Attached files

file filename
EX-32.1 - EX-32.1 - American Electric Technologies Incaeti-ex321_7.htm
EX-31.2 - EX-31.2 - American Electric Technologies Incaeti-ex312_6.htm
EX-31.1 - EX-31.1 - American Electric Technologies Incaeti-ex311_8.htm

 

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

 

FORM 10-Q

 

x

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

FOR THE QUARTERLY PERIOD ENDED June 30, 2016

¨

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.)

1250 Wood Branch Park Drive, Suite 600, Houston, TX 77079

(Address of principal executive offices)

(713) 644-8182

(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  x    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 (S. 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  x    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 in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

 

¨

  

Accelerated filer

 

¨

 

 

 

 

Non-accelerated filer

 

¨

  

Smaller reporting company

 

x

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

As of August 11, 2016 the registrant had 8,330,524 shares of its Common Stock outstanding.

 

 

 

 

 


AMERICAN ELECTRIC TECHNOLOGIES, INC. AND SUBSIDIARIES

FORM 10-Q Index

For the Quarterly Period Ended June 30, 2016

 

 

  

 

  

Page

 

  

Part I. Financial Information

  

 

 

Item 1.

  

Financial Statements (Unaudited)

  

 

 

  

 

Condensed Consolidated Balance Sheets at June 30, 2016 and December 31, 2015

  

3

 

  

 

Condensed Consolidated Statements of Operations for the Three and Six months ended June 30, 2016 and 2015

  

4

 

 

 

Condensed Consolidated Statements of Comprehensive Income (Loss) for the Three and Six months ended June 30, 2016 and 2015

 

5

 

  

 

Condensed Consolidated Statements of Cash Flows for the Six months ended June 30, 2016 and 2015

  

6

 

  

 

Notes to Condensed Consolidated Financial Statements

  

7

 

Item 2.

  

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

  

13

 

Item 3.

  

Quantitative and Qualitative Disclosures about Market Risk

  

22

 

Item 4.

  

Controls and Procedures

  

22

 

  

 

Part II. Other Information

  

 

 

Item 1.

  

Legal Proceedings

  

23

 

Item 1A.

  

Risk Factors

  

23

 

Item 2.

  

Unregistered Sales of Equity Securities and Use of Proceeds

  

23

 

Item 3.

  

Defaults upon Senior Securities

  

23

 

Item 4.

  

Mine Safety Disclosures

  

23

 

Item 5.

  

Other Information

  

23

 

Item 6.

  

Exhibits

  

23

 

Signatures

  

24

 

 

 

 

 

 

 

 

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)  

 

 

June 30, 2016

 

 

December 31,

 

 

(unaudited)

 

 

2015

 

Assets

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

Cash and cash equivalents

$

3,961

 

 

$

7,989

 

Restricted short-term investments

 

507

 

 

 

507

 

Accounts receivable-trade, net of allowance of $257 and $225 at June 30, 2016 and December 31, 2015

 

7,444

 

 

 

6,853

 

Inventories, net of allowance of $73 and $60 at June 30, 2016 and December 31, 2015

 

1,093

 

 

 

1,325

 

Cost and estimated earnings in excess of billings on uncompleted contracts

 

5,374

 

 

 

2,302

 

Prepaid expenses and other current assets

 

298

 

 

 

324

 

Total current assets

 

18,677

 

 

 

19,300

 

Property, plant and equipment, net

 

7,591

 

 

 

7,915

 

Advances to and investments in foreign joint ventures

 

10,650

 

 

 

11,104

 

Intangibles

 

409

 

 

 

218

 

Other assets

 

64

 

 

 

49

 

Total assets

$

37,391

 

 

$

38,586

 

Liabilities, Convertible Preferred Stock and Stockholders’ Equity

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

Revolving line of credit

$

900

 

 

$

1,043

 

Current portion of long-term note payable

 

300

 

 

 

300

 

Accounts payable and other accrued expenses

 

7,463

 

 

 

4,907

 

Accrued payroll and benefits

 

631

 

 

 

476

 

Billings in excess of costs and estimated earnings on uncompleted contracts

 

906

 

 

 

1,629

 

Total current liabilities

 

10,200

 

 

 

8,355

 

Long-term note payable

 

4,050

 

 

 

4,200

 

Deferred compensation

 

283

 

 

 

305

 

Deferred income taxes

 

2,901

 

 

 

3,064

 

Total liabilities

 

17,434

 

 

 

15,924

 

Convertible preferred stock:

 

 

 

 

 

 

 

Redeemable convertible preferred stock, Series A, net of discount of $645 at June 30, 2016 and $671 at December 31, 2015; $0.001 par value, 1,000,000 shares authorized, issued and outstanding at June 30, 2016 and December 31, 2015

 

4,355

 

 

 

4,329

 

Stockholders’ equity:

 

 

 

 

 

 

 

Common stock; $0.001 par value, 50,000,000 shares authorized, 8,438,630 and 8,385,929 shares issued and 8,292,753 and 8,254,001 shares outstanding at June 30, 2016 and December 31, 2015

 

8

 

 

 

8

 

Treasury stock, at cost 145,877 shares at June 30, 2016 and 131,928 shares at December 31, 2015

 

(827

)

 

 

(792

)

Additional paid-in capital

 

12,309

 

 

 

12,032

 

Accumulated other comprehensive income

 

245

 

 

 

310

 

Retained earnings; including accumulated statutory reserves in equity method investments of $2,722 at June 30, 2016 and December 31, 2015

 

3,867

 

 

 

6,775

 

Total stockholders’ equity

 

15,602

 

 

 

18,333

 

Total liabilities, convertible preferred stock and stockholders’ equity

$

37,391

 

 

$

38,586

 

 

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 June 30,

 

 

Six Months Ended June 30,

 

 

2016

 

 

2015

 

 

2016

 

 

2015

 

Net sales

$

11,444

 

 

$

12,302

 

 

$

19,742

 

 

$

27,613

 

Cost of sales

 

10,218

 

 

 

10,258

 

 

 

18,425

 

 

 

23,286

 

Gross profit

 

1,226

 

 

 

2,044

 

 

 

1,317

 

 

 

4,327

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

196

 

 

 

90

 

 

 

719

 

 

 

228

 

Selling and marketing

 

417

 

 

 

493

 

 

 

1,293

 

 

 

1,096

 

General and administrative

 

981

 

 

 

1,256

 

 

 

2,327

 

 

 

2,523

 

Total operating expenses

 

1,594

 

 

 

1,839

 

 

 

4,339

 

 

 

3,847

 

Income (loss) from operations

 

(368

)

 

 

205

 

 

 

(3,022

)

 

 

480

 

Net equity income (loss) from foreign joint ventures’ operations:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Equity income (loss) from foreign joint ventures’ operations

 

347

 

 

 

284

 

 

 

152

 

 

 

400

 

Foreign joint ventures’ operations related expenses

 

(98

)

 

 

(109

)

 

 

(149

)

 

 

(207

)

Net equity income (loss) from foreign joint ventures’ operations

 

249

 

 

 

175

 

 

 

3

 

 

 

193

 

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

 

(119

)

 

 

380

 

 

 

(3,019

)

 

 

673

 

Other income (expense):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense and other, net

 

317

 

 

 

(45

)

 

 

278

 

 

 

(64

)

Foreign transaction gain

 

-

 

 

 

134

 

 

 

-

 

 

 

134

 

Income (loss) before income taxes

 

198

 

 

 

469

 

 

 

(2,741

)

 

 

743

 

Provision for (benefit from) income taxes

 

47

 

 

 

(78

)

 

 

(9

)

 

 

(78

)

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

 

151

 

 

 

547

 

 

 

(2,732

)

 

 

821

 

Dividends on redeemable convertible preferred stock

 

(88

)

 

 

(87

)

 

 

(176

)

 

 

(174

)

Net income (loss) attributable to common stockholders

$

63

 

 

$

460

 

 

$

(2,908

)

 

$

647

 

Earnings (loss) per common share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

$

0.01

 

 

$

0.06

 

 

$

(0.35

)

 

$

0.08

 

Diluted

$

0.01

 

 

$

0.06

 

 

$

(0.35

)

 

$

0.08

 

Weighted - average number of common shares outstanding:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

8,292,751

 

 

 

8,250,833

 

 

 

8,277,897

 

 

 

8,235,901

 

Diluted

 

8,292,751

 

 

 

8,293,947

 

 

 

8,277,897

 

 

 

8,279,015

 

 

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 June 30,

 

 

2016

 

 

2015

 

Net income (loss) before dividends on redeemable convertible

  preferred stock

$

151

 

 

$

547

 

Other comprehensive income:

 

 

 

 

 

 

 

Foreign currency translation gain (loss), net of deferred income taxes of

   $85 and ($27) for the three months ended June 30, 2016 and 2015

 

(165

)

 

 

52

 

Total comprehensive income (loss)

$

(14

)

 

$

599

 

 

 

 

 

 

 

 

 

 

Six Months Ended June 30,

 

 

2016

 

 

2015

 

Net income (loss) before dividends on redeemable convertible

  preferred stock

$

(2,732

)

 

$

821

 

Other comprehensive income:

 

 

 

 

 

 

 

Foreign currency translation gain (loss), net of deferred income taxes of

   $33 and $49 for the six months ended June 30, 2016 and 2015

 

(65

)

 

 

(95

)

Total comprehensive income (loss)

$

(2,797

)

 

$

726

 

 

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)

 

Six Months Ended June 30,

 

 

2016

 

 

2015

 

Cash flows from operating activities:

 

 

 

 

 

 

 

Net income (loss)

$

(2,732

)

 

$

821

 

Adjustments to reconcile net income (loss) to net cash provided by

   operating activities:

 

 

 

 

 

 

 

Deferred income tax provision (benefit)

 

(129

)

 

 

(78

)

Equity income (loss) from foreign joint ventures’ operations

 

(152

)

 

 

(400

)

Depreciation and amortization

 

444

 

 

 

459

 

Stock based compensation

 

267

 

 

 

256

 

Gain on fixed asset disposal

 

(75

)

 

 

-

 

Bad debt expense

 

84

 

 

 

25

 

Obsolete inventory expense

 

35

 

 

 

35

 

Deferred compensation costs

 

(22

)

 

 

8

 

Change in operating assets and liabilities:

 

 

 

 

 

 

 

Accounts receivable

 

(811

)

 

 

4,310

 

Inventories

 

198

 

 

 

624

 

Costs and estimated earnings in excess of billings on uncompleted contracts

 

(2,784

)

 

 

(801

)

Prepaid expenses and other current assets

 

(55

)

 

 

(184

)

Accounts payable

 

2,793

 

 

 

(2,793

)

Billings in excess of costs and estimated earnings on uncompleted contracts

 

(723

)

 

 

732

 

Accrued liabilities and other current liabilities

 

(559

)

 

 

(304

)

Net cash provided by (used in) operating activities

 

(4,221

)

 

 

2,710

 

Cash flows from investing activities:

 

 

 

 

 

 

 

Proceeds from sale of property and equipment

 

309

 

 

 

-

 

Purchases of property, plant and equipment and other

   assets

 

(372

)

 

 

(449

)

Proceeds from foreign joint ventures' operations dividends

 

589

 

 

 

1,170

 

Net cash provided by (used in) from investing activities

 

526

 

 

 

721

 

Cash flows from financing activities:

 

 

 

 

 

 

 

Proceeds from sale of common stock, preferred stock, and

   warrants

 

10

 

 

 

(1

)

Treasury stocks purchase

 

(36

)

 

 

(70

)

Preferred stock cash dividend

 

(75

)

 

 

(75

)

Proceeds from long-term notes payable

 

-

 

 

 

4,000

 

Advances from revolving credit facility (repayments)

 

(143

)

 

 

(2,500

)

Payments on long-term notes payable

 

(150

)

 

 

(89

)

Net cash provided by (used in) financing activities

 

(394

)

 

 

1,265

 

Effect of exchange rate on cash

 

61

 

 

 

-

 

Net increase (decrease) in cash and cash equivalents

 

(4,028

)

 

 

4,696

 

Cash and cash equivalents, beginning of period

 

7,989

 

 

 

3,550

 

Cash and cash equivalents, end of period

 

3,961

 

 

 

8,246

 

 

 

 

 

 

 

 

 

Supplemental disclosures of cash flow information:

 

 

 

 

 

 

 

Interest paid

$

95

 

 

$

75

 

Income taxes paid

$

-

 

 

$

-

 

 

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 a fair presentation of financial position as of June 30, 2016 and December 31, 2015 and results of operations for the three and six months ended June 30, 2016 and 2015. 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, 2015, which was filed on March 30, 2016. All dollar amounts disclosed in the footnotes are stated in thousands.

2. 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 and six months ended June 30, 2016 and 2015  .

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 and six months ended June 30, 2016, 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 tables set forth the computation of basic and diluted common shares.

 

 

Three Months Ended

 

 

Six Months Ended

 

 

June 30,

 

 

June 30,

 

 

2016

 

 

2015

 

 

2016

 

 

2015

 

Weighted average basic shares

 

8,292,751

 

 

 

8,250,833

 

 

 

8,277,897

 

 

 

8,235,901

 

Dilutive effect of preferred stock, warrants, stock options

   and restricted stock units

 

-

 

 

 

43,114

 

 

 

-

 

 

 

43,114

 

Total weighted average diluted shares

 

8,292,751

 

 

 

8,293,947

 

 

 

8,277,897

 

 

 

8,279,015

 

 

 

3. Recently Issued Accounting Pronouncements

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). We are currently evaluating the future impact of our pending adoption of ASU No. 2014-09 on our consolidated financial statements and have not yet determined the method with which we will adopt the standard in 2018.  

In June 2014, the FASB issued ASU No. 2014-12, Compensation – Stock Compensation (Topic 718): Accounting for Share Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period. The amendments in this ASU require that a performance target that affects vesting and that could be achieved after the requisite service period be treated as a performance condition. A reporting entity should apply existing guidance in Topic 718, Compensation – Stock Compensation, as it relates to awards with performance conditions that affect vesting to account for such awards. The performance target should not be reflected in estimating the grant-date fair value of the award. Compensation cost should be recognized in the period in which it becomes probable that the performance target will be achieved and should represent the

7


compensation cost attributable to the period(s) for which the requisite service has already been rendered. If the performance target becomes probable of being achieved before the end of the requisite service period, the remaining unrecognized compensation cost should be recognized prospectively over the remaining requisite service period. The total amount of compensation cost recognized during and after the requisite service period should reflect the number of awards that are expected to vest and should be adjusted to reflect those awards that ultimately vest. The requisite service period ends when the employee can cease rendering service and still be eligible to vest in the award if the performance target is achieved. The amendments in ASU No. 2014-12 are effective for annual periods and interim periods within those annual periods beginning after December 15, 2015, with early adoption permitted. The adoption of ASU No. 2014-12 did not have a significant impact on the Company’s consolidated financial position, results of operations and disclosures.

In January 2015, the FASB issued ASU No. 2015-01, Income Statement – Extraordinary and Unusual Items (Subtopic 225-20): Simplified Income Statement Presentation by Eliminating the Concept of Extraordinary Items. This ASU eliminates from U.S. GAAP the concept of extraordinary items. Subtopic 225-20, Income statement – Extraordinary and Unusual Items, requires that an entity separately classify, present and disclose extraordinary events and transactions. Presently, an event or transaction is presumed to be ordinary and usual activity of the reporting entity unless evidence clearly supports its classification as an extraordinary item. If an event or transaction meets the criteria for extraordinary classification, an entity is required to segregate the extraordinary item from the results of ordinary operations and show the item separately in the income statement, net of tax, after income from operations. The entity also is required to disclose applicable income taxes and either present or disclose earnings-per-share data applicable to the extraordinary item. ASU No. 2015-01 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. The amendments of ASU No. 2015-01 can be applied prospectively or retrospectively to all prior periods presented in the financial statements. Early adoption is permitted. The adoption of ASU No. 2015-01 did not have a significant impact on the Company’s consolidated financial position, results of operations and disclosures.

In February 2015, the FASB issued ASU No. 2015-02, Consolidation (Topic 810): Amendments to the Consolidation Analysis, which is intended to improve targeted areas of consolidation guidance for legal entities such as limited partnerships, limited liability corporations, and securitization structures. ASU No. 2015-02 focuses on the consolidation evaluation for reporting organizations that are required to evaluate whether they should consolidate certain legal entities. In addition to reducing the number of consolidation models from four to two, the new standard simplifies the FASB Accounting Standards Codification TM and improves current U.S. GAAP by: (1) Placing more emphasis on risk of loss when determining a controlling financial interest. A reporting organization may no longer have to consolidate a legal entity in certain circumstances based solely on its fee arrangement, when certain criteria are met; (2) Reducing the frequency of the application of related-party guidance when determining a controlling financial interest in a variable interest entity; and (3) Changing consolidation conclusions for public and private companies in several industries that typically make use of limited partnerships or variable interest entities. ASU No. 2015-02 is effective for periods beginning after December 15, 2015. The adoption of ASU No. 2015-02 did not have a significant impact on the Company’s consolidated financial position, results of operations and disclosures.

In July 2015, the FASB issued ASU No. 2015-11 Inventory (Topic 330): Simplifying the Measurement of Inventory, which is intended to converge U.S. GAAP on this topic with International Financial Reporting Standards (IFRS). ASU No. 2015-11 focuses on the premeasurement of inventory measured using any method other than LIFO, for example, average cost. Inventory within the scope of ASU No. 2015-11 is required to be measured at the lower of cost and net realizable value. When evidence exists that the net realizable value of inventory is lower than its cost, the difference shall be recognized as a loss in earnings in the period in which it occurs. That loss may be required, for example, due to damage, physical deterioration, obsolescence, changes in price levels, or other causes. The amendments in ASU No. 2015-11 are effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. Management is currently evaluating the future impact of ASU No. 2015-11 on the Company’s consolidated financial position, results of operations and disclosures.

In September 2015, the FASB issued ASU No. 2015-16, Business Combinations (Topic 805): Simplifying the Accounting for Measurement-Period Adjustments. ASU No. 2015-16 requires that an acquirer recognize adjustments to estimated amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined. ASU No. 2015-16 requires that the acquirer record, in the same period’s financial statements, the effect on earnings of changes in depreciation, amortization, or other income effects, if any, as a result of the change to the provisional amounts, calculated as if the accounting had been completed at the acquisition date. ASU No. 2015-16 also requires an entity to present separately on the face of the income statement or disclose in the notes the portion of the amount recorded in current-period earnings by line item that would have been recorded in previous reporting periods if the adjustment to the provisional amounts had been recognized as of the acquisition date. ASU No. 2015-16 is effective for fiscal years beginning after December 15, 2015. ASU No. 2015-16 should be applied retrospectively and early adoption is permitted. The adoption of ASU No. 2015-16 did not have a significant impact on the Company’s consolidated financial position, results of operations and disclosures.

In November, 2015, the FASB issued ASU No. 2015-17, Balance Sheet Classification of Deferred Taxes. The new guidance requires that all deferred tax assets and liabilities, along with any related valuation allowance, be classified as noncurrent on the balance sheet. As a result, each jurisdiction will now only have one net noncurrent deferred tax asset or liability. The new guidance will be effective for fiscal years beginning after December 15, 2017 and early adoption is permitted.  The Company has elected to early adopt this pronouncement and has reflected the change on the consolidated balance sheet for all periods presented.

8


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. Management is currently evaluating the future impact of ASU No. 2016-01 on the Company’s consolidated financial position, results of operations and 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 expired before the earliest comparative period presented. Lessees and lessors may not apply a full retrospective transition approach. Management is currently evaluating the future impact of ASU No. 2016-02 on the Company’s consolidated financial position, results of operations and disclosures.

4. Investments in Foreign Joint Ventures

We have interests in two joint ventures, outside of the United States of America (“U.S.”) which are 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; and,

 

M&I Electric Far East, Ltd. ("MIEFE”), in which the Company holds a 41% interest, MIEFE’s general manager holds an 8% interest and, Sonepar of France holds a 51% interest. The business is currently inactive and the investment in MIEFE was written down to zero in the first quarter of 2016.

BOMAY was formed in 2006 in China with a term of 12 years. The term of the joint venture may be extended upon agreement of all parties. In such case, the joint venture shall apply for the extension to the relevant Chinese authority six months before expiry of the venture.

There were no sales to joint ventures for the three months ended June 30, 2016 and 2015. Sales to joint ventures totaled $0.04 million and $0.15 million for the six months ended June 30, 2016 and 2015.

Summary (unaudited) financial information of our foreign joint ventures in U.S. dollars was as follows at June 30, 2016 and December 31, 2015 and for the three and six months ended June 30, 2016 and 2015 (in thousands):

 

 

BOMAY

 

 

MIEFE

 

 

2016

 

 

2015

 

 

2016

 

 

2015

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total current assets

$

68,493

 

 

$

68,151

 

 

$

1,033

 

 

$

2,365

 

Total non-current assets

 

3,898

 

 

 

4,131

 

 

 

55

 

 

 

70

 

Total assets

$

72,391

 

 

$

72,282

 

 

$

1,088

 

 

$

2,435

 

Liabilities and equity:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total liabilities

$

45,464

 

 

$

44,415

 

 

$

1,193

 

 

$

1,930

 

Total joint ventures’ equity

 

26,927

 

 

 

27,867

 

 

 

(105

)

 

 

505

 

Total liabilities and equity

$

72,391

 

 

$

72,282

 

 

$

1,088

 

 

$

2,435

 

 

 

9


 

Three Months Ended June 30,

 

 

BOMAY

 

 

MIEFE

 

 

2016

 

 

2015

 

 

2016

 

 

2015

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenue

$

17,000

 

 

$

13,426

 

 

$

178

 

 

$

1,701

 

Gross Profit

$

2,118

 

 

$

2,120

 

 

$

147

 

 

$

504

 

Earnings

$

1,032

 

 

$

660

 

 

$

50

 

 

$

47

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Six Months Ended June 30,

 

 

BOMAY

 

 

MIEFE

 

 

2016

 

 

2015

 

 

2016

 

 

2015

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenue

$

23,987

 

 

$

22,228

 

 

$

840

 

 

$

3,435

 

Gross Profit

$

3,262

 

 

$

3,834

 

 

$

318

 

 

$

687

 

Earnings

$

1,065

 

 

$

1,139

 

 

$

(619

)

 

$

(137

)

 

The following is a summary of activity in investments in foreign joint ventures for the six months ended June 30, 2016 (unaudited):

 

June 30, 2016

 

 

BOMAY**

 

 

MIEFE

 

 

TOTAL

 

 

(in thousands)

 

Investments in foreign joint ventures:

 

 

 

 

 

 

 

 

 

 

 

Balance at December 31, 2015

$

10,896

 

 

$

208

 

 

$

11,104

 

Equity in earnings (loss) in 2016

 

426

 

 

 

(3

)

 

$

423

 

Dividend distributions in 2016

 

(589

)

 

 

-

 

 

$

(589

)

Foreign currency translation adjustment

 

(293

)

 

 

5

 

 

$

(288

)

Investments, end of period

$

10,440

 

 

$

210

 

 

$

10,650

 

 

 

 

 

 

 

 

 

 

 

 

 

Components of investments in foreign joint ventures:

 

 

 

 

 

 

 

 

 

 

 

Investment in joint ventures

$

2,033

 

 

$

15

 

 

$

2,048

 

Undistributed earnings

 

7,935

 

 

 

(15

)

 

$

7,920

 

Foreign currency translation

 

472

 

 

 

210

 

 

$

682

 

Investments, end of period

$

10,440

 

 

$

210

 

 

$

10,650

 

**

Accumulated statutory reserves of $2.72 million  in equity method investments at June 30, 2016 and December 31, 2015, 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, an enterprise established in the PRC with foreign ownership 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 statement of operations as equity income (loss) 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 ventures, reduce the carrying value of the investment. During the six months ended June 30, 2016, the Company recognized losses from its investment in MIEFE of $0.27 million.  Losses were applied to the investment balance to the extent of the Company’s  initial investment, with the remaining $0.27 million accrued in other current liabilities to reflect the Company’s intention to fund their share of losses.

The Company reviews its equity method investments 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.

 

10


5. Notes Payable

Revolving Credit Agreement

On December 29, 2015, the Company entered into a Loan Agreement (the “Loan Agreement”) with Frost Bank (the “Bank”). The Loan Agreement provides two separate revolving credit facilities to the Company. The first facility (“Facility A”) provides the Company with a $4.00 million revolving line of credit with a two-year term maturing December 29, 2017, subject to a maximum loan amount (the “Borrowing Base”) based on a formula related to the value of certain of the Company’s accounts receivable, inventories and equipment totaling $3.10 million at June 30, 2016. Under Facility A, the Company may borrow, repay and reborrow, up to the Borrowing Base. Facility A also allows the issuance of standby letters of credit. As of June 30, 2016, we had no letters of credit outstanding. At June 30, 2016, the outstanding balance of Facility A is $0.90 million.

The second facility (“Facility B”) provides the Company with a $4.50 million declining revolving line of credit. The Company may borrow, repay and reborrow from the line. The amount available to borrow under Facility B declines from the initial $4.50 million by $0.15 million each six months. Facility B’s maturity date is December 29, 2020 when all outstanding principal and unpaid accrued interest is due and payable. At June 30, 2016, the outstanding balance is $4.35 million.         

Under the Loan Agreement, the interest rate on both facilities is LIBOR (0.65% at June 30, 2016) plus 4.00% per year. The Loan Agreement also provides for usual and customary covenants and restrictions  including that the borrower must maintain a fixed charge coverage ratio of no less than 1.25 to 1.00, and a ratio of consolidated total liabilities to consolidated net worth not to exceed 1.25. The Company maintains it is in compliance with all covenants required under the Loan Agreement. As of the date of this filing, the Bank has verbally communicated that they believe the Company is not in compliance with the free cash flow covenant. The Company is currently in discussion with the Bank to resolve this issue.

The Company had a total of $5.25 million of borrowings outstanding under the Bank Loan Agreement at June 30, 2016 and $5.54 million at December 31, 2015.                                

 

6. Inventories

Inventories consisted of the following at June 30, 2016 (unaudited) and December 31, 2015 (in thousands):  

 

 

June 30, 2016

 

 

December 31, 2015

 

 

(in thousands)

 

Raw materials

$

650

 

 

$

594

 

Work-in-process

 

516

 

 

 

791

 

 

 

1,166

 

 

 

1,385

 

Less: allowance

 

(73

)

 

 

(60

)

Total inventories

$

1,093

 

 

$

1,325

 

 

7. Income Taxes

The tax benefit for the three and six months ended June 30, 2016 reflect a 34% U.S. tax rate related to the equity in earnings from foreign joint ventures’ operations, net of dividends received and taxes paid on dividends from China resulting in an effective rate of 24% and 0%, respectively. The tax provision for the three and six months ending June 30, 2015 reflects a 34% U.S. tax rate related to the equity in foreign joint ventures’ operations, net of dividends received and taxes paid on dividends from China, for an effective rate of -17% and -11%, respectively.

8. Fair Value of Financial Instruments and Fair Value Measurements

The carrying amounts of cash and cash equivalents, trade accounts receivable and accounts payable approximate fair value as of June 30, 2016 and December 31, 2015 because of the relatively short maturity of these instruments.

The carrying amount of our long-term note payable approximates the fair value as the interest rate on the note is based on a market rate.

9. Redeemable Convertible Preferred Stock

In conjunction with the issuance of the Redeemable Convertible Preferred Stock, Series A in May 2012, warrants were issued for common stock.

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 for the six months ended June 30, 2016 and 2015 totaled $0.03 million and $0.02 million.

The Series A Convertible Preferred Stock accrues cumulative dividends at a rate of 6% per annum payable quarterly in cash or with our Common Stock, at the option of the Company, based on the then current liquidation value of the Series A Convertible

11


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 Common Stock or conversion of the Series A Convertible Preferred Stock to Common Stock.   

10. Sale of South Coast Electric Assets

On June 24, 2016, the Company sold its Bay St. Louis, MS manufacturing facility and related assets including fixed assets, work in process, and inventory to an unrelated party.  The sale resulted in a gain of $0.18 million of which $0.07 million is in relation to the gain of sale of fixed assets is reported in other income and $0.11 million is related to inventory and is reflected in income from operations.

 

 

 


12


ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion should be read in conjunction with the condensed consolidated financial statements and notes thereto included elsewhere in the Form 10-Q and the consolidated financial statements included in the 2015 Annual Report on Form 10-K filed on March 30, 2016. Historical results and percentage relationships set forth in the condensed consolidated statements of operations and cash flows, including trends that might appear, are not necessarily indicative of future operations or cash flows.

FORWARD-LOOKING STATEMENTS

Except for historical and factual information, this document contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements include statements that address activities, events or developments that we expect, believe or anticipate will or may occur in the future, such as predictions of future financial performance. All forward-looking statements are based on assumptions made by us based on our experience and perception of historical trends, current conditions, expected future developments and other factors we believe are appropriate under the circumstances.

These statements, including statements regarding our capital needs, business strategy, expectations and intentions, are subject to numerous risks and uncertainties, many of which are beyond our control, including our ability to maintain key products’ sales or effectively react to other risks including those discussed in Part I, Item 1A, Risk Factors, of our 2015 Annual Report on Form 10-K filed on March 30, 2016. We urge you to consider that statements that use the terms “believe,” “do not believe,” “anticipate,” “expect,” “plan,” “estimate,” “intend” and similar expressions are intended to identify forward-looking statements. No forward-looking statement can be guaranteed, and actual results may differ materially from those projected. We undertake no obligation to publicly update any forward-looking statement, whether as a result of new information, future events or otherwise.

BUSINESS

The Company was incorporated on October 21, 1996 as a Florida corporation. On May 15, 2007, we completed a business combination (the “M&I Merger”) with M&I Electric Industries, Inc. (“M&I”), a Texas corporation, and changed our name to American Electric Technologies, Inc. (“AETI”). Our principal executive offices are located at 1250 Wood Branch Park Drive, Suite 600, Houston, Texas 77079 and our telephone number is 713-644-8182.

Our corporate structure currently consists of American Electric Technologies, Inc., which owns 100% of M&I Electric Industries, Inc. including its wholly-owned subsidiaries, South Coast Electric Systems, LLC (“SCES”) and M&I Electric Brazil Sistemas e Servicios em Energia LTDA (“M&I Brazil”). The manufacturing operations of SCES were sold on June 24, 2016. AETI will retain the entity along with the existing service organization.


13


Overview

The Company is a leading provider of power delivery solutions to the global energy industry.

Products and Services

We have provided sophisticated custom-designed power distribution, power conversion, and automation and control systems for our customers since 1946. Our products are used to safely distribute and control the flow of electricity from the source of the power being generated (e.g. a diesel generator or the utility grid) to whatever mechanical device needs to use the power (drilling machinery, motors, other process equipment, etc.) at low and medium voltages.

Our power distribution products include low and medium voltage switchgear that provides power distribution and protection for electrical systems from electrical faults. Our products include traditional low voltage and medium voltage switchgear, as well as a variety of arc-managed and arc-resistant switchgear to increase end-user safety in case of an arc-flash explosion. Our products are suitable for both American National Standards Institute (“ANSI”) and International Electrotechnical Commission (“IEC”) markets. Other power distribution products in our solution set include low voltage and medium voltage motor control centers, bus ducts, fuse and switch products, and other related power distribution equipment. We also bundle third party products per our customer specifications including items such as battery backup power systems and transformers.

The Company has recently announced its new IntelliSafe™ medium voltage Arc-resistant switchgear product line, which is designed for the refining and petrochemical industries, process industries and the power generation market. IntelliSafe is built with the goal of being the safest arc-resistant product on the market, and meets key industry specifications and certifications.

Our power conversion solutions include analog, digital silicon controlled rectifier (“SCR”) and alternating current variable frequency drive (“AC VFD”) systems, that are used to adjust the speed and torque of an electric motor to match various user applications, primarily in the land and offshore drilling and marine vessel markets.

Our automation and control solutions are programmable logic controllers (“PLC”) based systems designed for the management and control of power in a user’s application. Our DrillAssist™ for land and offshore drilling are control systems that enable the management of an entire drilling rig’s operations. DrillAssist™ includes auto-drill capabilities and a driller’s chair and cabin where the drilling rig operator manages the rig.

Our Power Distribution Centers (“PDC”) are a critical element of our turnkey solution set and are used to house our power distribution and power conversion products. Our PDCs can be manufactured over 100 ft. long and 40 ft. wide. The Company also manufactures VFD and SCR houses for land drilling and driller’s cabins for land and offshore deployment.

We have the technical expertise to provide these solutions in compliance with a number of applicable industry standards such as National Electrical Manufacturers Association (“NEMA”) and ANSI or IEC equipment to meet American Bureau of Shipping (“ABS”), United States Coast Guard (“USCG”), Lloyd’s Register, a provider of marine certification services, and Det Norske Veritas (a leading certification body/registrar for management systems certification services) standards.

Our power distribution and control products are generally custom-designed to our customers’ specific requirements, and we do not maintain an inventory of such products.

We provide services to commission and maintain our customers’ electrical power conversion and controls systems. We also provide low and medium voltage start-up/commissioning, preventative maintenance, emergency call out services, and breaker and switchgear refurbishment services.

We offer a full range of electrical and instrumentation construction and installation services to our markets. These services include new construction as well as electrical and instrumentation turnarounds, maintenance and renovation projects. Applications include installation of switchgear, AC and DC motors, drives, motor controls, lighting systems and high voltage cable. Much of this work is generated from the installation (“rig-up”) of our power delivery solutions into our packaged power control systems.

 

The principal markets that we serve include:

 

·

Power generation and distribution– the Company designs, optimizes, manufactures, commissions, and maintains our equipment for implementation in base-load, peaking power, cogeneration, and substation transmission facilities worldwide.

 

·

The Company sells power delivery solutions to Original Equipment Manufacturers (OEM) such as  natural gas and steam turbine manufacturers, and diesel and natural engine-generator (gen-set) manufacturers and dealers for deployment with the OEM power generation products.

 

·

The Company sells our power delivery products and solutions to Power Generation and Distribution oriented Engineering Procurement and Construction (EPC) firms, and to high voltage service companies for the projects they have under contract.

14


 

·

The Company also participates in renewable power generation projects including biomass power generation, geothermal power generation and other renewable energy related businesses.

 

·

Oil & gas – the Company provides “turn-key” power delivery solutions for the upstream, midstream and downstream oil and natural gas sectors.

 

·

Upstream relates to the exploration and production of oil and natural gas. The Company serves customers in the land drilling, offshore drilling, land-based production, and offshore production segments of the market.

 

·

Midstream, which is primarily related to oil & gas transportation, including oil & gas pipelines and compression and pumping stations. The Company has a strong customer base in natural gas fractionation (separation), cryo, natural gas to liquids, and other natural gas related-plants.

 

·

Downstream, which includes oil refining and petrochemical plants, as well as oil and gas export and storage facilities and Liquefied Natural Gas (LNG) projects.

 

·

Marine and Industrial

 

·

Marine applications includes blue water vessels such as platform supply vessels (PSV), offshore supply vessels (OSV), tankers and other various work boats, typically up to 300 ft. in length. The Company also provides solutions to brown water vessels such as barges and other river and inland water vessels.

 

·

Industrial projects include non-oil & gas chemicals, as well as steel, paper, heavy commercial, and other industrial applications.

Foreign Operations

We have three primary models for conducting our international business. First, the Company uses a network of 3rd party representatives and local agents to sell our products in certain geographic markets. Many of those international partners also provide local service and support for our products in those overseas markets.

Second, where local market conditions dictate, we have expanded internationally by forming joint venture operations with local partners in key markets such as China and Singapore, where we can partner with the key local players in the market, or there are local content requirements or a competitive advantage to using local manufacturing.

We currently have interests in two joint ventures outside of the U. S. which are accounted for on 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, and;

 

·

M&I Electric Far East, Ltd. (“MIEFE”), in which the Company holds a 41% interest; MIEFE’s general manager holds an 8% interest and, Sonepar of France, holds a 51% interest. The business is currently inactive and the investment in MIEFE was written down to zero in the first quarter of 2016.

Finally, in Brazil, we have a wholly-owned subsidiary, M&I Electric Brazil, with offices in Rio de Janeiro and Macaé to serve this market. The M&I Electric Brazil team focuses primarily on services for the offshore drilling and production market segments in Brazil.

Locations

Our Company headquarters are located in Houston, Texas. We have domestic facilities and sales offices in Houston and Beaumont, Texas.

We operate M&I Electric Brazil as a wholly-owned subsidiary with two locations (Macaé and Rio de Janiero) in Brazil to offer our services to the Brazil oil & gas, marine vessel, and industrial markets.

We also have a minority interests in foreign joint ventures which have facilities in Singapore and Xian, China.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

We have adopted various critical accounting policies that govern the application of accounting principles generally accepted in the United States of America (“U.S. GAAP”) in the preparation of our condensed consolidated financial statements. The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Although these estimates are based on management’s knowledge of current events and actions it may undertake in the future, they may ultimately differ from actual results.

Certain accounting policies involve significant estimates and assumptions by us that have a material impact on our consolidated financial condition or operating performance. Management believes the following critical accounting policies reflect its most significant estimates and assumptions used in the preparation of our condensed consolidated financial statements. We do not

15


have off-balance sheet arrangements, financings, or other relationships with unconsolidated entities or other persons, also known as “special purpose entities”, nor do we have any “variable interest entities”.

Inventories – Inventories are stated at the lower of cost or market, with material value determined using an average cost method. Inventory costs for work-in-process include direct material, direct labor, production overhead and outside services. Indirect overhead is apportioned to work-in-process based on direct labor incurred.

Allowance for Obsolete and Slow-Moving Inventory – The Company regularly reviews the value of inventory on hand using specific aging categories, and records a provision for obsolete and slow-moving inventory based on historical usage and estimated future usage. As actual future demand or market conditions may vary from those projected, adjustments to our inventory reserve may be required. Based on this assessment at June 30, 2016 and December 31, 2015, management believes the inventory reserve is adequate.

Allowance for Doubtful Accounts – The Company maintains an allowance for doubtful accounts for estimated losses resulting from the inability of customers to make required payments. The estimate is based on management’s assessment of the collectability of specific customer accounts and includes consideration for credit worthiness and the financial condition of those specific customers. The Company also reviews historical experience with the customer, the general economic environment and the aging of receivables. The Company records an allowance to reduce receivables to the amount that is reasonably believed to be collectible. Based on this assessment at June 30, 2016 and December 31, 2015, management believes the allowance for doubtful accounts is adequate.

Revenue Recognition – The Company reports earnings from fixed-price and modified fixed-price long-term contracts on the percentage-of-completion 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.  However, for our manufacturing activities we have determined that labor incurred, rather than total costs incurred, provides an improved measure of percentage-of-completion. For contracts with anticipated losses, estimated losses are charged to operations in the period such losses are determined. A contract is considered complete when all costs, except insignificant items, have been incurred and the project has been accepted by the customer. Revenue from non-time and material jobs of a short-term nature (typically less than one month) is recognized on the completed-contract method 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 percentage-of-completion method. The asset, “Work-in-process,” which is included in inventories, represents the cost of labor, material, and overhead on jobs accounted for under the completed-contract method. For contracts accounted for under the percentage-of-completion method, the asset, “Costs and estimated earnings in excess of billings on uncompleted contracts,” represents revenue recognized in excess of amounts billed and the liability, “Billings in excess of costs and estimated earnings on uncompleted contracts,” represents billings in excess of revenue recognized.

Foreign Currency Gains and Losses – Foreign currency translations are included as a separate component of comprehensive income. The Company has determined the local currency of its foreign joint ventures and foreign subsidiary, M&I Brazil, to be the functional currency. In accordance with ASC 830, the assets and liabilities of the foreign equity investees and M&I Brazil, denominated in foreign currency, are translated into United States dollars at exchange rates in effect at the consolidated balance sheet date and net sales and expenses are translated at the average exchange rate for the period. Related translation adjustments are reported as comprehensive income, net of deferred income taxes, which is a separate component of stockholders’ equity, whereas gains and losses resulting from foreign currency transactions are included in results of operations.

Federal Income Taxes – The liability method is used in accounting for federal income taxes. Under this method, deferred tax assets and liabilities are determined based on differences between the financial reporting and tax basis of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. Our ability to realize the deferred tax assets are evaluated annually and a valuation allowance is provided if it is more likely than not that the deferred tax assets will not give rise to future benefits in the Company’s tax returns.

Contingencies – The Company records an estimated loss from a loss contingency when information indicates that it is probable that an asset has been impaired or a liability has been incurred and the amount of loss can be reasonably estimated. Contingencies are often resolved over long time periods, are based on unique facts and circumstances, and are inherently uncertain. The Company regularly evaluates the current information that is available to determine whether such accruals should be adjusted or other disclosures related to contingencies are required. The ultimate resolution of these matters, individually or in the aggregate, is not likely to have a material impact on the Company’s consolidated financial position or results of operations.

Equity Income from Foreign Joint Ventures’ Operations – The Company accounts for its investments in foreign joint ventures’ using the equity method. Under the equity method, the Company records its pro-rata share of foreign joint ventures’ income or losses and adjusts the basis of its investment accordingly. Dividends received from the joint ventures, if any, are recorded as reductions to the investment balance.

Carrying Value of Joint Venture Investments – The Company reviews its equity method investments 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 the most

16


recent review at June 30, 2016 and December 31, 2015, management believes the carrying value of investments in foreign joint ventures is recoverable.

Business Outlook

As previously described, the Company participates in the oil & gas, power generation and distribution and the marine and industrial markets.  Beginning in December of 2014, the global energy market started to experience a significant decline in the price of oil. This oil price decline has had a significant impact on new projects for the land and offshore drilling market in North America and globally. In 2015, the Company started to see an impact in the midstream portion of the oil & gas market including reduced order flow from oil and natural gas infrastructure projects such as pipelines and for gas processing projects. In addition to capital spending delays from our customers and the cancellation of several projects in the industry, the Company has also experienced pricing pressures which could lead to continued margin erosion. As these conditions continue into 2016, the Company is maintaining its focus its marketing efforts in the power generation and distribution market. The Company believes there are drivers underpinning market potential in this market sector, including the need for further power generation capacity in the United States, the desire to move away from coal to natural gas for base load power due to environmental reasons and the need for the U.S. to upgrade its aging power distribution infrastructure.

The Company believes that the refining and petrochemical markets which benefit from low oil & natural gas prices, will remain a focus for the Company in 2016. We are also looking at our new IntelliSafe™ arc-resistant switchgear to drive market share for the company. IntelliSafe has recently received two industry awards and the sales team has taken IntelliSafe on a road show to visit major prospective new customers in our target market sectors.

Additionally, the Company continues to take those actions which we believe are necessary to manage the company during this challenging period.

In China and Brazil, market demand is down and the local management teams are taking actions to manage through this period.

OVERALL RESULTS OF OPERATIONS

The following table represents revenue and income (loss) from consolidated operations and net equity income from foreign joint ventures’ operations, for the periods indicated (in thousands):

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

 

(Audited)

 

 

(Audited)

 

 

2016

 

 

2015

 

 

2016

 

 

2015

 

Net sales

$

11,444

 

 

$

12,302

 

 

$

19,742

 

 

$

27,613

 

Cost of sales

 

10,218

 

 

 

10,258

 

 

 

18,425

 

 

 

23,286

 

Gross profit

 

1,226

 

 

 

2,044

 

 

 

1,317

 

 

 

4,327

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

196

 

 

 

90

 

 

 

719

 

 

 

228

 

Selling and marketing

 

417

 

 

 

493

 

 

 

1,293

 

 

 

1,096

 

General and administrative

 

981

 

 

 

1,256

 

 

 

2,327

 

 

 

2,523

 

Total operating expenses

 

1,594

 

 

 

1,839

 

 

 

4,339

 

 

 

3,847

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income (loss) from operations

 

(368

)

 

 

205

 

 

 

(3,022

)

 

 

480

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net equity income (loss) from foreign joint ventures’ operations:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Equity income (loss) from foreign joint ventures’ operations

 

347

 

 

 

284

 

 

 

152

 

 

 

400

 

Foreign joint ventures’ operations related expenses

 

(98

)

 

 

(109

)

 

 

(149

)

 

 

(207

)

Net equity income (loss) from foreign joint ventures’ operations

 

249

 

 

 

175

 

 

 

3

 

 

 

193