UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

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

 

For the quarterly period ended June 30, 2015

 

OR

 

[  ]

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

 

Commission File Number 1-10367

 

Advanced Environmental Recycling Technologies, Inc.

(Exact name of registrant as specified in its charter)

Delaware (State or other jurisdiction of incorporation or organization)		71-0675758 (I.R.S. Employer Identification No.)

 

914 N. Jefferson Street Springdale, Arkansas (Address of principal executive offices)

72764 (Zip Code)

 

(479) 756-7400

(Registrant’s telephone number, including area code)

 

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

 

Large accelerated filer [  ]	Accelerated filer [  ]
Non-accelerated filer [  ]	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]

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date. As of July 31, 2015, the number of shares outstanding of the Registrant’s Class A common stock, which is the class registered under the Securities Exchange Act of 1934, was 89,631,162.

ADVANCED ENVIRONMENTAL RECYCLING TECHNOLOGIES, INC.

 

FORM 10-Q

 

TABLE OF CONTENTS

 

PART I – FINANCIAL INFORMATION	2
Item 1. Financial Statements	2
BALANCE SHEETS	2
BALANCE SHEETS (continued)	3
STATEMENTS OF OPERATIONS	4
STATEMENTS OF CASH FLOWS	5
NOTES TO FINANCIAL STATEMENTS	6
Note 1: Unaudited Information	6
Note 2: Description of the Company	6
Note 3: Cash Flows	7
Note 4: Significant Accounting Policies	7
Note 5: Income Taxes	9
Note 6: Earnings per Share	10
Note 7: Line of Credit	11
Note 8:  Related Party Transactions	12
Note 9: Commitments and Contingencies	12
Note 10:  New Accounting Pronouncements	13
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.	14
Item 4. Controls and Procedures.	20
PART II – OTHER INFORMATION	21
Item 1. Legal Proceedings	21
Item 5. Other	21
Item 6. Exhibits	21
SIGNATURES	22
INDEX TO EXHIBITS	23

PART I – FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

ADVANCED ENVIRONMENTAL RECYCLING TECHNOLOGIES, INC.

 

BALANCE SHEETS

(In thousands)

 

 

 

The accompanying notes are an integral part of these financial statements.

ADVANCED ENVIRONMENTAL RECYCLING TECHNOLOGIES, INC.

 

BALANCE SHEETS (continued)

(In thousands, except share and per share data)

 

 

 

 

 

 

 

 

The accompanying notes are an integral part of these financial statements.

ADVANCED ENVIRONMENTAL RECYCLING TECHNOLOGIES, INC.

 

STATEMENTS OF OPERATIONS

(Unaudited)

(In thousands, except share and per share data)

 

 

 

 

The accompanying notes are an integral part of these financial statements.

ADVANCED ENVIRONMENTAL RECYCLING TECHNOLOGIES, INC.

 

STATEMENTS OF CASH FLOWS

(Unaudited)

(In thousands)

 

 

 

The accompanying notes are an integral part of these financial statements.

NOTES TO FINANCIAL STATEMENTS

Unaudited

 

 

 

 

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

 

Three Months Ended June 30, 2015 Compared to Three Months Ended June 30, 2014

 

The following table sets forth selected information from our statements of operations (dollars in thousands):

 

		Three Months Ended
		June 30,				June 30,
		2015				2014				% Change
		(unaudited)				(unaudited)
Net sales		$	31,527			$	24,547				28.4	%
Cost of goods sold			25,035				18,501				35.3	%
% of net sales			79.4	%			75.4	%
Gross margin			6,492				6,046				7.4	%
% of net sales			20.6	%			24.6	%
Gain from asset disposition			-				(7	)			*
Selling and administrative costs			3,471				2,859				21.4	%
% of net sales			11.0	%			11.6	%
Operating income			3,021				3,194				(5.4	%)
% of net sales			9.6	%			13.0	%
Other income:
Other income (expense)			4				(5	)			(180.0	%)
Gain on involuntary conversion of non-monetary assets due to fire			-				500				*
Net interest expense			(929	)			(804	)			15.5	%
Income before dividends			2,096				2,885				(27.3	%)
% of net sales			6.6	%			11.8	%
Dividends on preferred stock			(391	)			(369	)			6.0	%
Net income applicable to common stock		$	1,705			$	2,516				(32.2	%)
% of net sales			5.4	%			10.2	%

 

*not meaningful as a percentage change

 

Net Sales

 

Second quarter 2015 sales were up $7.0 million, or 28.4%, from the same period in 2014 primarily as a result of increased ChoiceDek® sales, effectively making up for the shortfall experienced in ChoiceDek® sales during the first quarter of 2015 as the Company transitioned to selling directly to Lowe’s.

 

Cost of Goods Sold and Gross Margin

 

The total cost of goods sold for the second quarter of 2015 increased $6.5 million, or 35.3%, from the second quarter of 2014 primarily due to freight inclusive pricing for direct sales to Lowe’s, increased sales volume and increased costs of raw materials. As a percentage of net sales, gross margin decreased 4 percentage points.

 

Selling and Administrative Costs

 

Selling and administrative costs increased $0.6 million, or 21.4%, for the second quarter of 2015 as compared to the second quarter of 2014. This increase was primarily due to providing a reserve for a doubtful account, increased advertising and promotional expense related to MoistureShield® sales and increased insurance costs.

 

Earnings

 

Net income decreased $0.8 million, or 32.3%, for the quarter ended June 30, 2015 when compared to the same period in 2014. Included in 2014 net income was $0.5 million received in partial settlement for property damage as a result of the fire in the Springdale facility in mid-2013.

 

Interest costs increased $0.1 million, or 15.5%, in the second quarter of 2015 compared to the second quarter of 2014 largely due to increased payment in kind (PIK) interest that is accrued and added to the principal on the H.I.G. Series A and Series B notes quarterly.

 

Six Months Ended June 30, 2015 Compared to Six Months Ended June 30, 2014

 

The following table sets forth selected information from our statements of operations (dollars in thousands):

 

		Six Months Ended
		June 30,				June 30,
		2015				2014				% Change
		(unaudited)				(unaudited)
Net sales		$	43,721			$	41,237				6.0	%
Cost of goods sold			35,746				33,043				8.2	%
% of net sales			81.8	%			80.1	%
Gross margin			7,975				8,194				(2.7	%)
% of net sales			18.2	%			19.9	%
Gain from asset disposition			(1	)			(14	)			(92.9	%)
Selling and administrative costs			6,507				6,010				8.3	%
% of net sales			14.9	%			14.6	%
Operating income			1,469				2,198				(33.2	%)
% of net sales			3.4	%			5.3	%
Other income:
Other income (expense)			10				(1	)			*
Gain on involuntary conversion of non-monetary assets due to fire			-				845				*
Net interest expense			(1,771	)			(1,593	)			11.2	%
Income (loss) before dividends			(292	)			1,449				(120.2	%)
% of net sales			(0.7	%)			3.5	%
Dividends on preferred stock			(777	)			(732	)			6.1	%
Net loss applicable to common stock		$	(1,069	)		$	717				(249.1	%)
% of net sales			(2.4	%)			1.7	%

 

*not meaningful as a percentage change

 

Net Sales

 

Sales for the six months ended June 30, 2015 were up $2.5 million or 6.0% from the same period in 2014. This increase is due to increased ChoiceDek® sales.

 

Cost of Goods Sold and Gross Margin

 

Total cost of goods sold for the first six months of 2015 increased $2.7 million, or 8.2%, over the same period in 2014. As a percent of sales, the cost of goods sold increased 1.7 percentage points. This increase is primarily due to increased raw material costs.

 

Selling and Administrative Costs

 

Selling and administrative costs were up $0.5 million, or 8.3%, in the first six months of 2015 compared to the first six months of 2014. The increase was primarily due to the reserve for doubtful accounts and increased selling expenses associated with growing the MoistureShield® sales lines.

 

Earnings

 

Net income was down $1.8 million, or 249.1%, for the six months ended June 30, 2015 as compared to the same period in 2014. In 2014, a gain of $0.8 million from involuntary conversion of non-monetary assets was recorded due to the fires at the Springdale and Lowell plants in July 2013. Increased costs of goods sold due to purchasing volume increases for raw materials and selling expenses associated with the growing line of MoistureShield® products were also factors as well as increased interest expense. Interest costs were up 11.2% as a result of increased borrowing during the period on our $8.0 million line of credit with AloStar Bank of Commerce (the “Revolver”) and PIK interest on the H.I.G. Series A and B notes.

 

Liquidity and Capital Resources

 

Liquidity refers to the liquid financial assets available to fund our business operations and pay for near-term obligations as well as unused borrowing capacity under our revolving credit facility. Our cash requirements have historically been satisfied through a combination of cash flows from operations and debt financings. While our financial arrangement with the Revolver expires on November 15, 2015, we are confident that a new financing arrangement will be reached with a comparable lender. However, there is no assurance that a new financing agreement on terms as favorable as the Revolver, or at all, will be secured.

 

The Revolver is used to cover operating expenses as needed. At June 30, 2015, $7.0 million was available for drawdown. AERT has also entered into an accounts receivable purchase agreement with a third party to sell our Lowe’s receivables. This agreement enables us to improve cash flow to the Company.

 

The Company plans to structure its operations to grow its business, improve its margins and generate future income in order to maximize shareholder value. The Company is currently working to improve its liquidity by:

 

·

Streamlining operations to increase efficiencies: The Company expects to make changes to certain operational processes in order to increase productivity. These changes include the installation of equipment to reduce process material handling costs and manufacturing equipment that will improve yields. The Company is evaluating its existing recycling processes and new technology.

 

·

Seeking additional sources of revenue:  The Company is pursuing additional distribution of its current product lines with new distributors and is introducing new products, including deck lighting and aluminum railing systems, in order to increase its sales.

 

Cash Flows 

 

Cash Flows from Operations

 

Cash provided by operations for the first six months of 2015 was $6.4 million, an increase of $1.3 million from the first six months of 2014. This increase was due to a change in current assets and liabilities as a result of the following:

 

·

Accounts receivable increased $1.6 million in the first six months of 2015 as compared to an increase of $1.2 million in the first six months of 2014. In 2015 the increase was a result of increased sales, whereas the increase in 2014 was the result of increased insurance receivable relating to the fire at the Springdale extrusion facility in 2013.

·

In the first six months of 2015 inventory levels decreased $2.1 million as a result of increased sales compared to an increase of $1.1 million in the first six months of 2014.

·

Accounts payable increased $2.7 million in the first six months of 2015 compared to an increase of $2.0 million in the first six months of 2014 due to increased purchases of raw materials.

·

Accrued liabilities decreased $0.5 million in the first six months of 2015 compared to a decrease of $0.8 million in the first six months of 2014.

 

Cash Flows from Investing Activities

 

Cash used in investing activities in the first six months of 2015 was $1.4 million compared to cash used in investing activities of $0.7 million for the same period in 2014. This change was primarily due to increased purchases of capital assets needed for continuous improvements of air quality in our production facilities and to decrease labor costs from automation.

 

Cash Flows from Financing Activities

 

Cash used in financing activities was $4.9 million for the first six months of 2015 compared to cash used in financing activities of $4.4 million for the same period in 2014. The change was primarily due to payments on notes payable.

 

Working Capital

 

At June 30, 2015, the Company had working capital of $2.9 million compared to working capital of $2.6 million at December 31, 2014. The changes in working capital primarily consisted of a decrease in borrowing on the Revolver, an increase in accounts receivable, an increase in accounts payable and a decrease in inventory.

 

Buildings and Equipment

 

Property additions and betterments include construction costs and property purchases. The depreciation of buildings and equipment is provided on a straight-line basis over the estimated useful lives of the assets. Gains or losses on sales, or other dispositions of property, are credited or charged to income in the period incurred. Repairs and maintenance costs are charged to income in the period incurred, unless it is determined that the useful life of the respective asset has been extended.

 

For purposes of testing impairment, we group our long-lived assets at the same level for which there are identifiable cash flows independent of other asset groups. Currently, there is only one level of aggregation for our assets.

 

Recoverability of assets to be held and used in operations is measured by a comparison of the carrying amount of our assets to the undiscounted future net cash flows expected to be generated by the assets. The factors used to evaluate the future net cash flows, while reasonable, require a high degree of judgment and the results could vary if the actual results are materially different than the forecasts. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less selling costs.

 

Buildings and equipment are stated at cost and depreciated over the estimated useful life of each asset using the straight-line method. Estimated useful lives are: buildings — 15 to 30 years, leasehold improvements — 2 to 6 years, and machinery and equipment — 3 to 10 years.

 

We assess the impairment of long-lived assets, consisting of property, plant, and equipment, whenever events or circumstances indicate that the carrying value may not be recoverable. Examples of such events or circumstances include:

 

·

an asset group's inability to continue to generate income from operations and positive cash flow in future periods;

·

loss of legal ownership or title to an asset;

·

significant changes in our strategic business objectives and utilization of the asset(s); and

·

the impact of significant negative industry or economic trends.

 

For the quarter ended June 30, 2015, the Company has determined that there were no events or circumstances indicating the carrying value may not be recoverable.

 

We also periodically review the useful lives assigned to our assets to ensure that our initial estimates do not exceed any revised estimated periods from which we expect to realize cash flows from the asset. If a change were to occur in any of the above-mentioned factors or estimates, the likelihood of a material change in our reported results would increase.

 

We are constantly searching for improvements and efficiencies to our production process and are exploring alternative recycling technology at the Lowell facility. Although no changes have been made or approved, any significant modifications to the process could potentially result in a future impairment of assets currently used in operations if the new technology is successfully implemented.

 

Debt

 

Oklahoma Energy Program Loan

 

On July 14, 2010, the Company entered into a loan agreement with the Oklahoma Department of Commerce (ODOC) under award number 14215 SSEP09, whereby ODOC agreed to a 15-year, $3.0 million loan to AERT at a fixed interest rate of 3.0%. The balance on the loan at June 30, 2015 was $2.5 million.

 

H.I.G. Long Term Debt

 

In 2011, the Company consummated related recapitalization transactions with H.I.G. AERT, LLC, an affiliate of H.I.G. Capital L.L.C. (H.I.G.). H.I.G. exchanged secured debt in the Company for a combination of new debt (Series A Note and Series B Note issued pursuant to that certain Credit Agreement dated March 18, 2011, the lending party thereto, and H.I.G. AERT, LLC as administrative agent (the “Credit Agreement”)) and equity. As a result, H.I.G. owns approximately 80% of the outstanding common equity securities of the Company on a fully diluted, as converted basis.

 

The Credit Agreement contains provisions requiring mandatory payments upon the Series A Note and Series B Note equal to 50% of the Company’s “Excess Cash Flow,” (as defined in the Credit Agreement) and equal to 100% of proceeds from most non-ordinary course asset dispositions, additional debt issuances or equity issuances (subject to certain exceptions in each case or as H.I.G. otherwise agrees), and contains covenant restrictions on the incurrence of additional debt, liens, leases or equity issuances.

 

The Series A Note matures on March 17, 2017 and, at the Company’s option, either (i) bears cash interest at 8.0% per annum or (ii) bears cash interest at 4.0% per annum, plus a rate of interest equal to 4.0% per annum PIK and added to the outstanding principal amount of the Series A Note (with the latter option only being available until March 17, 2013, after which time, the Series A Note will bear cash interest at 8.0% per annum). Payment of cash interest has been waived until August 12, 2015. PIK interest is accrued and added to the principal of the Series A Note quarterly.

 

The Series B Note matures on March 17, 2017 and, at the Company’s option, either (i) bears cash interest at 10.0% per annum or (ii) bears cash interest at 4.0% per annum, plus a rate of interest equal to 6.0% per annum payable in kind and added to the outstanding principal amount of the Series B Note. The Series B Note ranks equally to the Series A Note. Payment of cash interest has been waived until August 7, 2015. PIK interest is accrued and added to the principal of the Series B Note quarterly.

 

AloStar Bank of Commerce Term Loan

 

On November 15, 2012, the Company entered into a $15.0 million Loan and Security Agreement (the “Security Agreement”) with AloStar Bank of Commerce, which includes the Revolver and a $7.0 million asset-based loan (the “Term Loan”). The Term Loan requires that AloStar hold first security interest to the majority of AERT’s plant, property, and equipment; as well as, real estate. Payments on the principal portion of the loan commenced on December 1, 2012 and will be made in 36 equal monthly installments of $0.08 million plus interest. The final installment $4.1 million shall be due and payable on the commitment termination date. Interest is calculated at 4.5% plus the greater of (a) 1.0% and (b) the LIBOR Rate as shown in the Wall Street Journal on such day for United States dollar deposits for the one month delivery of funds in amounts approximately equal to the principal amount of the Loan for which such rate is being determined or, if such day is not a Business Day on the immediately preceding Business Day. Interest accrued on the principal balance of the Term Loan shall be due and payable on the first day of each month, computed through the last day of the preceding month. Interest, expressed in simple interest terms as of June 30, 2015, is 5.5%.

 

The Term Loan contains certain covenants, including restrictions on: (1) fundamental changes in ownership, (2) conduct of business, (3) declaration of distributions, (4) amendments or modifications to existing agreements, (5) property acquisitions, (6) affiliated party transactions, and (7) hedging agreements.

 

Debt Covenants

 

The Company’s Security Agreement with AloStar and the Company’s Credit Agreement with HIG contain covenant restrictions, as defined in the respective agreements.

 

		June 30, 2015		Covenant		Compliance
AloStar
Adjusted EBITDA	=	$6.9M		=>$6.0M		Yes
Fixed Charge Coverage Ratio	=	1.3		> 1.10:1.00		Yes
Adjusted Consolidated EBITDA (as defined in the Security Agreement)
/ Consolidated Fixed Charges
Capital Expenditures*,**	=	$1.6M		< $2.7M		Yes
HIG:
Consolidated EBITDA	=	$6.9M		=>$10.0M		No, Waived
Fixed Charge Coverage Ratio	=	1.4		> 1.50:1.00		No, Waived
Adjusted Consolidated EBITDA (as defined in the Credit Agreement)
/ Consolidated Fixed Charges
Leverage Ratio	=	5.93		= < 3.1:1.00		No, Waived
Consolidated Indebtedness / Consolidated EBITDA
Capital Expenditures**	=	$3.9M		< $2.5M		No, Waived
*Adjusted for financed capital expenditures
**Annual covenant for 2015

 

 

On July 9, 2015, H.I.G. AERT, LLC, waived the Specified Events of Default (as defined in the waiver) as a result of AERT failing to have attained the required EBITDA of $10.0 million, a fixed charge coverage ratio of greater than 1.5:1.0, and a leverage ratio of below 3.1 to 1.0 for the four Fiscal Quarters ending June 30, 2015. H.I.G. AERT, LLC also waived the Specified Events of Default as a result of AERT having exceeded its 2015 annual covenant for capital expenditures. In addition, on July 9, 2015, H.I.G. AERT, LLC, the holder of all of the issued and outstanding shares of our Series E cumulative participating Preferred Stock, waived its right to deliver a Triggering Event Redemption Notice on the Preferred Stock solely as a result of the Specified Events of Default.

 

Uncertainties, Issues and Risks

 

There are many factors that could adversely affect AERT’s business and results of operations. These factors include, but are not limited to, general economic conditions, decline in demand for our products, business or industry changes, government rules and regulations, environmental concerns, litigation, new products / product transition, product obsolescence, competition, acts of war, terrorism, public health issues, concentration of customer base, loss of a significant customer, availability of raw material (plastic) at a reasonable price, inability to obtain adequate financing (i.e. working capital), equipment breakdowns, low stock price, and fluctuations in quarterly performance.

 

Forward-Looking Information

 

This Form 10-Q contains certain “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 (the “Securities Act”) and Section 21E of the Securities Exchange Act of 1934 (the “Exchange Act”) which statements include, but are not limited to statements regarding streamlining operations to increase efficiencies, securing a new financing arrangement to replace the Revolver and seeking new sources of revenue. Such forward-looking statements, which are often identified by words such as “believes”, “anticipates”, “expects”, “estimates”, “should”, “may”, “will” and similar expressions, represent our expectations or beliefs concerning future events. Numerous assumptions, risks, and uncertainties could cause actual results to differ materially from the results discussed in the forward-looking statements. While these forward-looking statements, and any assumptions upon which they are based, are made in good faith and reflect management’s current judgment regarding the direction of the business, actual results will almost always vary, sometimes materially, from any estimates, predictions, projections, or other future performance suggested herein. Some important factors (but not necessarily all factors) that could affect the sales volumes, growth strategies, future profitability and operating results, or that otherwise could cause actual results to differ materially from those expressed in any forward-looking statement include the following: market, political or other forces affecting the pricing and availability of plastics and other raw materials; accidents or other unscheduled shutdowns affecting us, our suppliers’ or our customers’ plants, machinery, or equipment; competition from products and services offered by other enterprises; our ability to refinance short-term indebtedness; state and federal environmental, economic, safety and other policies and regulations, any changes therein, and any legal or regulatory delays or other factors beyond our control; execution of planned capital projects; weather conditions affecting our operations or the areas in which our products are marketed; adverse rulings, judgments, or settlements in litigation or other legal matters. We undertake no obligation to publicly release the result of any revisions to any such forward-looking statements that may be made to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events.

 

Item 4. Controls and Procedures.

 

Our Chief Executive Officer, Timothy D. Morrison, who is our principal executive officer, and our Chief Financial Officer, J. R. Brian Hanna, who is our principal financial and accounting officer, have reviewed and evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of June 30, 2015. Based upon this evaluation, our Chief Executive Officer and our Chief Financial Officer have concluded that, as of June 30, 2015, the end of the period covered by this report, AERT’s disclosure controls and procedures are effective in recording, processing, summarizing and reporting, on a timely basis, information required to be disclosed by AERT in the reports that it files or submits under the Exchange Act and are effective in ensuring that information required to be disclosed by AERT in the reports that it files or submits under the Exchange Act is accumulated and communicated to AERT’s management, including AERT’s Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

 

During the six months ended June 30, 2015, there have been no changes in our internal controls over financial reporting that have materially affected, or that are reasonably likely to materially affect, our internal controls over financial reporting.

PART II – OTHER INFORMATION

 

Item 1. Legal Proceedings

 

Refer to the discussion under Part I, Item 1, Notes to Financial Statements, Note 9: Commitments and Contingencies, which discussion is incorporated herein by reference.

 

Item 5. Other

 

At the annual meeting of shareholders on June 19, 2015, the shareholders voted to strike all reference of issuance of Class B Common Stock from the Company’s Delaware Certificate of Incorporation. As of November 18, 2014, all holders of Class B Common Stock had voluntarily converted all their Class B Common shares to Class A Common Stock. An Amendment to the Company’s Articles of Incorporation was approved by the State of Delaware on July30, 2015. There will be no shares of Class B stock issued.

 

Item 6. Exhibits

 

The exhibits listed in the accompanying Index to Exhibits are filed and incorporated by reference as part of this report.

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.

 

		ADVANCED ENVIRONMENTAL
		RECYCLING TECHNOLOGIES, INC.
		By: /s/ TIMOTHY D. MORRISON
		Timothy D. Morrison,
		Chief Executive Officer and Director
		(Principal Executive Officer)
		/s/ J. R. BRIAN HANNA
		J. R. Brian Hanna,
		Chief Financial Officer & Principal Financial Officer and Principal Accounting Officer

Date: August 11, 2015

 

 

 

 

INDEX TO EXHIBITS

 

 

3.1		Amendment to Certificate of Incorporation filed July 30, 2015**
10.1		Waiver of Default - H.I.G. Credit Agreement dated July 9, 2015**
10.2		Waiver of "Special Events Default" per Series A & B Term Loan Interest dated July 29, 2015**
10.3		Waiver of "Special Events Default" per Series E Convertible Preferred Stock Rights dated July 9, 2015**
10.4		Lowe's Companies, Inc. Supply Chain Financing Program (Prime Revenue) agreement dated February 20, 2015**
31.1		Certification per Sarbanes-Oxley Act of 2002 (Section 302) by the Company's chief executive and principal executive officer**
31.2		Certification per Sarbanes-Oxley Act of 2002 (Section 302) by the Company’s chief financial and principal accounting officer **
32.1		Certification per Sarbanes-Oxley Act of 2002 (Section 906) by the Company's chief executive and principal executive officer**
32.2		Certification per Sarbanes-Oxley Act of 2002 (Section 906) by the Company's chief financial and principal accounting officer**
101.IN		XBRL Instance Document
101.SCH		XBRL Taxonomy Extension Schema Document
101.CAL		XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF		XBRL Taxonomy Extension Definition Linkbase Document
101.LAB		XBRL Taxonomy Extension Label Linkbase Document
101.PRE		XBRL Taxonomy Extension Presentation Linkbase Document

 

_________

 

** Filed herewith

 

 

23

---

Exhibit 3.1

 

Exhibit 10.1

 

WAIVER

 

July 9, 2015

 

 

Advanced Environmental Recycling Technologies, Inc.

914 N. Jefferson

Springdale, Arkansas 72764

Attention: Chief Executive Officer

 

 

Ladies and Gentlemen:

 

Reference hereby is made to that certain Credit Agreement, dated as of March 18, 2011, as amended by that certain First Amendment to Credit Agreement, dated as of May 23, 2011, and as further amended by that certain Second Amendment to Credit Agreement, dated as of October 20, 2011 (as further amended, restated, supplemented, or otherwise modified from time to time, the “Credit Agreement”), by and among Advanced Environmental Recycling Technologies, Inc., a Delaware corporation (“Borrower”), the lenders from time to time parties hereto (the “Lenders”), H.I.G. AERT, LLC, as the administrative agent for the Lenders (in such capacity, together with its successors and assigns in such capacity, “Agent”; and together with the Lenders, collectively, the “Lender Group”). Capitalized terms used herein and not otherwise defined or limited herein shall have the meanings ascribed to such terms in the Credit Agreement.

 

As you are aware, Borrower has failed to perform obligations owed to the Lender Group under the terms and conditions of the Credit Agreement as a result of Borrower’s failure to comply with Sections 6.10 and 6.11 of the Credit Agreement, which require Borrower to have (i) a Leverage Ratio of below 3.10 to 1.00, (ii) a Fixed Charge Coverage Ratio greater than 1.50, (iii) a Minimum EBITDA of $10 million, and (iv) Capital Expenditures of less than $2.5 million for the current fiscal year, respectively (collectively, the “Specified Events of Default”) for four Fiscal Quarters (as defined in the Credit Agreement) ending June 30, 2015. The Specified Events of Default represent Events of Default under the Notes (as defined in the Company’s Certificate of Designations, Preferences and Rights of the Series E Convertible Preferred Stock of Advanced Environmental Recycling Technologies, Inc. dated March 17, 2011 (the “Certificate of Designation”)) resulting in the occurrence of a Triggering Event (as defined in the Certificate of Designation) under Section 5(a)(ii) of the Certificate of Designation.

 

As a result of the Specified Events of Default, Events of Default have occurred and are currently continuing under the Credit Agreement. You have requested that the Lender Group waive the Specified Events of Default. This letter (this “Waiver”) is to advise you that the Lender Group hereby waives the Specified Events of Default and their rights and remedies under the Credit Agreement arising as a result of the Specified Events of Default.

 

Notwithstanding the foregoing, such waiver shall not waive any other requirement or hinder, restrict or otherwise modify the rights and remedies of the Lender Group following the occurrence of any other Event of Default under the Credit Agreement. Except as otherwise expressed herein, the text of the Credit Agreement and the other Credit Documents shall remain in full force and effect, and the Lender Group hereby reserves its rights to require strict compliance in the future with all terms and conditions of the Credit Agreement and the other Credit Documents. Borrower hereby reaffirms its obligations under each Credit Document to which it is a party. Borrower hereby further ratifies and reaffirms the validity and enforceability of all of the Liens heretofore granted, pursuant to and in connection with the Security Agreement or any other Credit Document, to Agent, on behalf and for the benefit of each member of the Lender Group, as collateral security for the Obligations under the Credit Documents in accordance with their respective terms, and acknowledges that all of the Liens, and all Collateral heretofore pledged as security for the Obligations, continues to be and remain Collateral for the Obligations from and after the date hereof. Borrower hereby restates, ratifies and reaffirms each and every term and condition set forth in the Credit Agreement and the Credit Documents effective as of the date hereof.

 

This Waiver may be executed in multiple counterparts, each of which (including any counterpart delivered by facsimile or other electronic method of transmission) shall be deemed to be an original and all of which, taken together, shall constitute one and the same agreement, and this Waiver shall be deemed to be made under, and for all purposes shall be construed in accordance with, the laws of the State of New York. This Waiver shall be effective as of the date set forth above when and only when, Agent shall have received a counterpart of this Waiver duly executed by Borrower and the Lenders.

 

This Waiver shall constitute a Credit Document for all purposes.

 

[remainder of page intentionally left blank]

 

 

 

 

 

 

 

IN WITNESS WHEREOF, the parties hereto have caused this Waiver to be executed and delivered as of the date first above written.

 

 

	H.I.G. AERT, LLC,
	as Administrative Agent and Lender
	By:	/s/ Todd Ofenloch
		Name:	Todd Ofenloch
		Title:	Authorized Signatory

 

 

Acknowledged and agreed to

as of the date first written above:

  

 

ADVANCED ENVIRONMENTAL
RECYCLING TECHNOLOGIES, INC.,
a Delaware corporation
By:	/s/ J. R. Brian Hanna
Name:	J. R. Brian Hanna
Title:	Chief Financial Officer & Principal Accounting Officer

 

 

 

 

 

 

Waiver (H.I.G. LOAN Agreement)

---

Exhibit 10.2

 

WAIVER

 

July 29, 2015

 

 

Advanced Environmental Recycling Technologies, Inc.

914 N. Jefferson

Springdale, Arkansas 72764

Attention: Chief Executive Officer

 

 

Ladies and Gentlemen:

 

Reference hereby is made to that certain Credit Agreement, dated as of March 18, 2011, as amended by that certain First Amendment to Credit Agreement, dated as of May 23, 2011, and as further amended by that certain Second Amendment to Credit Agreement, dated as of October 20, 2011 (as further amended, restated, supplemented, or otherwise modified from time to time, the “Credit Agreement”), by and among Advanced Environmental Recycling Technologies, Inc., a Delaware corporation (“Borrower”), the lenders from time to time parties hereto (the “Lenders”), H.I.G. AERT, LLC, as the administrative agent for the Lenders (in such capacity, together with its successors and assigns in such capacity, “Agent”; and together with the Lenders, collectively, the “Lender Group”). Capitalized terms used herein and not otherwise defined or limited herein shall have the meanings ascribed to such terms in the Credit Agreement.

 

As you are aware, Borrower has failed to perform obligations owed to the Lender Group under the terms and conditions of the Credit Agreement as a result of Borrower’s failure to comply with Sections 2.12(a), 2.12(b) and 7.01(b) which requires Borrower to begin paying cash interest on the Series A Term Loan beginning March 17, 2013, and cash interest on the Series B Term Loan respectively (collectively, the “Specified Events of Default”).

 

As a result of the Specified Events of Default, Events of Default have occurred and are currently continuing under the Credit Agreement. You have requested that the Lender Group waive the Specified Events of Default until August 12, 2015, at which time all interest on the Series A Term Loan will bear cash interest at 8.0% per annum (collectively, the “Series A Interest Rate”) and the Series B Term Loan will bear cash interest at 4.0% per annum (collectively, the “Series B Interest Rate”). This letter (this “Waiver”) is to advise you that the Lender Group hereby waives the Specified Events of Default and their rights and remedies under the Credit Agreement arising as a result of the Specified Events of Default.

 

Notwithstanding the foregoing, such waiver shall not waive any other requirement or hinder, restrict or otherwise modify the rights and remedies of the Lender Group following the occurrence of any other Event of Default under the Credit Agreement. Except as otherwise expressed herein, the text of the Credit Agreement and the other Credit Documents shall remain in full force and effect, and the Lender Group hereby reserves its rights to require strict compliance in the future with all terms and conditions of the Credit Agreement and the other Credit Documents. Borrower hereby reaffirms its obligations under each Credit Document to which it is a party. Borrower hereby further ratifies and reaffirms the validity and enforceability of all of the Liens heretofore granted, pursuant to and in connection with the Security Agreement or any other Credit Document, to Agent, on behalf and for the benefit of each member of the Lender Group, as collateral security for the Obligations under the Credit Documents in accordance with their respective terms, and acknowledges that all of the Liens, and all Collateral heretofore pledged as security for the Obligations, continues to be and remain Collateral for the Obligations from and after the date hereof. Borrower hereby restates, ratifies and reaffirms each and every term and condition set forth in the Credit Agreement and the Credit Documents effective as of the date hereof.

 

This Waiver may be executed in multiple counterparts, each of which (including any counterpart delivered by facsimile or other electronic method of transmission) shall be deemed to be an original and all of which, taken together, shall constitute one and the same agreement, and this Waiver shall be deemed to be made under, and for all purposes shall be construed in accordance with, the laws of the State of New York. This Waiver shall be effective as of the date set forth above when and only when, Agent shall have received a counterpart of this Waiver duly executed by Borrower and the Lenders.

 

This Waiver shall constitute a Credit Document for all purposes.

 

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IN WITNESS WHEREOF, the parties hereto have caused this Waiver to be executed and delivered as of the date first above written.

 

 

	H.I.G. AERT, LLC,
	as Administrative Agent and Lender
	By:	/s/ Bobby J. Sheth
		Name:	Bobby J. Sheth
		Title:	Authorized Signatory

 

 

Acknowledged and agreed to

as of the date first written above:

  

 

ADVANCED ENVIRONMENTAL
RECYCLING TECHNOLOGIES, INC.,
a Delaware corporation
By:	/s/ J. R. Brian Hanna
Name:	J. R. Brian Hanna
Title:	Chief Financial Officer

 

 

 

 

 

 

Waiver (H.I.G. LOAN Agreement)

---

Exhibit 10.3

 

July 9, 2015

 

Advanced Environmental Recycling Technologies, Inc.

914 N. Jefferson

Springdale, Arkansas 72764

Attention: Chief Executive Officer

 

Ladies and Gentlemen:

 

The undersigned, being the holder of all of the issued and outstanding shares of Series E Convertible Preferred Stock of Advanced Environmental Recycling Technologies, Inc., a Delaware corporation (the “Company”), hereby acknowledges that the Company has failed to have (i) a Leverage Ratio (as defined in that certain Credit Agreement, dated as of March 18, 2011, as amended by that certain First Amendment to Credit Agreement, dated as of May 23, 2011, and as further amended by that certain Second Amendment to Credit Agreement, dated as of October 20, 2011 (as further amended, restated, supplemented or otherwise modified from time to time, the “Credit Agreement”), by and among the Company, the lenders from time to time parties thereto and H.I.G. AERT, LLC) of below 3.10 to 1.00, (ii) a Fixed Charge Coverage Ratio greater than 1.50, (iii) a Minimum EBITDA of $10 million, and (iv) Capital Expenditures of less than $2.5 million for the current fiscal year, respectively (collectively, the “Specified Events of Default”) for four Fiscal Quarters (as defined in the Credit Agreement) ending June 30, 2015. The Specified Events of Default represent Events of Default under the Notes (as defined in the Company’s Certificate of Designations, Preferences and Rights of the Series E Convertible Preferred Stock of Advanced Environmental Recycling Technologies, Inc. dated March 17, 2011 (the “Certificate of Designation”)) resulting in the occurrence of a Triggering Event (as defined in the Certificate of Designation) under Section 5(a)(ii) of the Certificate of Designation.

 

You have requested that the holders of the Company’s Series E Convertible Preferred Stock waive their right to deliver a Triggering Event Redemption Notice (as defined in the Certificate of Designation) as a result of the Specified Event of Default. This letter (this “Waiver”) is to advise you that the holders of the Company’s Series E Convertible Preferred Stock hereby waive the right to deliver a Triggering Event Redemption Notice solely as a result of the Specified Event of Default.

 

This Waiver shall not (i) constitute a waiver of the right of the holders of Series E Convertible Preferred Stock to deliver one or more Triggering Event Redemption Notice upon the occurrence of any Triggering Event other than the Triggering Event resulting from the Specified Event of Default and (ii) otherwise hinder, restrict or modify the rights and remedies of the holders of Series E Convertible Preferred Stock under the Certificate of Designation. The holders of Series E Convertible Preferred Stock hereby reserve the right to require strict compliance in the future with all terms and conditions of, and to exercise any other rights or remedies provided for in, the Certificate of Designation.

 

This Waiver may be executed in multiple counterparts, each of which (including any counterpart delivered by facsimile or other electronic method of transmission) shall be deemed to be an original and all of which, taken together, shall constitute one and the same agreement.

 

IN WITNESS WHEREOF, the parties hereto have caused this Waiver to be executed and delivered as of the date first above written.

 

	H.I.G. AERT, LLC, as the holder of all of the
	issued and outstanding shares of Series E
	Convertible Preferred Stock
	By:	/s/ Todd Ofenloch
		Name:	Todd Ofenloch
		Title:	Authorized Signatory

 

 

Acknowledged and agreed to

as of the date first written above:

  

 

ADVANCED ENVIRONMENTAL
RECYCLING TECHNOLOGIES, INC.,
a Delaware corporation
By:	/s/ J. R. Brian Hanna
Name:	J. R. Brian Hanna
Title:	Chief Financial Officer & Principal Accounting Officer

 

 

 

 

 

Waiver (Series E Preferred)

---

Exhibit 10.4

 

Exhibit 31.1

 

CERTIFICATION

 

 

I, Timothy D. Morrison, certify that:

 

1.	I have reviewed this quarterly report on Form 10-Q of Advanced Environmental Recycling Technologies, Inc.;

 

2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 

4.

The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

 

(a)

Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

(b)

Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 

(c)	Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

(d)

Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

 

5.	The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

 

(a)	All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

 

(b)	Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 

Date:  August 11, 2015

 

	/s/ Timothy D. Morrison
	TIMOTHY D. MORRISON
	Chief Executive Officer and Director (Principal Executive Officer)

 

 

Exhibit 31.2

CERTIFICATION

 

 

I, J. R. Brian Hanna, certify that:

 

1.	I have reviewed this quarterly report on Form 10-Q of Advanced Environmental Recycling Technologies, Inc.;

 

2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 

4.

The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

 

(a)

Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

(b)

Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 

(c)	Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

(d)

Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

 

5.	The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

 

(a)	All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

 

(b)	Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 

Date:  August 11, 2015

 

 

	/s/ J. R. Brian Hanna
	J. R. BRIAN HANNA
	Chief Financial Officer Principal Accounting Officer & Principal Financial Officer

 

Exhibit 32.1

 

OFFICER CERTIFICATION

 

PURSUANT TO 18 U.S.C. 1350, AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

 

In connection with the quarterly report of Advanced Environmental Recycling Technologies, Inc. (the “Company”) on Form 10-Q for the three months ended June 30, 2015, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Timothy D. Morrison, certify pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to the best of my knowledge:

 

(1)	The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

 

(2)	The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

 

Date:  August 11, 2015

 

	/s/ Timothy D. Morrison
	TIMOTHY D. MORRISON
	Chief Executive Officer and Director
	(Principal Executive Officer)

 

 

 

 

 

 

Exhibit 32.2

 

OFFICER CERTIFICATION

 

PURSUANT TO 18 U.S.C. 1350, AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

 

In connection with the quarterly report of Advanced Environmental Recycling Technologies, Inc. (the “Company”) on Form 10-Q for the three months ended June 30, 2015, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, J. R. Brian Hanna, certify pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to the best of my knowledge:

 

(1)	The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

 

(2)	The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

 

Date:  August 11, 2015

 

	/s/ J. R. Brian Hanna
	J. R. BRIAN HANNA
	Chief Financial Officer Principal Accounting Officer & Principal Financial Officer