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Saturday, June 16, 2007

Amerex Group (AEXG)

AEXG, Amerex Group, Inc, website, sec, chart

A misstated net loss.
...in footnote 1 of the financial statements, it declares that the Company incurred a net loss of $1,325,459 during the year ended December 31, 2006. The correct number should declare a net loss of $5,218,444.
Amended 10-Q for period ending Mar 31, 2007:
Balance sheet shows capital intensive business with fairly new PP&E (10% depreciated).
Current ratio is absolutely terrible.
Equity deficit.

Revenues nearly doubled yoy.
They had a tiny operating income for the quarter.
Net loss is hideous.

Positive free cash flow due to low capex, non-cash debt expense, and AR.

10-K for the year ending Dec 31, 2006:
reverse merger in mid 2006

Amerex is in the waste disposal business for commercial and industrial businesses (health care, educational, research, other waste management companies, and the government): flammables, combustibles, organics, acids, caustics, cyanides, sulfides, solids, sludge, wastewater, PCB, electrical light ballast, medical waste, regulated waste, non-hazzardous waste.

Feb 2006: Amerex bought 168 acres of old heavy industry property from Kaiser Aluminum. Asbestos is being removed with Amerex putting $800K in escrow until it's done (and $400K with regulatory agencies to ensure closing of two injection wells).

Apr 2006: Amerex bought some Environmental Remediation Services, Inc. equipment: vacuum trucks and equipment, trailer equipment, safety stuff, tow motors, tractors, etc. $1.2 million plus a one-year consulting agreement with the owner. $600K irrevocable standby letter of credit, with $150K released each quarter.

Moving into the oil and gas industry to remove "production water": salty water injected into wells to help extract oil. They intend to separate out the residual oil and sell it. The technology will need to be licensed (negotiating). They expect to process 10,000 barrels of water/oil per day (extracting 200 to 500 barrels of oil per day), potential to expand to 20,000 barrels per day. [maybe $2 million per year in operating profits?]

Also looking into picking up oily residue in tank bottoms (requires treatment to recover the oil). Spent $422K on equipment so far. This while business area could be a dead-end.

Plan to start operations on two permitted water treatment plants which discharge into publicly owned treatment works (POTW). Construction starting May 2007, finishing later in 2007. $275K for Tulsa funded by anticipated revolver. $800K for Kansas City (more due to buying the land, doing demolitions, and constructing the building).

Existing operations are expanding to 7 days per week, and adding two daily eight-hour shifts (24/7?) starting Fall 2006. The customer demand is expected to be there, especially from 2nd largest customer (industrial services).

Converting Pryor, OK property into a 2nd RCRA Part B licensed waste mgmt plant. 168 acres. Two Class 1 injection wells to dispose of industrial hazardous waste and municipal non-hazardous waste (some background here and here). This is after treatment. These wells are not yet permitted. There are currently only 51 active Class 1 injection wells injecting hazardous waste into the ground in the US. 221 are actively injecting non-hazardous waste. Most of these are owned by competitors. The Pryor, OK property has a nasty amonia/urea fertilizer plant and other industrial mfg buildings. The property has rail access for receiving and delivering waste. They could expand into railcar decontamination. The property should be operational in Q3 2009 (the long time is due to RCRA permitting). Costs will be $1 million.

The scrap from these buildings is est to be worth $2.3 million gross.

Expanded the sales force by 2 experienced specialists. Plan to add one more (already identified).
We market our services on an integrated basis and, in many instances, services in one area of our business support or lead to a project undertaken in another area.
300 customers in 18 states. Typically no contracts.

26% customer: US Dept of Justice, DEA for drug lab cleanups (hehe, they find meth labs everywhere, even in caves). Contract started Jan 9, 2006, ends after 2 years. Not to exceed $7.25 million.
25% of revenue from two industrial services customers.
10% of revenue from another industrial services customer.
That's a lot of customer concentration.

Numerous non-critical subcontractors.

4,300 (somewhat) competitors in the US.
...management has taken notice of an important and advantageous industry trends in the efforts by many generators of industrial wastes to decrease the number of service providers that they utilize to a select group of industry leaders in order to minimize potential liability inherent in using less qualified or less responsive firms.
Permitting Process:
1) Informal meeting with the public and make announcements.
2) Apply for permit (very detailed and lengthy).
3) The regulator sends out a notice to everyone that it received a permit application.
4) Revisions based on Notices of Deficiency (NOD).
5) Preliminary decision, possibly a draft permit detailing conditions required, possibly a "notice of intent to deny". This is announced to the public.
6) 45 days for public comment. Citizens can request a public hearing or the agency can hold one without a request.
7) Final permit decision, possibly with responses to public comments.

A permit is for 10 years. Even after the permit, the agency monitors construction and operation to ensure compliance.

Permits can be appealed, modified, terminated, or renewed (renewal requires the same process as for new permits... ugh).

Competitors include Clean Harbors, Duratek, and Perma-Fix. Also lots of small companies.

Customers are increasingly looking for single company solutions. Amerex claims this is good for them, but it seems to be to favor the very large competitors like Clean Harbors.
Our competitive advantage is our ability to offer a more comprehensive range of industrial waste management services than any of our competitors in our service territory, enhanced by the proximity of our facilities to hazardous waste generators, and the barriers to enter this industry from significant capital and licensing requirements.
Revenues for 2005 only started in May. However, revenues have been ramping up, you can see this by the Q3 2006 increase from $108K to $2.3 million in revenue, also for the Q1 2007 increase from $1.2 million to $2.1 million. The DEA contract greatly increased revenue for 2006. Also, the acquisition of Waste Express in Sept 2005 increased revenue.

Gross margin is 31% for 2006. There was one project (14% of revenue) that had a 10% gross margin. This was a one-time unusual deal. Gross margins have generally been around 38%. Increases in fuel costs won't affect the overall costs much. They haven't had enough trucks to run the business, so they had to rent trucks at a high cost. In Jan 2007, they contracted with a leasing company to reduce costs (by around 3% of total costs?).

SG&A was higher than normal due to accounting costs from a first audit of Waste Express and setting up registration. Amerex apparently also had never been audited. During the development stage, they offered more stock compensation than they will offer going forward (the key positions are now filled). This added to expenses.

They suffered penalties for failing to register in time.

Segment results. The segments are Waste Express (the acquisition) and Amerex. Both are similar businesses.
Amerex reported a loss of $1.9 million (includes most of the corporate expenses and depreciatable assets).
Waste Express reported a profit of $262K (they had a small loss in 2005).
So the comparison isn't very valid.

The majority of debt matures in the upcoming year. Amerex is in default of some non-financial covenants making the debt payable now.

Prior financing was via subordinated debt and a line of credit.

The plan going forward is to increase revenue, reduce costs to increase margins, potential equity financing, possibly more subordinated debt, looking into a $500K mortgage on the Kansas City property, but that requires a release from CAMOFi who holds a senior lien. Also a possible sale/leaseback of Pryor, OK property.

They have a $400K loan at 15% interest! Plus warrants on 800K shares at 50 cents. Ouch. Lots of other financing that needs investigation.

Auditors: Sartain Fischbein of Tulsa.
Going concern qualifier.
...the Company has experienced cash flow difficulties, and is in default on its note agreements, which causes the balances to become due on demand. The Company does not currently have alternate sources of capital sufficient to meet such demands, if made. Most of the Company’s debt is due in November 2007, and there are no assurances that this debt will be renewed. These conditions raise substantial doubt about the Company’s ability to continue as a going concern.
I'll jump ahead to Q1 for the financial statements. But at Dec 31, 2006, current assets were $4.2 million and current liabilities were $12.8 million. Operations burned $1.45 million in cash, capex was $449K, increased restricted cash of $2.3 million, acquisition cost $1.9 million, investing burned $280K, the line of credit added $1.3 million, long term debt added $800K, debt issue costs ate up $598K, $681K debt was repaid. Overall financing provided around $800K. Cash overall dropped to close to zero.

Officers and directors own 98.74% of the stock!

Looking at Q1, things don't look good enough. Gross margins are back up to 40%. Revenues are up to $2.15 million, but this is actually lower than Q3 or Q4.

SG&A is down to $646K. They show a slight operating income for the quarter. However, the interest and other expenses are huge resulting in a net loss of $1.3 million.

Cash flow: Operations provided $248K thanks to AR, non-cash charges, and depreciation. Capex was almost nothing and overall investments generated some cash. This all allowed for $116K of debt to be repaid.

There were 18.8 million shares outstanding on May 18, 2007. It look like there's a huge amount of dilution, but the wording of the 10-K and Q1 10-Q make it difficult to know if this is true today (as opposed to 1 year ago when it was definitely true, but I doubt there were many expirations or forfeitures). Warrants to issue 5.8 million shares. Obligations to issue 1.8 million shares. 13 million shares obligated to employees. 2.5 million to a consultant. 0.8 million to other non-employees. Another 984K were later committed to a lender. Another 200K issued to a non-employee. That would make a total of about 44 million shares fully diluted (these are currently anti-dilutive, but if I invest and expect to get a good return, they wouldn't be). Serious dilution. I'd assume 60 million totally diluted given their financial situation.

At 40% gross margins, and even if we assume SG&A doesn't grow, they would need to increase revenue by 52% just to break even. If this company does great things going forward and manages to survive, they might be worth 15 cents per share. They're currently selling for 32 cents. They've sold for as much as $1.50. I think they're overpriced.

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