aert_10q.htm
UNITED
STATES SECURITIES AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
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☑
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QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
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For
the quarterly period ended September 30, 2016
OR
☐
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TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
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Commission
File Number 1-10367
Advanced
Environmental Recycling Technologies, Inc.
(Exact name of registrant as specified in its charter)
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Delaware
(State or other jurisdiction of
incorporation or organization)
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71-0675758
(I.R.S. Employer Identification No.)
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914
N. Jefferson Street
Springdale,
Arkansas
(Address of principal executive offices)
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72764
(Zip Code)
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(479) 756-7400
(Registrant’s telephone number, including area
code)
Indicate by check
mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such
shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements
for the past 90 days. YES: ☑ NO:
Indicate by check
mark whether the registrant has submitted electronically and posted
on its corporate Web site, if any, every Interactive Data File
required to be submitted and posted pursuant to Rule 405 of
Regulation S-T (§232.405 of this chapter) during the preceding
12 months (or for such shorter period that the registrant was
required to submit and post such files).YES: ☑ NO:
☐
Indicate by check
mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company. See the definitions of “large accelerated filer,”
“accelerated filer” and “smaller reporting
company” in Rule 12b-2 of the Exchange Act. (Check
one):
Large accelerated
filer ☐
Accelerated filer ☐
Non-accelerated
filer
☐
(Do not check if a smaller reporting
company)
Smaller reporting company ☑
Indicate by check
mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes ☐ No
☑
Indicate the number
of shares outstanding of each of the issuer’s classes of
common stock, as of the latest practicable date. As of October 31,
2016, the number of shares outstanding of the Registrant’s
Class A common stock, which is the class registered under the
Securities Exchange Act of 1934, was 89,631,162.
ADVANCED
ENVIRONMENTAL RECYCLING TECHNOLOGIES, INC.
FORM 10-Q
TABLE OF
CONTENTS
PART I – FINANCIAL INFORMATION
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2
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Item
1. Financial Statements
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2
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BALANCE
SHEETS
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2
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BALANCE
SHEETS (continued)
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3
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STATEMENTS
OF OPERATIONS
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4
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STATEMENTS
OF CASH FLOWS
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5
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NOTES
TO FINANCIAL STATEMENTS
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6
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Note
1: Unaudited Information
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6
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Note
2: Description of the Company
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6
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Note
3: Cash Flows
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7
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Note
4: Significant Accounting Policies
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7
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Note
5: Income Taxes
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9
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Note
6: Earnings per Share
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9
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Note
7: Line of Credit
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11
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Note
8: Related Party Transactions
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11
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Note
9: Commitments and Contingencies
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11
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Note
10: New Accounting Pronouncements
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11
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Item 2.
Management’s Discussion and Analysis of Financial Condition
and Results of Operations.
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13
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Item 4.
Controls and Procedures.
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20
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PART II – OTHER INFORMATION
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21
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Item
1. Legal Proceedings
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21
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Item 6.
Exhibits.
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21
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SIGNATURES
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22
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INDEX TO EXHIBITS
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23
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PART
I – FINANCIAL INFORMATION
Item
1. Financial Statements
ADVANCED
ENVIRONMENTAL RECYCLING TECHNOLOGIES, INC.
BALANCE
SHEETS
(In thousands)
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Assets
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Current
assets:
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Cash
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$3,307
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$216
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Trade
accounts receivable, net of allowance of $57 and $239
at
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September
30, 2016 and December 31, 2015, respectively
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2,992
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4,378
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Inventories
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19,013
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20,968
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Prepaid
expenses
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1,619
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1,412
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Total
current assets
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26,931
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26,974
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Land,
buildings and equipment:
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Land
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2,220
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2,220
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Buildings
and leasehold improvements
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17,222
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17,071
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Machinery
and equipment
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55,973
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54,493
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Construction
in progress
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1,194
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1,753
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Total
land, buildings and equipment
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76,609
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75,537
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Less
accumulated depreciation
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51,136
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47,990
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Net
land, buildings and equipment
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25,473
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27,547
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Other
assets:
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Debt
issuance costs on line of credit, net of
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accumulated
amortization of $80 and $14 at
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September
30, 2016 and December 31, 2015, respectively
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358
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420
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Other
assets
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558
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379
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Total
other assets
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916
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799
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Total
assets
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$53,320
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$55,320
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The accompanying
notes are an integral part of these financial
statements.
ADVANCED
ENVIRONMENTAL RECYCLING TECHNOLOGIES, INC.
BALANCE SHEETS (continued)
(In thousands, except share and per share data)
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Liabilities and Stockholders' Deficit
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Current
liabilities:
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Accounts
payable – trade
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$4,556
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$6,190
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Accounts
payable – related parties
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32
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29
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Current
maturities of long-term debt
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2,022
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2,046
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Other
accrued liabilities
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5,360
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4,438
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Working
capital line of credit
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-
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7,503
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Total
current liabilities
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11,970
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20,206
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Long-term
debt, less current maturities
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37,043
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37,020
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Less
unamortized debt issuance costs
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550
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729
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Total
long-term debt less unamortized debt issuance costs
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and
current maturities
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36,493
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36,291
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Commitments and contingencies (See Note 9)
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Series
E cumulative convertible preferred stock, $0.01 par value;
30,000
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shares
authorized, 20,524 shares issued and outstanding at
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September
30, 2016 and December 31, 2015, including accrued
unpaid
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dividends
of $8,021 and $6,774 at September 30, 2016 and
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December
31, 2015, respectively
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28,545
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27,298
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Stockholders'
deficit:
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Class
A common stock, $0.01 par value; 525,000,000 shares
authorized;
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89,631,162
shares issued and outstanding at September 30, 2016
and
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December
31, 2015, respectively
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897
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897
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Additional
paid-in capital
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53,660
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53,660
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Accumulated
deficit
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(78,245)
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(83,032)
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Total
stockholders' deficit
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(23,688)
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(28,475)
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Total
liabilities and stockholders' deficit
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$53,320
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$55,320
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The accompanying
notes are an integral part of these financial
statements.
ADVANCED
ENVIRONMENTAL RECYCLING TECHNOLOGIES, INC.
STATEMENTS
OF OPERATIONS
(Unaudited)
(In thousands, except share and per share data)
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Net
sales
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$20,476
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$21,843
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$66,622
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$65,564
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Cost
of goods sold
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15,327
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16,503
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48,705
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52,249
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Gross
margin
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5,149
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5,340
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17,917
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13,315
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Gain
from asset disposition
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-
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(1)
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(1)
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Selling
and administrative costs
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3,378
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3,318
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10,820
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9,825
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Operating
income
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1,771
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2,022
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7,098
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3,491
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Other
income and expenses:
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Other
income
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1
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2
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1,111
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12
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Net
interest expense
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(698)
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(853)
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(2,175)
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(2,624)
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Net
income
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1,074
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1,171
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6,034
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879
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Dividends
on preferred stock
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(422)
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(398)
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(1,247)
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(1,175)
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Net
income (loss) applicable to common stock
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$652
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$773
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$4,787
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$(296)
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Income
(loss) per share of common stock (basic)
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$0.00
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$0.00
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$0.01
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$0.00
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Income
(loss) per share of common stock (diluted)
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$0.00
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$0.00
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$0.01
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$0.00
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Weighted
average common shares outstanding (basic)
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89,631,162
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89,631,162
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89,631,162
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89,631,162
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Weighted
average common shares outstanding (diluted)
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466,461,213
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444,674,483
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460,953,190
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89,631,162
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The accompanying
notes are an integral part of these financial
statements.
ADVANCED
ENVIRONMENTAL RECYCLING TECHNOLOGIES, INC.
STATEMENTS
OF CASH FLOWS
(Unaudited)
(In thousands)
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Cash
flows from operating activities:
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Net
income (loss) applicable to common stock
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$4,787
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$(296)
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Adjustments
to reconcile net income (loss) to net cash provided
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by
operating activities:
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Depreciation
and amortization
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3,967
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3,734
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Dividends
on preferred stock
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1,247
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1,175
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Accrued
interest converted to long-term debt
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1,312
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2,100
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Gain
from asset disposition
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-
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(1)
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Change
in accounts receivable allowance
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(182)
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161
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Change
in other assets
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152
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-
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Changes
in other current assets and current liabilities
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2,581
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714
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Net
cash provided by operating activities
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13,864
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7,587
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Cash
flows from investing activities:
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Purchases
of land, buildings and equipment
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(1,978)
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(1,723)
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Proceeds
from disposition of assets
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-
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4
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Net
cash used in investing activities
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(1,978)
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(1,719)
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Cash
flows from financing activities:
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Proceeds
from issuance of notes
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375
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-
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Payments
on notes
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(1,667)
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(2,112)
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Net
payments on line of credit
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(7,503)
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(3,625)
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Net
cash used in financing activities
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(8,795)
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(5,737)
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Increase
in cash
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3,091
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131
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Cash,
beginning of period
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216
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112
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Cash,
end of period
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$3,307
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$243
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The accompanying
notes are an integral part of these financial
statements.
NOTES TO FINANCIAL STATEMENTS
Unaudited
Note
1: Unaudited Information
Advanced
Environmental Recycling Technologies, Inc. (the Company, AERT, we,
our or us) has prepared the financial statements included herein
without audit, pursuant to the rules and regulations of the
Securities and Exchange Commission (SEC). However, all adjustments
have been made to the accompanying financial statements, which are,
in the opinion of the Company’s management, necessary for a
fair presentation of the Company’s operating results. Certain
information and footnote disclosures normally included in financial
statements prepared in accordance with accounting principles
generally accepted in the United States of America (U.S. GAAP) have
been condensed or omitted pursuant to such rules and
regulations. Although the Company believes that the
disclosures are adequate to make the information presented herein
not misleading, it is recommended that these financial statements
be read in conjunction with the financial statements and the notes
thereto included in the Company’s latest annual report on
Form 10-K. Interim reports, such as this one, however, are not
necessarily indicative of results to be obtained for the full
year.
Reclassifications
We adopted
Accounting Standards Update (ASU) 2015-03, Interest-Imputation of Interest (Subtopic
835-30): Simplifying the Presentation of Debt Issuance Costs
(ASU 2015-03) during the first quarter of 2016. As shown
in the table below, pursuant to the guidance in ASU 2015-03 we have
reclassified unamortized debt issuance costs associated with our
long-term debt obligations in our previously reported balance sheet
as of December 31, 2015 as follows (in thousands):
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Other
assets - Debt issuance costs on line of
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credit, net of accumulated amortization
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$1,149
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$(729)
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$420
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Long-term
debt, less unamortized debt
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issuance
costs and current maturities
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$37,020
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$(729)
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$36,291
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Note 2: Description of the
Company
AERT, founded in
1988, recycles polyethylene plastic and develops, manufactures, and
markets composite building materials that are used in place of
traditional wood or plastic products for exterior applications in
building and remodeling homes and for certain other industrial or
commercial building purposes. The Company’s products are
manufactured primarily from approximately equal amounts of waste
wood fiber, which has been cleaned, sized and reprocessed, and
recycled polyethylene plastics that have been cleaned, processed,
and reformulated utilizing our patented and proprietary
technologies. Our products have been extensively tested, and are
sold by leading companies such as Lowe’s Companies, Inc.
(Lowe’s) and CanWel Building Materials Ltd. The
Company’s products are primarily used in renovation and
remodeling by consumers, homebuilders, and contractors as an
environmentally responsible building alternative for exterior
decking, railing, and trim products.
We manufacture our
composite products at extrusion facilities in Springdale, Arkansas,
and operate plastic recycling, blending and storage facilities in
Lowell, Arkansas and Watts, Oklahoma. We lease warehouses and land
for inventory storage in Lowell, Arkansas.
Note 3: Cash Flows
In order to
determine net cash provided by operating activities, net income has
been adjusted by, among other things, changes in current assets and
current liabilities, excluding changes in cash, current maturities
of long-term debt and current notes payable. Those changes, shown
as an (increase) decrease in current assets and an increase
(decrease) in current liabilities, are as follows (in
thousands):
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Receivables
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$1,568
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$872
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Inventories
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1,955
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(2,685)
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Prepaid
expenses
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(207)
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197
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Accounts
payable - trade and related parties
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(1,631)
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1,982
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Accrued
liabilities
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896
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348
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Change
in current assets and liablilites
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$2,581
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$714
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Cash
paid for interest
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$598
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$515
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Supplemental
Disclosures of Non-Cash Investing and Financing Activities
(in
thousands):
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Notes
payable for financing manufacturing equipment
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$-
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$2,322
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Notes
payable for financing insurance policies
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$-
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$817
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Note
4: Significant Accounting Policies
Revenue Recognition Policy
The Company
recognizes revenue when the title and risk of loss have passed to
the customer, there is persuasive evidence of an arrangement,
shipment has occurred or services have been rendered, the sales
price is determinable and collectability is reasonably assured. The
Company typically recognizes revenue at the time product is shipped
or when segregated and billed under a bill and hold arrangement.
For sales to Lowe’s, we recognize revenue when the product is
delivered to Lowe’s in accordance with our agreement. The
following table sets forth the amount of discounts, rebates and
returns for the periods indicated:
Estimates of
expected sales discounts are calculated by applying the appropriate
sales discount rate to all unpaid invoices that are eligible for
the discount. The Company’s sales prices are determinable
given that its sales discount rates are fixed and given the
predictability with which customers take sales
discounts.
Shipping
and Handling
The Company records
shipping fees billed to customers in net sales and records the
related expenses in cost of goods sold.
Inventories
Inventories are
stated at the lower of cost (first-in, first-out method) or market.
Material, labor, and factory overhead necessary to produce the
inventories are included at cost.
Inventories
consisted of the following (in thousands):
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Raw
materials
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$4,718
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$5,541
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Work
in process
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2,191
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1,979
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Finished
goods
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12,104
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13,448
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Total
inventory
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$19,013
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$20,968
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Accounts
Receivable
Accounts receivable
are uncollateralized customer obligations due under normal trade
terms generally requiring payment within thirty days from the
invoice date. Accounts receivable are stated at the amount
management expects to collect from outstanding balances. Payments
of accounts receivable are allocated to the specific invoices
identified on the customers’ remittance advice.
Accounts receivable
are carried at original invoice amounts less an estimated reserve
provided for returns and discounts based on a review of historical
rates of returns and expected discounts. The carrying amount of
accounts receivable is reduced, if needed, by a valuation allowance
that reflects management’s best estimate of the amounts that
will not be collected. Management individually reviews all overdue
accounts receivable balances and, based on an assessment of current
creditworthiness, estimates the portion, if any, of the balance
that will not be collected. Management provides for probable
uncollectible amounts through a charge to earnings and a credit to
an allowance account based on its assessment of the current status
of the individual accounts. Balances which remain outstanding after
management has used reasonable collection efforts are written off
through a charge to the valuation allowance and a credit to
accounts receivable. Recoveries of accounts receivables previously
written off are recorded when received.
On February 20,
2015, the Company entered into an accounts receivable purchase
agreement (Lowe’s Companies, Inc. Supply Chain Financing
Program) with a third party financial institution to sell selected
accounts receivable from Lowe’s. The Company, at
its sole option, may offer to sell to the financial institution all
or part of the Company’s accounts receivable from
Lowe’s. The financial institution, upon acceptance
of the offer, advances to the Company 95% of the balance due within
15 days of the invoice date with the remaining 5% being paid under
agreed upon terms. AERT pays interest on advanced
amounts at an agreed-upon rate, 1.42% per annum at September 30,
2016. The Lowe’s receivables are sold without
recourse. The purchase agreement may be terminated by
either party with 30-days’ notice. As of September
30, 2016, the amount due from the financial institution was $0.3
million.
Use
of Estimates
The preparation of
financial statements in conformity with U.S. GAAP requires
management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those
estimates.
Concentration
Risk
Credit
Risk and Major Customers
The Company’s
revenues are derived principally from national and regional
building products distributors. The Company extends unsecured
credit to its customers. The Company’s concentration in the
building materials industry has the potential to impact its
exposure to credit risk because changes in economic or other
conditions in the construction industry may similarly affect the
Company’s customers.
The Company has
significant customer concentration, with one customer representing
approximately 40% of our accounts receivable at September 30, 2016,
as compared to another customer who represented approximately 30%
at December 31, 2015.
For the nine months
ended September 30, 2016 and 2015, Lowe’s represented
approximately 50% of the Company’s net sales. Our next
largest customer, BlueLinx Corp, accounted for approximately 12% of
the Company’s net sales for the nine months ended September
30, 2016 compared to approximately 15% for the nine months ended
September 30, 2015.
Cash
The Company
maintains bank accounts that are insured by the Federal Deposit
Insurance Corporation (FDIC) up to $250,000. At times, cash
balances may be in excess of the FDIC limit. The Company believes
no significant concentrations of risk exist with respect to its
cash.
Note
5: Income Taxes
As of September 30,
2016, the Company has net operating loss (NOL) carryforwards that
are potentially available to reduce future taxable income for
federal and state income tax. However, of the approximately $52.0
million available to reduce future tax liability, $27.3 million may
expire (due to carryforward rules) before the Company can use them
and $24.7 million will be subject to and limited by the provisions
of Section 382 of the Internal Revenue Code of 1986, as amended
(IRC 382).
In March 2011,
H.I.G. AERT, LLC (H.I.G.) acquired a controlling interest in the
Company, which resulted in a significant restriction on the
utilization of the Company’s NOL carryforwards pursuant to
IRC 382 as noted in the previous paragraph. The utilization of
future NOL carryforwards will be limited per IRC 382 to
approximately $0.8 million per year for the next 17 years plus
cumulative NOL carryforwards incurred since the HIG acquisition.
For the year ended December 31, 2015, the amount of NOL
carryforwards incurred since H.I.G. acquired a controlling interest
in the Company was approximately $9.0 million.
There is
insufficient evidence that the Company will be able to generate
future taxable income to enable it to realize its NOL carryforwards
prior to expiration. Therefore, the Company maintains a valuation
allowance to recognize its deferred tax assets only to the extent
of its deferred tax liabilities. For 2016, the Company’s
estimated annual effective income tax rate is 0% due to the change
in the valuation allowance.
Based upon a review
of its income tax filing positions, the Company believes that its
positions would be sustained upon an audit and does not anticipate
any adjustments that would result in a material change to its
financial position. Therefore, no reserves for uncertain income tax
positions have been recorded. The Company recognizes interest
related to income taxes as interest expense and recognizes
penalties as operating expense. The Company is subject to routine
audits by various taxing jurisdictions. The Company is no longer
subject to income tax examinations by taxing authorities for years
before 2012, except in the States of California, Colorado and
Texas, for which the 2011 tax year is still subject to
examination.
Note
6: Earnings per Share
The Company
utilizes the two-class method for computing and presenting earnings
per share (EPS). The Company currently has one class of common
stock (the Common Stock) and one class of cumulative participating
preferred stock, Series E (the Series E Preferred
Stock). Holders of the Series E Preferred Stock are
entitled to receive per share dividends equal to 6% per annum of
the stated value of $1,000 per share of Series E Preferred Stock
when declared by the Company’s Board of Directors. In
addition, holders of the Series E Preferred Stock are entitled to
participate in any dividends declared on shares of the
Company’s Common Stock on an as-converted basis. Therefore,
the Series E Preferred Stock is considered a participating security
requiring the two-class method for the computation and presentation
of EPS – basic.
The two-class
computation method for each period segregates basic earnings per
common and participating share into two categories: distributed
earnings per share (i.e., the Series E Preferred Stock stated
dividend) and undistributed EPS, which allocates earnings after
subtracting the Series E Preferred Stock dividend to the total of
weighted average common shares outstanding plus equivalent
converted common shares related to the Series E Preferred Stock.
Basic earnings per common and participating share exclude the
effect of Common Stock equivalents, and are computed using the
two-class computation method.
In computing
diluted EPS, only potential common shares that are
dilutive—those that reduce EPS per share or increase loss per
share—are included. The exercise of options or conversion of
convertible securities is not assumed if the result would be
antidilutive, such as when a loss from continuing operations is
reported. As a result, if there is a loss from continuing
operations, diluted EPS would be computed in the same manner as
basic EPS is computed, even if an entity has net income after
adjusting for discontinued operations or the cumulative effect of
an accounting change.
The following
presents the two-class method calculation of EPS for the three and
nine months ended September 30, 2016 and 2015:
BASIC AND DILUTED EARNINGS PER SHARE
(in thousands, except share and per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss) applicable to common stock
|
$652
|
$773
|
$4,787
|
$(296)
|
Preferred
stock dividend
|
422
|
398
|
1,247
|
1,175
|
Income
(loss) before dividends
|
$1,074
|
$1,171
|
$6,034
|
$879
|
|
|
|
|
|
Per
share information:
|
|
|
|
|
Basic
earnings (losses) per common and participating share:
|
|
|
|
|
Distributed
earnings per share:
|
|
|
|
|
Common
|
$0.00
|
$0.00
|
$0.00
|
$0.00
|
Preferred
|
$0.00
|
$0.00
|
$0.00
|
$0.00
|
|
|
|
|
|
Earned,
unpaid dividends per share:
|
|
|
|
|
Preferred
|
$20.55
|
$19.39
|
$60.75
|
$57.24
|
|
|
|
|
|
Undistributed
earnings (losses) per share:
|
|
|
|
|
Common
|
$0.00
|
$0.00
|
$0.01
|
$0.00
|
Preferred
|
$25.68
|
$30.07
|
$187.88
|
$0.00
|
|
|
|
|
|
Total
basic earnings (losses) per common and participating
share:
|
|
|
|
|
Common
|
$0.00
|
$0.00
|
$0.01
|
$0.00
|
Preferred
|
$46.23
|
$49.46
|
$248.63
|
$57.24
|
|
|
|
|
|
Basic
weighted average common shares:
|
|
|
|
|
Common
weighted average number of shares
|
89,631,162
|
89,631,162
|
89,631,162
|
89,631,162
|
Participating
preferred shares - if converted (1)
|
376,830,051
|
355,043,321
|
371,322,028
|
-
|
Total
weighted average number of shares
|
466,461,213
|
444,674,483
|
460,953,190
|
89,631,162
|
|
|
|
|
|
Total
weighted average number of preferred shares
|
20,524
|
20,524
|
20,524
|
20,524
|
|
|
|
|
|
(1) Although not included in
the basic EPS calculation under the two-class method, due to a
period of loss, the Company had 349,873,827 shares of common stock
issuable upon conversion of the Series E Preferred Stock
outstanding at September 30, 2015. These financial instruments
would need to be included with future calculations of basic EPS
under the two-class method in periods of
income.
|
Note
7: Line of Credit
On October 30,
2015, AERT entered into a Credit and Financing Agreement (the WBCC
Agreement) with Webster Business Credit Corporation (WBCC), a state
banking institution organized under the laws of the State of
Connecticut.
Included in the
WBCC Agreement is an asset-based revolver loan (WBCC Revolver Loan)
capped at $8.5 million for the period June 1 to December 31 of each
calendar year and $15.0 million for the five months ended May 31 of
each calendar year. The WBCC Revolver Loan is secured by amounts
(less reserves) equal to 85% of the Company’s qualifying
accounts receivable balance and 85% of the net orderly liquidation
value of the inventory.
AERT borrows on the
WBCC Revolver Loan at the domestic base rate set forth in the WBCC
Agreement (Domestic Base Rate), which at September 30, 2016, was
3.5% plus an applicable margin. At its option, the
Company may convert the WBCC Revolver advances to short-term (30 to
90 day) loans at LIBOR plus an applicable margin. Conversion of
advances at domestic base rate to short-term loans at the LIBOR
rate plus an applicable margin must be made in minimum increments
of $250,000 and convert back to original terms of the advances upon
maturity (unless renewed).
As of September 30,
2016, the outstanding balances, rates and availability remaining on
the WBCC Revolver Loan are as follows (dollars in
thousands):
|
|
|
Total
availability
|
$8,500
|
|
Less:
Other Reserves
|
(75)
|
|
Net
Availability
|
8,425
|
|
Domestic
Base Rate loans
|
-
|
4.5%
|
LIBOR
rate loans
|
-
|
|
Total
outstanding
|
-
|
|
|
|
|
Remaining
availability
|
$8,425
|
|
Note
8: Related Party Transactions
Advisory Services
The Company entered
into an Advisory Services Agreement with H.I.G. Capital, L.L.C. on
March 18, 2011, that provides for an annual monitoring fee between
$250,000 and $500,000 and reimbursement of all other out-of-pocket
fees and expenses incurred by H.I.G. Capital, L.L.C. For the nine
months ended September 30, 2016 and 2015, we recorded an advisory
fee expense of $187,500.
Note
9: Commitments and Contingencies
AERT is involved
from time to time in litigation arising in the normal course of
business that is not disclosed in its filings with the SEC. In
management's opinion, the Company is not involved in any litigation
that is expected to materially impact, individually or in the
aggregate, the Company's results of operations or financial
condition.
Note
10: New Accounting Pronouncements
In May 2014, the
Financial Accounting Standards Board (FASB) issued Accounting
Standards Update No. 2014-09, Revenue from Contracts with Customers
(ASU 2014-09), which supersedes nearly all existing revenue
recognition guidance under U.S. GAAP. The core principle of ASU
2014-09 is to recognize revenues when promised goods or services
are transferred to customers in an amount that reflects the
consideration to which an entity expects to be entitled for those
goods or services. ASU 2014-09 defines a five step process to
achieve this core principle and, in doing so, more judgment and
estimates may be required within the revenue recognition process
than are required under existing U.S. GAAP.
The standard
provides for either of the following transition methods: (i) a full
retrospective approach reflecting the application of the standard
in each prior reporting period with the option to elect certain
practical expedients, or (ii) a retrospective approach with the
cumulative effect of initially adopting ASU 2014-09 recognized at
the date of adoption (which includes additional footnote
disclosures).
On July 9, 2015,
the FASB voted to defer the effective date of ASU 2014-09 by one
year to December 15, 2017 for interim and annual reporting periods
beginning after that date and permitted early adoption of the
standard, but not before the original effective date, December 15,
2016. We are currently evaluating the impact of our
pending adoption of ASU 2014-09 on our financial statements and
have not yet determined the transition method we will utilize upon
adoption of the standard.
During the fourth
quarter of the year ended December 31, 2015, the FASB issued a new
accounting standard which is intended to simplify the subsequent
measurement of inventory, (ASU No. 2015-11, Inventory (Topic 330): Simplifying the
Measurement of Inventory). The new standard replaces the
current lower of cost or market test with a lower of cost and net
realizable value test. Under the current guidance, market could be
replacement cost, net realizable value or net realizable value less
an approximately normal profit margin. Net realizable value is the
estimated selling prices in the ordinary course of business, less
reasonably predictable costs of completion, disposal and
transportation. This guidance should be applied on a prospective
basis and is effective for the Company beginning in the first
quarter of 2017. We are currently in the process of assessing
what impact ASU 2015-11 may have on our financial
statements.
In February, 2016,
the FASB issued ASU No. 2016-02, Leases, which relates to the accounting
of leasing transactions. This standard requires a lessee
to record on the balance sheet the assets and liabilities for the
rights and obligations created by leases with lease terms of more
than 12 months. In addition, this standard requires both
lessees and lessors to disclose certain key information about lease
transactions. This standard will be effective for fiscal
years beginning after December 15, 2018, including interim periods
within those fiscal years. We are evaluating the impact
the adoption of ASU 2016-02 will have on our financial
statements.
In March 2016, the
FASB issued ASU No. 2016-09, “Compensation – Stock Compensation (Topic
718)”. The pronouncement was issued to simplify the
accounting for share-based payment transactions, including income
tax consequences, the classification of awards as either equity or
liabilities, and the classification on the statement of cash flows.
This pronouncement is effective for reporting periods beginning
after December 15, 2016. The expected adoption method of ASU
2016-09 is being evaluated by the Company, and the impact of the
adoption has not yet been determined.
In June 2016, the
FASB issued ASU No. 2016-13, Financial Instruments - Credit
Losses (Topic 326). The new standard changes
the impairment model for most financial assets and certain other
instruments. Entities will be required to use a model that will
result in the earlier recognition of allowances for losses for
trade and other receivables and other instruments. For
available-for-sale debt securities with unrealized losses, the
losses will be recognized as allowances rather than as reductions
in the amortized cost of the securities. The amendments in
this standard are effective for fiscal years beginning after
December 15, 2019, including interim periods within those fiscal
years. The Company is currently evaluating the impact of the
provisions of this new standard on its financial
statements.
Item 2.
Management’s Discussion and Analysis of Financial Condition
and Results of Operations.
Three
Months Ended September 30, 2016 Compared to Three Months Ended
September 30, 2015
The following table
sets forth selected information from our statements of operations
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales
|
$20,476
|
$21,843
|
(6.3%)
|
Cost
of goods sold
|
15,327
|
16,503
|
(7.1%)
|
%
of net sales
|
74.9%
|
75.6%
|
|
Gross
margin
|
5,149
|
5,340
|
(3.6%)
|
%
of net sales
|
25.1%
|
24.4%
|
|
|
|
|
|
Selling
and administrative costs
|
3,378
|
3,318
|
1.8%
|
%
of net sales
|
16.5%
|
15.2%
|
|
Operating
income
|
1,771
|
2,022
|
(12.4%)
|
%
of net sales
|
8.6%
|
9.3%
|
|
|
|
|
|
Other
income or (expense):
|
|
|
|
Other
income
|
1
|
2
|
(50.0%)
|
Net
interest expense
|
(698)
|
(853)
|
(18.2%)
|
Net
income
|
1,074
|
1,171
|
(8.3%)
|
%
of net sales
|
5.2%
|
5.4%
|
|
Dividends
on preferred stock
|
(422)
|
(398)
|
6.0%
|
Net
income applicable to common stock
|
$652
|
$773
|
(15.7%)
|
%
of net sales
|
3.2%
|
3.5%
|
|
Net Sales
Third quarter 2016
sales were down $1.4 million, or 6.3% from the same period in 2015
primarily as a result of decreased international
sales.
Cost of Goods Sold and Gross Margin
Third quarter costs
of goods sold for 2016 was $15.3 million, or 7.1% below the 2015
third quarter costs of $16.5 million due in part to decreased
production and increased plant efficiencies. As a percentage of
sales, the cost of goods sold reduction was 0.7 percentage points,
reflecting manufacturing efficiencies from new capital projects,
process enhancements, and lower raw material and freight
costs.
Selling and Administrative Costs
Selling and
administrative costs for the third quarter of 2016 increased $60
thousand over the third quarter of 2015. Increased marketing and
promotional costs, as well as higher salary and wage costs were the
primary reason for the increase, partially offset by lower
commissions and professional fees.
Earnings
Net income
decreased by $0.1 million for the third quarter of 2016 compared to
the third quarter of 2015. This decrease was primarily
due to the lower sales volume and the increase in selling and
administrative costs, offset by reduced interest of $0.2 million
for the quarter.
Interest costs
decreased 18.2% for the third quarter of 2016 as compared to the
third quarter of 2015 due to lower interest rates resulting from
the financing arrangement with Webster Business Credit Corporation
(WBCC), no borrowing on the line of credit, and greater cash flow
from operations for 2016.
Nine
Months Ended September 30, 2016 Compared to Nine Months Ended
September 30, 2015
The
following table sets forth selected information from our statements
of operations (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales
|
$66,622
|
$65,564
|
1.6%
|
Cost
of goods sold
|
48,705
|
52,249
|
(6.8%)
|
%
of net sales
|
73.1%
|
79.7%
|
|
Gross
margin
|
17,917
|
13,315
|
34.6%
|
%
of net sales
|
26.9%
|
20.3%
|
|
|
|
|
|
Gain
from asset disposition
|
(1)
|
(1)
|
0.0%
|
Selling
and administrative costs
|
10,820
|
9,825
|
10.1%
|
%
of net sales
|
16.2%
|
15.0%
|
|
Operating
income
|
7,098
|
3,491
|
103.3%
|
%
of net sales
|
10.7%
|
5.3%
|
|
|
|
|
|
Other
income or (expense):
|
|
|
|
Other
income
|
1,111
|
12
|
*
|
Net
interest expense
|
(2,175)
|
(2,624)
|
(17.1%)
|
Income
before dividends
|
6,034
|
879
|
*
|
%
of net sales
|
9.1%
|
1.3%
|
|
Dividends
on preferred stock
|
(1,247)
|
(1,175)
|
6.1%
|
Net
income (loss) applicable to common stock
|
$4,787
|
$(296)
|
*
|
%
of net sales
|
7.2%
|
(0.5%)
|
|
|
|
|
|
*not meaningful as a percentage change
|
|
|
|
Net Sales
Net sales for the
nine months ended September 30, 2016 were up $1.0 million or 1.6%
from the same period in 2015. This increase was due to higher
ChoiceDek® sales, primarily in the first quarter of
2016.
Cost of Goods Sold and Gross Margin
Total cost of goods
sold for the first nine months of 2016 decreased $3.5 million, or
6.8% over the same period in 2015. As a percentage of
sales, cost of goods sold decreased 6.6 percentage points,
reflecting lower labor and overhead costs resulting from new cost
saving capital projects, improved manufacturing efficiencies
resulting in higher yields, along with process enhancements and
lower raw material and freight costs.
Selling and Administrative Costs
Selling and
administrative costs were up $1.0 million, or 10.1%, in the first
nine months of 2016 compared to the first nine months of 2015. The
increase was primarily due to higher marketing and promotional
costs and increased salaries and wages.
Earnings
Net income was up
$5.1 million for the nine months ended September 30, 2016 as
compared to the same period in 2015. This increase was primarily
due to higher gross margins for the year and a net insurance
recovery of $1.1 million from the final settlement of all claims
related to the 2013 fire at the Springdale plant, offset by a $1.0
million increase in selling and administrative costs as described
above.
Interest costs
decreased $0.4 million, or 17.1% for the first nine months of 2016
compared to the first nine months of 2015 as a result of lower
interest rates from the financing arrangement with WBCC and reduced
borrowings on the line of credit.
Liquidity and Capital Resources
Liquidity refers to
the liquid financial assets available to fund our business
operations and pay for near-term obligations as well as unused
borrowing capacity under our revolving credit facility. Our cash
requirements have historically been satisfied through a combination
of cash flows from operations and debt financings.
On October 30,
2015, we signed a Credit and Security Agreement with WBBC. The new
agreement provides us with working capital to balance the
fluctuations in our business cycle.
The Company plans
to structure its operations to grow its business, improve its
margins and generate future income in order to maximize shareholder
value. The Company is currently working to improve its liquidity
by:
●
Streamlining operations to increase
efficiencies: The Company has changed and continues to make
changes to certain operational processes in order to increase
productivity. These changes include the installation of
equipment to reduce process material handling costs and
manufacturing equipment that will improve yields. The Company
constantly evaluates its existing recycling processes and new
manufacturing technology.
●
Seeking additional sources of
revenue: The Company has added additional distribution
channels for its current product lines and is introducing new
products, including deck lighting and aluminum railing systems in
order to increase its sales.
We anticipate our
cash on hand and borrowing availability under the WBCC Revolver,
combined with our cash flows from operations, will be sufficient to
fund our business operations and debt service over the next twelve
months and beyond. This expectation is forward-looking and subject
to a number of uncertainties and assumptions. If our expectations
about our liquidity prove to be incorrect, we could be subject to a
shortfall in liquidity in the future, and this shortfall may occur
rapidly and with little or no notice, which would limit our ability
to address the shortfall on a timely basis. For example, changes to
our revenue and cost of raw materials significantly impact the
Company’s liquidity. We are in the remodeling industry that
may be cyclical and dependent on home prices. Our business is
dependent upon the economy and we cannot accurately predict
cyclical economic changes or the impact on consumer
buying.
Cash Flows
Cash Flows from Operations
Cash provided by
operations for the first nine months of 2016 was $13.9 million, an
increase of $6.3 million over the first nine months of 2015. This
change was primarily due to an increase in net income of $5.1
million, increases in other current assets and liabilities of $1.9
million, and offset by a decrease in accrued interest converted to
debt of $0.8 million and accounts receivable allowance of $0.3
million.
Cash Flows from Investing Activities
Cash used in
investing activities in the first nine months of 2016 was $2.0
million compared to $1.7 million for the same period in 2015. This
amount was used for the purchase of assets used in the
manufacturing process.
Cash Flows from Financing Activities
Cash used in
financing activities was $8.8 million for the first nine months of
2016 compared to $5.7 million at September 30, 2015.
The change was primarily due to payments on the line of
credit.
Working Capital
At September 30,
2016, we had working capital of $15.0 million compared to $6.8
million at December 31, 2015. This increase resulted from an
increase in cash available of $3.1 million, a reduction in
outstanding borrowings under the line of credit with WBCC by $7.5
million, a decrease in accounts payable of $1.6 million, and
decreases in inventory and accounts receivable of $2.0 million and
$1.4 million, respectively.
Buildings and Equipment
Property
additions and betterments include construction costs and property
purchases. The depreciation of buildings and equipment is provided
on a straight-line basis over the estimated useful lives of the
assets. Gains or losses on sales, or other dispositions of
property, are credited or charged to income in the period incurred.
Repairs and maintenance costs are charged to income in the period
incurred, unless it is determined that the useful life of the
respective asset has been extended.
For purposes of testing impairment, we group our
long-lived assets at the same level for which there are
identifiable cash flows independent of other asset groups.
Currently, there is only one level of aggregation for our assets.
We also periodically review the lives assigned to our assets to
ensure that our initial estimates do not exceed any revised
estimated periods from which we expect to realize cash flows from
the asset. If a change were to occur in any of the above-mentioned
factors or estimates, the likelihood of a material change in our
reported results would increase.
Recoverability of
assets to be held and used in operations is measured by a
comparison of the carrying amount of our assets to the undiscounted
future net cash flows expected to be generated by the assets. The
factors used to evaluate the future net cash flows, while
reasonable, require a high degree of judgment and the results could
vary if the actual results are materially different than the
forecasts. If such assets are considered to be impaired, the
impairment to be recognized is measured by the amount by which the
carrying amount of the assets exceeds the fair value of the assets.
Assets to be disposed of are reported at the lower of the carrying
amount or fair value less selling costs.
Buildings and
equipment are stated at cost and depreciated over the estimated
useful life of each asset using the straight-line method. Estimated
useful lives are: buildings — 15 to 30 years,
leasehold improvements — 2 to 6 years, and
machinery and equipment — 3 to 10 years.
We assess the
impairment of long-lived assets, consisting of property, plant, and
equipment, whenever events or circumstances indicate that the
carrying value may not be recoverable. Examples of such events or
circumstances include:
●
an asset group's
inability to continue to generate income from operations and
positive cash flow in future periods;
●
loss of legal
ownership or title to an asset;
●
significant changes
in our strategic business objectives and utilization of the
asset(s); and
●
the impact of
significant negative industry or economic
trends.
For the quarter ended September 30, 2016, the
Company has determined that there were no events or circumstances
indicating the carrying value may not be recoverable.
We are constantly
searching for and adding improvements and efficiencies to our
production process and are exploring alternative recycling
technology at the Lowell, Arkansas facility. Although no
changes have been made or approved, any significant modifications
to the process could potentially result in a future impairment of
assets currently used in operations if the new technology is
successfully implemented.
Debt
Oklahoma Energy Program Loan
On July 14, 2010,
the Company entered into a loan agreement with the Oklahoma
Department of Commerce (ODOC) under award number 14215 SSEP09,
whereby ODOC agreed to a 15-year, $3.0 million loan to AERT at a
fixed interest rate of 3.0%. The balance on the loan at September
30, 2016, was $2.2 million.
H.I.G. Long Term Debt
In 2011, the
Company consummated related recapitalization transactions with
H.I.G. AERT, LLC, an affiliate of H.I.G. Capital LLC. (H.I.G.).
H.I.G. exchanged secured debt in the Company for a combination of
new debt and equity. In exchange for secured debt in the Company
and making $6.9 million of additional capital available to the
Company, H.I.G. was issued:
1.
a Series A
Term Note in the aggregate principal amount of $10,000,000 (the
Series A Note)
2.
a Series B
Senior Term Note in the aggregate principal amount of $9,000,000
(or such lesser amount as is actually borrowed thereunder) (the
Series B Note) and
3.
20,524.149
shares of cumulative participating preferred stock, Series E, par
value $0.01 per share, of the Company
As a result, H.I.G.
owns approximately 84% of the outstanding common equity securities
of the Company on a fully diluted, as converted basis.
The Series A Note
matures on April 30, 2021 and bears cash interest at 7.25% per
annum. Payment of cash interest has been waived until
November 14, 2016, and in lieu of cash interest, payment in kind
interest is accrued and added to the principal quarterly. The
balance on the Series A Note at September 30, 2016, was $15.4
million.
The Series B Note
matures on April 30, 2021 and, at the Company’s option,
either (i) bears cash interest at 9.25% per annum or (ii) bears
cash interest at 4.0% per annum, plus a rate of interest equal to
5.25% per annum payable in kind and added to the outstanding
principal amount of the Series B Term Note. The Series B Note ranks
pari passu to the Series A Note. Payment of cash
interest has been waived until November 14, 2016, and in lieu of
such cash interest, payment in kind interest is accrued and added
to the principal quarterly. The balance on the Series B Note at
September 30, 2016, was $7.6 million.
The Credit
Agreement with H.I.G. contains provisions requiring mandatory
payments on the Notes equal to 50% of the Company’s
“Excess Cash Flow” (as defined in the Credit Agreement)
and equal to 100% of proceeds from most non-ordinary course asset
dispositions, additional debt issuances or equity issuances
(subject to certain exceptions in each case or as H.I.G. otherwise
agrees), and contains covenant restrictions on the incurrence of
additional debt, liens, leases or equity issuances.
Webster Business Credit Corporation
On October 30,
2015, AERT entered into the WBCC Agreement for the WBCC Revolver
Loan (as described in Note 7, Line
of Credit), a $5.5 million machinery and equipment loan
(WBCC M&E Loan), a $7.2 million real estate loan (WBCC RE
Loan), a $1.5 million asset-based loan (WBCC Term Loan) and a
prospective $1.2 million capital expenditure loan (WBCC CAPEX
Loan).
The purpose of the
WBCC Agreement was to refinance a portion of the Company’s
senior and subordinated debt, to cover the costs and expenses
associated with the loan transactions and to provide working
capital to fund business operations. The WBCC Agreement
expires on October 30, 2020. The WBCC Agreement requires
that WBCC hold first priority security interest on the majority of
AERT’s land, buildings and equipment. The uses of the funds
received under the WBCC Agreement at closing were as
follows:
|
|
AloStar
Revolver Loan (retired)
|
$7,538
|
H.I.G.
Series B Note (partial payoff)
|
11,000
|
Banc
of America Leasing & Capital LLC
|
755
|
Deferred
financing costs
|
1,119
|
Total
use of funds
|
$20,412
|
Payments on the
principal portion of the WBCC M&E Loan, WBCC RE Loan and WBCC
Term Loan commenced on December 1, 2015, and are being made in 60
equal monthly installments of $0.12 million plus
interest. The final installment of $7.0 million is due
and payable on October 30, 2020.
AERT borrows under
the WBCC Agreement at the domestic base rate, which at September
30, 2016 was 3.5% plus an applicable margin. At its
option, the Company may convert any of the loans under the WBCC
Agreement to a loan that bears interest at the LIBOR rate plus an
applicable margin. Domestic base rate loan conversions to LIBOR
rate loans must be made in minimum increments of
$250,000.
As of September 30,
2016, outstanding domestic base rate loans and LIBOR rate loans
were (in thousands):
|
WBCC M&E
Loan
|
WBCC RE
Loan
|
WBCC Term
Loan
|
|
Amount Rate
|
Amount
Rate
|
Amount
Rate
|
Domestic Base
Rate
|
$ 67 4.50%
|
$ 30 4.75%
|
$
25 5.50%
|
LIBOR
Rate
|
4,767 3.27%
|
6,870 3.52%
|
1,225 4.27%
|
Total
|
$
4,834
|
$
6,900
|
$
1,250
|
Only ten LIBOR rate
loans may be outstanding at any time. Loan interest
periods are available for one, two or three months. The applicable
margin for each loan is as follows:
|
|
|
Loan
|
|
|
WBCC
Revolver Loan
|
1.00%
|
2.50%
|
WBCC
M&E Loan
|
1.25%
|
2.75%
|
WBCC
CAPEX Loan
|
1.25%
|
2.75%
|
WBCC
RE Loan
|
1.50%
|
3.00%
|
WBCCC
Term Loan
|
2.25%
|
3.75%
|
Advances on the
WBCC CAPEX Loan will be subject to an amount equal to 80% of the
hard cost of the equipment to be purchased and must be greater than
$25,000. There were no borrowings outstanding on the
WBCC CAPEX Loan as of September 30, 2016.
Debt
Covenants
The Company’s
Credit Agreement with WBCC and the Credit Agreement with H.I.G.
contain the following covenant restrictions, as defined in the
respective agreements.
|
|
September 30, 2016
|
|
Covenant
|
|
Compliance
|
WBCC:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed Charge Coverage
Ratio
|
=
|
3.2
|
|
>
1.10:1.00
|
|
Yes
|
Adjusted Consolidated EBITDA / Consolidated Fixed
Charges
|
|
|
|
|
|
|
Capital
Expenditures*
|
=
|
$2.0M
|
|
<
$4.0M
|
|
Yes
|
|
|
|
|
|
|
|
HIG:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
EBITDA
|
=
|
$13.0M
|
|
=>$5.6M
|
|
Yes
|
Fixed Charge
Coverage Ratio
|
=
|
3.8
|
|
>
1.05:1.00
|
|
Yes
|
Adjusted Consolidated EBITDA / Consolidated
Fixed Charges
|
|
|
|
|
|
|
Leverage
Ratio
|
=
|
3.0
|
|
= <
6.75:1.00
|
|
Yes
|
Consolidated Indebtedness / Consolidated
EBITDA
|
|
|
|
|
|
|
Capital
Expenditures*
|
=
|
$2.0M
|
|
<
$4.0M
|
|
Yes
|
*Annual
Covenant
|
|
|
|
|
|
|
Uncertainties,
Issues and Risks
An investment in
our securities involves a high degree of risk. Prior to making an
investment, prospective investors should carefully consider the
following factors that could adversely affect our business and
results of operations, among others, and seek professional
advice.
There are many
factors that could adversely affect our business and results of
operations. These factors include, but are not limited to, general
economic conditions, decline in demand for our products, business
or industry changes, critical accounting policies, government rules
and regulations, environmental concerns, litigation, new products /
product transition, product obsolescence, competition, acts of war,
terrorism, public health issues, concentration of customer base,
loss of a significant customer, availability of raw material
(plastic) at a reasonable price, management’s failure to
execute effectively, manufacturing inefficiencies, high scrap
rates, inability to obtain adequate financing (i.e. working
capital), equipment breakdowns, low stock price, and fluctuations
in quarterly performance.
Forward-Looking
Information
This Form 10-Q
contains certain estimates, predictions, projections and other
“forward-looking statements” within the meaning of
Section 27A of the Securities Act of 1933, as amended (the
“Securities Act”) and Section 21E of the
Securities Exchange Act of 1934, as amended (the “Exchange
Act”) which statements include, but are not limited to
statements regarding our ability to generate adequate amounts of
cash to meet our need for cash in the future, streamlining
operations to increase efficiencies and seeking new sources of
revenue. Such forward-looking statements, which are often
identified by words such as “believes”,
“anticipates”, “expects”,
“estimates”, “should”, “may”,
“will” and similar expressions, represent our
expectations or beliefs concerning future events. Numerous
assumptions, risks, and uncertainties could cause actual results to
differ materially from the results discussed in the forward-looking
statements.
While these
forward-looking statements, and any assumptions upon which they are
based, are made in good faith and reflect management’s
current judgment regarding the direction of the business, actual
results will almost always vary, sometimes materially, from any
estimates, predictions, projections, or other future performance
suggested herein. Some important factors (but not necessarily all
factors) that could affect the sales volumes, growth strategies,
future profitability and operating results, or that otherwise could
cause actual results to differ materially from those expressed in
any forward-looking statement include the following: market,
political or other forces affecting the pricing and availability of
plastics and other raw materials; accidents or other unscheduled
shutdowns affecting us, our suppliers’ or our
customers’ plants, machinery, or equipment; competition from
products and services offered by other enterprises; our ability to
refinance short-term indebtedness; state and federal environmental,
economic, safety and other policies and regulations, any changes
therein, and any legal or regulatory delays or other factors beyond
our control; execution of planned capital projects; weather
conditions affecting our operations or the areas in which our
products are marketed; and adverse rulings, judgments, or
settlements in litigation or other legal matters.
We undertake no
obligation to publicly release the result of any revisions to any
such forward-looking statements that may be made to reflect events
or circumstances after the date hereof or to reflect the occurrence
of unanticipated events. Prospective investors in our securities
should carefully consider the information contained herein or in
the documents incorporated herein by reference.
Item 4.
Controls and Procedures.
Our management,
with the participation of our Chief Executive Officer, Timothy D.
Morrison, who is our principal executive officer, and our Chief
Financial Officer, J. R. Brian Hanna, who is our principal
financial and accounting officer, have reviewed and evaluated the
effectiveness of our disclosure controls and procedures (as defined
in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange
Act of 1934, as amended (the Exchange Act)) as of September
30, 2016. Based upon this evaluation, our Chief Executive Officer
and our Chief Financial Officer have concluded that, as of
September 30, 2016, the end of the period covered by this report,
AERT’s disclosure controls and procedures are effective in
recording, processing, summarizing and reporting, on a timely
basis, information required to be disclosed by AERT in the reports
that it files or submits under the Exchange Act and are effective
in ensuring that information required to be disclosed by AERT in
such reports is accumulated and communicated to AERT’s
management, including AERT’s Chief Executive Officer and
Chief Financial Officer, as appropriate to allow timely decisions
regarding required disclosure. During the three months ended
September 30, 2016, there have been no changes in our internal
controls over financial reporting that have materially affected, or
that are reasonably likely to materially affect, our internal
controls over financial reporting.
PART
II – OTHER INFORMATION
Item 1. Legal Proceedings –
(See Note 9: Commitments and
Contingencies)
Item 6.
Exhibits.
The exhibits listed
in the accompanying Index to Exhibits are filed or incorporated by
reference as part of this report and such Index to Exhibits is
hereby incorporated by reference.
Pursuant to the
requirements of the Securities Exchange Act of 1934, the registrant
has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
|
|
|
|
|
ADVANCED
ENVIRONMENTAL
|
|
|
RECYCLING
TECHNOLOGIES, INC.
|
|
|
|
|
|
/s/
TIMOTHY D. MORRISON
|
|
|
Timothy D.
Morrison,
|
|
|
Chairman and Chief Executive Officer
|
|
|
(principal executive officer)
|
|
|
|
|
|
/s/ J. R. BRIAN
HANNA
|
|
|
J. R. Brian
Hanna,
|
|
|
Chief Financial Officer & Principal Accounting
Officer
|
Date: November
14, 2016
INDEX
TO EXHIBITS
10.1
|
|
Waiver of "Special Events Default" per Series A & B Term Loan
Interest dated September 30, 2016*
|
|
|
|
10.2
|
|
Triggering Event Redemption Notice Waiver per the Series E
Convertible Preferred Stock Rights
|
|
|
dated September 30, 2016*
|
31.1
|
|
Certification per Sarbanes-Oxley Act of 2002 (Section 302) by the
Company's chief executive and principal
|
|
|
executive officer*
|
31.2
|
|
Certification per Sarbanes-Oxley Act of 2002 (Section 302) by the
Company’s chief financial and principal
|
|
|
accounting officer *
|
32.1
|
|
Certification per Sarbanes-Oxley Act of 2002 (Section 906) by the
Company's chief executive and principal executive
officer**
|
|
|
|
32.2
|
|
Certification per Sarbanes-Oxley Act of 2002 (Section 906) by the
Company's chief financial and principal accounting
officer**
|
|
|
|
101.INS
|
|
XBRL Instance Document
|
|
|
|
101.SCH
|
|
XBRL Taxonomy Extension Schema Document
|
|
|
|
101.CAL
|
|
XBRL Taxonomy Extension Calculation Linkbase Document
|
|
|
|
101.DEF
|
|
XBRL Taxonomy Extension Definition Linkbase Document
|
|
|
|
101.LAB
|
|
XBRL Taxonomy Extension Label Linkbase Document
|
|
|
|
101.PRE
|
|
XBRL Taxonomy Extension Presentation Linkbase Document
|
|
|
|
___________________________
|
|
|
|
*
|
|
Filed herewith
|
**
|
|
Furnished herewith
|