more feel as to what was going on by the end of the second quarter potentially. Is that something that you guys feel like it's going to be a one-off thing? Or is this maybe potentially something you're going to continually work with them going forward?

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Charles M. Dauber, American Electric Technologies, Inc - CEO, President & Director [71]

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So we have done a number of tuck-in acquisitions over time. And I think what we would say is, is that they have been very successful. One was the Brazilian services team in Rio, that was the offshore part of the founding of the program M&I Brazil. And the other was for our automation business that we bought a drilling control system company. And that product is now in all of our solutions that we sell as part of our automation solution. So we've got an immediate thing we've got to go get resolution on, which is the liquidity. And there's a variety of ways to solve that liquidity, and that's part of their thing. But part of why I liked Oppenheimer is that they really are actually experts in the oil and gas market and in the industrial technology market. So the release is written to sort of encapsulate it could be a whole variety of different things. And for us to make sense as a public company, we've got to be at a certain size and a certain revenue and a certain profits, and the board and I think everybody understands we've got to go get there. And our organic growth has been choppy based on market environments and all that, and we've got to go complement that with some inorganic growth. And that's all part of the bundle with what we're trying to get done with Oppenheimer.

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Unidentified Analyst, [72]

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Okay. No, like I said, just trying to figure out if this is just kind of a one-off that you guys are trying to figure out something that they can offer to you or if it was maybe going down a continuous basis. But thanks for the feel there. My last question would be, when you used the word unacceptable going into the main part of the beginning of the press release, what really -- I mean, it seemed like you almost said that like it was a surprise. Or was that just, flat-out, that's unacceptable going forward?

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Charles M. Dauber, American Electric Technologies, Inc - CEO, President & Director [73]

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I'm talking about it's unacceptable going forward. We have to do better. We have to have more bookings, so we have more backlog. We have to get the revenue where we need it to go, so we can be at breakeven first and then profitability. Those are the things that are not acceptable to me. We got to go -- we got to continue booking orders to get above that run rate and start making money.

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Unidentified Analyst, [74]

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Okay. And then the last question would be, I didn't see the 10-Q yet, did you guys need to do another waiver in regards to the credit facility?

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Charles M. Dauber, American Electric Technologies, Inc - CEO, President & Director [75]

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We have a waiver. We've done a waiver. We're all good with our lender.

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Operator [76]

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And with no further questions, this does conclude the first quarter 2018 results call.

We thank you all for your participation, and you may now disconnect.