The accompanying notes are an integral part of the condensed consolidated financial statements
The accompanying notes are an integral part of the condensed consolidated financial statements
The accompanying notes are an integral part of the condensed consolidated financial statements
The accompanying notes are an integral part of the condensed consolidated financial statements
Notes to Condensed Consolidated Financial Statements (Unaudited)
1. Basis of Presentation
The accompanying unaudited condensed consolidated financial statements of American Electric Technologies, Inc. and its wholly-owned subsidiaries (“AETI”, “the Company”, “our”, “we”, “us”) have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information and include all adjustments which, in the opinion of management, are necessary for fair financial statement presentation.
All adjustments are of a normal recurring nature. The results of operations for interim periods are not necessarily indicative of the results to be expected for a full year. Certain information and footnote disclosures normally included in the financial statements prepared in accordance with U.S. GAAP have been condensed or omitted. The statements should be read in conjunction with the Company’s consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2017, which was filed on March 29, 2018. The December 31, 2017 balance sheet was derived from the audited financial statements contained in our 2017 Form 10-K.
2. Summary of Certain Significant Accounting Policies
Adoption of New Revenue Recognition Standard
In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers, which supersedes nearly all existing revenue recognition guidance under U.S. GAAP. The core principle of ASU No. 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 No. 2014-09 defines a five step process to achieve this core principle and, in doing so, more judgment and estimates may be required under existing U.S. GAAP. The standard is effective for annual periods beginning after December 15, 2016, and interim periods therein, using 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 No. 2014-09 recognized at the date of adoption (which includes additional footnote disclosures). In July 2015, the FASB issued ASU No. 2015-14 which delayed the effective date of ASU No. 2014-09 by one year (effective for annual periods beginning after December 15, 2017). The Company adopted ASU No. 2014-09, effective January 1, 2018, using the modified retrospective method. The adoption of the standard did not have a material impact on the Company’s revenue recognition policies, other than enhanced disclosures related to the disaggregation of revenues from contracts with customers, the Company’s performance obligations and any significant judgments.
In April 2016, the FASB issued ASU No. 2016-10, Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing, to clarify two aspects of Topic 606: (i) identifying performance obligations; and (ii) the licensing implementation guidance. The amendments do not change the core principle of the guidance in Topic 606. The effective date and transition requirements for ASU No. 2016-10 are the same as the effective date and transition requirements for ASU No. 2014-09. This standard was adopted effective January 1, 2018.
In May 2016, the FASB issued ASU No. 2016-12, Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients. ASU No. 2016-12 provides narrow-scope improvements to the guidance on collectability, noncash consideration, and completed contracts at transition. The amendment also provides a practical expedient for contract modifications at transition and an accounting policy election related to the presentation of sales taxes and other similar taxes collected from customers and are expected to reduce the judgment necessary to comply with Topic 606. The effective date and transition requirements for ASU No. 2016-12 are the same as the effective date and transition requirements for ASU No. 2014-09. This standard was adopted effective January 1, 2018.
In December 2016, the FASB issued ASU No. 2016-20, Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers. ASU No. 2016-20 allows entities not to make quantitative disclosures about remaining performance obligations in certain cases and require entities that use any of the new or previously existing optional exemptions to expand their qualitative disclosures. The amendment also clarifies narrow aspects of ASC 606, including contract modifications, contract costs, and the balance sheet classification of items as contract assets versus receivables, and corrects unintended application of the guidance. The effective date and transition requirements for ASU No. 2016-20 are the same as the effective date and transition requirements for ASU No. 2014-09.
The Company recognizes revenue when or as it satisfies a performance obligation by transferring promised goods or services to a customer using the over-time method to account for certain long-term contracts and the point in time method for non-time and material jobs. The non-time and material jobs are of a short-term nature (typically less than one month) and are determined after considering the attributes of such contracts. This method is used because these contracts are typically completed in a short period of time and the financial position and results of operations do not vary materially from those which would result from use of the over-time method. Earnings are accrued based on the ratio of costs incurred to total estimated costs. Costs include direct material, direct labor, and job related overhead. For our manufacturing activities we have determined that labor incurred, rather than total costs
7
incurred, provides an improved measure of percentage-of-completion. For contracts with anticipated losses, the estimated losses are charge
d to operations in the period such losses are determined.
Costs and estimated earnings in excess of billings on uncompleted contracts related to our continuing operations was $1.2 million at September 30, 2018 and $0.6 million at December 31, 2017. Costs and estimated earnings in excess of billings on uncompleted contracts related to our discontinued operations was $0.0 million and $5.8 million at September 30, 2018 and 2017, respectively, and included in current assets held for sale.
The order backlog at September 30, 2018 and December 31, 2017 was $1.0 million and $2.2 million, respectively. This backlog is for continuing operation and related to work in Brazil and is expected to be recognized in revenue during the remainder of 2018 and 2019.
The table below shows the revenue by geographic area for the three and nine months ended September 30, 2018 and 2017 (dollars in thousands). During the three months ended September 30, 2018, the Company sold the net assets of its wholly owned subsidiary that generated all revenues in North America (See Note 11). All revenues and expenses associated with this business has been reported as discontinued operations for all periods presented and excluded from the below presentation. These revenues reflect continuing operations in Brazil:
|
Three Months Ended September 30,
|
|
|
(in thousands)
|
|
|
2018
|
|
|
2017
|
|
North America
|
$
|
-
|
|
|
$
|
-
|
|
International
|
|
1,934
|
|
|
|
1,456
|
|
|
$
|
1,934
|
|
|
$
|
1,456
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30,
|
|
|
(in thousands)
|
|
|
2018
|
|
|
2017
|
|
North America
|
$
|
-
|
|
|
$
|
-
|
|
International
|
|
5,885
|
|
|
|
4,002
|
|
|
$
|
5,885
|
|
|
$
|
4,002
|
|
The table below shows North America and International revenue disaggregated by sectors for the three and nine months ended September 30, 2018 and 2017 (dollars in thousands). These revenues reflect continuing operations in Brazil:
|
Three Months Ended September 30, 2018 and 2017
|
|
|
(in thousands)
|
|
2018
|
Oil & Gas
|
|
|
Power
Generation
& Distribution
|
|
|
Marine
&
Other
Industrial
|
|
|
Total
|
|
North America
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
International
|
|
1,377
|
|
|
|
132
|
|
|
|
425
|
|
|
|
1,934
|
|
|
$
|
1,377
|
|
|
$
|
132
|
|
|
$
|
425
|
|
|
$
|
1,934
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North America
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
International
|
|
853
|
|
|
|
103
|
|
|
|
500
|
|
|
|
1,456
|
|
|
$
|
853
|
|
|
$
|
103
|
|
|
$
|
500
|
|
|
$
|
1,456
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2018 and 2017
|
|
|
(in thousands)
|
|
2018
|
Oil & Gas
|
|
|
Power
Generation
& Distribution
|
|
|
Marine
&
Other
Industrial
|
|
|
Total
|
|
North America
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
International
|
|
4,191
|
|
|
|
402
|
|
|
|
1,292
|
|
|
|
5,885
|
|
|
$
|
4,191
|
|
|
$
|
402
|
|
|
$
|
1,292
|
|
|
$
|
5,885
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North America
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
International
|
|
3,062
|
|
|
|
333
|
|
|
|
607
|
|
|
|
4,002
|
|
|
$
|
3,062
|
|
|
$
|
333
|
|
|
$
|
607
|
|
|
$
|
4,002
|
|
8
Uses and Sources of Liquidity
The Company’s primary need for liquidity is to fund working capital requirements of the Company’s business, capital expenditures and for general corporate purposes. The Company has incurred losses and experienced negative operating cash flows for the past several years, and accordingly, the Company has taken a number of actions to continue to support its operations and meet its obligations.
During 2017, the Company refinanced its outstanding loan which at that time provided approximately $1.0 million of working capital. In addition, the Board of Directors of the Company created a special committee to address strategic initiatives that include addressing liquidity. The loan was paid in full in August 2018.
During the three months ended September 30, 2018, the Company sold its operations in the United States of American “U.S.” to a third-party.
The Company expects to continue to optimize its international operations including expansion of its service business in Brazil and diversification of its joint venture operations in China into downstream oil & gas markets.
3. Earnings per Common Share
Basic earnings per share is computed by dividing net income (loss) attributable to common stockholders by the weighted average number of shares of common stock outstanding for the three months and nine months ended September 30, 2018 and 2017 .
Diluted earnings per share is computed by dividing net income (loss) attributable to common stockholders, by the sum of (1) the weighted-average number of shares of common stock outstanding during the period, (2) the dilutive effect of the assumed exercise of convertible instruments and (3) the dilutive effect of the exercise of stock options and other stock units to our common stock.
For the three months and nine months ended September 30, 2018, common stock equivalents from convertible instruments, stock options and other stock units have been excluded from the calculation of weighted average diluted shares because all such instruments were anti-dilutive.
The following table sets forth the computation of basic and diluted weighted average common shares.
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
September 30,
|
|
|
September 30,
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
Weighted average basic shares
|
|
8,934,005
|
|
|
|
8,598,461
|
|
|
|
8,819,700
|
|
|
|
8,478,848
|
|
Dilutive effect of preferred stock, warrants, stock options
and restricted stock units
|
|
2,212,389
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Total weighted average diluted shares
|
|
11,146,394
|
|
|
|
8,598,461
|
|
|
|
8,819,700
|
|
|
|
8,478,848
|
|
4. Recently Issued Accounting Pronouncements
In January 2016, the FASB issued ASU No. 2016-01, Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. ASU No. 2016-01 requires (1) an entity to measure equity instruments (except those accounted for under the equity method of accounting, or those that result in consolidation of the investee) at fair value with changes in fair value recognized in net income; (2) entities to use the exit price notation when measuring the fair value of financial instruments for disclosure purposes; (3) separate presentation of financial assets and financial liabilities by measurement category and form of financial asset; and (4) elimination of the requirement to disclose the methods and significant assumptions used to estimate fair value that is required to be disclosed for financial instruments measured at amortized cost. ASU No. 2016-01 is effective for fiscal years beginning after December 15, 2017 with early adoption permitted. The adoption of ASU No. 2016-01, effective January 1, 2018 had no significant impact on the Company’s consolidated financial position, results of operations or disclosures.
In February 2016, the FASB issued ASU No. 2016-02, Leases, which requires lessees to recognize the following for all leases (with the exception of short-term leases) at the commencement date: (1) a lease liability, which is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis; and (2) a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. Under ASU No. 2016-02, lessor accounting is largely unchanged. ASU No. 2016-02 is effective for fiscal years beginning after December 15, 2018 with early application permitted. Lessees and lessors must apply a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. The modified retrospective approach would not require any transition accounting for leases expiring before the earliest comparative period presented. Lessees and lessors may not apply a full retrospective transition approach. Management is currently reviewing the Company’s various leases to identify those affected by ASU No. 2016-02.
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. ASU No. 2016-13 eliminates the probable initial recognition threshold in current U.S. GAAP
9
and, instead, requires the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportab
le forecasts. In addition, ASU No. 2016-13 amends the accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration. ASU No. 2016-13 is effective for annual periods beginning after December 15,
2019, with early application permitted in annual periods beginning after December 15, 2018. The amendments of ASU No. 2016-13 should be applied through a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in
which the guidance is effective. Management is currently evaluating the future impact of ASU No. 2016-13 on the Company’s consolidated financial position, results of operations and disclosures.
In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments. ASU No. 2016-15 addresses eight specific cash flow issues and is intended to reduce diversity in practice in how certain cash receipts and cash payments are presented and classified in the statement of cash flows. ASU No. 2016-15 is effective for reporting periods beginning after December 15, 2017. Early adoption is permitted. The adoption of ASU No. 2016-15 effective January 1, 2018 did not have a significant impact on the Company’s consolidated financial position, results of operations and disclosures.
In January 2017, the FASB issued ASU No. 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business. ASU No. 2017-01 clarifies the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of a business or as acquisitions (or disposals) of assets. ASU No. 2017-01 is effective for annual periods beginning after December 15, 2018, with early adoption permitted under certain circumstances. The amendments of ASU No. 2017-01 should be applied prospectively as of the beginning of the period of adoption. Management is currently evaluating the future impact of ASU No. 2017-01 on the Company’s consolidated financial position, results of operations and disclosures.
In July 2018, the FASB issued ASU No. 2018-11, Leases (Topic 842): Targeted Improvements. ASU No. 2018-11 provides entities with an additional (and optional) transition method to adopt the new lease standard. Under this new transition method, an entity initially applies the new leases standard at the adoption date and recognizes a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. Consequently, an entity’s reporting for the comparative periods presented in the financial statements in which it adopts the new leases standard will continue to be in accordance with current GAAP (Topic 840, Leases). ASU No. 2018-11 also provide lessors with a practical expedient, by class of underlying asset, to not separate nonlease components from the associated lease component and, instead, to account for those components as a single component if the nonlease components otherwise would be accounted for under the new revenue guidance (Topic 606) and certain criteria are met: If the nonlease component or components associated with the lease component are the predominant component of the combined component, an entity is required to account for the combined component in accordance with Topic 606. Otherwise, the entity must account for the combined component as an operating lease in accordance with Topic 842. The amendments in ASU No. 2018-11 are effective at the same time the amendments in ASU No. 2016-02 discussed above.
5. Investments in Foreign Joint Venture
We have interests in one joint venture, outside of the U.S. which is accounted for using the equity method:
BOMAY Electric Industries Company, Ltd. (“BOMAY”), in which the Company holds a 40% interest, Baoji Oilfield Machinery Co., Ltd. (a subsidiary of China National Petroleum Corporation) holds a 51% interest, and AA Energies, Inc., holds a 9% interest. BOMAY was formed in 2006 in China with a term of 12 years and was set to expire in 2018. In March 2018, an agreement was approved by the BOMAY Board of Directors extending the joint venture agreement until April 17, 2028.
The Company disposed of its M&I Electric Far East (“MIEFE”) joint venture interest during the second quarter of 2018.
The Company made no sales to its joint venture for the three months and nine months ended September 30, 2018 and 2017.
Summary (unaudited) financial information of our foreign joint venture in U.S. dollars was as follows at September 30, 2018 and December 31, 2017 and for the three and nine months ended September 30, 2018 and 2017 (in thousands):
|
BOMAY
|
|
|
MIEFE
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
$
|
54,158
|
|
|
$
|
50,000
|
|
|
$
|
-
|
|
|
$
|
121
|
|
Total non-current assets
|
|
3,154
|
|
|
|
3,457
|
|
|
|
-
|
|
|
|
15
|
|
Total assets
|
$
|
57,312
|
|
|
$
|
53,457
|
|
|
$
|
-
|
|
|
$
|
136
|
|
Liabilities and equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
$
|
31,788
|
|
|
$
|
25,598
|
|
|
$
|
-
|
|
|
$
|
198
|
|
Total joint ventures’ equity
|
|
25,524
|
|
|
|
27,859
|
|
|
|
-
|
|
|
|
(62
|
)
|
Total liabilities and equity
|
$
|
57,312
|
|
|
$
|
53,457
|
|
|
$
|
-
|
|
|
$
|
136
|
|
10
|
Three Months Ended September 30,
|
|
|
BOMAY
|
|
|
MIEFE
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
$
|
9,283
|
|
|
$
|
6,076
|
|
|
$
|
-
|
|
|
$
|
46
|
|
Gross Profit
|
$
|
1,918
|
|
|
$
|
1,160
|
|
|
$
|
-
|
|
|
$
|
10
|
|
Earnings
|
$
|
627
|
|
|
$
|
245
|
|
|
$
|
-
|
|
|
$
|
11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30,
|
|
|
BOMAY
|
|
|
MIEFE
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
$
|
29,592
|
|
|
$
|
17,225
|
|
|
$
|
-
|
|
|
$
|
80
|
|
Gross Profit
|
$
|
5,615
|
|
|
$
|
3,805
|
|
|
$
|
-
|
|
|
$
|
22
|
|
Earnings
|
$
|
1,764
|
|
|
$
|
709
|
|
|
$
|
-
|
|
|
$
|
51
|
|
The following is a summary of activity in investments in foreign joint ventures for the nine months ended September 30, 2018 (unaudited):
|
September 30, 2018
|
|
|
BOMAY*
|
|
|
MIEFE
|
|
|
TOTAL
|
|
|
(in thousands)
|
|
Investments in foreign joint ventures:
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2017
|
$
|
10,736
|
|
|
$
|
211
|
|
|
$
|
10,947
|
|
Equity in earnings in 2018
|
|
706
|
|
|
|
-
|
|
|
|
706
|
|
Dividend paid in 2018
|
|
(1,127
|
)
|
|
|
-
|
|
|
|
(1,127
|
)
|
Foreign currency translation adjustment
|
|
(566
|
)
|
|
|
(211
|
)
|
|
|
(777
|
)
|
Investments, end of period
|
$
|
9,749
|
|
|
$
|
-
|
|
|
$
|
9,749
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Components of investments in foreign joint ventures:
|
|
|
|
|
|
|
|
|
|
|
|
Investment in joint ventures
|
$
|
2,033
|
|
|
$
|
-
|
|
|
$
|
2,033
|
|
Undistributed earnings
|
|
7,545
|
|
|
|
-
|
|
|
|
7,545
|
|
Foreign currency translation
|
|
171
|
|
|
|
-
|
|
|
|
171
|
|
Investments, end of period
|
$
|
9,749
|
|
|
$
|
-
|
|
|
$
|
9,749
|
|
*
|
Accumulated statutory reserves in equity method investments of $2.81 million at September 30, 2018 and December 31, 2017, respectively, are included in AETI’s consolidated retained earnings. In accordance with the People’s Republic of China, (“PRC”), regulations on enterprises with foreign ownership, a wholly-owned foreign invested enterprise established in the PRC is required to provide for certain statutory reserves, namely (i) General Reserve Fund, (ii) Enterprise Expansion Fund and (iii) Staff Welfare and Bonus Fund, which are appropriated from net profit as reported in the enterprise’s PRC statutory accounts. A non-wholly-owned foreign invested enterprise is permitted to provide for the above allocation at the discretion of its board of directors. The aforementioned reserves can only be used for specific purposes and are not distributable as cash dividends.
|
Under the equity method of accounting, the Company’s share of the joint ventures’ operations’ earnings or loss is recognized in the condensed consolidated statements of operations as equity income from foreign joint ventures’ operations. Joint venture income increases the carrying value of the joint venture investment and joint venture losses, as well as dividends received from the joint venture, reduce the carrying value of the investment.
The Company reviews its equity method investment for impairment whenever events or changes in circumstances indicate that the carrying amount of the investment may not be recoverable or the inability of the investee to sustain an earnings capacity that would justify the carrying amount of the investment. Based on this analysis, there was no indication of impairment at September 30, 2018 and December 31, 2017.
6. Notes Payable
Senior Secured Term Note
On March 23, 2017, the Company and its subsidiaries, M&I Electric Industries, Inc. and South Coast Electric Systems, LLC (collectively, the “Sellers”) issued and sold to HD Special-Situations III, L.P. (the “Purchaser”) a $7.00 million principal amount Senior Secured Term Note (the “Note”) bearing interest at 11.5% per annum with principal of $0.50 million due and paid on June 30,
11
2017, and
the remaining balance due 48 months after issuance for cash at par pursuant to a Note Purchase Agreement
(the “Purchase Agreement”). Proceeds from the sale of the Note were used to fully repay and terminate the Company’s prior revolving credit facilities
with approximately $1.00 million being available for the Company’s working capital and general business purposes.
On November 13, 2017, the Company entered into an agreement modifying the terms of its Senior Secured Term Note. The modification included revisions to the original revenue and EBITDA covenants along with the requirement of minimum principal reductions of $30,000 per month beginning in April 2018. In consideration for the modified terms, the Company issued 500,000 warrants to purchase the Company’s common stock at an exercise price of $2.26 which expire in November 2023.
The fair value of the warrants of approximately $0.37 million was recognized as additional paid-in capital with a corresponding discount to long-term notes payable. The discount is accreted to interest expense through the Note’s maturity.
During the quarter ended September 30, 2018, the Company paid off the debt in full. Total interest expense recognized for the three months ended September 30, 2018 and 2017 was $0.08 million
and $0.22 million, respectively. Total interest expense recognized for the nine months ended September 30, 2018 and 2017 was $0.64 million and $0.54
million, respectively. Interest expense related to the Note has been allocated to discontinued operations because the debt is required to be repaid as a result of the disposal transaction discussed in Note 11.
On March 29, 2018, the Company’s subsidiary, M&I Brazil, extended the terms of its Loan Agreement with the former chairman of AETI to June 7, 2019. The Loan Agreement provides M&I Brazil with a $0.30 million loan facility of which $0.20 million is drawn and is outstanding as of September 30, 2018 and with any balance outstanding due June 7, 2019. Under the loan agreement, the interest rate on the loan facility is 10.0%, per annum, payable each quarter. The loan facility is secured by the assets held by M&I Brazil.
7. Inventories
Inventories consisted of the raw materials of $0.04 million as of September 30, 2018 and $0.00 million as of December 31, 2017.
8. Income Taxes
The tax provision for the three and nine months ended September 30, 2018 reflects the provision from taxes on our earnings from our Brazilian subsidiary and dividends received from BOMAY. The Company has established a valuation allowance on its deferred tax assets due to uncertainty regarding future realization.
9. Fair Value of Financial Instruments and Fair Value Measurements
The carrying amounts of cash and cash equivalents, short-term investments, trade accounts receivable and accounts payable approximate fair value as of September 30, 2018 and December 31, 2017 because of the relatively short maturity of these instruments.
10. Redeemable Convertible Preferred Stock and Common Stock
Redeemable Convertible Preferred Stock
In conjunction with the issuance of 1,000,000 shares of Redeemable Convertible Preferred Stock, Series A in May 2012, warrants to purchase 325,000 shares of our common stock (the “Warrants”) were issued.
The initial value allocated to the Warrants was recognized as a discount on the Series A Convertible Preferred Stock, with a corresponding charge to additional paid-in capital. The discount related to the Warrants is accreted to retained earnings through the scheduled redemption date of the redeemable Series A Convertible Preferred Stock. Discount accretion totaled $0.01 million for both the three months ended September 30, 2018 and 2017. Discount accretion totaled $0.03 million for both the nine months ended September 30, 2018 and 2017.
The Series A Convertible Preferred Stock accrues cumulative dividends at a rate of 6% per annum payable quarterly in cash or in shares of Common Stock, at the option of the Company, based on the then current liquidation market price value of the Series A Convertible Preferred Stock, which is currently $5.00 per share. Quarterly dividends not paid in cash or Common Stock accumulate without interest and must be fully paid before any dividend or other distribution can be paid on or declared and set apart for the holders of Common Stock or the conversion of the Series A Convertible Preferred Stock to Common Stock. At September 30, 2018 and December 31, 2017, the company had accrued but unpaid dividends totaling $0.08 million which is included in accounts payable and other accrued expenses in the condensed consolidated balance sheets. During the nine months ended September 30, 2018 and 2017, the Company issued 182,025 and 149,422 shares of common stock as payment of dividends, respectively.
On or after April 30, 2017, the holders of a majority of the outstanding shares of the Series A Convertible Preferred Stock may require the Company to redeem the Series A Convertible Preferred Stock at a redemption price equal to the lessor of (i) the liquidation preference per share (initially $5.00 per share, subject to adjustments for certain future equity transactions defined in the Securities Purchase Agreement) and (ii) the fair market value of the Series A Convertible Preferred Stock per share, as determined in good faith by the Company’s Board of Directors. As of September 30, 2018 and December 31, 2017, the redemption price per share
12
was $5.00 in both years. If the holder of the Series A Convertible Preferred Stock exercise their right of redemption, the redemption price, plus any accrued
and unpaid dividends, shall be payable in 36 equal monthly installments plus interest at an annual rate of 6%.
In connection with the issuance of the Company’s senior secured term note, described in Note 6, the Company has agreed with the Purchaser of the Note and the holder of the Preferred Stock (the “Holder”) not to declare, authorize or pay any cash dividends on the Preferred Stock until the earlier of (i) March 22, 2018, or (ii) the date the obligations under the Note Purchase Agreement have been paid in full (the “Standstill Period”), without the prior written consent of the Purchaser. Following the expiration of the Standstill Period, for so long as the obligations under the Note remain outstanding, the Company may, at its sole discretion, declare, authorize or pay dividends in cash on the Preferred Stock so long as no event of default exists under the Term Note or would result therefrom. The Holder also agreed that it shall not exercise its rights to require the Company to redeem any of the Preferred Stock during the Standstill Period. Following the expiration of the Standstill Period, so long as the obligations under the Note remain outstanding, the Holder may compel the Company to redeem shares of Preferred Stock provided no event of default exists under the Note or would result from such redemption. In consideration for the Holder’s consent to the foregoing restrictions on the payment of cash dividends and redemption of the Preferred Stock, the Company entered into an agreement with the Holder (the “Repricing Agreement”) on August 1, 2017. Pursuant to the Repricing Agreement, each share of Series A Preferred Stock will be initially convertible, at the option of the holder, into one (1) share of common stock at a conversion price of $2.26 per share of common stock, so that the Series A Preferred Stock sold to the Holder are currently convertible into an aggregate of 2,212,389 shares of common stock. In addition, pursuant to the Repricing Agreement, the Series A Warrants sold to the Holder will be exercisable for 125,000 shares of common stock at an initial exercise price of $2.72 per share and the Series B Warrants sold to the Holder will be exercisable for 200,000 shares of common stock at an initial exercise price of $3.17 per share.
As a result of the payoff of the secured term loan, there are no longer any restrictions on the Company’s payment of dividends on the Series A Convertible Preferred Stock or the ability of the holders to exercise their right of redemption.
This agreement was approved by a committee of the Board of Directors comprised solely of independent directors.
Common Stock
For the nine months ended September 30, 2018, the Company issued a total of 312,880 shares of common stock. The Company issued 182,025 shares of common stock as payment of accrued preferred dividends, as noted above, with the remaining 130,855 shares issued in connection with the Company’s Employee Stock Purchase Plan and upon vesting of restricted stock units.
11. Discontinued Operations
On August 6, 2018, the Company announced it had agreed to sell its U.S. business operated by its wholly owned subsidiary, M&I Electric Industries, Inc. to an affiliate of Myers Power Products, Inc. pursuant to an Asset Purchase Agreement (the “Transaction”). The Transaction closed on August 12, 2018 for a total cash purchase price of $12.4M plus the value of assumed indebtedness of approximately $12.8M. In addition, the Company was required to provide $740,000 into escrow in order to secure certain of the Company’s indemnification obligations within a six month period following closing. A portion of the funds provided by the Transaction were required to be used to pay off the Senior Secured Term Note and related interest totaling approximately $6.5 million.
The contractual terms of the aforementioned sale include a provision to true-up the net working capital, estimated as of the date of closing, to the actual working capital as calculated by the Buyer and agreed to by the Seller. Any difference in actual (conclusive) net working capital in relation to the estimated working capital at closing could result in an adjustment to the purchase price. Subsequent to September 30, 2018, the Company received notification from the Buyer of their actual working capital calculation. In the notification, the Buyer has communicated a decrease of approximately $4.3 million dollars in net working capital, in comparison to the estimated working capital used at the contract closing. The Company has until November 28, 2018 to review the documentation from the Buyer and respond. In the event the Buyer and Seller cannot agree to a conclusive net working capital adjustment, then all items remaining in dispute shall be submitted by either one of the parties within thirty (30) calendar days after the expiration of the resolution period to a national or regional independent accounting firm mutually acceptable to Buyer and Seller (the "Neutral Arbitrator"). The Neutral Arbitrator shall act as an arbitrator to determine the conclusive net working capital. The conclusive net working capital, once finally determined, may result in a purchase price adjustment due to the Buyer or to the Company as Seller.
As of the date of the filing of the 10-Q for the period ended September 30, 2018, the Company disagrees with the buyers working capital calculation and has not received documentation sufficient to support the buyers position. As such, no adjustments have been considered in determining the gain on the sale of assets reported as of September 30, 2018. The resulting purchase price adjustment based on the conclusive net working capital adjustment, if any, would be reflected in the fourth quarter of 2018.
As of June 30, 2018, the assets and liabilities sold in the Transaction were reflected as held for sale in the Company’s Consolidated Balance Sheets, and the related operating results and cash flows of the assets sold and liabilities assumed were reflected as discontinued operations in the Company’s Consolidated Statements of Operations, Consolidated Statements of Comprehensive Income (Loss), and Consolidated Statements of Cash Flows for all periods presented.
13
The following tables summarize the M&I Electric Industries Inc. United States assets and liabilities held for sale and operating resu
lts.
M&I Electric Industries Inc. in the United States
Assets and Liabilities held for sale
(in thousands)
|
June 30,
|
|
|
December 31,
|
|
|
2018
|
|
|
2017
|
|
Assets
|
(unaudited)
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
$
|
2,858
|
|
|
$
|
2,046
|
|
Restricted short-term investments
|
|
50
|
|
|
|
50
|
|
Accounts receivable-trade, net
|
|
5,405
|
|
|
|
5,266
|
|
Inventories, net
|
|
1,206
|
|
|
|
1,325
|
|
Cost and estimated earnings in excess of billings on uncompleted contracts
|
|
1,973
|
|
|
|
5,841
|
|
Prepaid expenses and other current assets
|
|
379
|
|
|
|
384
|
|
Total current portion of assets held for sale
|
|
11,871
|
|
|
|
14,912
|
|
Property, plant and equipment, net
|
|
6,000
|
|
|
|
6,323
|
|
Intangibles
|
|
506
|
|
|
|
458
|
|
Retainage receivables
|
|
-
|
|
|
|
785
|
|
Total non-current assets held for sale
|
|
6,506
|
|
|
|
7,566
|
|
Total assets held for sale
|
$
|
18,377
|
|
|
$
|
22,478
|
|
Liabilities
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
Accounts payable and other accrued expenses
|
$
|
9,378
|
|
|
$
|
11,278
|
|
Short-term note payable
|
|
116
|
|
|
|
150
|
|
Accrued payroll and benefits
|
|
415
|
|
|
|
338
|
|
Billings in excess of costs and estimated earnings on uncompleted contracts
|
|
3,801
|
|
|
|
1,792
|
|
Total current liabilities held for sale
|
|
13,710
|
|
|
|
13,558
|
|
Total liabilities held for sale
|
$
|
13,710
|
|
|
$
|
13,558
|
|
M&I Electric Industries Inc. in the United States
Statements of Operations (Discontinued)
Unaudited
(in thousands)
|
Three Months Ended September 30,
|
|
|
Nine Months Ended September 30,
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
Net sales
|
$
|
3,736
|
|
|
$
|
11,811
|
|
|
$
|
17,899
|
|
|
$
|
30,255
|
|
Cost of sales
|
|
4,326
|
|
|
|
11,028
|
|
|
|
20,358
|
|
|
|
29,716
|
|
Gross margin
|
|
(590
|
)
|
|
|
783
|
|
|
|
(2,459
|
)
|
|
|
539
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
15
|
|
|
|
55
|
|
|
|
100
|
|
|
|
238
|
|
Selling and marketing
|
|
329
|
|
|
|
519
|
|
|
|
1,561
|
|
|
|
1,561
|
|
General and administrative
|
|
683
|
|
|
|
-
|
|
|
|
681
|
|
|
|
-
|
|
Total operating expenses
|
|
1,027
|
|
|
|
574
|
|
|
|
2,342
|
|
|
|
1,799
|
|
Income (loss) from discontinued operations
|
|
(1,617
|
)
|
|
|
209
|
|
|
|
(4,801
|
)
|
|
|
(1,260
|
)
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense and other, net
|
|
6,030
|
|
|
|
(321
|
)
|
|
|
5,649
|
|
|
|
(826
|
)
|
Income (loss) from discontinued operations before income taxes
|
|
4,413
|
|
|
|
(112
|
)
|
|
|
848
|
|
|
|
(2,086
|
)
|
Provision for (benefit from) income taxes on discontinued operations
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Income (loss) from discontinued operations
|
$
|
4,413
|
|
|
$
|
(112
|
)
|
|
$
|
848
|
|
|
$
|
(2,086
|
)
|
Cash provided by operating activities of discontinued operations for the nine months ended September 30, 2018 was $0.8 million. Cash provided by operating activities of discontinued operations for the nine months ended September 30, 2017 was $0.8
14
million. Cash provided in investing activities of discontinued operations for the nine months ended September 30, 2018 was $11.6 million. Cash used in investing activities of discontinued operations for the nine
months ended September 30, 2017 was $0.1 million. The general and administrative costs represent severance payments that coincided with the discontinued operations.