aeti-10q_20180930.htm

  . 

 

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

 

FORM 10-Q

 

QUARTERLY REPORT UNDER SECTION 13 OR 15 (D) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED September 30, 2018

TRANSITION REPORT UNDER SECTION 13 OR 15 (D) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE TRANSITION PERIOD FROM                 TO                

Commission File No. 000-24575

 

AMERICAN ELECTRIC TECHNOLOGIES, INC.

(Exact name of registrant as specified in its charter)

 

 

Florida

 

59-3410234

(State or other jurisdiction
of incorporation)

 

(I.R.S. Employer
Identification No.)

6575 West Loop South, Suite 500, Bellaire, TX 77401

(Address of principal executive offices)

(832) 241-6330

(Registrant’s telephone number)

* * * * * * * * * * * * * * * * * * * * * *

 

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 every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (S. 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes      No  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one): 

Large accelerated filer

 

  

Accelerated filer

 

 

 

 

 

Non-accelerated filer

 

  

Smaller reporting company

 

 

 

 

 

 

 

 

Emerging growth company   

 

 

 

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.     

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes      No  

As of November 12, 2018 the registrant had 8,969,437 shares of its Common Stock outstanding.

 

 

 

1


 

AMERICAN ELECTRIC TECHNOLOGIES, INC. AND SUBSIDIARIES

FORM 10-Q Index

For the Quarterly Period Ended September 30, 2018

 

 

  

 

  

Page

 

  

Part I. Financial Information

  

 

 

Item 1.

  

Financial Statements (Unaudited)

  

 

 

  

 

Condensed Consolidated Balance Sheets at September 30, 2018 and December 31, 2017

  

3

 

  

 

Condensed Consolidated Statements of Operations for the Three Months and Nine Months Ended September 30, 2018 and 2017

  

4

 

 

 

Condensed Consolidated Statements of Comprehensive Income (Loss) for the Three Months and Nine Months Ended September 30, 2018 and 2017

 

5

 

  

 

Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2018 and 2017

  

6

 

  

 

Notes to Condensed Consolidated Financial Statements

  

7

 

Item 2.

  

Management’s Discussion and Analysis of Financial Condition and Results of Operations

  

15

 

Item 3.

  

Quantitative and Qualitative Disclosures about Market Risk

  

21

 

Item 4.

  

Controls and Procedures

  

21

 

  

 

Part II. Other Information

  

 

 

Item 1.

  

Legal Proceedings

  

22

 

Item 1A.

  

Risk Factors

  

22

 

Item 2.

  

Unregistered Sales of Equity Securities and Use of Proceeds

  

22

 

Item 3.

  

Defaults upon Senior Securities

  

22

 

Item 4.

  

Mine Safety Disclosures

  

22

 

Item 5.

  

Other Information

  

22

 

Item 6.

  

Exhibits

  

22

 

Signatures

  

23

 

 

 

 

 

 

 

 

2


PART I – FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

American Electric Technologies, Inc. and Subsidiaries

Condensed Consolidated Balance Sheets

(in thousands, except share and per share data)  

 

 

September 30,

 

 

December 31,

 

 

2018

 

 

2017

 

Assets

(unaudited)

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

Cash and cash equivalents

$

5,653

 

 

$

243

 

Accounts receivable-trade, net

 

598

 

 

 

794

 

Inventories, net

 

44

 

 

 

2

 

Unbilled receivables

 

1,219

 

 

 

592

 

Prepaid expenses and other current assets

 

282

 

 

 

151

 

Current portion of assets held for sale

 

-

 

 

 

14,912

 

Total current assets

 

7,796

 

 

 

16,694

 

Property, plant and equipment, net

 

500

 

 

 

598

 

Advances to and investments in foreign joint ventures

 

9,749

 

 

 

10,947

 

Other assets

 

99

 

 

 

116

 

Assets held for sale, less current portion

 

-

 

 

 

7,566

 

Total assets

$

18,144

 

 

$

35,921

 

Liabilities, Convertible Preferred Stock and Stockholders’ Equity

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

Current portion of long-term note payable

$

-

 

 

$

270

 

Short-term note payable

 

199

 

 

 

203

 

Accounts payable and other accrued expenses

 

4,249

 

 

 

1,058

 

Accrued payroll and benefits

 

801

 

 

 

574

 

Current portion of liabilities held for sale

 

-

 

 

 

13,558

 

Total current liabilities

 

5,249

 

 

 

15,663

 

Long-term note payable, net

 

-

 

 

 

5,524

 

Deferred compensation

 

170

 

 

 

213

 

Total liabilities

 

5,419

 

 

 

21,400

 

Convertible preferred stock:

 

 

 

 

 

 

 

Redeemable convertible preferred stock, Series A, net of discount of $517 at September 30, 2018 and $562 at December 31, 2017; $0.001 par value, 1,000,000 shares authorized, issued and outstanding at September 30, 2018 and December 31, 2017

 

4,483

 

 

 

4,438

 

Stockholders’ equity:

 

 

 

 

 

 

 

Common stock; $0.001 par value, 50,000,000 shares authorized, 9,163,412 and 8,850,532 shares issued and 8,969,437 and 8,669,650 shares outstanding at September 30, 2018 and December 31, 2017

 

9

 

 

 

9

 

Treasury stock, at cost 193,975 and 180,882 shares at September 30, 2018 and December 31, 2017

 

(950

)

 

 

(916

)

Additional paid-in capital

 

14,628

 

 

 

13,811

 

Accumulated other comprehensive income

 

(644

)

 

 

401

 

Accumulated Deficit; including accumulated statutory reserves in equity method investments of $2,809 at September 30, 2018 and December 31, 2017

 

(4,801

)

 

 

(3,222

)

Total stockholders’ equity

 

8,242

 

 

 

10,083

 

Total liabilities, convertible preferred stock and stockholders’ equity

$

18,144

 

 

$

35,921

 

 

The accompanying notes are an integral part of the condensed consolidated financial statements

3


American Electric Technologies, Inc. and Subsidiaries

Condensed Consolidated Statements of Operations

Unaudited

(in thousands, except share and per share data)

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Net sales

$

1,934

 

 

$

1,456

 

 

$

5,885

 

 

$

4,002

 

Cost of sales

 

1,377

 

 

 

1,162

 

 

 

4,490

 

 

 

3,204

 

Gross margin

 

557

 

 

 

294

 

 

 

1,395

 

 

 

798

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Selling and marketing

 

98

 

 

 

127

 

 

 

289

 

 

 

391

 

General and administrative

 

1,390

 

 

 

1,125

 

 

 

3,599

 

 

 

3,117

 

Total operating expenses

 

1,488

 

 

 

1,252

 

 

 

3,888

 

 

 

3,508

 

Loss from continuing operations

 

(931

)

 

 

(958

)

 

 

(2,493

)

 

 

(2,710

)

Net equity income from foreign joint ventures’ operations:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Equity income from foreign joint ventures’ operations

 

251

 

 

 

98

 

 

 

706

 

 

 

284

 

Foreign joint ventures’ operations related expenses

 

(32

)

 

 

(68

)

 

 

(142

)

 

 

(195

)

Net equity income from foreign joint ventures’ operations

 

219

 

 

 

30

 

 

 

564

 

 

 

89

 

Income (loss) from continuing operations and net equity income from foreign joint ventures’ operations

 

(712

)

 

 

(928

)

 

 

(1,929

)

 

 

(2,621

)

Other income (expense):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense and other, net

 

16

 

 

 

11

 

 

 

85

 

 

 

29

 

Income (loss) from continuing operations before income taxes

 

(696

)

 

 

(917

)

 

 

(1,844

)

 

 

(2,592

)

Provision for (benefit from) income taxes on continuing operations

 

128

 

 

 

11

 

 

 

318

 

 

 

(84

)

Net income (loss) from continuing operations

 

(824

)

 

 

(928

)

 

 

(2,162

)

 

 

(2,508

)

Income (loss) from discontinued operations, including gain on sale of $6,279 during the three months ended September 30, 2018

 

4,413

 

 

 

(112

)

 

 

848

 

 

 

(2,086

)

Provision for (benefit from) income taxes on discontinued operations

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Net income (loss) from discontinued operations

 

4,413

 

 

 

(112

)

 

 

848

 

 

 

(2,086

)

Net income (loss) before dividends on redeemable convertible preferred stock

 

3,589

 

 

 

(1,040

)

 

 

(1,314

)

 

 

(4,594

)

Dividends on redeemable convertible preferred stock

 

(90

)

 

 

(89

)

 

 

(270

)

 

 

(267

)

Net income (loss) attributable to common stockholders

$

3,499

 

 

$

(1,129

)

 

$

(1,584

)

 

$

(4,861

)

Earnings (loss) per common share - basic:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Continuing operations

$

(0.10

)

 

$

(0.12

)

 

$

(0.28

)

 

$

(0.33

)

Discontinued operations

$

0.49

 

 

$

(0.01

)

 

$

0.10

 

 

$

(0.24

)

Consolidated operations

$

0.39

 

 

$

(0.13

)

 

$

(0.18

)

 

$

(0.57

)

Earnings (loss) per common share - diluted:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Continuing operations

$

(0.08

)

 

$

(0.12

)

 

$

(0.28

)

 

$

(0.33

)

Discontinued operations

$

0.40

 

 

$

(0.01

)

 

$

0.10

 

 

$

(0.24

)

Consolidated operations

$

0.32

 

 

$

(0.13

)

 

$

(0.18

)

 

$

(0.57

)

 

The accompanying notes are an integral part of the condensed consolidated financial statements

 

4


American Electric Technologies, Inc. and Subsidiaries

Condensed Consolidated Statements of Comprehensive Income (Loss)

(Unaudited)

(in thousands)

 

 

Three Months Ended September 30,

 

 

2018

 

 

2017

 

Net income (loss)

$

3,589

 

 

$

(1,040

)

Other comprehensive income:

 

 

 

 

 

 

 

Foreign currency translation adjustment, net

 

(435

)

 

 

172

 

Total comprehensive income (loss)

$

3,154

 

 

$

(868

)

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30,

 

 

2018

 

 

2017

 

Net loss

$

(1,314

)

 

$

(4,594

)

Other comprehensive income:

 

 

 

 

 

 

 

Foreign currency translation adjustment

 

(926

)

 

 

274

 

Total comprehensive loss

$

(2,240

)

 

$

(4,320

)

 

The accompanying notes are an integral part of the condensed consolidated financial statements

 


5


American Electric Technologies, Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows

Unaudited

(in thousands)

 

Nine Months Ended September 30,

 

 

2018

 

 

2017

 

Cash flows from operating activities:

 

 

 

 

 

 

 

Net loss

$

(1,314

)

 

$

(4,594

)

Income (loss) from discontinued operations

 

5,431

 

 

 

2,086

 

Gain on sale of discontinued operations, net of taxes (see note 11)

 

(6,279

)

 

 

-

 

Net loss

 

(2,162

)

 

 

(2,508

)

Adjustments to reconcile net loss to net cash used in

   operating activities:

 

 

 

 

 

 

 

Equity income from foreign joint ventures’ operations

 

(706

)

 

 

(284

)

Depreciation and amortization

 

70

 

 

 

85

 

Change in operating assets and liabilities:

 

 

 

 

 

 

 

Accounts receivable

 

(795

)

 

 

(352

)

Inventories

 

(29

)

 

 

(8

)

Prepaid expenses and other current assets

 

13

 

 

 

(38

)

Accounts payable

 

(51

)

 

 

72

 

Accrued liabilities and other current liabilities

 

975

 

 

 

202

 

Net cash (used in) by continuing operating activities

 

(2,685

)

 

 

(2,831

)

Net cash (used in) provided by discontinued operations

 

834

 

 

 

795

 

Net cash (used in) provided by operating activities

 

(1,851

)

 

 

(2,036

)

Cash flows from investing activities:

 

 

 

 

 

 

 

Dividends received from joint venture

 

1,127

 

 

 

781

 

Purchases of property, plant and equipment and other

   assets

 

(97

)

 

 

(135

)

Redemption of certificates of deposit

 

-

 

 

 

457

 

Net cash provided by from continuing investing activities

 

1,030

 

 

 

1,103

 

Net cash provided by (used in) investing activities of discontinued opertations

 

11,643

 

 

 

(128

)

Net cash provided by (used in) investing activities

 

12,673

 

 

 

975

 

Cash flows from financing activities:

 

 

 

 

 

 

 

Proceeds from sale of common stock, preferred stock, and

   warrants

 

8

 

 

 

10

 

Treasury stocks purchase

 

(34

)

 

 

(53

)

Proceeds from long-term notes payable

 

-

 

 

 

7,000

 

Proceeds from short-term notes payable

 

-

 

 

 

200

 

Payments on revolving credit facility

 

-

 

 

 

(1,500

)

Payments on long-term notes payable

 

(360

)

 

 

(4,200

)

Payments on short-term notes payable

 

(5,629

)

 

 

(500

)

Payments of debt issuance costs

 

-

 

 

 

(427

)

Other financial activities, net

 

(1,392

)

 

 

-

 

Net cash provided by (used in) by financing activities

 

(7,407

)

 

 

530

 

Effect of exchange rate changes on cash

 

(51

)

 

 

11

 

Net decrease in cash and cash equivalents

 

3,364

 

 

 

(520

)

Cash and cash equivalents, beginning of period

 

2,289

 

 

 

1,618

 

Cash and cash equivalents, end of period

$

5,653

 

 

$

1,098

 

Supplemental disclosures of cash flow information:

 

 

 

 

 

 

 

Interest paid

$

661

 

 

$

611

 

Non-cash investing and financing transactions:

 

 

 

 

 

 

 

Issuance of shares of common stock on accrued preferred dividends payables

$

225

 

 

$

375

 

The accompanying notes are an integral part of the condensed consolidated financial statements


6


AMERICAN ELECTRIC TECHNOLOGIES, INC. AND SUBSIDIARIES

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 charged 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 supportable 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 results.

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