UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

 

x

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended: September 30, 2016

 

OR

 

¨

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from     to

 

Commission file number: 001-12127

 

EMPIRE RESOURCES, INC.

(Exact name of registrant as specified in its charter)

 

Delaware		22-3136782
(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		Identification No.)

 

2115 Linwood Avenue

Fort Lee, New Jersey 07024
(Address of principal executive offices)
(Zip Code)

(201) 944-2200
(Registrant’s telephone number, including area code)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes 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 (§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. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer ¨		Accelerated filer ¨
Non-accelerated filer ¨		Smaller reporting company x
(Do not check if a smaller reporting company)

 

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

 

The number of shares of the registrant’s common stock, $0.01 par value, outstanding as of November 9, 2016: 8,403,150

 

 

TABLE OF CONTENTS

 

		Page
	PART I
Item 1.	Financial Statements	3
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	16
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	22
Item 4.	Controls and Procedures	22
	PART II
Item 1.	Legal Proceedings	22
Item 1A.	Risk Factors	22
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

 

 

PART I - FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

EMPIRE RESOURCES, INC. AND SUBSIDIARIES 

Consolidated Balance Sheets
(In thousands except share and per share amounts)

 

		September 30, 2016				December 31, 2015
		(unaudited)
ASSETS
Current assets:
Cash		$	5,719			$	7,315
Trade accounts receivable (less allowance for doubtful accounts of $1,192 and $1,190)			64,143				60,525
Inventories			116,717				157,025
Deferred tax assets			5,102				5,101
Other current assets, including derivatives			4,177				10,601
Total current assets			195,858				240,567
Property and equipment, net			7,364				7,340
Total assets		$	203,222			$	247,907
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable - banks (net of unamortized financing costs of $369 and $629)		$	108,556			$	138,517
Current maturities of mortgage payable			265				265
Subordinated convertible debt net of unamortized discount of $216			-				10,784
Trade accounts payable			26,403				35,741
Income taxes payable			3,429				2,092
Accrued expenses and derivative liabilities			9,417				6,177
Derivative liability for embedded conversion option			-				942
Dividends payable			339				213
Total current liabilities			148,409				194,731
Mortgage payable, net of current maturities			4,770				4,969
Deferred taxes payable			6				8
Total liabilities			153,185				199,708
Commitments (Note 18)
Stockholders' equity:
Common stock $0.01 par value, 20,000,000 shares authorized and 11,749,651 shares issued at September 30, 2016 and December 31, 2015			117				117
Additional paid-in capital			13,037				13,037
Retained earnings			44,858				42,749
Accumulated other comprehensive loss			(484	)			(666	)
Treasury stock, 3,327,371 and 3,218,691 shares at September 30, 2016 and December 31, 2015			(7,491	)			(7,038	)
Total stockholders' equity			50,037				48,199
Total liabilities and stockholders' equity		$	203,222			$	247,907

 

See notes to unaudited consolidated financial statements

 

 

EMPIRE RESOURCES, INC. AND SUBSIDIARIES

Unaudited Consolidated Statements of Income
(In thousands except per share amounts)

 

		Three Months Ended September 30,								Nine Months Ended September 30,
		2016				2015				2016				2015
Net sales		$	113,599			$	121,950			$	358,235			$	424,689
Cost of goods sold			108,088				116,603				341,536				406,488
Gross profit			5,511				5,347				16,699				18,201
Selling, general and administrative expenses			3,335				3,094				9,918				10,632
Operating income			2,176				2,253				6,781				7,569
Interest expense, net			786				1,419				3,128				4,665
Income before change in value of derivative liability			1,390				834				3,653				2,904
Reduction (increase) in value of derivative liability			-				(224	)			942				1,184
Income before income taxes			1,390				610				4,595				4,088
Income taxes			502				295				1,596				1,314
Net income		$	888			$	315			$	2,999			$	2,774
Weighted average shares outstanding:
Basic			8,504				8,870				8,486				8,709
Diluted			8,536				8,898				10,137				11,736
Earnings per share:
Basic		$	0.10			$	0.04			$	0.35			$	0.32
Diluted		$	0.10			$	0.04			$	0.25			$	0.22

 

See notes to unaudited consolidated financial statements

 

 

EMPIRE RESOURCES, INC. AND SUBSIDIARIES

Unaudited Consolidated Statements of Comprehensive Income
(In thousands)

 

		Three Months Ended September 30,								Nine Months Ended September 30,
		2016				2015				2016				2015
Net income		$	888			$	315			$	2,999			$	2,774
Other comprehensive (loss)/income
Foreign currency translation adjustments			37				13				182				(242	)
Comprehensive income		$	925			$	328			$	3,181			$	2,532

 

See notes to unaudited consolidated financial statements

 

 

EMPIRE RESOURCES, INC. AND SUBSIDIARIES

Unaudited Consolidated Statements of Cash Flows
(In thousands)

 

		Nine Months Ended September 30,
		2016				2015
Cash flows - operating activities:
Net income		$	2,999			$	2,774
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization			543				487
Reduction in value of derivative liability			(942	)			(1,184	)
Amortization of convertible note discount			216				457
Imputed interest on vendor advance			-				(53	)
Provision for doubtful accounts			(7	)			(188	)
Amortization of supply agreement			-				240
Deferred income taxes			(3	)			73
Foreign exchange loss and other			928				437
Changes in:
Trade accounts receivable			(3,790	)			13,043
Inventories			40,209				37,828
Other current assets			6,389				5,353
Trade accounts payable			(9,341	)			(19,689	)
Income taxes payable			1,335				(2,973	)
Accrued expenses and derivative liabilities			3,232				2,649
Net cash  provided by operating activities			41,768				39,254
Cash flows - investing activities:
Repayment related to supply agreement			-				2,500
Purchases of property and equipment			(159	)			(237	)
Net cash (used in)/provided by investing activities			(159	)			2,263
Cash flows - financing activities:
Repayment of notes payable – banks			(30,514	)			(33,978	)
Repayment of convertible subordinated debt			(11,000	)			-
Purchase of stock options			-				(922	)
Excess tax benefit related to purchase of stock options			-				282
Repayments of mortgage loan			(199	)			-
Deferred financing costs			(148	)			(158	)
Dividends paid			(766	)			(884	)
Treasury stock purchased			(453	)			(1,407	)
Net cash used in financing activities			(43,080	)			(37,067	)
Net (decrease)/increase in cash			(1,471	)			4,450
Effect of exchange rate			(125	)			(44	)
Cash at beginning of period			7,315				1,130
Cash at end of period		$	5,719			$	5,536
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest		$	3,001			$	4,024
Income taxes		$	1,444			$	2,480
Non cash financing activities:
Dividend declared but not yet paid		$	339			$	217

 

See notes to unaudited consolidated financial statements

 

 

EMPIRE RESOURCES, INC. AND SUBSIDIARIES

Unaudited Consolidated Statement of Stockholders’ Equity

(In thousands, except per share amounts)

 

		Common Stock Number of Shares				Common Stock  Amount				Additional Paid-in Capital				Retained Earnings				Accumulated Other Comprehensive (Loss)				Treasury Stock				Total Stockholders' Equity
Balance at December 31, 2015			11,750			$	117			$	13,037			$	42,749			$	(666	)		$	(7,038	)		$	48,199
Treasury stock acquired																							(453	)			(453	)
Change in cumulative translation adjustment																			182								182
Dividends declared ($0.105 per share)															(890	)											(890	)
Net income															2,999												2,999
Balance at September 30, 2016			11,750			$	117			$	13,037			$	44,858			$	(484	)		$	(7,491	)		$	50,037

 

See notes to unaudited consolidated financial statements

 

 

Empire Resources, Inc. and Subsidiaries.

 

Notes to Unaudited Consolidated Financial Statements

(In thousands, except for per share amounts)

 

1. The Company

 

The condensed consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries, Empire Resources Pacific Ltd., the Company’s sales agent in Australia, 8911 Kelso Drive, (organized in June 2015) the owner of the warehouse facility in Essex, Maryland, 6900 Quad Avenue, LLC, the former owner of a warehouse facility in Baltimore, Maryland which was sold in 2015, Imbali Metals BVBA, Empire Resources (UK) Ltd (organized in February 2015), and Empire Resources de Mexico, the Company’s operating subsidiaries in Europe and Mexico. All intercompany balances and transactions have been eliminated on consolidation. The Company purchases and sells semi-finished aluminum and steel products to a diverse customer base located in the Americas, Australia, Europe and New Zealand.

 

2. Recently Issued Accounting Pronouncements

 

In May 2014, the Financial Accounting Standards Board (“FASB”) issued new accounting guidance, Accounting Standards Update ("ASU") No. 2014-09, Revenue from Contracts with Customers, on revenue recognition. The new standard provides for a single five-step model to be applied to all revenue contracts with customers as well as requiring additional financial statement disclosures that will enable users to understand the nature, amount, timing and uncertainty of revenue and cash flows relating to customer contracts. Companies have an option to use either a retrospective approach or cumulative effect adjustment approach to implement the standard. For public entities, this ASU is effective for fiscal years and interim periods within those years beginning after December 15, 2017, with early adoption permitted for fiscal years and interim periods within those years beginning after December 15, 2016, the original effective date of the statement. The Company is currently evaluating the impact of the new guidance on its consolidated financial statements.

 

In April 2015, the FASB issued ASU No. 2015-03, Simplifying the Presentation of Debt Issuance Costs. The guidance requires debt issuance costs related to a recognized debt liability to be presented in the balance sheet as a direct deduction from the carrying amount of the related debt liability, consistent with the presentation of debt discounts. The guidance will be effective for fiscal years beginning after December 15, 2015. ASU No. 2015-03 requires the new guidance to be applied on a retroactive basis. The Company adopted this guidance in the quarter ended March 31, 2016 and resulted in the Company reclassifying long term unamortized financing costs of $369 and $629 as of September 30, 2016 and December 31, 2015 respectively, from assets to be shown as a direct deduction from the carrying amount of the related debt liability.

 

In July 2015, the FASB issued Accounting Standards Update 2015-11, Inventory (Topic 330): Simplifying the Measurement of Inventory ("ASU 2015-11") which changes the measurement principle for inventory from the lower of cost or market to the lower of cost and net realizable value. ASU 2015-11 defines net realizable value as estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. The new guidance must be applied on a prospective basis and is effective for periods beginning after December 15, 2016, with early adoption permitted. The Company is currently evaluating the effect that the new guidance will have on its financial statements and related disclosures.

 

In November 2015, the FASB issued ASU No. 2015-17, Income Taxes- Balance Sheet Classification of Deferred Taxes. To simplify the presentation of deferred income taxes, the amendments in this ASU require that deferred tax liabilities and assets be classified as noncurrent in a classified statement of financial position. The amendments in this update apply to all entities that present a classified statement of financial position. The amendments in this update are effective for financial statements issued for annual periods beginning after December 15, 2016, and interim periods within those annual periods.

 

In February 2016, the FASB issued Accounting Standards Update 2016-02, Leases (Topic 842) (“ASU 2016-02”) which is effective for fiscal years, and interim periods within those years, beginning after December 15, 2018 with early adoption permitted. Under ASU 2016-02, lessees will be required to recognize for all leases at the commencement date a lease liability, which is a lessee’s obligation to make lease payments arising from a lease measured on a discounted basis, and a right-to-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.  The Company is currently evaluating the effect that the new guidance will have on its financial statements and related disclosures.

 

 

In March 2016, the FASB issued ASU 2016-09, Improvements to Employee Share-Based Payment Accounting, which requires all excess tax benefits or deficiencies to be recognized as income tax expense or benefit in the income statement. In addition, excess tax benefits should be classified along with other income tax cash flows as an operating activity in the statement of cash flows. Application of the standard is required for the annual and interim periods beginning after December 15, 2016. Early adoption is permitted. The Company is currently evaluating the effect that the new guidance will have on its financial statements and related disclosures.

 

In August 2016, the FASB issued ASU 2016-15, Classification of Certain Cash Receipts and Payments, which addresses the classification of certain specific cash receipts and payments within the statement of cash flows, with the objective of reducing the existing diversity in practice of such classifications. ASU 2016-15 is effective for annual and interim periods beginning after December 15, 2017 with early adoption permitted. The guidance is to be applied using a retrospective transition method to each period presented. The Company does not expect the adoption of this guidance to have a material impact on its consolidated financial statements.

 

3. Interim Financial Statements

 

The condensed consolidated interim financial statements included herein have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) for interim reporting. The information and note disclosures normally included in complete financial statements prepared in accordance with generally accepted accounting principles in the United States (“GAAP”) have been condensed or omitted pursuant to such rules and regulations. The interim financial statements should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2015.

 

The Company’s management is responsible for interim financial information. In the opinion of management, the accompanying unaudited condensed consolidated financial statements contain all adjustments, which are of a normal and recurring nature, necessary to present fairly the Company’s financial position as of September 30, 2016 and the results of its operations and cash flows for the three and nine months ended September 30, 2016 and 2015. Interim results may not be indicative of the results that may be expected for the year.

 

4. Use of Estimates

 

The preparation of financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of income and expenses during the reporting period.  Actual results could differ from these estimates.

 

5. Concentrations

 

During the nine month periods ended September 30, 2016 and September 30, 2015 one customer, Ryerson Inc., accounted for 10.6% and 10.3% of sales respectively.

 

The Company purchases metal products from a limited number of suppliers throughout the world. Three suppliers, Hulamin Ltd, Southeast Aluminum and PT Alumindo Light Metal Industry Tbk (“PT. Alumindo”) accounted for an aggregate of 54% of total purchases during the nine month period ended September 30, 2016. For the nine month period ended September 30, 2015, two suppliers, PT Alumindo and Southeast Aluminium accounted for an aggregate of 44% of total purchases.

 

The loss of any one of the Company’s largest suppliers or a material default by any such supplier in its obligations to the Company could have a material adverse effect on the Company’s business.

 

6. Stock Options

 

Stock-based compensation for an award of equity instruments, including stock options, is recognized as an expense over the vesting period based on the fair value of the award at the grant date. As of September 30, 2016, there were outstanding employee stock options to acquire 50 shares of common stock, which had vested in prior years. During the nine month period ended September 30, 2016, the Company did not grant any stock options.

 

 

7. Treasury Stock

 

On July 22, 2008, the Board of Directors authorized the Company to repurchase up to 2,000 shares of its common stock. As of September 30, 2016, the Company repurchased a total of 1,821 shares under the repurchase program for an aggregate cost of $5,670. During the nine month periods ended September 30, 2016 and 2015, the Company repurchased 109 and 330 common shares at a cost of $453 and $1,407, respectively.

 

8. Inventories

 

Inventories, which consist of purchased semi-finished metal products, are stated at the lower of cost or market value.  Cost is determined by the specific-identification method. Inventory is purchased for specific customer orders and the Company’s own inventory.  The carrying amount of inventory which is hedged by futures contracts designated as fair value hedges, is adjusted to fair value.

 

9. Notes Payable—Banks

 

On June 19, 2014 the Company entered into an amended and restated committed credit agreement with Rabobank International, for itself and as lead arranger and agent, BNP Paribas, for itself and as syndication agent, and Société Générale, ABN AMRO, RB International, and Brown Brothers Harriman as well as a new uncommitted line of credit with Rabobank International, BNP Paribas and Société Générale. Both credit lines are secured, asset-based credit facilities. The committed credit facility provided for amounts up to $150,000, and the uncommitted facility provided for a maximum amount of $75,000. The agreement also allowed for an additional increase in the committed credit facility of $75,000, for a total of $300,000, subject to certain restrictions and conditions. On December 18, 2014, these lines were amended and increased the working capital credit agreement by $50,000 increasing the overall line of credit to $275,000. The amended committed credit agreement was increased by $35,000 to $185,000, and the uncommitted credit facility was increased by $15,000 to $90,000. On June 14, 2016 the Company amended the committed credit facility by reducing the facility to $162,500. In addition, the Company also amended the uncommitted credit facility by reducing the facility to $50,000, and extending the termination date to June 19, 2017. There are no changes to the interest rate or to the maturity date of the committed facility, which remains June 19, 2017. Subsequent to these amendments the additional increase available under the term of the committed credit facility is $40,000, subject to certain restrictions and conditions. Borrowings under this line of credit are secured by substantially all of the Company’s assets. During the first half of 2017, prior to the expiration of the credit agreements, the Company expects to renew its credit agreements, however there can be no assurances that it will be able to successfully conclude new agreements.

 

Amounts borrowed bear interest at Eurodollar, money market or base rates, at our option, plus an applicable margin.   The credit agreements contain financial and other covenants, including but not limited to, covenants requiring maintenance of minimum tangible net working capital and compliance with leverage ratios, as well as an ownership minimum and limitations on other indebtedness, liens, distributions or dividends, and investments and dispositions of assets.   As of September 30, 2016, the Company was in compliance with all covenants under this credit agreement.

 

Both credit agreements provide that amounts under the facilities may be borrowed and repaid, and re-borrowed, subject to a borrowing base test. The committed and uncommitted lines of credit mature June 19, 2017.  As of September 30, 2016 and December 31, 2015, the credit utilized amounted to, respectively, $160,994, and $158,922 (including approximately $61,994, and $27,922 of outstanding letters of credit). As of September 30, 2016 the committed line of credit had loans outstanding of $84,000 and the uncommitted line of credit had loans outstanding of $15,000.

 

The Company’s wholly owned Belgian subsidiary, Imbali, maintained a line of credit with ING Belgium S.A./N.V., (“ING”) for a EUR 8,000 (US$8,992) commitment for loans and documentary letters of credit. On July 30, 2015, Imbali entered into an uncommitted credit agreement with Rabobank International for EUR 12,500 (US$14,050) to replace ING and utilized EUR 4,000 (US$4,496) of borrowings under the Rabobank facility to repay the outstanding balance due to ING. Loan advances are limited to a percentage of Imbali’s pledged accounts receivables and inventory and bear interest at EURIBOR plus 1.9%. This secured credit arrangement is unconditionally guaranteed by the Company. As of September 30, 2016, the outstanding loan amounted to EUR 8,830 (US$9,925) and letters of credit of $2,208. As of December 31, 2015, the outstanding loan amounted to EUR 7,500 (US$8,430) and letters of credit of $1,500. As of September 30, 2016, Imbali was in compliance with all financial covenants.

 

 

10. Convertible Subordinated Debt

 

On June 3, 2011, the Company issued $12,000 principal amount of 10% Convertible Senior Subordinated Notes Due June 1, 2016 in a private placement to selected accredited investors.  On June 1, 2016, the remaining $11,000 principal amount of outstanding notes was repaid in full. Prior to the repayment, the notes were convertible at the option of the note holders into shares of common stock at a conversion rate of 265.82 shares of common stock per $1 principal amount of notes (equivalent to a conversion price of $3.762 per share of common stock), subject to dilutive adjustment for cash and stock dividends, stock splits and similar transactions, at any time before maturity.  The last conversion price reflected twenty adjustments for dividends declared on the Company’s common stock since the issuance of the notes. Interest on the notes was payable in arrears on the first day of June and December every year the notes were outstanding. The purchase agreement pursuant to which the notes were issued contained covenants, including restrictions on the Company’s ability to incur certain indebtedness and create certain liens. Officers and directors of the Company and certain affiliated entities purchased $4,000 principal amount of the notes.

 

As a result of transactions which caused adjustments to the conversion rate, the embedded conversion option was bifurcated and recorded as a separate derivative liability at a fair value at issuance of the notes of $2,829, with a corresponding discount recorded on the notes. The derivative liability was carried at fair value with changes therein recorded in income. The quarterly mark to market of the derivative liability resulted in non-operating, non-cash gains or losses based on decreases or increases in the Company’s stock price, respectively, among other factors. The non-cash discount was being amortized as additional interest expense over the term of the notes. The change in the fair value of the derivative liability resulted in a loss of $0 and $224 during the three month periods ended September 30, 2016 and 2015, respectively and gains of $942 and $1,184 during the nine month periods ended September 30, 2016 and 2015 respectively. Amortization of the discount amounted to $0 and $130 for the three month periods ended September 30, 2016 and 2015, respectively, and $216 and $457 for the nine month periods ended September 30, 2016 and 2015 respectively.

 

The derivative liability had a carrying value of $0 at maturity on June 1, 2016. Prior to maturity the derivative liability was valued using a lattice model using unobservable level 3 inputs. This technique was selected because it embodies all of the types of inputs that the Company expects market participants would consider in determining the fair value of equity linked derivatives embedded in hybrid debt agreements.

 

The following table summarizes the significant inputs resulting from the calculations as of December 31, 2015, June 30, 2015 and issuance:

 

		December 31, 2015				June 30, 2015				June 3, 2011
Equity value		$	29,846			$	35,215			$	36,811
Volatility			60	%			30	%			70	%
Risk free return			0.49	%			0.28	%			1.60	%
Dividend yield			2.87	%			2.47	%			2.51	%
Strike price		$	3.79			$	3.84			$	4.65

 

The majority of proceeds of the convertible subordinated debt was earmarked for a long term advance in connection with a supply agreement with the Indonesian company PT. Alumindo Light Metal Industry Tbk, (PT. Alumindo) a leading producer of high quality semi-finished aluminum products, and its affiliates.  The agreement called for, and the Company provided a $10,000 non-interest bearing loan to an affiliate of PT. Alumindo to enable the expansion of capacity within that group of companies’ production network.  The agreements also provided for a long term, multi-year substantial and preferential supply position from PT. Alumindo's premier aluminum rolling mill located in Surabaya, Indonesia.   The loan was being repaid to the Company beginning on January 1, 2013 in monthly installments of $278 and was fully repaid on December 1, 2015.

 

 

11. Earnings per Share

 

Basic earnings per share are based upon weighted average number of shares of common stock outstanding during each period. Diluted earnings per share are based upon the weighted average number of shares of common stock outstanding during each period, plus potential dilutive shares of common stock from assumed exercise of the outstanding stock options using the treasury stock method and assumed conversion of subordinated debt. The convertible debt is assumed to have been converted at the beginning of the period and the related dilutive common shares assumed issued upon conversion are included in the denominator for the period up to the date the debt was repaid.

 

The following table sets forth the computation of basic and diluted earnings per share:

 

		Three Months  Ended September 30,								Nine Months  Ended September 30,
		2016				2015				2016				2015
Numerator:
Net income		$	888			$	315			$	2,999			$	2,774
Add back of interest on convertible subordinated debt, net of taxes											283				510
Add back of amortization of discount on convertible subordinated debt, net of taxes											134				283
Adjustment for change in value of convertible note derivative, net of taxes											(859	)			(1,010	)
Numerator for diluted earnings per share		$	888			$	315			$	2,557			$	2,557
Denominator:
Weighted average shares outstanding-basic			8,504				8,870				8,486				8,709
Dilutive effect of convertible subordinated debt											1,623				2,884
Dilutive effect of stock options			32				28				28				143
Weighted average shares outstanding-diluted			8,536				8,898				10,137				11,736
Basic earnings per share		$	0.10			$	0.04			$	0.35			$	0.32
Diluted earnings per share		$	0.10			$	0.04			$	0.25			$	0.22

 

In computing earnings per share for the three months ended September 30, 2015 no effect has been given to the 2,884 common shares, issuable on conversion of subordinated debt as their effect is anti-dilutive.

 

12. Dividends

 

On March 23, 2016, the Company announced a cash dividend of $0.025 per share to stockholders of record at the close of business on April 5, 2016. The dividend, totaling $212, was paid on April 12, 2016. On June 29, 2016 the Company announced a cash dividend of $0.04 per share to stockholders of record at the close of business on July 14, 2016. The dividend totaling $340 was paid on July 22, 2016. On September 14, 2016 the Company announced a cash dividend of $0.04 per share to stockholders of record at the close of business on September 30, 2016. The dividend totaling $339 was paid on October 7, 2016. The Board of Directors will review its dividend policy on a quarterly basis, and make a determination regarding future dividends subject to the profitability and free cash flow and the other requirements of the business.

 

13. Derivative Financial Instruments and Risk Management

 

The Company uses derivative financial instruments designated as fair value hedges to manage its exposure to commodity price risk and foreign currency exchange risk inherent in its operations. It is the Company’s policy to hedge such risks to the extent practicable. The Company enters into high-grade aluminum futures contracts to limit its gross margin exposure by hedging the metal content element of firmly committed purchase and sales commitments. The Company also enters into foreign exchange forward contracts to hedge its exposure related to commitments to buy and sell metals as well as its accounts receivable denominated in international currencies.

 

 

The Company’s unrealized assets and liabilities in respect of its fair value hedges measured at fair value are as follows:

 

Derivatives designated as fair value hedges		Balance Sheet Location		September 30, 2016				December 31, 2015
(Liability) asset derivatives:
Aluminum futures contracts		Other current assets, including derivatives			-			$	3,892
Aluminum futures contracts		Accrued expenses and derivative liabilities			(1,883	)			-
Foreign currency forward contracts		Accrued expenses and derivative liabilities			(89	)			(348	)
Total				$	(1,972	)		$	3,544

 

For the three and nine month periods ended September 30, 2016 and September 30, 2015, hedge ineffectiveness associated with derivatives designated as fair value hedges was insignificant, and no fair value hedges were derecognized.

 

The table below summarizes the realized gains or (losses) of the Company’s derivative instruments and their location in the income statement:

 

Derivatives in hedging				Location of Gain or (Loss)		Three Months Ended September  30,								Nine Months Ended September 30,
relationships				Recognized		2016				2015				2016				2015
Foreign currency forward contracts	(a)			Cost of goods sold		$	103			$	283			$	(269	)		$	(196	)
Aluminum futures	(b)			Cost of goods sold			(649	)			7,175				3,299				17,171
Total						$	(546	)		$	7,458			$	3,030			$	16,975

 

a)

Fair value hedge: the related hedged item is accounts receivable and offsetting losses in the three months ended September 30, 2016 and 2015 and gains in the nine months ended September 30, 2016 and September 30, 2015 are included in cost of goods sold in the same respective amounts.

b)

Fair value hedge: the related hedged item is inventory and offsetting gains in the three months ended September 30, 2016 and offsetting losses in the three months ended September 30, 2015 and the nine months ended September 30, 2016 and 2015 are included in cost of goods sold in the same respective amounts.

 

14. Fair Value

 

Authoritative guidance defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The fair value hierarchy consists of three broad levels, as described below:

 

·

Level 1 - Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities.

·

Level 2 - Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly.

·

Level 3 - Inputs that are both significant to the fair value measurement and unobservable.

 

Derivative contracts consisting of aluminum contracts and foreign currency contracts are valued using quoted market prices and significant other observable inputs. These financial instruments are typically exchange-traded and are generally classified within Level 1 or Level 2 of the fair value hierarchy depending on whether the exchange is deemed to be an active market or not.

 

 

 

Major categories of assets and liabilities measured at fair value at September 30, 2016 and December 31, 2015 are classified as follows:

 

		September 30, 2016												December 31, 2015
		Level 1				Level 3				Level 2				Level 1				Level 2				Level 3
Assets:
Inventories		$	107,962											$	149,451
Aluminum futures contracts															3,892
Foreign currency forward contracts
Liabilities:
Foreign currency forward contracts		$	89												348
Embedded conversion option																						$	942
Aluminum futures contracts			1,883

 

15. Fair Value of Financial Instruments

 

The carrying amounts of variable rate notes payable to the banks approximate fair value as of September 30, 2016 and December 31, 2015, because these notes reflect market changes to interest rates. The fair value of the subordinated convertible debt approximates its principal amount of $11,000 at December 31, 2015, which exceeds its carrying amount as a result of the unamortized discount related to the bifurcation of the embedded conversion option. Derivative financial instruments are carried at fair value (see Note 13).

 

16. Business Segment and Geographic Area Information

 

The Company’s only business segment is the sale and distribution of metals. Sales are attributed to countries based on location of customers as follows:

 

		Three Months Ended September 30,								Nine Months Ended September 30,
		2016				2015				2016				2015
United States		$	82,764			$	88,920			$	261,816			$	314,337
Europe			10,820				12,679				36,343				31,348
Canada			10,378				9,426				31,041				33,757
Australia & New Zealand			9,196				10,004				27,438				29,738
Latin America			441				921				1,597				15,509
		$	113,599			$	121,950			$	358,235			$	424,689

 

 

17. Accumulated Other Comprehensive (Loss)

 

Changes in accumulated other comprehensive (loss) are as follows:

 

Three Months ended September 30, 2016		Foreign Currency Translation				Total
Beginning balance		$	(521	)		$	(521	)
Other comprehensive (loss) for the period			37				37
Ending balance		$	(484	)		$	(484	)
Three Months ended September 30, 2015		Foreign Currency Translation				Total
Beginning balance		$	(589	)		$	(589	)
Other comprehensive income for the period			13				13
Ending balance		$	(576	)		$	(576	)
Nine Months ended September 30, 2016		Foreign Currency Translation				Total
Beginning balance		$	(666	)		$	(666	)
Other comprehensive income for the period			182				182
Ending balance		$	(484	)		$	(484	)
Nine Months ended September 30, 2015		Foreign Currency Translation				Total
Beginning balance		$	(334	)		$	(334	)
Other comprehensive loss for the period			(242	)			(242	)
Ending balance		$	(576	)		$	(576	)

 

18. Commitments

 

The Company had $64,202 in outstanding letters of credit to certain of its suppliers at September 30, 2016 and $29,422 at December 31, 2015.

 

19. Income Taxes

 

For interim income tax reporting, the Company estimates its annual effective tax rate and applies it to its year to date ordinary income. The effect on the tax rate related to income or loss attributable to the change in value of the derivative liability is separately computed and recognized as such income or loss occurs. The disproportionate relationship between income taxes and pre-tax income for the nine months ended September 30, 2016, results primarily from no deferred tax being provided on the non-taxable gain resulting from the change in the value of the derivative liability to the extent the gain exceeds the $216 amortization of the related debt discount for which a deferred tax benefit is provided.

 

The disproportionate relationship between income taxes and pre-tax income for the nine months ended September 30, 2015, results primarily from no deferred tax being provided on the non-taxable gain resulting from the change in the value of the derivative liability to the extent such gains exceeds the $457 amortization of the related debt discount, for which a deferred tax benefit is provided.

 

The disproportionate relationship between income taxes and pre-tax income for the three months ended September 30, 2015, results primarily from no tax benefit being recognized on the non-deductible loss resulting from the change in the value of the derivative liability.

 

 

Item 2.

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

 

You should read the following discussion of our financial condition and results of operations in conjunction with the consolidated financial statements and the notes thereto included elsewhere in this Quarterly Report on Form 10-Q and our 10-K filed with the Securities and Exchange Commission on March 30, 2016. All numbers used in this discussion are in thousands, except for per share information and percentages.

 

Forward-Looking Statements

 

This Quarterly Report on Form 10-Q contains “forward-looking statements,” which include information relating to future events, future financial performance, strategies, expectations, competitive environment and regulation. Words such as “may,” “should,” “could,” “would,” “predict,” “potential,” “continue,” “expect,” “anticipate,” “future,” “intend,” “plan,” “believe,” “estimate,” and similar expressions, as well as statements in future tense, identify forward-looking statements. Forward-looking statements should not be read as a guarantee of future performance or results and may not be accurate indications of when such performance or results will be achieved. Forward-looking statements are based on information we have when those statements are made or our management’s good faith belief as of that time with respect to future events, and are subject to risks and uncertainties that could cause actual performance or results to differ materially from those expressed in or suggested by the forward-looking statements. Important factors that could cause such differences include, but are not limited to:

 

·

loss or default of one or more suppliers;

 

·

loss or default of one or more significant customers;

 

·

default by the counterparties to our derivative financial instruments;

 

·

changes in general, national or regional economic conditions;

 

·

an act of war or terrorism that disrupts international shipping;

 

·

changes in laws, regulations and tariffs;

 

·

the imposition of anti-dumping duties on the products we import;

 

·

changes in the size and nature of our competition;

 

·

changes in interest rates, foreign currencies or spot prices of aluminum;

 

·

loss of one or more key executives;

 

·

increased credit risk from customers;

 

·

our failure to grow internally or by acquisition; and

 

·

failure to improve operating margins and efficiencies.

 

For a discussion of these and other risks that relate to our business and investing in shares of our common stock, you should carefully review the risk factors and other cautionary statements in our Annual Report on Form 10-K for the year ended December 31, 2015 described under the heading “Part II - Item 1A Risk Factors” and elsewhere in this Quarterly Report on Form 10-Q and those described from time to time in our other reports filed with the Securities and Exchange Commission. The forward-looking statements contained in this Quarterly Report on Form 10-Q are expressly qualified in their entirety by this cautionary statement. We do not undertake any obligation to publicly update any forward-looking statement to reflect events or circumstances after the date on which any such statement is made or to reflect the occurrence of unanticipated events.

 

 

Our Business

 

We are engaged in the purchase, sale and distribution of semi-finished aluminum and steel products to a diverse customer base located in the Americas, Europe, Australia and New Zealand. We sell our products through our own marketing and sales personnel as well as through commission based independent sales agents located in North America and Europe. We purchase products from suppliers located throughout the world. Our three largest suppliers furnished approximately 54% of our products during the first nine months of 2016 as compared to an aggregate of 44% of our products during the same period in 2015. We place orders with our suppliers based upon orders that we receive from our customers and also purchase material for our own stock, which we typically use for shorter term deliveries to our customers.

 

Critical Accounting Policies and Estimates

 

The following discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with generally accepted accounting principles in the U.S. The preparation of financial statements in accordance with generally accepted accounting principles in the U.S. requires us to make estimates and assumptions that affect the amounts reported in our financial statements. The financial statements include estimates based on currently available information and our judgment as to the outcome of future conditions and circumstances. Significant estimates in these financial statements include allowance for doubtful accounts. Changes in the status of certain facts or circumstances could result in material changes to the estimates used in the preparation of the financial statements and actual results could differ from the estimates and assumptions.

 

Among the significant judgments made by management in the preparation of our financial statements are the following:

 

Allowance for Doubtful Accounts

 

As of September 30, 2016, we had $64,143 in trade receivables, after an allowance for doubtful accounts of $1,192. We report accounts receivable, net of an allowance for doubtful accounts, to represent our estimate of the amount that ultimately will be realized in cash. We review the adequacy of our allowance for doubtful accounts on an ongoing basis, using historical collection trends, age of receivables, as well as review of specific accounts, and make adjustments in the allowance that we believe are necessary. We maintain credit insurance policies on the majority of our customers. In general, this policy has a 10% deductible; however there are some instances where the co-insurance may vary and instances where we may exceed the insured values. Changes in economic conditions could have an impact on the collection of existing receivable balances or future allowance considerations. In addition, changes in the credit insurance environment could affect the availability of credit insurance and our ability to secure it.

 

Accruals for Inventory Claims

 

Generally, our exposure on claims for defective material is relatively small, as we usually refer all claims on defects back to our suppliers. If we do not believe that a supplier will honor a material claim for a defective product, we will record an allowance for inventory adjustments.

 

Results of Operations

 

General

 

We are engaged in the purchase, sale and distribution of semi-finished aluminum and steel products which we purchase from producing mills around the world.  The market prices of materials we purchase, as well as the market price of materials we sell, fluctuate constantly in world markets.  Our cost of sales is composed of metal content, which in part is determined on world metal exchanges, plus a unique fabrication premium charged by each producer to convert the raw metal to a semi-finished product.  In turn, we typically sell to our customers either on a fixed price basis or based on metal content plus a premium which includes supplier fabrication margin, and costs of importation, warehousing, and delivery of material to customers.  Since metal content costs are the largest component of cost of sales and selling price, our sales pricing trends and cost of sales trends generally track consistently.

 

 

Comparison of Three Months Ended September 30, 2016 and 2015

 

During the three months ended September 30, 2016, net sales decreased by $8,351, from $121,950 to $113,599 or 6.8 % from the same period in 2015.   Sales in all areas declined with the exception of Canadian sales which increased by $952 quarter over quarter. The largest decline was a decline of $6,156 in the United States, impacted by softer customer demand during the period.

 

Gross profit increased by $164, to $5,511 during the three months ended September 30, 2016, from $5,347 in the same period of 2015, representing a 3.1% increase. As a result of reduced inventory levels and our purchase of a new warehouse in the fourth quarter of 2015, we were able to achieve reduced storage, freight and handling costs, yielding a positive impact on gross profit.

 

Selling, general and administrative expenses during the three months ended September 30, 2016 increased by $241 from $3,094 to $3,335. The increases in selling, general and administrative are primarily due to increases in consulting expenses, accruals for payroll and office expenses.

 

During the three months ended September 30, 2016, interest expense decreased 45% or $633 to $786 from $1,419 for the same period in 2015 as a result of decreased bank loans due to reduced inventory levels as well as the elimination of interest on the subordinated debt, as such debt was repaid in full on June 1, 2016. During the three months ended September 30, 2016 and 2015, interest on our 10% Convertible Senior Subordinated Notes Due June 1, 2016 totaled $0 and $275, respectively. Amortization of the debt discount in connection with these notes totaled $0 and $130 for the three months ended September 30, 2016 and September 30, 2015, respectively.

 

The 10% Convertible Senior Subordinated Notes Due June 1, 2016 had an embedded conversion option which was bifurcated and recorded as a separate derivative liability at a fair value at issuance of the notes. The derivative liability was carried at fair value with changes in mark to market recorded in income. There were no changes in the fair value of the derivative liability during the three month period ended September 30, 2016 as compared to a $224 non-cash non-operating loss during the same period in 2015.

 

During the three months ended September 30, 2016 income before income taxes increased by $780 from $610 to $1,390 or 128%. This increase is primarily due to the reduction in interest expense as well as the improved gross profit, offset by slightly higher SG&A and the elimination of the revaluation of the derivative liability.

 

 

Fair value accounting requires changes in derivative liabilities related to our convertible notes to be charged or credited to income during each accounting period. Such losses are not tax deductible, and likewise any recoveries of such losses are not taxable upon recovery. Accordingly, no tax effect was given to the September 2015 non-cash, non-operating loss of $224, and therefore the tax rate for the quarter ended September 30, 2016 was 36.1% and 48.4% for the quarter ended September 30, 2015.

 

Net income increased by $573 to $888 during the three months ended September 30, 2016 from $315 during the three months ended September 30, 2015. The increase in net income of $573 or 181.9% is primarily the result of decreases in interest expense, improved gross profit margins, offset by reduced sales for the quarter.

 

Comparison of Nine Months Ended September 30, 2016 and 2015

 

During the nine months ended September 30, 2016, net sales decreased by $66,454, from $424,689 to $358,235 or 15.6 % from the same period in 2015. Sales in all regions, except for Europe declined in 2016 as compared to 2015. Our sales in North America declined by $55,237 comprised of a decline in both our aluminum and steel sales.

 

Gross profit decreased by $1,502, to $16,699 during the nine months ended September 30, 2016, from $18,201 in the same period of 2015, representing a 8.3% decrease, attributable to reduced sales, offset by improved gross profit margins. As a result of reduced inventory levels and our purchase of a new warehouse in the fourth quarter of 2015, we were able to achieve reduced storage, freight and handling costs, yielding a positive impact on gross profit. Additionally, we negotiated lower ocean freight rates due to softer container line shipping market conditions.

 

 

 

Selling, general and administrative expenses during the nine months ended September 30, 2016 decreased by $714 from $10,632 during the nine months ended September 30, 2015 to $9,918 primarily as a result of lower compensation costs, allowance for doubtful accounts, offset by increased unused bank commitment fees and consulting fees.

 

During the nine months ended September 30, 2016, interest expense decreased 32.9% or $1,537 to $3,128 from $4,665 for the same period in 2015 as a result of decreased bank loans due to reduced inventory levels as well as the elimination of interest on the subordinated debt for the last four months of the period as such debt was repaid in full on June 1, 2016. During the nine months ended September 30, 2016 and 2015, interest on our 10% Convertible Senior Subordinated Notes Due June 1, 2016 totaled $458 and $825, respectively. Amortization of the debt discount in connection with these notes totaled $216 and $457 for the nine months ended September 30, 2016 and 2015, respectively.

 

During the nine months ended September 30, 2016 income before change in value of derivative liability increased by $749 from $2,904 to $3,653 or 25.8%. This increase is due to reduced interest expense, reduced selling, general and administrative expenses offset by reduced gross profit due to the decline in sales.

 

The 10% Convertible Senior Subordinated Notes Due June 1, 2016 had an embedded conversion option which was bifurcated and recorded as a separate derivative liability at a fair value at issuance of the notes. The derivative liability was carried at fair value with changes in mark to market recorded in income. The changes in the fair value of the derivative liability resulted in a non-cash non-operating gain of $942 during the nine month period ended September 30, 2016 as compared to a $1,184 non-cash non-operating gain during the same period in 2015. The valuation has numerous inputs, however, these changes were driven primarily by the change in the stock price at the end of both quarters.

 

Fair value accounting requires changes in derivative liabilities related to our convertible notes to be charged or credited to income during each accounting period. Such losses are not tax deductible, and likewise any recoveries of such losses are not taxable upon recovery. Accordingly, no tax effect was given to the non-cash, non-operating gains of $942 and $1,184, to the extent they exceeded the amortization of the related debt discount during the nine month periods ended September 30, 2016 and 2015, respectively. Accordingly, the tax rate for the nine months ended September 30, 2016 was 34.7% and 32.1% for the nine months ended September 30, 2015.

 

Net income increased to $2,999 during the nine months ended September 30, 2016 from a $2,774 during the nine months ended September 30, 2015 an increase of $225. This increase is the result of reduced sales for the nine month period ending September 30, 2016, offset by lower operating and interest expenses.

 

Liquidity and Capital Resources

 

Overview

 

At September 30, 2016, we had cash of $5,719, net accounts receivable of $64,143, and senior secured debt of $99,000.  Management believes that cash from operations, together with funds available under our credit facility will be sufficient to fund the cash requirements relating to our existing operations for the next twelve months. However, we will require additional debt or equity financing in connection with future expansion of operations.

 

 

Comparison of Nine Month Periods Ended September 30, 2016 and 2015

 

Net cash provided by operating activities was $41,768 during the nine months ended September 30, 2016, as compared to $39,254 during the same period in 2015. In the nine months ended September 30, 2016 cash provided by operating activities resulted primarily from decreases in inventories of $40,209, offset by increases in trade accounts receivable of $3,790 and decreases in accounts payable of $9,341.

 

Our days sales outstanding remained relatively stable at 48 days for September 2016 and 49 days for September 2015 periods. Our inventory in warehouses, available for delivery to customers, as of September 2015 was approximately 80 days of sales as compared to 64 days as of the same date in 2016. Total inventory levels have been reduced by $40,209 since December 2015, as we continue to manage our inventory downwards to align with our sales volume and improve inventory turns. Our inventory turn rate, including materials in transit, was 3.7 times or 98 days on hand, as of September 30, 2015 as compared to 4.1 times or 88 days on hand as of September 30, 2016. The days payable outstanding was 24 days as of September 2016, as compared to 17 days for the same period in 2015.

 

Cash flows used in and provided by investing activities during the nine months ended September 30, 2016 and 2015, amounted to $159 and $2,263 respectively. During 2015, this was primarily the monthly repayment by PT. Alumindo of the advance related to our supply agreement, which was repaid in full as of the end of 2015.

 

Cash flows used in financing activities during the nine months ended September 30, 2016, amounted to $43,080, as compared to $37,067 during the same period in 2015.  During the nine month period ended September 30, 2016 we reduced notes payable to banks by $30,514 as compared to $33,978 in notes payable during the same period of 2015. In addition, on June 1, 2016, we repaid the $11,000 of our 10% Convertible Subordinated Debt in full.

 

Credit Agreements and Other Debt

 

On June 19, 2014 we entered into an amended and restated committed credit agreement with Rabobank International, for itself and as lead arranger and agent, BNP Paribas, for itself and as syndication agent, and Société Générale, ABN AMRO, RB International, and Brown Brothers Harriman as well as a new uncommitted line of credit with Rabobank International, BNP Paribas and Société Générale. Both credit lines are secured, asset-based credit facilities. The committed credit facility provided for amounts up to $150,000, and the uncommitted facility provided for a maximum amount of $75,000. The agreement also allowed for an additional increase in the committed credit facility of $75,000, for a total of $300,000, subject to certain restrictions and conditions. On December 18, 2014, these lines were amended and increased the working capital credit agreement by $50,000 increasing the overall line of credit to $275,000. The amended committed credit agreement was increased by $35,000 to $185,000, and the uncommitted credit facility was increased by $15,000 to $90,000. On June 14, 2016 we amended the committed credit facility by reducing the facility to $162,500. In addition, we also amended the uncommitted credit facility by reducing the facility to $50,000, and extending the termination date to June 19, 2017. There are no changes to the interest rate or to the maturity date of the committed facility, which remains June 19, 2017. Subsequent to these amendments the additional increase available under the terms of the committed credit facility is $40,000, subject to certain restrictions and conditions. Borrowings under this line of credit are secured by substantially all of our assets. During the first half of 2017, prior to the expiration of the credit agreements, we expect to renew our credit agreements, however there can be no assurances that we will be able to successfully conclude new agreements.

 

Amounts borrowed bear interest at Eurodollar, money market or base rates, at our option, plus an applicable margin.   The credit agreements contain financial and other covenants, including but not limited to, covenants requiring maintenance of minimum tangible net working capital and compliance with leverage ratios, as well as an ownership minimum and limitations on other indebtedness, liens, distributions or dividends, and investments and dispositions of assets.   As of September 30, 2016, we were in compliance with all covenants under this credit agreement.

 

Both credit agreements provide that amounts under the facilities may be borrowed and repaid, and re-borrowed, subject to a borrowing base test. The committed and uncommitted lines of credit mature June 19, 2017.  As of September 30, 2016 and December 31, 2015, the credit utilized amounted to, respectively, $160,994, and $158,922 (including approximately $61,994, and $27,922 of outstanding letters of credit). As of September 30, 2016, the committed line of credit had loans outstanding of $84,000 and the uncommitted line of credit had loans outstanding of $15,000.

 

 

Our wholly owned Belgian subsidiary, Imbali, maintained a line of credit with ING Belgium S.A./N.V., (“ING”) for a EUR 8,000 (US$8,992) commitment for loans and documentary letters of credit. On July 30, 2015, Imbali entered into an uncommitted credit agreement with Rabobank International for EUR 12,500 (US$14,050) to replace ING and utilized EUR 4,000 (US$4,496) of borrowings under the Rabobank facility to repay the outstanding balance due to ING. Loan advances are limited to a percentage of Imbali’s pledged accounts receivables and inventory and bear interest at EURIBOR plus 1.9%. This secured credit arrangement is unconditionally guaranteed by the Company. As of September 30, 2016, the outstanding loan amounted to EUR 8,830 (US$9,925) and letters of credit of $2,208. As of December 31, 2015, the outstanding loan amounted to EUR 7,500 (US$8,430) and letters of credit of $1,500. As of September 30, 2016, Imbali was in compliance with all financial covenants.

 

On June 3, 2011, we issued $12,000 principal amount of 10% Convertible Senior Subordinated Notes Due June 1, 2016 in a private placement to selected accredited investors.   On June 1, 2016, the remaining $11,000 principal amount of outstanding notes were repaid in full. Prior to the repayment, the notes were convertible at the option of the note holders into shares of common stock at a conversion rate of 265.82 shares of common stock per $1 principal amount of notes (equivalent to a conversion price of $3.762 per share of common stock), subject to dilutive adjustment for cash and stock dividends, stock splits and similar transactions, at any time before maturity.  The last conversion price reflected twenty adjustments for dividends declared on our common stock since the issuance of the notes. Interest on the notes was payable in arrears on the first day of June and December every year the notes were outstanding. The purchase agreement pursuant to which the notes were issued contained covenants, including restrictions on our ability to incur certain indebtedness and create certain liens.

 

Derivative Financial Instruments

 

Inherent in our business is the risk of matching the timing of our purchase and sales contracts. The prices of the aluminum products we buy and sell are based on a constantly moving terminal market price determined by the London Metal Exchange. Were we not to hedge such exposures, we could be exposed to significant losses due to the continually changing aluminum prices.

 

We use aluminum futures contracts to manage our exposure to this commodity price risk. It is generally our policy to hedge such risks to the extent practicable. We enter into hedges to limit our exposure to volatile price fluctuations that we believe would impact our gross margins on firm purchase and sales commitments. As an example, if we enter into fixed price contracts with our suppliers and variable priced sales contracts with our customers, we will generally enter into a futures contract to sell the aluminum for future delivery in the month when the aluminum is to be priced and delivered to the customer and repurchase this position once the pricing has been fixed with our customer.  If the underlying metal price increases, we suffer a hedging loss and have a derivative liability, but the sales price to the customer is based on a higher market price and offsets the loss. Conversely, if the metal price decreases, we have a hedging gain and recognize a derivative asset, but the sales price to the customer is based on the lower market price and offsets the gain.

 

We also enter into foreign exchange forward contracts to hedge our exposure related to commitments to purchase or sell metals and accounts receivable denominated in some international currencies. In such cases, we will purchase or sell the foreign currency through a bank for an approximate date when we anticipate making a payment to a supplier or receiving payment from the foreign customer.

 

In accordance with generally accepted accounting principles in the U.S., we designate these derivative contracts as fair value hedges and recognize them on our balance sheet at fair value.  We also recognize offsetting changes in the fair value of the related firm purchase and sales commitment to which the hedge is attributable in earnings upon revenue recognition, which occurs at the time of delivery to our customers.

 

The potential for losses related to our hedging activities, given our hedging methodology, arises from counterparty defaults with banks for our foreign exchange hedging, the London Metal Exchange for our aluminum hedges, or customer defaults. In the event of a customer default, we might be forced to sell the material in the open market and absorb losses for metal or foreign exchange hedges that were applied to the defaulting customers’ transactions. Our results of operations could be materially impacted by any counterparty or customer default, as we might not be able to collect money owed to us and/or our hedge might effectively be cancelled.

 

We use futures and forward contracts as hedges, for no purpose other than to avoid exposure to changes in aluminum prices and foreign currency rates between when we buy a shipment of aluminum from a supplier and when we deliver it to a customer.  Our derivatives are not for purposes of trading in the futures market. We earn our gross profit margin through our business operations and not from the movement of aluminum prices.

 

 

As part of our business we also engage in the purchase, sale and distribution of steel products. If we do not have a matching sales contract related to such products, (for example, any steel products that are unsold in our inventory), we have price risk that we currently do not or are unable to hedge. As such, any decline in pricing for such products may adversely impact our profitability.

 

Off-Balance Sheet Arrangements

 

We do not have any off-balance sheet arrangements.

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

 

Not required.

 

Item 4.

Controls and Procedures

 

Management’s Conclusions Regarding Effectiveness of Disclosure Controls and Procedures

 

As of September 30, 2016, we conducted an evaluation, under the supervision and participation of management including our chief executive officer and chief financial officer, of the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) and Rule 15d-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). There are inherent limitations to the effectiveness of any system of disclosure controls and procedures. Accordingly, even effective disclosure controls and procedures can only provide reasonable assurance of achieving their control objectives.

 

Based upon this evaluation, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures are effective at the reasonable assurance level as of September 30, 2016.

 

Changes in Internal Control over Financial Reporting

 

There was no change in our internal control over financial reporting identified in connection with the evaluation required by Rule 13a-15(d) or 15d-15(d) of the Exchange Act that occurred during the fiscal quarter ended September 30, 2016 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

PART II - OTHER INFORMATION

 

Item 1.

Legal Proceedings

 

From time to time, we may be involved in litigation that arises through the normal course of business. As of the date of this filing, we are not aware of any material legal proceedings to which we or any of our subsidiaries is a party or to which any of our property is subject, nor are we aware of any such threatened or pending litigation or any such proceedings known to be contemplated by governmental authorities.

 

We are not aware of any material proceedings in which any of our directors, officers or affiliates or any registered or beneficial stockholder of more than 5% of our common stock, or any associate of any of the foregoing, is a party adverse to or has a material interest adverse to, us or any of our subsidiaries.

 

Item 1A.

Risk Factors

 

There have been no material changes to the risk factors disclosed under “Item 1A. Risk Factors” of our Annual Report on Form 10-K for the year ended December 31, 2015. For more information concerning our risk factors, please refer to “Item 1A. Risk Factors” of our Annual Report on Form 10-K.

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

 

(a)

Unregistered Sales of Equity Securities

 

None.

 

(b)

Issuer Purchases of Equity Securities

 

The following table sets forth information with respect to purchases by us of our equity securities during the three months ended September 30, 2016 (all numbers in thousands, except for per share data):

 

Period		Total Number of Shares Purchased				Average Price Paid per Share				Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs				Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs
July 1, 2016- July 31, 2016			13			$	4.14				13				227
August 1, 2016 - August 31, 2016			29			$	4.53				29				198
September 1, 2016 - September 30, 2016			19			$	5.00				19				179
Total			61			$	4.56				61				179

 

In July 2008, the Board of Directors authorized the repurchase of 2 million shares of the Company’s common stock at a maximum price of $3.50 per share. In September 2014, the Board of Directors authorized a change in the maximum per share price from $3.50 to $5.00 per share. As of September 30, 2016 approximately 1.822 million of the 2 million shares authorized have been repurchased.

 

Item 3.

Defaults Upon Senior Securities

 

None.

 

Item 4.

Mine Safety Disclosures

 

Not applicable.

 

Item 5.

Other Information

 

None.

 

Item 6.

Exhibits

 

(a)

Exhibits

 

See Index to Exhibits.

 

 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

	EMPIRE RESOURCES, INC.
Date: November 14, 2016	By:	/s/ Nathan Kahn
		Name:	Nathan Kahn
		Title:	President and Chief Executive Officer
			(Principal Executive Officer)
	By:	/s/Sandra Kahn
		Name:	Sandra Kahn
		Title:	Vice President and Chief Financial Officer
			(Principal Financial Officer)

 

 

EXHIBIT INDEX

 

3.1		Amended and Restated Certificate of Incorporation (incorporated by reference to Exhibit 3.1 to Registration Statement on Form S-1 filed with the Securities and Exchange Commission on January 30, 2012).
3.2		Certificate of Amendment of Amended and Restated Certificate of Incorporation (Amendment No. 1) (incorporated by reference to Exhibit 3.2 to Registration Statement on Form S-1 filed with the Securities and Exchange Commission on January 30, 2012).
3.3		Certificate of Amendment of the Amended and Restated Certificate of Incorporation (Amendment No. 2) (incorporated by reference to Exhibit 3.3 to Registration Statement on Form S-1 filed with the Securities and Exchange Commission on January 30, 2012).
3.4		Amended and Restated By-Laws (incorporated by reference to Exhibit 3.4 to Registration Statement on Form S-1 filed with the Securities and Exchange Commission on January 30, 2012).
3.5		Amendment No. 1 to Amended and Restated By-Laws (incorporated by reference to Exhibit 3.5 to Registration Statement on Form S-1 filed with the Securities and Exchange Commission on January 30, 2012).
3.6		Amendment No. 2 to Amended and Restated By-Laws (incorporated by reference to Exhibit 3.6 to Registration Statement on Form S-1 filed with the Securities and Exchange Commission on January 30, 2012).
31.1*		Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2*		Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1*		Certification of Principal Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2*		Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101*		The following materials from the Company’s Quarterly Report on Form 10-Q for the quarter ended September  30, 2016, formatted in XBRL (eXtensible Business Reporting Language), (i) Consolidated Balance Sheets, (ii) Consolidated Statements of Comprehensive Income, (iii) Consolidated Statements of Cash Flows, (iv)  Consolidated Statements of Stockholders’ Equity, and (v) the Notes to the  Consolidated Financial Statements.

 

*           Filed herewith.