Tecnoglass Inc.
Tecnoglass Inc. (Form: 10-Q, Received: 08/10/2018 18:08:16)

 

 

 

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 June 30, 2018

 

[  ] 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: 001-35436

 

TECNOGLASS INC.

(Exact Name of Registrant as Specified in Its Charter)

 

Cayman Islands   98-1271120
(State or other jurisdiction
of incorporation or organization)
  (I.R.S. Employer
Identification No.)

 

Avenida Circunvalar a 100 mts de la Via 40, Barrio Las Flores Barranquilla, Colombia

(Address of principal executive offices)

 

(57)(5) 3734000

(Issuer’s telephone number)

 

N/A

(Former name, former address and former fiscal year, if changed since last report):

 

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 past 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, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer [  ] Accelerated filer [X]
       
Non-accelerated filer [  ] Smaller reporting company [  ]
(Do not check if smaller reporting company)    
     
  Emerging growth company [  ]

 

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

 

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

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 37,041,669 ordinary shares as of June 30, 2018.

 

 

 

     
 

 

TECNOGLASS INC.

 

FORM 10-Q FOR THE PERIOD ENDED JUNE 30, 2018

 

TABLE OF CONTENTS

 

    Page
Part I. Financial Information  
  Item 1. Financial Statements (Unaudited) 3
  Condensed Consolidated Balance Sheets 3
  Condensed Consolidated Statements of Operations and Comprehensive Income 4
  Condensed Consolidated Statements of Cash Flows 5
  Condensed Consolidated Statements of Shareholders’ Equity 6
  Notes to Condensed Consolidated Financial Statements 7
     
  Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 25
     
  Item 3. Quantitative and Qualitative Disclosures About Market Risk 30
     
  Item 4. Controls and Procedures 30
     
Part II. Other Information  
  Item 1. Legal Proceedings 31
     
  Item 6. Exhibits 31
Signatures 32

 

  2  

 

 

PART I - FINANCIAL INFORMATION

 

Item 1. Financial Statements.

 

Tecnoglass Inc. and Subsidiaries

Condensed Consolidated Balance Sheets

(In thousands, except share and per share data)

(Unaudited)

 

    June 30, 2018     December 31, 2017  
ASSETS                
Current assets:                
Cash and cash equivalents   $ 29,925     $ 40,923  
Investments     2,061       1,680  
Trade accounts receivable, net     87,432       110,464  
Due from related parties     7,428       8,500  
Inventories     79,903       71,656  
Unbilled receivables on uncompleted contracts     -       9,996  
Contract assets – current portion     46,677       -  
Other current assets     18,486       18,679  
Total current assets   $ 271,912     $ 261,898  
                 
Long term assets:                
Property, plant and equipment, net   $ 167,647     $ 168,701  
Deferred taxes     -       103  
Contract assets – non-current     925       -  
Intangible Assets     10,583       11,517  
Goodwill     23,561       23,130  
Other long term assets     3,008       2,651  
Total long term assets     205,724       206,102  
Total assets   $ 477,636     $ 468,000  
                 
LIABILITIES AND SHAREHOLDERS’ EQUITY                
Current liabilities:                
Short-term debt and current portion of long term debt   $ 11,498     $ 3,260  
Trade accounts payable and accrued expenses     59,440       55,182  
Accrued interest expense     7,450       7,392  
Due to related parties     1,002       975  
Payable associated to GM&P acquisition     8,500       29,000  
Dividends payable     734       585  
Current portion of customer advances on uncompleted contracts     -       11,429  
Contract liability – current portion     16,079       -  
Other current liabilities     3,890       13,626  
Total current liabilities   $ 108,593     $ 121,449  
                 
Long term liabilities:                
Deferred income taxes   $ 3,246     $ 2,317  
Customer advances on uncompleted contracts     -       1,571  
Contract liability – non-current     1,586       -  
Long term debt     220,392       220,998  
Total Long Term Liabilities     225,224       224,886  
Total liabilities   $ 333,817     $ 346,335  
COMMITMENTS AND CONTINGENCIES                
                 
SHAREHOLDERS’ EQUITY                
Preferred shares, $0.0001 par value, 1,000,000 shares authorized, 0 shares issued and outstanding at June 30, 2018 and December 31, 2017 respectively   $ -     $ -  
Ordinary shares, $0.0001 par value, 100,000,000 shares authorized, 37,041,669 and 34,836,575 shares issued and outstanding at June 30, 2018 and December 31, 2017, respectively     4       3  
Legal Reserves     1,367       1,367  
Additional paid-in capital     148,375       125,317  
Retained earnings     19,029       22,212  
Accumulated other comprehensive (loss)     (26,089 )     (28,651 )
Shareholders’ equity attributable to controlling interest     142,686       120,248  
Shareholders’ equity attributable to non-controlling interest     1,133       1,417  
Total shareholders’ equity     143,819       121,665  
Total liabilities and shareholders’ equity   $ 477,636     $ 468,000  

 

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

 

  3  

 

 

Tecnoglass Inc. and Subsidiaries

Condensed Consolidated Statements of Operations and Other Comprehensive Income

(In thousands, except share and per share data)

(Unaudited)

 

    Three months ended June 30,     Six months ended June 30,  
    2018     2017     2018     2017  
Operating revenues:                                
External customers   $ 87,785     $ 79,885     $ 173,992     $ 144,328  
Related parties     1,184       1,091       2,137       2,465  
Total operating revenues     88,969       80,976       176,129       146,793  
Cost of sales     64,327       58,432       124,739       101,997  
Gross Profit     24,642       22,544       51,390       44,796  
                                 
Operating expenses:                                
Selling expense     (8,567 )     (9,528 )     (17,704 )     (17,417 )
General and administrative expense     (8,453 )     (7,600 )     (16,074 )     (15,101 )
Total Operating Expenses     (17,020 )     (17,128 )     (33,778 )     (32,518 )
                                 
Operating income     7,622       5,416       17,612       12,278  
                                 
Non-operating income     709       922       1,808       1,949  

Foreign currency transactions (losses) gains

    (8,307 )     (8,713 )     1,666       (6,288 )
Loss on extinguishment of debt     -       (2 )     -       (3,161 )
Interest expense and deferred cost of financing     (5,361 )     (5,175 )     (10,411 )     (10,257 )
                                 
(Loss) Income before taxes     (5,337 )     (7,552 )     10,675       (5,479 )
                                 
Income tax benefit (provision)     1,467       4,052       (3,926 )     3,010  
                                 
Net (loss) income   $ (3,870 )   $ (3,500 )   $ 6,749     $ (2,469 )
                                 
(Income) loss attributable to non-controlling interest     212       (60 )     284       (72 )
                                 
(Loss) Income attributable to parent   $ (3,658 )   $ (3,560 )   $ 7,033     $ (2,541 )
                                 
Comprehensive income:                                
Net (loss) income   $ (3,870 )   $ (3,500 )   $ 6,749     $ (2,469 )
Foreign currency translation adjustments     (6,139 )     (5,250 )     2,562       (449 )
                                 
Total comprehensive (loss) income   $ (10,009 )   $ (8,750 )   $ 9,311     $ (2,918 )
Comprehensive (income) loss attributable to non-controlling interest     212       (60 )     284       (72 )
                                 
Total comprehensive (loss) income attributable to parent   $ (9,797 )   $ (8,810 )   $ 9,595     $ (2,990 )
                                 
Basic income per share   $ (0.11 )   $ (0.10 )   $ 0.19     $ (0.07 )
                                 
Diluted income per share   $ (0.11 )   $ (0.10 )   $ 0.19     $ (0.07 )
                                 
Basic weighted average common shares outstanding     35,935,442       35,763,650       35,869,746       35,759,895  
                                 
Diluted weighted average common shares outstanding     35,935,442       35,763,650       36,362,493       35,759,895  

 

 

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

 

  4  

 

 

Tecnoglass Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows

(Amounts in thousands)

(Unaudited)

 

    Six months ended June 30,  
    2018     2017  
CASH FLOWS FROM OPERATING ACTIVITIES                
Net income   $ 6,749     $ (2,541 )
Adjustments to reconcile net income to net cash provided by (used in) operating activities:                
Provision for bad debts     (413 )     2,617  
Provision for obsolete inventory     27       58  
Depreciation and amortization     11,458       10,366  
Deferred income taxes     2,126       (6,870 )
Extinguishment of debt     -       2,585  
Director stock compensation     142       142  
Other non-cash adjustments     679       519  
Changes in operating assets and liabilities:                
Trade accounts receivables     (3,952 )     5,830  
Inventories     (7,329 )     (6,811 )
Prepaid expenses     (425 )     83  
Other assets     (91 )     1,984  
Trade accounts payable and accrued expenses     (2,274 )     8,224  
Accrued interest expense     41       7,175  
Taxes payable     (10,617 )     (15,104 )
Labor liabilities     (114 )     (130 )
Related parties     1,279       1,784  
Contract assets and liabilities     (3,735 )     -  
Customer advances on uncompleted contracts     -       2,283  
CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES   $ (6,449 )   $ 12,194  
                 
CASH FLOWS FROM INVESTING ACTIVITIES                
Proceeds from sale of investments     367       358  
Aquisition of businesses     (6,000 )     (7,873 )
Purchase of investments     (662 )     (727 )
Acquisition of property and equipment     (4,889 )     (4,295 )
CASH USED IN INVESTING ACTIVITIES   $ (11,184 )   $ (12,537 )
                 
CASH FLOWS FROM FINANCING ACTIVITIES                
Proceeds from debt     9,067       20,915  
Cash Dividend     (1,359 )     (1,219 )
Proceeds from bond issuance     -       201,716  
Repayments of debt     (1,934 )     (203,754 )
CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES   $ 5,774     $ 17,658  
                 
Effect of exchange rate changes on cash and cash equivalents   $ 861     $ (551 )
                 
NET (DECREASE) INCREASE IN CASH     (10,998 )     16,764  
CASH - Beginning of period     40,923       26,918  
CASH - End of period   $ 29,925     $ 43,682  
                 
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION                
Cash paid during the period for:                
Interest   $ 9,074     $ 6,864  
Income Tax   $ 5,517     $ 15,168  
                 
NON-CASH INVESTING AND FINANCING ACTIVITES:                
Assets acquired under capital lease and debt   $ 703     $ -  
Gain in extinguishment of GM&P payment settlement   $ 3,606     $ -  

 

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

 

  5  

 

 

Tecnoglass Inc. and Subsidiaries

Condensed Consolidated Statements of Shareholders’ Equity

(Amounts in thousands, except share and per share data)

(Unaudited)

 

    Ordinary Shares, $0.0001 Par Value     Additional Paid in     Legal     Retained     Accumulated Other Comprehensive     Total Shareholders’     Non-Controlling     Total Shareholders’ Equity and Non-Controlling  
    Shares     Amount     Capital     Reserve     Earnings     Loss     Equity     Interest     Interest  
Balance at December 31, 2017     34,836,575       3       125,317       1,367       22,212       (28,651 )     120,248       1,417       121,665  
                                                                         
Issuance of common stock     1,242,659       -       14,534       -       -       -       14,534       -       14,534  
                                                                         
Adoption of ASC 606     -       -       -       -       (187 )     -       (187 )     -       (187 )
                                                                         
Stock dividend     962,435       1       8,524       -       (10,029 )     -       (1,504 )     -       (1,504 )
                                                                         
Foreign currency translation     -       -       -       -       -       2,562       2,562       -       2,562  
                                                                         
Net income     -       -       -       -       7,033       -       7,033       (284 )     6,749  
                                                                         
Balance at June 30, 2018     37,041,669       4       148,375       1,367       19,029       (26,089 )     142,686       1,133       143,819  

 

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

 

  6  

 

 

Tecnoglass Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(Amounts in thousands, except share and per share data)

 

Note 1. General

 

Business Description

 

The Company manufactures hi-specification, architectural glass and windows for the global residential and commercial construction industries. Currently the Company offers design, production, marketing, and installation of architectural systems for buildings of high, medium and low elevation size. Products include windows and doors in glass and aluminum, office partitions and interior divisions, floating facades and commercial window showcases. The Company sells to customers in North, Central and South America, and exports about half of its production to foreign countries.

 

The Company manufactures both glass and aluminum products. Its glass products include tempered glass, laminated glass, thermo-acoustic glass, curved glass, silk-screened glass, acoustic glass and digital print glass. Its Alutions plant produces mill finished, anodized, painted aluminum profiles and rods, tubes, bars and plates. Alutions’ operations include extrusion, smelting, painting and anodizing processes, and exporting, importing and marketing aluminum products.

 

The Company also designs, manufactures, markets and installs architectural systems for high, medium and low-rise construction, glass and aluminum windows and doors, office dividers and interiors, floating facades and commercial display windows.

 

On March 1, 2017, the Company entered into and consummated a purchase agreement, as amended, with Giovanni Monti, the owner of 100% of the outstanding shares of Giovanni Monti and Partners Consulting and Glazing Contractors (“GM&P”). GM&P is a consulting and glazing contracting company located in Miami, Florida with over 15 years of experience in the design and installation of various building enclosure systems such as curtain window walls and a long-standing commercial relationship with the Company, working alongside it in the past in different projects within the U.S, by providing engineering and installation services to those projects.

 

Note 2. Basis of Presentation and Summary of Significant Accounting Policies

 

Basis of Presentation and Use of Estimates

 

The accompanying unaudited, condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“US GAAP”) and pursuant to the accounting and disclosure rules and regulations of the Securities and Exchange Commission (“SEC”) for interim reporting purposes. The results reported in these unaudited condensed consolidated financial statements are not necessarily indicative of results that may be expected for the entire year. These unaudited condensed consolidated financial statements should be read in conjunction with the information contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017. The year-end condensed balance sheet data was derived from audited financial statements, but does not include all disclosures required by US GAAP.

 

The preparation of these unaudited, condensed consolidated financial statements requires the Company to make estimates and judgments that affect the reported amounts of assets and liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities at the date of the Company’s financial statements. Actual results may differ from these estimates under different assumptions and conditions. Estimates inherent in the preparation of these condensed consolidated financial statements relate to the collectability of account receivables, the valuation of inventories, estimated earnings on uncompleted contracts, useful lives and potential impairment of long-lived assets. Changes in estimates are reflected in the periods during which they become known. Actual amounts may differ from these estimates and could differ materially These financial statements reflect all adjustments that in the opinion of management are necessary for a fair statement of the financial position, results of operations and cash flows for the period presented, and are of a normal, recurring nature.

 

The Company has one operating segment, Architectural Glass and Windows, which is also its reporting segment, comprising the design, manufacturing, distribution, marketing and installation of high-specification architectural glass and window product sold to the construction industry.

 

  7  

 

 

Principles of Consolidation

 

These unaudited condensed consolidated financial statements consolidate TGI, its subsidiaries TG, ES and ESW LLC, Tecno LLC, Tecno RE, GM&P and Componenti USA LLC (“Componenti”), which are entities in which we have a controlling financial interest because we hold a majority voting interest. To determine if we hold a controlling financial interest in an entity, we first evaluate if we are required to apply the variable interest entity (“VIE”) model to the entity, otherwise the entity is evaluated under the voting interest model. All significant intercompany accounts and transactions are eliminated in consolidation, including unrealized intercompany profits and losses.

 

Non-controlling interest

 

When the Company owns a majority (but less than 100%) of a subsidiary’s stock, the Company includes in its condensed consolidated Financial Statements the non-controlling interest in the subsidiary. The non-controlling interest in the Condensed Consolidated Statements of Operations and Other Comprehensive Income is equal to the non-controlling proportionate share of the subsidiary’s net income and, as included in Shareholders’ Equity on the Consolidated Balance Sheet, is equal to the non-controlling proportionate share of the subsidiary’s net assets.

 

Foreign Currency Translation

 

The condensed consolidated financial statements are presented in U.S. Dollars, the reporting currency. Some of our foreign subsidiaries’ local currency is the Colombian Peso, which is also their functional currency as determined by the analysis of markets, costs and expenses, assets, liabilities, financing and cash flow indicators. As such, our subsidiaries’ assets and liabilities are translated at the exchange rate in effect at the balance sheet date, with equity being translated at the historical rates. Revenues and expenses of our foreign subsidiaries are translated at the average exchange rates for the period. The resulting cumulative foreign currency translation adjustments from this process are included as a component of accumulated other comprehensive income (loss). Therefore, the U.S. Dollar value of these items in our financial statements fluctuates from period to period.

 

Also, exchange gains and losses arising from transactions denominated in a currency other than the functional currency are included in the condensed consolidated statement of operations as foreign exchange gains and losses.

 

Revenue Recognition

 

Our principal sources of revenue are derived from product sales of manufactured glass and aluminum products. Revenue is recognized when (i) persuasive evidence of an arrangement exists in the form of a signed purchase order or contract, (ii) delivery has occurred per contracted terms, (iii) fees and prices are fixed and determinable, and (iv) collectability of the sale is reasonably assured. All revenue is recognized net of discounts, returns and allowances. Delivery to the customer is deemed to have occurred when the title is passed to the customer. Generally, title passes to the customer upon shipment, but title transfer may occur when the customer receives the product based on the terms of the agreement with the customer.

 

Effective January 1, 2018, the Company adopted Accounting Standards Update (ASU) 2014-09, Revenue from Contracts with Customers, as amended (commonly referred to as ASC 606) using the modified retrospective transition method. The cumulative effect of applying the standard was a decrease of $187 to shareholders’ equity as of January 1, 2018. The Company’s statement of operations for the six-month period ended June 30, 2018 and the Company’s balance sheet as of June 30, 2018 are presented under ASC 606, while the Company’s statement of operations for the quarterly period ended June 30, 2017 and the Company’s balance sheet as of December 31, 2017 are presented under ASC 605, Revenue Recognition . See Note 3 for disclosure of the impact of the adoption of ASC 606 on the Company’s statement of operations and balance sheet for the quarterly period ended June 30, 2018, and the effect of changes made to the Company’s consolidated balance sheet as of January 1, 2018.

 

Approximately 45% of the Company’s consolidated net sales is generated from long-term contracts with customers that require to design, develop, test, manufacture, and install windows according to the customers’ specifications. These contracts are primarily multi-year contracts with real estate general contractors and are generally priced on a fixed-price basis and are invoiced based on contract progress.

 

  8  

 

 

To determine the proper revenue recognition method, the Company first evaluates each of its contractual arrangements to identify its performance obligations. A performance obligation is a promise in a contract to transfer a distinct good or service to the customer. All the Company’s contracts have a single performance obligation because the promise to transfer the individual good or service is not separately identifiable from other promises within the contract and is, therefore, not distinct. These contractual arrangements either require the use of a highly specialized manufacturing process to provide goods according to customer specifications or represent a bundle of contracted goods and services that are integrated and together represent a combined output, which may include the delivery of multiple units.

 

A substantial amount of the Company’s sales are from performance obligations satisfied over time and are primarily with general contractors to real estate developers. Sales are recognized over time when control is continuously transferred to the customer during the contract. The continuous transfer of control to the customer is supported by contract clauses that provide for progress or performance-based payments. Generally, if a customer unilaterally terminate a contract, the Company has the right to receive payment for costs incurred plus a reasonable profit for products and services that do not have alternative use to the Company.

 

Sales are recorded using the cost-to-cost method on fixed price contracts that include performance obligations satisfied over time are generally recorded at amounts equal to the ratio of actual cumulative costs incurred divided by total estimated costs at completion, multiplied by (i) the transaction price, less (ii) the cumulative sales recognized in prior periods.

 

Accounting for the sales and profits on performance obligations for which progress is measured using the cost-to-cost method involves the preparation of estimates of: (1) transaction price and (2) total costs at completion, which is equal to the sum of the actual incurred costs to date on the contract and the estimated costs to complete the contract’s statement of work. Incurred costs include labor, material, and overhead and represent work performed, which corresponds with and thereby represents the transfer of ownership to the customer. Performance obligations are satisfied over time when the risk of ownership has been passed to the customer and/or services are performed. The estimated profit or loss at completion on a contract is equal to the difference between the transaction price and the total estimated cost at completion.

 

Contract modifications routinely occur to account for changes in contract specifications or requirements. In most cases, contract modifications are for goods or services that are not distinct and, therefore, are accounted for as part of the existing contract. Transaction price estimates include additional consideration for submitted contract modifications or claims when the Company believes it has an enforceable right to the modification or claim, the amount can be reliably estimated and its realization is reasonably assured. Amounts representing modifications accounted for as part of the existing contract are included in the transaction price and recognized as an adjustment to sales on a cumulative catch-up basis.

 

The Company’s fixed-price type contracts allow for progress payments to bill the customer as contract costs are incurred and the customer often retains a small portion of the contract price until satisfactory completion of the contractual statement of work, which is a retainage of approximately 10%. The Company records an asset for unbilled receivables due to completing more work than the progress payment schedule allows to collect at a point in time. For certain fixed-price contracts, the Company receives advance payments. Advanced payments are not considered a significant financing component because they are a negotiated contract term to ensure the customer meets its financial obligation, particularly when there are significant upfront working capital requirements. The Company records a liability for advance payments received in excess of sales recognized, which is presented as a contract liability on the balance sheet.

 

Revisions or adjustments to estimates of the transaction price, estimated costs at completion and estimated profit or loss of a performance obligation are often required as work progresses under a contract, as experience is gained, as facts and circumstances change and as new information is obtained, even though the scope of work required under the contract may not change. Revisions or adjustments may also be required if contract modifications occur. The impact of revisions in profit or loss estimates are recognized on a cumulative catch-up basis in the period in which the revisions are made. The revisions in contract estimates, if significant, can materially affect the Company’s results of operations and cash flows, as well as reduce the valuations of contract assets and inventories, and in some cases result in liabilities to complete contracts in a loss position. The Company recognizes a liability for non-recurring obligations as situations considering that projects actual costs are usually adjusted to estimated costs. The Company did not recognize sales for performance obligations satisfied in prior periods during the three and six months ended June 30, 2018.

 

Remaining Performance Obligations

 

On June 30, 2018, the Company had $273 million of remaining performance obligations, which represents the transaction price of firm orders minus sales recognized from inception to date. Remaining performance obligations exclude unexercised contract options, verbal commitments and potential orders under basic ordering agreements. The Company expects to recognize 100% of sales relating to existing performance obligations within three years.

 

  9  

 

 

Income Taxes

 

The Company’s operations in Colombia are subject to the taxing jurisdiction of the Republic of Colombia. Tecnoglass LLC and Tecnoglass RE LLC are subject to the taxing jurisdiction of the United States. TGI and Tecnoglass Holding are subject to the taxing jurisdiction of the Cayman Islands. Annual tax periods prior to December 2015 are no longer subject to examination by taxing authorities in Colombia. GM&P, Componenti and ESW LLC are U.S. entities based in Florida subject to U.S. federal and state income taxes.

 

The Company accounts for income taxes using the asset and liability approach of accounting for income taxes (ASC 740 “Income Taxes”). Under this approach, deferred taxes represent the future tax consequences expected to occur when the reported amounts of assets and liabilities are recovered or paid. The provision for income taxes represents income taxes paid or payable for the current year plus the change in deferred taxes during the year. Deferred taxes result from differences between the financial and tax basis of the Company’s assets and liabilities and are adjusted for changes in tax rates and tax laws when changes are enacted. For each tax jurisdiction in which the Company operates, deferred tax assets and liabilities are offset against one another and are presented as a single noncurrent amount within the consolidated balance sheets.

 

The Company recognizes the financial statement effects of uncertain income tax positions when it is more likely than not, based on the technical merits, that the position will be sustained upon examination. Interest accrued related to unrecognized tax and income tax related penalties are included in the provision for income taxes. The uncertain income taxes positions are recorded in “Taxes payable” in the consolidated balance sheets.

 

Earnings per Share

 

Basic earnings per share is computed by dividing net income by the weighted-average number of ordinary shares outstanding during the period. Income per share assuming dilution (diluted earnings per share) would give effect to dilutive options and other potential ordinary shares outstanding during the period. Diluted loss per share is computed similar to basic loss per share except that the denominator is increased to include the number of additional common shares that would have been outstanding if the potential common shares had been issued and if the additional common shares were dilutive.

 

The following table sets forth the computation of the basic and diluted earnings per share for the three and six months ended June 30, 2018 and 2017:

 

    Three months ended June 30,     Six months ended June 30,  
    2018     2017     2018     2017  
Numerator for basic and diluted earnings per shares                                
Net (Loss) Income   $ (3,870 )   $ (3,500 )   $ 6,749     $ (2,469 )
                                 
Denominator                                
Denominator for basic earnings per ordinary share - weighted average shares outstanding     35,935,442       35,763,650       35,869,746       35,759,895  
Effect of dilutive securities and stock dividend     -       -       492,747       -  
Denominator for diluted earnings per ordinary share - weighted average shares outstanding     35,935,442       35,763,650       36,362,493       35,759,895  
                                 
Basic earnings per ordinary share   $ (0.11 )   $ (0.10 )   $ 0.19     $ (0.07 )
Diluted earnings per ordinary share   $ (0.11 )   $ (0.10 )   $ 0.19     $ (0.07 )

 

  10  

 

 

The effect of dilutive securities includes 492,747 as of June 30, 2018 for shares potentially issued in relation to the dividends declared. The denominator for basic and diluted earnings per ordinary share for the six months ended June 30, 2018 and the three and six months ended June 30, 2017, exclude 321,594 and 492,747 shares, respectively, issued in relation to the dividends declares due to the net loss for the period as their inclusion would be anti-dilutive.

 

Product Warranties

 

The Company offers product warranties in connection with the sale and installation of its products that are competitive in the markets in which the products are sold. Standard warranties depend upon the product and service, and are generally from five to ten years for architectural glass, curtain wall, laminated and tempered glass, window and door products. Warranties are not priced or sold separately and do not provide the customer with services or coverages in addition to the assurance that the product complies with original agreed-upon specifications. Claims are settled by replacement of the warrantied products.

 

The Company evaluated historical information regarding claims for replacements under warranties and concluded that the costs that the Company has incurred in relation to these warranties have not been material.

 

Non-Operating Income, net

 

The Company recognizes non-operating income from foreign currency transaction gains and losses, interest income on receivables, proceeds from sales of scrap materials and other activities not related to the Company’s operations. Foreign currency transaction gains and losses occur when monetary assets, liabilities, payments and receipts that are denominated in currencies other than the Company’s functional currency are recorded in the Colombian peso accounts of the Company in Colombia.

 

Shipping and Handling Costs

 

The Company classifies amounts billed to customers related to shipping and handling as product revenues. The Company records and presents shipping and handling costs in selling expenses. Shipping and handling costs for the three months ended June 30, 2018 and 2017 were $3,764 and $3,057, respectively. Shipping and handling costs for the six months ended June 30, 2018 and 2017 were $8,496 and $6,189, respectively.

 

Dividends Payable

 

The company accounts for its dividend declared as a liability under ASC 480 - Distinguishing Liabilities from Equity since the shareholder have the option to elect cash or stock and reclassifies from dividend payable to additional paid-in capital when shareholders elects a stock dividend instead of cash. The dividend payable is not subject to re-measurement at each balance sheet date since the dividend is a fixed monetary amount known at inception and thus no change in fair value adjustment is necessary.

 

  11  

 

 

Recently Issued Accounting Pronouncements

 

In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments (“ASU 2016-15”). ASU 2016-15 reduces diversity in practice by providing guidance on the classification of certain cash receipts and payments in the statement of cash flows. ASU 2016-15 clarifies that when cash receipts and cash payments have aspects of more than one class of cash flows and cannot be separated, classification will depend on the predominant source or use. ASU 2016-15 is effective on a retrospective basis for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2017, with early adoption permitted. Adoption of this ASU has no material impact on our consolidated financial statements.

 

In February 2016, the FASB issued ASU 2016-02 “Leases (Topic 842)” (“ASU 2016-02”). The FASB issued ASU 2016-02 to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. Under ASU 2016-02, a lessee will recognize in the statement of financial position a liability to make lease payments (the lease liability) and a right-to-use asset representing its right to use the underlying asset for the lease term. The recognition, measurement, and presentation of expenses and cash flows arising from a lease by a lessee have not significantly changed from current GAAP. ASU 2016-02 retains a distinction between finance leases (i.e. capital leases under current GAAP) and operating leases. The classification criteria for distinguishing between finance leases and operating leases will be substantially similar to the classification criteria for distinguishing between capital leases and operating leases under current GAAP. The amendments of this ASU are effective for reporting periods beginning after December 15, 2018, with early adoption permitted. An entity will be required to recognize and measure leases at the beginning of the earliest period presented using a modified retrospective approach. The Company is currently evaluating the potential effect of this ASU on its consolidated financial statements.

 

  12  

 

 

Note 3. New Accounting Standards Implemented

 

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers , as amended (commonly referred to as ASC 606), which replaces numerous requirements in U.S. GAAP, including industry-specific requirements, and provides companies with a single revenue recognition model for recognizing revenue from contracts with customers and significantly expanded the disclosure requirements for revenue arrangements. The new standard, as amended, was effective for the Company for interim and annual reporting periods beginning on January 1, 2018.

 

As discussed in Note 2, the Company adopted ASC 606 using the modified retrospective transition method. Results for reporting periods beginning after December 31, 2017 are presented under ASC 606, while prior period comparative information has not been restated and continues to be reported in accordance with ASC 605, Revenue Recognition, the accounting standard in effect for periods ending prior to January 1, 2018. With the adoption of ASC 606, the Company recognizes sales over time by using the percentage of completion method on all of its fixed-type contracts and measures the extent of progress toward completion using the cost-to-cost method after adjusting inventory for uninstalled materials and that the risk of ownership has not been passed to the customer. Previously, under ASC 605, the Company recognized sales over time by using the percentage of completion method on all of its fixed-type contracts and measured the extent of progress toward completion using the cost-to-cost method but adjusted inventory for uninstalled materials only for those projects were this method was not appropriately reflecting the progress on the contracts. Accordingly, the adoption of ASC 606 impacted all contracts that had uninstalled materials were the risk of ownership has not been passed to the customer regardless of the extent of progress toward completion.

 

Based on the analysis performed of the uninstalled materials at January 1, 2018, the Company recorded, upon adoption of ASC 606, a net decrease to retained earnings of $187, as shown on the table below. The adjustment to retained earnings primarily relates to contracts that had uninstalled material that were not previously included in inventory since the cost-to-cost method was appropriately reflecting the progress of these contracts.

 

The Company made certain presentation changes to its consolidated balance sheet on January 1, 2018 to comply with ASC 606. The components of contracts in process as reported under ASC 605, which included unbilled contract receivables and inventoried contract costs, have been reclassified as contract assets and inventories, respectively, after certain adjustments described below under ASC 606. The remainder of inventoried contract costs, primarily related to inventories not controlled by the Company’s customers, were reclassified to inventories. The Company expenses costs to obtain a contract and costs to fulfill a contract as incurred. Other revenues not related to fixed-type contracts did not result in any changes under ASC 606 and the revenues are still been recognized when the risk of ownership is transfered to the customer based on the sales terms.

 

  13  

 

 

The table below presents the cumulative effect of the changes made to the consolidated January 1, 2018 balance sheet due to the adoption of ASC 606.

 

   

December 31,

2017 As Reported

Under ASC 605

   

Adjustments Due

to ASC 606

   

January 1, 2018

As Adjusted

Under ASC 606

 
ASSETS                        
Trade accounts receivable, net   $ 110,464     $ (30,223 )   $ 80,241  
Inventories     71,656       1,975       73,631  
Unbilled receivables on uncompleted contracts     9,996       (9,996 )     -  
Contract assets     -       45,468       45,468  
Other Assets     275,884       -       275,884  
Total Assets   $ 468,000     $ 7,224     $ 475,224  
                         
LIABILITIES                        
Contract liabilities - current     -       18,945       18,945  
Current portion of customer advances on uncompleted contracts     11,429       (11,429 )     -  
Other current liabilities     13,626       (105 )     13,521  
Current portion of customer advances on uncompleted contracts     1,571       (1,571 )     -  
Contract liabilities - current     -       1,571       1,571  
Other Liabilities     319,709       -       319,709  
Total liabilities   $ 346,335     $ 7,411     $ 353,746  
                         
SHAREHOLDERS’ EQUITY                        
Retained earnings     22,212       (187 )     22,025  
Total shareholders’ equity   $ 121,665     $ (187 )   $ 121,478  

 

The adjustment of trade accounts receivable upon adoption of ASC 606 is related to the reclassification of retainage receivables to contract assets. See breakdown of contract assets further below.

 

The table below presents the impact of the adoption of ASC 606 on the Company’s statement of operations.

 

    Three months ended June 30, 2018  
   

Under ASC

605

   

Effect of ASC

606

    As Reported Under ASC 606  
Operating Revenues   $ 88,874     $ 95     $ 88,969  
Cost of Sales     64,243       84       64,327  
Gross Profit     24,631       11       24,642  
                         
Operating Expenses     (17,644 )     -       (17,644 )
Other Income and Expenses     (12,335 )     -       (12,335 )
                         
Income Before Tax     (5,348 )     11       (5,337 )
Income Tax Benefit (Provision)     1,469       (2 )     1,467  
Net Income     (3,870 )     -       (3,870 )
Net Income Attributable to Parent   $ (3,658 )   $ -     $ (3,658 )
                         
Basic earnings per share   $ (0.11 )   $ -     $ (0.11 )
Diluted earnings per share   $ (0.11 )   $ -     $ (0.11 )

 

    Six months ended June 30, 2018  
   

Under ASC

605

   

Effect of ASC

606

    As Reported Under ASC 606  
Operating Revenues   $ 177,960     $ (1,831 )   $ 176,129  
Cost of Sales     126,388       (1,649 )     124,739  
Gross Profit     51,572       (182 )     51,390  
                         
Operating Expenses     (34,402 )     -       (34,402 )
Other Income and Expenses     (6,313 )     -       (6,313 )
                         
Income Before Tax     10,857       (182 )     10,675  
Income Tax Provision     (3,973 )     47       (3,926 )
Net Income     6,893       (144 )     6,749  
Net Income Attributable to Parent   $ 7,177     $ (144 )   $ 7,033  
                         
Basic earnings per share   $ 0.19     $ -     $ 0.19  
Diluted earnings per share   $ 0.19     $ -     $ 0.19  

 

  14  

 

 

The table below presents the impact of the adoption of ASC 606 on the Company’s balance sheet.

 

    June 30, 2018  
   

Under ASC

605

   

Effect of ASC

606

    As Reported Under ASC 606  
ASSETS                        
Trade accounts receivable, net   $ 116,788     $ (29,356 )   $ 87,432  
Inventories     78,254       1,649       79,903  
Unbilled receivables on uncompleted contracts     14,312       (14,312 )     -  
Contract assets - current portion     -       46,677       46,677  
Other Assets     262,656       43       262,699  
Contract assets - Non-current     -       925       925  
Total Assets   $ 472,010     $ 5,626     $ 477,636  
                         
LIABILITIES                        
Contract liabilities - current     -       16,079       16,079  
Current portion of customer advances on uncompleted contracts     10,315       (10,315 )     -  
Other current liabilities     92,516       (2 )     92,514  
Customer advances on uncompleted contracts - non-current     1,586       (1,586 )     -  
Contract liabilities - non-current     -       1,586       1,586  
Other Liabilities     223,638       -       223,638  
Total liabilities   $ 328,055     $ 5,762     $ 333,817  
                         
SHAREHOLDERS’ EQUITY                        
Retained earnings     19,165       (136 )     19,029  
Total shareholders’ equity   $ 143,955     $ (136 )   $ 143,819  

 

Disaggregation of Total Net Sales

 

The Company disaggregates its sales with customers by revenue recognition method for its only segment, as the Company believes these factors affect the nature, amount, timing, and uncertainty of the Company’s revenue and cash flows.

 

    Three months ended June 30,     Six months ended June 30,  
    2018     2017     2018     2017  
Fixed price contracts   $ 37,814     $ 40,820     $ 80,030     $ 62,540  
Product sales     51,155       40,156       96,099       84,253  
Total Revenues   $ 88,969     $ 80,976     $ 176,129     $ 146,793  

 

The following table presents geographical information about revenues.

 

    Three months ended June 30,     Six months ended June 30,  
    2018     2017     2018     2017  
Colombia   $ 15,557     $ 15,525     $ 37,381     $ 31,953  
United States     69,852       60,342       132,845       106,650  
Panama     1,043       830       1,857       2,093  
Other     2,517       4,279       4,046       6,097  
Total Revenues   $ 88,969     $ 80,976     $ 176,129     $ 146,793  

 

  15  

 

 

Contract Assets and Contract Liabilities

 

Contract assets represent accumulated incurred costs and earned profits on contracts with customers that have been recorded as sales but have not been billed to customers and are classified as current. Contract liabilities consist of advance payments and billings in excess of costs incurred and deferred revenue, and represent amounts received in excess of sales recognized on contracts. The Company classifies advance payments and billings in excess of costs incurred as current, and deferred revenue as current or non-current based on the expected timing of sales recognition. Contract assets and contract liabilities are determined on a contract by contract basis at the end of each reporting period. The non-current portion of contract liabilities is included in other liabilities in the Company’s consolidated balance sheets.

 

The table below presents the components of net contract assets (liabilities).

 

    June 30, 2018     January 1 2018  
Contract assets — current   $ 46,677     $ 45,468  
Contract assets — non-current     925       -  
Contract liabilities — current     (16,079 )     (18,945 )
Contract liabilities — non-current     (1,586 )     (1,571 )
Net contract assets (liabilities)   $ 29,937     $ 24,952  

 

The components of contract assets are presented in the table below.

 

    June 30, 2018     January 1 2018  
Unbilled contract receivables, gross   $ 18,246     $ 15,245  
Retainage     29,356       30,223  
Total contract assets     47,602       45,468  
Less: current portion     46,677       45,468  
Contract Assets – non-current   $ 925     $ -  

 

The components of contract liabilities are presented in the table below.

 

    June 30, 2018     January 1 2018  
Billings in excess of costs   $ 5,571     $ 7,516  
Advances from customers on uncompleted contracts     12,094       13,000  
Total contract liabilties     17,665       20,516  
Less: current portion     16,079       18,945  
Contract liabilities – non-current   $ 1,586     $ 1,571  

 

For the six months ended June 30, 2018, the Company recognized $2,306 of sales related to its contract liabilities at January 1, 2018.

 

  16  

 

 

Note 4. GM&P Acquisition

 

On March 1, 2017, the Company entered into and consummated a purchase agreement, as amended, with Giovanni Monti, the owner of 100% of the outstanding shares of Giovanni Monti and Partners Consulting and Glazing Contractors (“GM&P”). GM&P is a consulting and glazing contracting company located in Miami, Florida with over 15 years of experience in the design and installation of various building enclosure systems such as curtain window walls and a long-standing commercial relationship with the Company, working alongside it in the past in different projects within the U.S, by providing engineering and installation services to those projects.

 

The Company acquired all of the shares of GM&P for a purchase price of $35 million, of which the Company paid $6 million of the purchase price in cash within 60 days following the closing date with the remaining $29 million of the purchase price to be paid by May 15, 2018. The Company paid an additional $6 million in cash on April 2018 and entered into a Debt Settlement Agreement to pay the remaining consideration price through a combination of stock, by issuing 1,238,095 ordinary shares valued at $10.50 per share and a $10 million Subordinated Seller´s Note. The Seller´s Note was subsequently reduced to $8.5 million to atone the Buyer for adjustments and process inefficiencies caused by changes in GM&P´s supply chain and other business optimization costs seen during the second quarter of 2018. Following our process optimization and changes in the supply chain process, we believe the associated cost impacts to be non-recurring.

 

Based on the implicit price at which the shares were issued, which at the time of the issuance in June 2018 was higher than the market price of those shares, the Company recorded a gain of $2,106. Additionally, including the reduction of the nominal amount of the Seller´s Note by $1,500, the Company recorded a gain on extinguishment of debt of $3,606. The gain on extinguishment of debt was recorded into Additional Paid-In Capital per guidance of ASC 470-50-40 because it is considered a related party transaction as the former owner of GM&P holds a management position within the Company.

 

With the acquisition of GM&P, the Company also acquired a 60% equity interest in Componenti, a subsidiary of GM&P that provides architectural specialties in the US, specializing in design-build systems for individual projects and with experience in value engineering to create products that comply with the architects’ original design intent, while maintaining focus on affordable construction methods and materials.

 

The following table summarizes the consideration transferred to acquire GM&P and the amounts of identified assets acquired and liabilities assumed at the acquisition date, as well as the fair value of the non-controlling interest in Componenti as of the acquisition date. Under ASC 805, a company can apply measurement period adjustments during the twelve-month period after the date of acquisition. During this period, the acquirer may adjust preliminary amounts recognized at the acquisition date to their subsequently determined final fair values. The allocation of the consideration transferred was based on management’s judgment after evaluation of several factors, including a preliminary valuation assessment. The analysis has been completed and results in measurement period adjustments are included in the final purchase price allocation as shown on the table below. The goodwill from the GM&P acquisition represents the expected synergies from combining operations with Tecnoglass Inc., and is not deductible for tax purposes

 

The following table summarizes the purchase price allocation of the total consideration transferred:

 

Consideration Transferred:      
Notes payable (Cash or Stock)   $ 35,000  
Fair value of the non-controlling interest in Componenti     1,141  

 

  17  

 

 

Recognized amounts of identifiable assets

acquired and liabilities assumed:

  Preliminary Purchase Price Allocation     Measurement Period Adjustments     Final Purchase Price Allocation  
Cash and equivalents   $ 509               509  
Accounts receivable     42,314               42,314  
Other current assets     5,287       242       5,529  
Property, plant, and equipment     684               684  
Other non-current tangible assets     59               59  
Trade name     980               980  
Non-compete agreement     165               165  
Contract backlog     3,090               3,090  
Customer relationships     4,140               4,140  
Accounts payable     (22,330 )     275       (22,055 )
Other current liabilities assumed     (13,967 )     (673 )     (14,640
Non-current liabilities assumed     (3,634 )     (3,231 )     (6,865 )
Total identifiable net assets     17,297       (3,387 )     13,910  
Goodwill (including Workforce)   $ 18,844       3,387     $ 22,231  

 

The adjustment made to the preliminary purchase price allocation to Non-current liabilities assumed is related to an adjustment in deferred tax liability and billings in excess of cost incurred. The excess of the consideration transferred over the estimated fair values of assets acquired and liabilities assumed was recorded as goodwill. The identifiable intangible asset subject to amortization was the tradename, customer relationships, non-compete agreement, and backlog, which have a remaining useful life of two to five years. See Note 6 – Goodwill and Intangible Assets for additional information.

 

The following unaudited pro forma financial information assumes the acquisition had occurred as of January 1, 2017 which does not include GM&P actual results for the entire period. Pro forma results have been prepared by adjusting our historical results to include the results of GM&P adjusted for the amortization expense related to the intangible assets arising from the acquisition. The unaudited pro forma results below do not necessarily reflect the results of operations that would have resulted had the acquisition been completed at the beginning of the earliest periods presented, nor does it indicate the results of operations in future periods. The unaudited pro forma results do not include the impact of synergies, nor any potential impacts on current or future market conditions which could alter the following unaudited pro forma results.

 

    Pro-Forma  
    Six Months  
    Ended  
(in thousands, except per share amounts)   June 30, 2017  
Pro Forma Results        
Net sales   $ 156,780  
         
Net (loss) income attributable to parent   $ (3,595 )
         
Net income per common share:        
Basic   $ (0.11 )
         
Diluted   $ (0.11 )

 

  18  

 

 

Non-controlling interest

 

The Company has 60% equity interest in Componenti. The 40% non-controlling interest in Componenti is included in the opening balance sheet as of the acquisition date and its fair value amounted to $1,141. When the company owns a majority (but less than 100%) of a subsidiary’s stock, the Company includes in its Consolidated Financial Statements the non-controlling interest in the subsidiary. The non-controlling interest in the Condensed Consolidated Statements of Operations and Other Comprehensive Income is equal to the non-controlling interests’ proportionate share of the subsidiary’s net income and, as included in Shareholders’ Equity on the Condensed Consolidated Balance Sheet, is equal to the non-controlling interests’ proportionate share of the subsidiary’s net assets. In determining the fair value we used the income approach and the market approach which was performed by third party valuation specialists under management.

 

Note 5. - Inventories, net

 

Inventories are comprised of the following:

 

    June 30, 2018     December 31, 2017  
Raw materials   $ 38,229     $ 40,509  
Work in process     20,995       11,468  
Finished goods     13,217       13,236  
Stores and spares     7,218       6,134  
Packing material     379       438  
      80,038       71,785  
Less: Inventory allowance     (135 )     (129 )
    $ 79,903     $ 71,656  

 

Note 6. Goodwill and Intangible Assets

 

Goodwill

 

The table below provides a reconciliation of the beginning and ending balances of the Goodwill recorded on the Company’s balance sheet:

 

Beginning balance - December 31, 2017   $ 23,130  
GM&P measurement period adjustment     431  
Ending balance – June 30, 2018   $ 23,561  

 

Intangible Assets, Net

 

Intangible assets include Miami-Dade County Notices of Acceptances (NOA’s), which are certificates in the required to market hurricane- resistant glass in Florida. Also, it includes the intangibles acquired from the acquisition of GM&P.

 

    June 30, 2018  
    Gross     Acc. Amort.     Net  
Trade Names   $ 980     $ (261 )   $ 719  
Notice of Acceptances (NOAs), product designs and other intellectual property     10,764       (5,008 )     5,756  
Non-compete Agreement     165       (44 )     121  
Contract Backlog     3,090       (2,060 )     1,030  
Customer Relationships     4,140       (1,183 )     2,957  
Total   $ 19,139     $ (8,556 )   $ 10,583  

 

  19  

 

 

    December 31, 2017  
    Gross     Acc. Amort.     Net  
Trade Names   $ 980     $ (163 )   $ 817  
Notice of Acceptances (NOAs), product designs and other intellectual property     10,826       (5,467 )     5,359  
Non-compete Agreement     165       (28 )     137  
Contract Backlog     3,090       (1,287 )     1,803  
Customer Relationships     4,140       (739 )     3,401  
Total   $ 19,201     $ (7,684 )   $ 11,517  

 

The weighted average amortization period is 4.9 years.

 

During the three months ended June 30, 2018 and 2017, the amortization expense amounted to $875 and $930, respectively, and was included within the general and administration expenses in our consolidated statement of operations. During the six months ended June 30, 2018 and 2017, amortization expense was $1,738 and $1,546, respectively.

 

The estimated aggregate amortization expense for each of the five succeeding years as of June 30, 2018 is as follows:

 

Year ending   (in thousands)  
2018   $ 1,889  
2019     2,507  
2020     2,127  
2021     2,097  
2022     1,211  
Thereafter     752  
    $ 10,583  

 

Note 7. Debt

 

The Company’s debt is comprised of the following:

 

    June 30, 2018     December 31, 2017  
Revolving lines of credit   $ 8,389     $ 638  
Capital lease     199       245  
Unsecured senior note     210,000       210,000  
Other loans     19,660       20,293  
Less: Deferred cost of financing     (6,358 )     (6,918 )
Total obligations under borrowing arrangements     231,890       224,258  
Less: Current portion of long-term debt and other current borrowings     11,498       3,260  
Long-term debt   $ 220,392     $ 220,998  

 

  20  

 

 

As of June 30, 2018, and December 31, 2017, the Company had $231,197 and $224,041 of debt denominated in US Dollars with the remaining amounts denominated in Colombian Pesos.

 

On January 23, 2017, the Company issued a U.S. dollar denominated, $210 million offering of 5-year senior unsecured notes at a coupon rate of 8.2% in the international debt capital markets under Rule 144A of the Securities Act to Qualified Institutional Buyers. The Company used approximately $179 million of the proceeds to repay outstanding indebtedness, including Capital leases, and as a result achieved a lower cost of funding and strengthened its capital structure given the non-amortizing structure of the bond. Of these repayments, $59,444 were used to refinance short term debt into long term debt. The senior note does not have negative covenants with an acceleration clause, however requires the Company to meet certain performance indicators in order to take on incremental debt.

 

The Company had $4,784 and $4,758 of property, plant and equipment pledged as collateral for various lines of credit as of June 30, 2018 and December 31, 2017, respectively.

 

As of June 30, 2018, the Company was obligated under various capital leases under which the aggregate present value of the minimum lease payments amounted to $199. Differences between capital lease obligations and the value of property, plant and equipment under capital lease arises from differences between the maturities of capital lease obligations and the useful lives of the underlying assets.

 

Maturities of long term debt and other current borrowings are as follows as of June 30, 2018:

 

2019   $ 11,498  
2020     2,410  
2021     2,361  
2022     212,359  
2023     2,360  
Thereafter     7,260  
Total   $ 238,248  

 

The Company’s loans have maturities ranging from a few weeks to 11 years. Our credit facilities bear interest at a weighted average of rate 7.7%.

 

Note 8. Income Taxes

 

The Company files income tax returns for TG and ES in the Republic of Colombia. On December 28, 2016, the Colombian congress enacted a structural tax reform that took effect on January 1, 2017 which reduces corporate income tax from 42% to 40% for fiscal year 2017, 37% in 2018 and 33% in 2019 and thereafter.

 

GM&P, Componenti and ESW LLC are U.S. entities based in Florida subject to U.S. federal and state income taxes. The estimated combined state and federal income tax rate is estimated at a rate of 25% based on the recently enacted U.S. Tax Reform. Tecnoglass Inc. as well as all the other subsidiaries in the Cayman Islands and Panama do not currently have any tax obligations.

 

The components of income tax expense (benefit) are as follows:

 

    Three months ended June 30,     Six months ended June 30,  
    2018     2017     2018     2017  
Current income tax                                
United States   $ 1,129     $ 1,759     $ 722     $ 2,211  
Colombia     (317 )     (630 )     (2,522 )     1,650  
      (812 )     1,129       (1,800 )     3,861  
Deferred income Tax                                
United States     (992 )     (377 )     (1,161 )     3  
Colombia     1,647       (4,804 )     (965 )     (6,874 )
      655       (5,181 )     (2,126 )     (6,871 )
Total income tax benefit (provision)   $ 1,467     $ 4,052     $ (3,926 )   $ 3,010  
                                 
Effective tax rate     27 %     54 %     37 %     55 %

 

  21  

 

 

The Company’s effective tax rate of 27% and 37% for the three and six months ended June 30, 2018 differ from the average statutory rate of 34% primarily because of non-deductible expenses and non-taxable income recorded in tax-exempt subsidiaries. The Company’s effective tax rate of 54% and 55% for the three and six-month period ended June 30, 2017, respectively, reflects the adoption of the Colombian tax reform described above, which became effective January 1, 2017.

 

As of June 30, 2018, the Company had settled an uncertain tax position concluding amounting to $2,073 related to $8,351 gross unrecognized tax benefit as of March 31, 2018 associated with a conversion of GM&P’s cash basis accounting for tax purposes to accrual basis for Fiscal years 2016 and 2015 after culminating an audit from the Internal Revenue Service. Before 2015, GM&P was using the cash method of accounting and due to IRS regulations, it needed to convert to accrual method and pay the IRS taxes over the gross unrecognized tax benefit associated with the conversion. The unrecognized tax benefits may increase or change during the next year for items that arise in the ordinary course of business and may be subject to inspection by the Colombian tax authorities for a period of up to two years until the statute of limitations period elapses and US tax authorities for a period of up to six years until the statute of limitations period elapses.

 

Note 9. Fair Value Measurements

 

The Company accounts for financial assets and liabilities in accordance with accounting standards that define fair value and establish a framework for measuring fair value. The hierarchy prioritizes the inputs into three broad levels. Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities. Level 2 inputs are quoted prices for similar assets and liabilities in active markets or inputs that are observable for the asset or liability, either directly or indirectly through market corroboration, for substantially the full term of the financial instrument. Level 3 inputs are unobservable inputs based on the Company’s assumptions used to measure assets and liabilities at fair value. A financial asset’s or liability’s classification within the hierarchy is determined based on the lowest level input that is significant to the fair value measurement.

 

The carrying amounts of the Company’s financial instruments, including cash and cash equivalents, accounts receivable, accounts payable and advances from customers approximate their fair value due to their relatively short-term maturities. The Company bases its fair value estimate for long term debt obligations on its internal valuation that all debt is floating rate debt based on current interest rates in Colombia.

 

As of December 31, 2017, financial instruments carried at amortized cost that do not approximate fair value consist of long-term debt. See Note 7 - Debt. The fair value of long term debt was calculated based on an analysis of future cash flows discounted with our average cost of debt which is based on market rates, which are level 2 inputs.

 

The following table summarizes the fair value and carrying amounts of our long-term debt:

 

    June 30, 2018     December 31, 2017  
Fair Value     236 ,952       240,057  
Carrying Value     220,392       220,998  

 

  22  

 

 

Note 10. Related Parties

 

The following is a summary of assets, liabilities, and income and expense transactions with all related parties, shareholders, directors and managers:

 

   

Three months ended June 30,

   

Six months ended June 30,

 
    2018     2017     2018     2017  
Sales to related parties   $ 1,184     $ 1,091     $ 2,137     $ 2,465  
                                 
Fees paid to directors and officers   $ 801     $ 662     $ 1,628     $ 1,372  
Payments to other related parties   $ 674     $ 1,066     $ 1,662     $ 1,872  

 

    June 30, 2018     December 31, 2017  
Current Assets:                
Due from VS   $ 5,261     $ 6,240  
Due from other related parties     2,167       2,260  
    $ 7,428     $ 8,500  
                 
Liabilities:                
Due to related parties   $ 1,002     $ 975  

 

Ventanas Solar S.A. (“VS”), a Panama sociedad anonima, is an importer and installer of the Company’s products in Panama. Family members of the Company’s CEO and COO and other related parties own 100% of the equity in VS. The Company’s sales to VS for the three months ended June 30, 2018 and 2017 were $588 and $739, respectively. The Company’s sales to VS for the six months ended June 30, 2018 and 2017 were $1,214 and $1,889, respectively.

 

Payments to other related parties during three and six months ended June 30, 2018 and 2017 include the following:

 

    Three months ended June 30,     Six months ended June 30,  
    2018     2017     2018     2017  
Charitable contributions   $ 296     $ 742