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, 20182019

 

[  ]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):

Securities registered pursuant to Section 12(b) of the Act:

Title of each classTrading Symbol(s)Name of each exchange on which registered
Ordinary Shares, par value $0.0001 per shareTGLSThe NASDAQ Stock Market LLC

 

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[  ]X]
(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: 37,041,66944,858,442 ordinary shares as of June 30, 2018.2019.

 

 

 

   
 

 

TECNOGLASS INC.

 

FORM 10-Q FOR THE PERIOD ENDED JUNE 30, 20182019

 

TABLE OF CONTENTS

 

  Page
Part I. Financial Information3
 Item 1. Financial Statements (Unaudited)3
 Condensed Consolidated Balance Sheets3
 Condensed Consolidated Statements of Operations and Comprehensive Income4
 Condensed Consolidated Statements of Cash Flows5
 Condensed Consolidated Statements of Shareholders’ Equity6
 Notes to Condensed Consolidated Financial Statements7
   
 Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations2518
   
 Item 3. Quantitative and Qualitative Disclosures About Market Risk3023
   
 Item 4. Controls and Procedures3023
   
Part II. Other Information24
 Item 1. Legal Proceedings3124
   
 Item 6. Exhibits3124
Signatures3225

 

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 

  June 30, 2019  December 31, 2018 
ASSETS      
Current assets:        
Cash and cash equivalents $47,638  $33,040 
Investments  2,336   1,163 
Trade accounts receivable, net  110,661   92,791 
Due from related parties  9,396   8,239 
Inventories  90,906   91,849 
Contract assets – current portion  50,580   46,018 
Other current assets  21,773   20,299 
Total current assets $333,290  $293,399 
         
Long term assets:        
Property, plant and equipment, net $155,900  $149,199 
Deferred income taxes  3,260   4,770 
Contract assets – non-current  8,601   6,986 
Intangible Assets  7,731   9,006 
Goodwill  23,561   23,561 
Long term investments  44,978   - 
Other long term assets  3,170   2,853 
Total long term assets  247,201   196,375 
Total assets $580,491  $489,774 
         
LIABILITIES AND SHAREHOLDERS’ EQUITY        
Current liabilities:        
Short-term debt and current portion of long-term debt $12,223  $21,606 
Trade accounts payable and accrued expenses  79,092   65,510 
Accrued interest expense  7,768   7,567 
Due to related parties  4,335   1,500 
Dividends payable  1,379   736 
Contract liability – current portion  14,013   16,789 
Due to equity partners  

10,900

   

-

 
Other current liabilities  8,579   8,887 
Total current liabilities $138,289  $122,595 
         
Long term liabilities:        
Deferred income taxes $689  $2,706 
Long Term Payable associated to GM&P acquisition  8,500   8,500 
Long term receivables from related parties  611   600 
Contract liability – non-current  564   1,436 
Long term debt  250,234   220,709 
Total Long Term Liabilities  260,598   233,951 
Total liabilities $398,887  $356,546 
COMMITMENTS AND CONTINGENCIES        
         
SHAREHOLDERS’ EQUITY        
Preferred shares, $0.0001 par value, 1,000,000 shares authorized, 0 shares issued and outstanding at June 30, 2019 and December 31, 2018 respectively $-  $- 
Ordinary shares, $0.0001 par value, 100,000,000 shares authorized, 44,858,442 and 38,092,996 shares issued and outstanding at June 30, 2019 and December 31, 2018, respectively  4   4 
Legal Reserves  1,367   1,367 
Additional paid-in capital  203,660   157,604 
Retained earnings  12,867   10,439 
Accumulated other comprehensive (loss)  (37,340)  (37,058)
Shareholders’ equity attributable to controlling interest  180,558   132,356 
Shareholders’ equity attributable to non-controlling interest  1,046   872 
Total shareholders’ equity  181,604   133,228 
Total liabilities and shareholders’ equity $580,491  $489,774 

 

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,

 
  2019  2018  2019  2018 
Operating revenues:                
External customers $112,259  $87,785  $217,067  $173,992 
Related parties  1,624   1,184   3,984   2,137 
Total operating revenues  113,883   88,969   221,051   176,129 
Cost of sales  75,046   64,327   150,322   124,739 
Gross Profit  38,837   24,642   70,729   51,390 
                 
Operating expenses:                
Selling expense  (11,219)  (8,567)  (20,781)  (17,704)
General and administrative expense  (9,354)  (8,453)  (17,448)  (16,074)
Total Operating Expenses  (20,573)  (17,020)  (38,229)  (33,778)
                 
Operating income  18,264   7,622   32,500   17,612 
                 
Non-operating income  353   709   628   1,808 
Equity method income (loss)  (22)  -   (22)  - 
Foreign currency transactions (losses) gains  (1,201)  (8,307)  2,085   1,666 
Interest expense and deferred cost of financing  (5,757)  (5,361)  (11,344)  (10,411)
                 
Income (loss) before taxes  11,637   (5,337)  23,847   10,675 
                 
Income tax (provision) benefit  (3,977)  1,467   (8,856)  (3,926)
                 
Net income (loss) $7,660  $(3,870) $14,991  $6,749 
                 
(Income) loss attributable to non-controlling interest  (181)  212   (174)  284 
                 
Income (loss) attributable to parent $7,479  $(3,658) $14,817  $7,033 
                 
Comprehensive income:                
Net income (loss) $7,660  $(3,870) $14,991  $6,749 
Foreign currency translation adjustments  (2,052)  (6,139)  (282)  2,562 
                 
Total comprehensive income (loss) $5,608  $(10,009) $14,709  $9,311 
Comprehensive (income) loss attributable to non-controlling interest  (181)  212   (174)  284 
              ��  
Total comprehensive income (loss) attributable to parent $5,427  $(9,797) $14,535  $9,595 
                 
Basic income (loss)per share $0.17  $(0.10) $0.35  $0.18 
                 
Diluted income (loss) per share $0.17  $(0.10) $0.35  $0.17 
                 
Basic weighted average common shares outstanding  44,840,263   38,200,792   42,254,672   38,135,096 
                 
Diluted weighted average common shares outstanding  45,603,939   38,200,792   43,018,348   38,898,772 

  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.

Tecnoglass Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows

(Amounts in thousands)

(Unaudited)

  Six months ended June 30, 
  2019  2018 
CASH FLOWS FROM OPERATING ACTIVITIES        
Net income $14,991  $6,749 
Adjustments to reconcile net income to net cash provided by (used in) operating activities:        
Provision for bad debts  524   (413)
Provision for obsolete inventory  -   27 
Depreciation and amortization  11,558   11,458 
Deferred income taxes  (317)  2,126 
Director stock compensation  -   142 
Equity method loss (income)  22   - 
Other non-cash adjustments  836   679 
Changes in operating assets and liabilities:        
Trade accounts receivables  (16,836)  (3,952)
Inventories  2,078   (7,329)
Prepaid expenses  (1,232)  (425)
Other assets  (1,279)  (91)
Trade accounts payable and accrued expenses  8,621   (2,274)
Accrued interest expense  194   41 
Taxes payable  (1,787)  (10,617)
Labor liabilities  (327)  (114)
Related parties  1,795   1,279 
Contract assets and liabilities  (9,793)  (3,735)
CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES $9,048  $(6,449)
         
CASH FLOWS FROM INVESTING ACTIVITIES        
Proceeds from sale of investments  638   367 
Acquisition of businesses  (34,100)  (6,000)
Purchase of investments  (676)  (662)
Acquisition of property and equipment  (13,778)  (4,889)
CASH USED IN INVESTING ACTIVITIES $(47,916) $(11,184)
         
CASH FLOWS FROM FINANCING ACTIVITIES        
Proceeds from debt  36,656   9,067 
Cash dividend  (2,170)  (1,359)
Proceeds from equity offering  36,478   - 
Repayments of debt  (17,661)  (1,934)
CASH PROVIDED BY FINANCING ACTIVITIES $53,303  $5,774 
         
Effect of exchange rate changes on cash and cash equivalents $163  $861 
         
NET INCREASE (DECREASE) IN CASH  14,598   (10,998)
CASH - Beginning of period  33,040   40,923 
CASH - End of period $47,638  $29,925 
         
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION        
Cash paid during the period for:        
Interest $9,529  $9,074 
Income Tax $8,369  $5,517 
         
NON-CASH INVESTING AND FINANCING ACTIVITES:        
Assets acquired under credit or debt $1,389  $703 
Gain in extinguishment of GM&P payment settlement $-  $3,606 

 

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

 

54
 

 

Tecnoglass Inc. and Subsidiaries

Condensed Consolidated Statements of Cash FlowsShareholders’ Equity

(Amounts in thousands)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, 2018  38,092,996   4   157,604   1,367   10,439   (37,058)  132,356   872   133,228 
                                     
Issuance of common stock  5,000,000   -   33,050   -   -   -   33,050   -   33,050 
                                     
Stock dividend  538,657   -   5,162   -   (6,109)  -   (947)  -   (947)
                                     
Foreign currency translation  -   -   -   -   -   1,770   1,770   -   1,770 
                                     
Net income  -   -   -   -   7,338   -   7,338   (7)  7,331 
                                     
Balance at March 31, 2019  43,631,653   4   195,816   1,367   11,668   (35,288)  173,567   865   174,432 
                                     
Issuance of common stock  551,423   -   3,428   -   -   -   3,428   -   3,428 
                                     
Stock dividend  675,366   -   4,416   -   (6,280)  -   (1,864)  -   (1,864)
                                     
Foreign currency translation  -   -   -   -   -   (2,052)  (2,052)  -   (2,052)
                                     
Net income  -   -   -   -   7,479   -   7,479   181   7,660 
                                     
Balance at June 30, 2019  44,858,442   4   203,660   1,367   12,867   (37,340)  180,558   1,046   181,604 

  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  $- 

  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  4,564   -   34   -   -   -   34   -   34 
                                     
Adoption ASC 606  -   -   -   -   (187)  -   (187)  -   (187)
                                     
Stock dividend  499,080   1   4,128   -   (4,947)  -   (818)  -   (818)
                                     
Foreign currency translation  -   -   -   -   -   8,701   8,701   -   8,701 
                                     
Net income  -   -   -   -   10,691   -   10,691   (72)  10,619 
                                     
Balance at March 31, 2018  35,340,219   4   129,479   1,367   27,769   (19,950)  138,669   1,345   140,014 
                                     
Issuance of common stock  1,238,095   -   14,500   -   -   -   14,500   -   14,500 
                                     
Adoption ASC 606  -   -   -   -   -   -   -   -   - 
                                     
Stock dividend  463,355   -   4,396   -   (5,082)  -   (686)  -   (686)
                                     
Foreign currency translation  -   -   -   -   -   (6,139)  (6,139)  -   (6,139)
                                     
Net income  -   -   -   -   (3,658)  -   (3,658)  (212)  (3,870)
                                     
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
 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 CompanyTecnoglass Inc., a Cayman Islands exempted company (the “Company”, “Tecnoglass,” “TGI,” “we, “ “us” or “our”) 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 sellsexports most of its production to foreign countries, selling to customers in North, Central and South America, and exports about half of its production to foreign countries.America.

 

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, 2017.2018. 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 unaudited 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 materiallymaterially. 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,Tecnoglass S.A.S (“TG”), C.I. Energía Solar S.A.S E.S. Windows (“ES”) and ES and Windows LLC (“ESW LLC”), Tecnoglass LLC (“Tecno LLC,LLC”), Tecno RE LLC (“Tecno RE”), GM&P Consulting and Glazing Contractors (“GM&P”), Componenti USA LLC (“Componenti”) and ES Metals SAS (“ES Metals”), 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. The equity method of accounting is used for investments in affiliates and other joint ventures over which the Company has significant influence but does not have effective control.

 

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 unaudited 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 statementCondensed Consolidated Statement of operationsOperations 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, 2019 and 2018 were $4,714 and 2017 were $3,764, and $3,057, respectively. Shipping and handling costs for the six months ended June 30, 2019 and 2018 were $9,024 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 shareholdershareholders have the option to elect cash or stock and reclassifies from dividend payable to additional paid-in capital when shareholders electselect 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 AugustJune 2016, the FASB issued Accounting Standards Update (ASU) 2016-13, Financial Instruments—Credit Losses (Topic 326). This 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 paymentsrepresents a significant change in the statementallowance for credit losses accounting model by requiring immediate recognition of cash flows.management’s estimates of current expected credit losses. Under the prior model, losses were recognized only as they were incurred, which FASB has noted delayed recognition of expected losses that might not yet have met the threshold of being probable. The new model is applicable to all financial instruments that are not accounted for at fair value through net income, thereby bringing consistency in accounting treatment across different types of financial instruments and requiring consideration of a broader range of variables when forming loss estimates. 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 2016-152016-13 is effective on a retrospective basis for fiscal years, and for interim periods within those fiscal years beginning after December 15, 2017,2019, (with early application permitted). During 2019, the FASB issued ASU 2019-04 and ASU 2019-05 with early adoption permitted. AdoptionCodification Improvements to Topic 326, Financial Instruments – Credit Losses. The Company is currently evaluating the potential effect of this ASU has no material impact on ourits consolidated financial statements.

New Accounting Standards Implemented

 

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 earlywhich for the Company is the fiscal year beginning January 1, 2019.

The Company did not adjust the comparative periods presented as the FASB provided entities the option to instead apply the provisions of the new leases guidance using the modified retrospective application approach.The new standard provided a number of optional practical expedients in transition. We elected the ‘package of practical expedients’, which allowed the company to not reassess our prior conclusions about lease identification, lease classification and direct costs.The new standard also provides practical expedients for an entity’s ongoing accounting. We elected the short-term lease recognition exemption for all leases that qualified, primarily for certain equipment leases that are month-to-month leases. This means, for those leases, we did not recognize right-of-use assets or lease liabilities. We also elected the practical expedient to not separate lease and non-lease components for all classes of underlying assets.

We have identified and analyzed our lease portfolio and evaluated the new reporting and disclosure requirements of the new guidance, and our lease-related processes and internal controls. The adoption permitted. An entity will be requiredof this standard had no material impact to the Company’s financial statements, as, under prior guidance, we had recognized capital leases which correspond to the right-of-use asset and lease liability described under the new guidance. This standard does not have a significant impact on our liquidity or on our debt covenant compliance under our current agreements.

As of January 1, 2019, the Company had $378 finance lease right-of-use assets related to computing equipment and a lease liability for $380 on its Condensed Consolidated Balance Sheet. As of June 30, 2019, the Company had $682 finance lease right-of-use assets related to computing equipment and a lease liability for $650 on its Condensed Consolidated Balance Sheet. The lease agreements include terms to extend the lease, however the Company does not intend to extend its current leases. The weighted average remaining lease term approximates 2.8 years. The right-of-use assets are depreciated and interest expense from the lease liability are recorded on our Condensed Consolidated Statement of Operations.

Additionally, as of June 30, 2019 the Company had a commitment for $102 under operating leases related to short term apartment leases, installation equipment and computing equipment which expire during the current year that have not been capitalized due to their short-term nature. Rental expense from these leases is recognized on our Condensed Consolidated Income Statement as incurred. Finance lease costs, including amortization of the right-of-use assets and interest expense, short term lease cost, and related cashflows have not been material as of June 30, 2019.

Leases Accounting Policy

We determine if an arrangement is a lease at inception. We include finance lease right-of-use assets as part of property and equipment and the lease liability as part of our current portion of long-term debt and long-term debt on our Condensed Consolidated Balance Sheet. Leases considered short-term are not capitalized, given our election not to recognize right-of-use assets and measurelease liabilities arising from short-term leases, atbut instead considered operating leases and the beginningresulting rental expense is recognized on our Condensed Consolidated Statement of Operations as incurred.

Finance lease right-of-use assets and lease liabilities are recognized based on the present value of the earliest period presented using a modified retrospective approach. The Companyfuture lease payments over the lease term at commencement date. As most of our leases do not provide an implicit rate, we use our incremental borrowing rate based on the information available at commencement date in determining the present value of future payments. Our lease terms may include options to extend or terminate the lease when it is currently evaluating the potential effect of this ASU on its consolidated financial statements.reasonably certain that we will exercise that option.

12

 

Note 3. New Accounting Standards Implemented– Long-term Investments

 

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.Saint-Gobain Joint Venture

 

As discussedOn January 11, 2019, we entered into a joint venture agreement with Saint-Gobain, a world leader in Note 2,the production of float glass, a key component of our manufacturing process, whereby we acquired a 25.8% minority ownership interest in Vidrio Andino Holdings S.A.S (“Vidrio Andino”), a Colombia-based subsidiary of Compagnie de Saint-Gobain S.A. (“Saint-Gobain”). The purchase price for our interest in this entity was $45 million, of which $34.1 was paid in cash, and $10.9 million is to be paid with a piece of land near our existing facility in Barranquilla. The land will be contributed on our behalf by our Chief Executive Officer and Chief Operating Officer, José M. Daes and Christian T. Daes in exchange for cash or shares of the Company adopted ASC 606and subject to an external valuation to support an arm´s length transaction. The land will serve the purpose of developing a second float glass plant nearby our existing manufacturing facilities which we expect to carry significant efficiencies for us once it becomes operative. Vidrio Andino’s float glass plant located in the outskirts of Bogota, Colombia, has been one of our main suppliers of raw glass. We believe this transaction will solidify our vertical integration strategy by acquiring an interest in the first stage of our production chain, while securing ample glass supply for our expected production needs.

On May 3, 2019, we consummated the joint venture agreement acquiring a 25.8% minority ownership interest in Vidrio Andino with a cash payment of $34.1 million, and the land still to be contributed by January 2020, as per the agreement. As of that date the Company recorded the investment within Long-term assets on the Company’s Condensed Consolidated Balance Sheet for $45.0 million and a liability for $10.9 million within current liabilities on the Company’s Condensed Consolidated Balance to be settled with the contribution of the aforementioned piece of land. Since the date of the acquisition, we have recognized the proportional share of Vidrio Andino’s net income 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 restatedequity method on the Condensed Consolidated Statement of Operations 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,Other Comprehensive Income as the Company recognizes sales over time by using the percentageis deemed to have significant influence, but does not have effective control of completion method on allVidrio Andino.

Establishment 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.a new subsidiary

 

BasedIn April 2019, ESMetals, a Colombian entity in which the Company has 70% equity interest began operations. ESMetals serves as a metalwork contractor to supply the Company with steel accessories used in the assembly of certain architectural systems as part of our vertical integration strategy. 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 analysis performedCondensed Consolidated Balance Sheet, is equal to the non-controlling interests’ proportionate share of the uninstalled materials at January 1, 2018,subsidiary’s net assets. In determining the Company recorded, upon adoption of ASC 606, a net decrease to retained earnings of $187, as shown onfair value we used the table below. The adjustment to retained earnings primarily relates to contracts that had uninstalled material that were not previously included in inventory sinceincome approach and the cost-to-cost methodmarket approach which was appropriately reflecting the progress of these contracts.performed by third party valuation specialists under management.

 

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.Note 4. - Inventories, net

 

13

  June 30, 2019  December 31, 2018 
Raw materials $52,019  $43,744 
Work in process  28,283   25,957 
Finished goods  2,023   14,251 
Stores and spares  7,669   7,437 
Packing material  999   540 
   90,993   91,929 
Less: Inventory allowance  (87)  (80)
  $90,906  $91,849 

 

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 

Note 5. – Revenues, Contract Assets and Contract Liabilities

 

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 

  Three months ended  Six months ended 
  June 30,  June 30, 
  2019  2018  2019  2018 
Fixed price contracts $46,721  $37,814  $88,897  $80,030 
Product sales  67,162   51,155   132,154   96,099 
Total Revenues $113,883  $88,969  $221,051  $176,129 

 

The following table presents geographical information about revenues.

 

 Three months ended  Six months ended 
 Three months ended June 30,  Six months ended June 30,  June 30,  June 30, 
 2018  2017  2018  2017  2019 2018 2019 2018 
Colombia $15,557  $15,525  $37,381  $31,953  $12,165  $15,557  $25,153  $37,381 
United States  69,852   60,342   132,845   106,650   99,326   69,852   191,360   132,845 
Panama  1,043   830   1,857   2,093   913   1,043   1,676   1,857 
Other  2,517   4,279   4,046   6,097   1,479   2,517   2,862   4,046 
Total Revenues $88,969  $80,976  $176,129  $146,793  $113,883  $88,969  $221,051  $176,129 

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.current and a portion of the amounts billed on certain fixed price contracts that are withheld by the customer as a retainage until a final good receipt of the complete project to the customers satisfaction. 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 

  June 30, 2019  December 31, 2018 
Contract assets — current $50,580  $46,018 
Contract assets — non-current  8,601   6,986 
Contract liabilities — current  (14,013)  (16,789)
Contract liabilities — non-current  (564)  (1,436)
Net contract assets $44,604  $34,779 

 

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

 

 June 30, 2018  January 1 2018  June 30, 2019  December 31, 2018 
Unbilled contract receivables, gross $18,246  $15,245  $27,644  $21,703 
Retainage  29,356   30,223   31,537   31,301 
Total contract assets  47,602   45,468   59,181   53,004 
Less: current portion  46,677   45,468   50,580   46,018 
Contract Assets – non-current $925  $-  $8,601  $6,986 

 

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

 

 June 30, 2018  January 1 2018  June 30, 2019  December 31, 2018 
Billings in excess of costs $5,571  $7,516  $3,101   4,393 
Advances from customers on uncompleted contracts  12,094   13,000   11,476   13,832 
Total contract liabilties  17,665   20,516   14,577   18,225 
Less: current portion  16,079   18,945   14,013   16,789 
Contract liabilities – non-current $1,586  $1,571  $564   1,436 

 

ForDuring the three months and six months ended June 30, 2019, the Company recognized $4,041 and $1,759 of sales related to its contract liabilities at January 1, 2019, respectively. During the three and six months ended June 30, 2018, the Company recognized $2,306 and $1,086 of sales related to its contract liabilities at January 1, 2018.2018, respectively.

 

11
 16

 

Note 4. GM&P AcquisitionRemaining Performance Obligations

 

On March 1, 2017,As of June 30, 2019, the Company entered intohad $285.9 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 consummated a purchase agreement, as amended, with Giovanni Monti, the owner ofpotential orders under basic ordering agreements. The Company expects to recognize 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 15sales relating to existing performance obligations within three 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 $35which $145.6 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 priceare expected 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 seenrecognized 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 adjustmentsyear ending December 31, 2019, $115.5 million 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 completedyear ending December 31, 2020 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$24.9 million thereafter.

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 theissued for approved products and required to market hurricane- resistant glass in Florida. Also, it includes the intangibles acquired from the acquisition of GM&P.

 

 June 30, 2018  June 30, 2019 
 Gross  Acc. Amort.  Net  Gross  Acc. Amort.  Net 
Trade Names $980  $(261) $719  $980  $(457) $523 
Notice of Acceptances (NOAs), product designs and other intellectual property  10,764   (5,008)  5,756   10,870   (5,822)  5,048 
Non-compete Agreement  165   (44)  121   165   (77)  88 
Contract Backlog  3,090   (2,060)  1,030 
Customer Relationships  4,140   (1,183)  2,957   4,140   (2,069)  2,071 
Total $19,139  $(8,556) $10,583  $16,155  $(8,425) $7,730 

 

19

 December 31, 2017  December 31, 2018 
 Gross  Acc. Amort.  Net  Gross  Acc. Amort.  Net 
Trade Names $980  $(163) $817  $980  $(359) $621 
Notice of Acceptances (NOAs), product designs and other intellectual property  10,826   (5,467)  5,359   10,881   (5,373)  5,508 
Non-compete Agreement  165   (28)  137   165   (60)  105 
Contract Backlog  3,090   (1,287)  1,803   3,090   (2,832)  258 
Customer Relationships  4,140   (739)  3,401   4,140   (1,626)  2,514 
Total $19,201  $(7,684) $11,517  $19,256  $(10,250) $9,006 

 

The weighted average amortization period is 4.95.4 years.

 

During the threesix months ended June 30, 20182019 and 2017,2018, the amortization expense amounted to $875$1,485 and $930,$1,776, respectively, and was included within the general and administration expenses in our consolidated statementCondensed Consolidated Statement of operations. DuringOperations. Similarly, amortization expense for the sixthree months ended June 30, 2019 and 2018 amounted to $609 and 2017, amortization expense was $1,738 and $1,546,$891, respectively.

 

The estimated aggregate amortization expense for each of the five succeeding years as of June 30, 20182019 is as follows:

 

Year ending (in thousands)   (in thousands) 
2018 $1,889 
2019  2,507   $1,154 
2020  2,127    2,180 
2021  2,097    2,150 
2022  1,211    1,270 
2023   789 
Thereafter  752    187 
 $10,583   $7,730 

 

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

  June 30, 2019  December 31, 2018 
Revolving lines of credit $9,788  $19,146 
Finance lease  650   380 
Unsecured senior note  210,000   210,000 
Other loans  16,641   17,804 
Syndicated loan  30,000   - 
Less: Deferred cost of financing  (4,622)  (5,015)
Total obligations under borrowing arrangements  262,457   242,315 
Less: Current portion of long-term debt and other current borrowings  12,223   21,606 
Long-term debt $250,234  $220,709 

 

As of June 30, 2018,2019, and December 31, 2017,2018, the Company had $231,197$261,730 and $224,041$242,106 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$5,070 and $4,758$5,037 of property, plant and equipment pledged as collateral for various lines of credit as of June 30, 20182019 and December 31, 2017,2018, respectively.

On May 2, 2019, the Company closed a $30 million five-year term debt facility with Banco de Crédito del Perú and Banco Sabadell which bears interest at Libor +2.95%. Proceeds from this long-term debt facility were used towards refinancing short-term debt and partially supporting expected capital expenditure needs for capacity expansion and the automatization of some of our processes. This facility also contains a covenant requiring that the company maintain certain leverage and fixed charge coverage ratios with which the Company is in compliance as of June 30, 2019.

 

As of June 30, 2018,2019, the Company was obligated under various capital leases under which the aggregate present value of the minimum lease payments amounted to $199.$650. 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 termlong-term debt and other current borrowings are as follows as of June 30, 2018:2019:

 

2019 $11,498 
2020  2,410   $12,411 
2021  2,361    5,508 
2022  212,359    219,988 
2023  2,360    11,400 
2024   12,868 
Thereafter  7,260    4,901 
Total $238,248   $267,077 

 

The Company’s loans have maturities ranging from a few weeks to 1110 years. Our credit facilities bear interest at a weighted average of rate 7.7%7.5%.

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 9.8. 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,June 30, 2019, 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 termlong-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   June 30, 2019  December 31, 2018 
Fair Value  236,952   240,057    266,223   234,163 
Carrying Value  220,392   220,998    250,234   220,709 

 

22

Note 9. Income Taxes

 

The Company files income tax returns for TG, ES and ES Metals in the Republic of Colombia. On December 28, 2018, a tax reform was implemented in Colombia which decreased the corporate income tax rate to 33% for fiscal year 2019, 32% for fiscal year 2020, 31% for fiscal year 2021 and 30% for fiscal year 2022, in comparison with a tax rate of 37% for 2018.

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 26.5% based on the recently enacted U.S. Tax Reform. Tecnoglass Inc. as well as all the other subsidiaries in the Cayman Islands do not currently have any tax obligations.

The components of income tax expense are as follows:

  Three months ended June 30,  Six months ended June 30, 
  2019  2018  2019  2018 
Current income tax                
United States $(903) $1,129  $(1,415) $722 
Colombia  (4,338)  (317)  (7,758)  (2,522)
   (5,241)  812   (9,173)  (1,800)
Deferred income Tax                
United States  957   (992)  1,126   (1,161)
Colombia  307   1,647   (809)  (965)
   1,264   655   317   (2,126)
Total income tax (provision) benefit $(3,977) $1,467  $(8,856) $(3,926)
                 
Effective tax rate  (34%)  27%  (37%)  37%

The Company’s weighted average statutory income tax rate is 33%.

 

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,

  Three months ended June 30,  Six months ended June 30, 
 2018  2017  2018  2017  2019  2018  2019  2018 
Sales to related parties $1,184  $1,091  $2,137  $2,465  $1,624  $1,184  $3,984  $2,137 
                                
Fees paid to directors and officers $801  $662  $1,628  $1,372  $1,013  $801  $1,822  $1,628 
Payments to other related parties $674  $1,066  $1,662  $1,872  $907  $674  $1,833  $1,662 

 

 June 30, 2018  December 31, 2017  June 30, 2019  December 31, 2018 
Current Assets:                
Due from VS $5,261  $6,240  $6,934  $6,229 
Due from other related parties  2,167   2,260   2,462   2,010 
 $7,428  $8,500  $9,396  $8,239 
                
Liabilities:                
Due to related parties $1,002  $975 
Due to related parties - current $4,335  $1,500 
Due to related parties - long term $611  $600 

The Company also has a note payable which matures in 2022 related to the acquisition GM&P for $8,500 due to the former owner who holds shares of the Company and a management position within the Company.

 

VentanasVentana Solar S.A. (“VS”), a Panama Ssociedad anonima,ociedad anónima,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, 2019 and 2018 were $855 and 2017 were $588, and $739, respectively. The Company’s sales to VS for the six months ended June 30, 2019 and 2018 were $1,525 and 2017 were $1,214, and $1,889, respectively.

 

Payments to other related parties during three and six months ended June 30, 20182019 and 20172018 include the following:

 

 Three months ended June 30,  Six months ended June 30,  Three months ended June 30,  Six months ended June 30, 
 2018  2017  2018  2017  2019  2018  2019  2018 
Charitable contributions $296  $742  $567  $1,158  $178  $296  $605  $567 
Sales commissions $336  $179  $677  $420  $286  $336  $762  $677 

 

Charitable contributions are donations made to the Company’s foundation, Fundación Tecnoglass-ESW.

 

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Note 11. Shareholders’ Equity

Dividends Payable

 

The Company originally authorized the payment of four regular quarterly dividends to holders of ordinary shares at a quarterly rate of $0.125 per share, or $0.50 per share on an annual basis, with the first quarterly dividend being paid on November 1, 2016. The dividends arewere payable in cash or ordinary shares, at the option of the holders of ordinary shares. On May 11, 2017, the Company announced that commencing with the declared quarterly dividend for the third quarter of 2017 through any future dividends to be declared and paid through the second quarter of 2018, a 12% increase to $0.14 per share, or $0.56 per share on an annual basis would apply. The Company has continued paying quarterly dividends at this rate through the second quarter of 2019.

 

As a result, the Company has declared dividends for $10,029$12,389 as of June 30, 20182019 and recorded a dividend payable amounting to $734$1,379 as of June 30, 2018.2019. The Company issued 956,1021,214,023 shares for the share dividends resulting in $8,524$9,578 being credited to Capital and paid $1,359$2,170 in cash during the six months ended June 30, 2018.

2019.

 

The Company analyzed the accounting guidance under ASC 505 and determined that this guidance is not applicable since the dividend are shares of the same class in which each shareholder is given an election to receive cash or shares. As such, the Company analyzed the dividend under ASC 480 — Distinguishing Liabilities from Equity and concluded that the dividend should be accounted for as a liability since the dividend is a fixed monetary amount known at inception. A reclassification from dividend payable to additional paid-in capital was done for the stocksstock dividend elections.

Energy Holding Corp., the majority shareholder of the Company, has irrevocably elected to receive any quarterly dividends declared through the second quarter of 2018 in ordinary shares, as opposed to cash.

 

Dividend declarations and the establishment of future record and payment dates are subject to the Board of Directors’ continuing determination that the dividend policy is in the best interests of the Company and its shareholders. The dividend policy may be changed or cancelled at the discretion of the Board of Directors at any time.

Follow-on Equity Offering

On March 25, 2019, the Company closed an underwritten follow-on public offering of 5,000,000 ordinary shares at a price to the public of $7.00 per share. As a result of this offering, the Company received a net amount of $33,050 after deducting underwriting and other related fees, which were credited to share capital and additional paid in capital.

Additionally, the Company granted the underwriters a 30-day option to purchase up to an additional 750,000 ordinary shares at the public offering price, less the underwriting discount, which option was exercised on April 3, 2019 with respect to 551,423 ordinary shares.

Proceeds from the offering were subsequently used to complete the joint venture transaction with Saint-Gobain discussed in Note 3. Vidrio Andino Acquisition.

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Earnings per Share

The following table sets forth the computation of the basic and diluted earnings per share for the six months ended June 30, 2019 and 2018:

  Three months ended June 30,  Six months ended June 30, 
  2019  2018  2019  2018 
Numerator for basic and diluted earnings per shares                
Net Income (loss) $7,660  $(3,870) $14,991  $6,749 
                 
Denominator                
Denominator for basic earnings per ordinary share - weighted average shares outstanding  44,840,263   38,200,792   42,254,672   38,135,096 
Effect of dilutive securities and stock dividend  763,676   -   763,676   763,676 
Denominator for diluted earnings per ordinary share - weighted average shares outstanding  45,603,939   38,200,792   43,018,348   38,898,772 
Basic earnings (loss) per ordinary share $0.17  $(0.10) $0.35  $0.18 
Diluted earnings (loss) per ordinary share $0.17  $(0.10) $0.35  $0.17 

The effect of dilutive securities includes 763,676 shares for shares potentially issued in relation to the dividends declared. For the quarter ended June 30, 2018, the effect of dilutive securities is excluded from the calculation of diluted earnings per share because including them would be anti-dilutive given the net loss during the period.

 

Note 12. Commitments and Contingencies

 

Commitments

 

As of June 30, 2018,2019, the Company hashad an outstanding obligation to purchase an aggregate of at least $39,140$25,141 of certain raw materials from a specific supplier before May 2026.

 

General Legal Matters

 

From time to time, the Company is involved in legal matters arising in the regular course of business. Some disputes are derived directly from our construction projects, related to supply and installation, and even though deemed ordinary, they may involve significant monetary damages. We are also subject to other type of litigations arising from employment practices, worker’s compensation, automobile claims and general liability. It is very difficult to predict precisely what the outcome of these litigations might be. However, with the information at outour disposition as this time, there are no indications that such claims will result in a material adverse effect on the business, financial condition or results of operations of the Company.

 

Note 13. Subsequent Events

 

Management concluded that no additional subsequent events required disclosure other than those disclosed in these financial statements.

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

 

Forward-Looking Statements

 

This Quarterly Report on Form 10-Q includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). We have based these forward-looking statements on our current expectations and projections about future events. These forward-looking statements are subject to known and unknown risks, uncertainties and assumptions about us that may cause our actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by such forward-looking statements. In some cases, you can identify forward-looking statements by terminology such as “may,” “should,” “could,” “would,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “continue,” or the negative of such terms or other similar expressions. Factors that might cause or contribute to such a discrepancy include, but are not limited to, those described in our other Securities and Exchange Commission (“SEC”) filings. References to “we”, “us” or “our” are to Tecnoglass Inc. (formerly Andina Acquisition Corporation), except where the context requires otherwise. The following discussion should be read in conjunction with our unaudited condensed consolidated financial statements and related notes thereto included elsewhere in this report.

 

Overview

 

The CompanyWe are a vertically-integrated manufacturer, supplier and installer of architectural glass, windows and associated aluminum products for the global commercial and residential construction markets. With a focus on innovation, combined with providing highly specified products with the highest quality standards at competitive prices, we have developed a leadership position in each of our core markets. In the United States, which is our largest market, we were ranked as the second largest glass and metal fabricator in 2018 by Glass Magazine. In addition, we believe we are the leading glass transformation company in Colombia. Based on our analysis of third-party industry sources we had an estimated market share of over 45% of the Colombian market in 2017. Our customers, which include developers, general contractors or installers for hotels, office buildings, shopping centers, airports, universities, hospitals and multi-family and residential buildings, look to us as a leading manufacturervalue-added partner based on our product development capabilities, our high-quality products and our unwavering commitment to exceptional service.

We have more than 30 years of hi-specexperience in architectural glass and aluminum profile structure assembly, we transform a variety of glass products, including tempered safety, double thermo-acoustic and laminated glass. Our finished glass products are installed in a wide variety of buildings across a number of different applications, including floating facades, curtain walls, windows, fordoors, handrails, interior and bathroom spatial dividers. We also produce aluminum products such as profiles, rods, bars, plates and other hardware used in the western hemisphere residential and commercial construction industries, operating through our direct and indirect subsidiaries. Headquarteredmanufacturing of windows.

Our products are manufactured in Barranquilla, Colombia, we operate out of a 2.7 million square foot, vertically-integrated, state-of-the-art manufacturing complex in Barranquilla, Colombia that provides easy access to the Americas,North, Central and South America, the Caribbean and the Pacific. Our products can be found on some of the most distinctive buildings in these regions including El Dorado Airport (Bogota), 50 United Nations Plaza (New York), Trump Plaza (Panama), Icon Bay (Miami), and Salesforce Tower (San Francisco). Our track record of successfully delivering high profile projects has earned us an increasing number of opportunities across the United States, evidenced by our expanding backlog and overall revenue growth.

 

The Company’ glassOur structural competitive advantage is underpinned by our low-cost manufacturing footprint, vertically integrated business model and geographic location. Our integrated facilities in Colombia and distribution and services operations in Florida provide us with a significant cost advantage in both manufacturing and distribution, and we continue to invest in these operations to expand our operational capabilities. Our lower cost manufacturing footprint allows us to offer competitive prices for our customers, while also providing innovative, high quality and high value-added products, include tempered glass, laminated glass, thermo-acoustic glass, curved glass, silk-screened glass,together with consistent and digital print glassreliable service. We have historically generated high margin organic growth based on our position as well as mill finished, anodized, painted aluminum profiles and produces rods, tubes, bars and plates. Window production lines are defined depending on the different types of windows: normal, impact resistant, hurricane-proof, safety, soundproof and thermal. The Company produces fixed body, sliding windows, projecting windows, guillotine windows, sliding doors and swinging doors, as well as facade products which include: floating facades, automatic doors, bathroom dividers and commercial display windows.a value-added solutions provider for our customers.

 

In recent years, weWe have expanded our US sales outside ofa strong presence in the Florida market, enteringwhich represents a substantial portion of our revenue stream and backlog. Our success in Florida has primarily been achieved through sustained organic growth, with further penetration now taking place into high-tech markets for curtain walls, obtaining a niche market access since this product is in high demand and marks a new trend in architecture. This product is a very sophisticated product and therefore garners high margins for us. These products involve high performance materials that are produced by Alutions and TG with stateother highly populated areas of the art technology.

The U.S. market represents approximately 75%United States. As part of our overall sales and is expectedstrategy to continue beingbecome a fully vertically integrated company, we have supplemented our most important market going forward. The U.S. construction market has been experiencing aorganic growth cycle as evidenced bywith some recent acquisitions that have allowed us added control over our supply chain. In March 2017, we completed the ABI (“Architectural Billing Index”) asacquisition of May 2018 and is indicating business conditions remain strong throughout the country, especially in the South region, where Tecnoglass mainly operates (Florida and Texas). Our strategy going forward will be to continue to focus on the U.S. as our main geographical target given its significant size and business activity. Within the U.S., Tecnoglass is seeking to continue diversifying its presence across a broader footprint in order to mitigate its concentration risk, while searching for new partnerships and commercial relationships in large metropolitan areas other than those in Florida (where it has historically had a strong market position). Our relationship with distributors, installers and general contractors continue to be key in our market penetration strategy and in our sales efficiency in order to target a broad variety of end clients. Construction activity in both the commercial and the residential markets within the U.S. has a direct impact in our ability to grow sales and profit margins. Although our efficient cost structure enables us to better withstand fluctuations and cycles in construction activity, our overall results could be significantly correlated with such cycles.

On March 1, 2017, the Company entered into and consummated a purchase agreement with Giovanni Monti, the owner of 100% of the outstanding shares of GM&P. GM&P, is a consulting and glazing contracting company locatedinstallation business that was previously our largest installation customer. In 2016, we completed the acquisition of ESW, which gave us control over the distribution of products into the United States from our manufacturing facilities in Miami, Florida with over 15 yearsColombia. These acquisitions allowed for further vertical integration of experienceour business and will act as a platform for our future expansion in the design and installationUnited States. Furthermore, on May 3, 2019, we consummated the joint venture agreement with Saint-Gobain, acquiring a 25.8% minority ownership interest in Vidrio Andino, a Colombia-based subsidiary of various building enclosure systems such as curtain window walls and a long-standing commercial relationship withSaint-Gobain, solidifying our vertical integration strategy by acquiring an interest in the Company, working alongside it in different projects within the U.S, by providing engineering and installation services to those projects.first stage of our production chain, while securing ample glass supply for our expected production needs.

 

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The continued diversification of the group’s presence and product portfolio is a core component of our strategy. In particular, we are actively seeking to expand our presence in United States outside of Florida. We also launched a residential windows offering which, we believe, will help us expand our presence in the United States and generate additional organic growth. We believe that the quality of our products, coupled with our ability to price competitively given our structural advantages on cost, will allow us to generate further growth in the future.

 

RESULTS OF OPERATIONS

 

  Three Months Ended June 30,  Six months ended June, 
  2018  2017  2018  2017 
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  (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)
Income tax benefit (provision)  1,467   4,052   (3,926)  3,010 
Net (loss) income  (3,870)  (3,500)  6,749   (2,469)
Income attributable to non-controlling interest  212   (60)  284   (72)
Net (loss) income attributable to parent $(3,658) $(3,560) $7,033  $(2,541)

  Three months ended June 30,  Six months ended June 30, 
  2019  2018  2019  2018 
Operating Revenues $113,883  $88,969  $221,051  $176,129 
Cost of sales  75,046   64,327   150,322   124,739 
Gross profit  38,837   24,642   70,729   51,390 
Operating expenses  (20,573)  (17,020)  (38,229)  (33,778)
Operating income  18,264   7,622   32,500   17,612 
Non-operating income  353   709   628   1,808 
Foreign currency transactions (losses) gains  (1,201)  (8,307)  2,085   1,666 
Equity method income (loss)  (22)  -   (22)  - 
Interest Expense and deferred cost of financing  (5,757)  (5,361)  (11,344)  (10,411)
Income tax provision  (3,977)  1,467   (8,856)  (3,926)
Net income  7,660   (3,870)  14,991   6,749 
(Income) loss attributable to non-controlling interest  (181)  212   (174)  284 
Income attributable to parent $7,479  $(3,658) $14,817  $7,033 

 

Comparison of quarterly periods ended June 30, 20182019 and March 31, 20172018

 

Revenues

 

The Company’s net operating revenues increased $8.0$24.9 million or 9.9%28.0% from $81.0$89.0 million to $89.0$113.9 million for the quarterly periodquarter ended June 30, 20182019 compared with the quarterly periodquarter ended June 30, 2017.2018.

 

SalesThe increase was driven by sales in the U.S. market formarkets, which increased $29.5 million or 42.2% in the second quarter of 2018 increased $9.5 million or 15.8%2019 compared to the same period of 2017. The2018. A portion of the Company’s sales growth in the American market continuehave been driven by our Elite and Prestige lines aimed towards residential markets, in which we did not actively participate prior to have a large component coming out of the South Florida market but constantly diversifying into other regions.2017. U.S. revenues contributed 79%87.2% and 75%78.5% of total sales during the second quarter of 2019 and 2018, and 2017, respectively, as the Company maintains its focus on expanding U.S. operationsrespectively. The increase in U.S revenues is aligned with our strategy to penetrate new regionsgeographical and new end markets.

 

SalesThis growth more than offset a slowdown of sales in the Colombian market, remained stable atwhich went from $15.6 million and $15.5to $12.2 million in the second quarter of 2018 and 2017,2019, respectively. The decrease in the Colombian market duringsales was mostly related to reduced activity in the second quarterconstruction industry, following a two-year period of 2018 was characterized by uncertainty generated by Colombian presidential electionseconomic slowdown, which were heldwe expect to undergo a slow recovery in June 2018, which caused delays in projects attaining financial closing.the near and mid-term future.

 

Gross profit

 

Gross profit increased 9.3%$14.2 million, or 57.6% to $24.6$38.8 million during the three months ended June 30, 2018,2019, compared with 2017.$24.6 million during the same period of 2018. Gross profit margins remained relatively stable at 27.7% and 27.8%improved to 34.1% during the second quarter of 20182019, from 27.7% during the second quarter of 2018. The margin enhancement is mainly related to economies of scale, enforcing tight cost control over fixed costs and 2017, respectively.higher sales, along with a mix of business with a smaller portion of revenues being derived from installation work, which carries a lower gross profit margin as a whole.

26

 

Expenses

 

Operating expenses remained stableincreased $3.6 million, or 20.9%, from $17.0 million to $17.1$20.6 million for the quarterly periodquarters ended June 30, 2018 and 2017,2019, respectively. This was primarily related to an increase$0.9 million higher shipping expense, which increased 25% from $3.8 million to $4.7 million as a result of $0.7higher sales. Additionally, provision of trade accounts receivable expense amounted to $0.4 million increase in shipping expenses dueduring the second quarter of 2019, compared with a net recovery of previously provisioned amounts for $0.5 million during 2018. Sales commissions increased $0.6 million related to a higher overall amount of sales during the quarter, and a larger amount of exports into the United States, $0.3million higher personnel expense, and U.S. aluminum and steel tariff implemented in 2018 resulted in an expense of $0.5 millionprimarily related to the importationsales of aluminum products manufactured in Colombia, which are being fully passed on to our clients through our sales prices. These increases were offset by a reduction of provisions for bad debt, which decreased from $1.6 in the second quarter of 2017 to a net recovery of previously provisioned amounts of $0.5 million in 2018.

Elite and Prestige product lines aimed towards residential U.S. markets.

Non-operating Income

 

During the three months ended June 30, 20182019 and 2017,2018, the Company recorded net non-operating gainincome of $0.7$0.4 million and $0.9$0.7 million, respectively. Non-operating income is comprised primarily of income from rental properties and gains on sale of scrap materials.

 

Foreign currency transaction gains and losses

 

During the quarter ended June 30, 2018,2019, the Company recorded a cashlessnon-cash loss of $1.2 million associated with foreign currency transactions. Most of this impact is associated with the remeasurement of a net liability position of $152.0 million U.S. dollar denominated monetary assets and liabilities held by the Company’s subsidiaries with the Colombian peso as their functional currency during a period in which the Colombian peso depreciated by 1%. Comparatively, the Company recorded a net loss of $8.3 million associated withduring the devaluation ofthree months ended June 30, 2018 while the Colombian peso ofdepreciated 5.4%. Similarly, the Company recorded a loss of $8.7 million associated with the devaluation of the Colombian Peso of 5.5% during the second quarter of 2017. While the exchange rates between the Colombian Peso and US dollar have devaluated by roughly similar rates during each of the quarters here reported, the exchange rates have remained relatively stable year over year devaluating approximately 3.5% between June 2017 and 2018. The foreign exchange gain and losses account for changes in USD denominated assets and liabilities against the company’s functional currency (the Colombian Peso).quarter.

 

Interest Expense

 

Interest expense was $5.4$5.8 million and $5.2$5.4 million during the quarters ended June 30, 20182019 and 2017,2018, respectively. The 4%7.4% increase in interest expense is related to ana proportional increase of 2%13% in the Company’s total debt at June 30, 20182019 compared with June 30, 2017, as well as an increase in floating interest rates affecting a portion of our debt indexed2018 to Libor.support its ongoing growth.

 

As a result of the foregoing, the Company recorded net lossincome for the three months ended June 30, 20182019 of $3.9$7.7 million compared to $3.5a net loss of $3.9 million in the three months ended June 30, 2017.2018.

20

 

Comparison of six-month periods ended June 30, 20182019 and June 30, 20172018

 

Revenues

 

The Company’s net operating revenues increased $29.3$44.9 million or 20%25.5% from $146.8$176.1 million to $176.1a record $221.1 million infor the six-month periodsix months ended June 30, 20182019 compared with the six-month periodsix months ended June 30, 2017.2018.

 

SalesThe increase was driven by sales in the U.S. market formarkets, which increased $58.5 million or 44.0% in the first half of 2018 increased $26.2 million or 24.6%2019 compared to the same period of 2017. The2018. A portion of the Company’s sales growth in the American market continuehave been driven by our Elite and Prestige lines aimed towards residential markets, in which we did not actively participate prior to have a large component out of the South Florida market but constantly diversifying into other regions. We are also expanding our business to dealers with our products aimed toward retail and residential markets. Our increase in sales in overall terms and into the U.S market were in part derived from the acquisition of GM&P which contributed its results from March 1, 2017, date of the acquisition versus a full six-month period in 2018. U.S. revenues contributed 75%86.6% and 73%75.4% of total sales during the first half of 2019 and 2018, and 2017, respectively, as the Company maintains its focus on expanding U.S. operationsrespectively. The increase in U.S revenues is aligned with our strategy to penetrate new regionsgeographical and new end markets.

 

SalesThis growth more than offset a slowdown of sales in the Colombian market, increased $5.4which went from $37.4 million or 17.0%,to $24.7 million in the first half of 2018 compared withand 2019, respectively. The decrease in the first halfColombian market sales was mostly related to reduced activity in the construction industry, following a two-year period of 2017. Colombian saleseconomic slowdown, which we expect to undergo a slow recovery in 2018 reflect a rebound in construction put in place during the first quarter after a general delay in construction during early 2017 while the country underwent a structural tax reform, which was preceded by a high inflationnear and high interest rate period, partially offset by a still second quarter characterized by uncertainty generated by Colombian presidential elections held in June 2018 which caused delays in projects attaining financial closing.mid-term future.

 

Gross profit

 

Gross profit increased 14.7%$19.3 million, or 37.6% to $51.4$70.7 million during the six months ended June 30, 2018,2019, compared with 2017.$51.4 million during the same period of 2018. Gross profit margins decreased from 30.5%improved to 32.0% during the first six monthshalf of 2017 to2019, from 29.2% during the first half of 20182018. The margin enhancement is mainly as a resultrelated to economies of incremental installationscale, enforcing tight cost control over fixed costs and other non-recurring costs on a handful of now completed projects.over higher sales.

27

 

Expenses

 

Operating expenses increased $1.3$4.5 million, or 3.9%13.2%, from $32.5$33.8 million to $33.7$38.2 million for the six-month periodsix months ended June 30, 2018 comparedand 2019, respectively. The increase was related, in part, to the six-month period ended June 30, 2017. As a percentage of total revenues, operating expenses were 19.2% compared to 22.2% in the prior year period. The nominal amount increase is mainly attributable to increases in shipping expense, from $6.2$1.0 million to $8.5 million duehigher sales commissions related to a higher overall amount of sales during the periodquarter, especially related to sales of our Elite and Prestige product lines aimed towards residential U.S. markets, a larger amount$0.9 million increase in provision of exports into the United States, offset by a reduction intrade accounts receivable provision,expense, which decreased from $2.6 inamounted to $0.5 million during the six months ended June 30, 2017, tofirst half of 2019, compared with a net recovery of previously provisioned amounts for $0.4 million induring 2018. Shipping expense increased $0.5 million, or 6.2%, despite higher sales growth, through our efforts for efficient logistics favoring maritime freights and minimizing costlier land transportation. Additionally, U.S. aluminumthe Company recorded $0.5 million incremental personnel expense, mostly to strengthen our sales force to support growth. The US Steel and steel tariff implemented inAluminum Tariff levied during the second quarter of 2018 resulted in an expenseincrease of $0.5 million related to$0.4 during the importation of aluminum products manufacturedsix-month period as the tariff was in Colombia, which are now being fully passed on to our clients through our sales prices.

Loss on extinguishment of debt

Uponeffect during the issuance of the 5-year senior unsecured note under Rule 144A mentioned belowfull term in the liquidity section, the Company determined that issuance was not considered a modification or exchangefirst half of the seven-year senior secured credit facility issued in January 2016; however, proceeds from the new issuance were used to repay the previous credit facility and the new issuance was accounted for as a liability equal to the proceeds received. As such, the payoff of the January 2016 credit facility was determined to be an extinguishment of the existing debt. As a result, we recorded a loss on the extinguishment of debt in the amount of $3.2 million during 2017 in the line item “Loss on Extinguishment of Debt” in our Condensed Consolidated Statements of Operations and Comprehensive Income. The loss represented the write off of deferred financing fees related to the extinguished debt facilities and penalties fees related to the early payoff of several loans and capital leases.2019.

 

Non-operating Income

 

During the six months ended June 30, 20182019 and 2017,2018, the Company reportedrecorded net non-operating gainincome of $0.6 million and $1.8 million, and $1.9 million, respectively. Other non-operatingNon-operating income is comprised primarily of income from rental properties and gains on sale of scrap materials.

 

Foreign currency transaction gains and losses

 

During the six-monthquarter ended June 30, 2019, the Company recorded a non-cash gain of $2.1 million associated to foreign currency transactions. Most of this impact is associated to the remeasurement of a net liability position of $152.0 million U.S. dollar denominated monetary assets and liabilities held by the Company’s subsidiaries with the Colombian peso as their functional currency during a period in which the Colombian peso appreciated 1%. Comparatively, the Company recorded a net gain of $1.7 million during the six months ended June 30, 2018 the Company recorded a cashless gain of $1.7 million associated with a 1.8% revaluation of the Colombian peso. Similarly, the Company recorded a loss of $6.3 million associated with the devaluation ofwhile the Colombian peso of 1.3% during the six-month period ended June 30, 2017, in part as the net position of the Company’s monetary assets and liabilities shifted during the period as a result of the refinance of Colombian peso denominated debt to US dollar denominated debt under the $210 million senior unsecured note.appreciated 2%.

 

Interest Expense

 

Interest expense remained stable at $10.4was $11.3 million and $10.3$10.4 million during the six-month periodssix months ended June 30, 2019 and 2018, and 2017, respectively, despiterespectively. The 9% increase in interest expense is related to a 2%proportional increase of 13% in the Company’s total debt at June 30, 20182019 compared with June 30, 2017, as well as an increase in floating interest rates affecting2018 to support its ongoing growth.

As a portionresult of our debt indexed to Libor. The moderate increase is also partially due to lower interest expense during the first quarterforegoing, the Company recorded net income for the six months ended June 30, 2019 of 2018,$15.0 million compared to 2017 during which we refinanced our debt and incurred in one month of double interest expense$6.7 million in the time between the issuance of the new senior note and repayment of the previous obligations.six months ended June 30, 2018.

 

LIQUIDITY AND CAPITAL RESOURCESLiquidity

 

As of June 30, 2018,2019, and December 31, 2017, the Company2018, we had cash and cash equivalents of approximately $29.9$47.7 million and $40.9$33.0 million, respectively. During the six months ended June 30, 2019, the main source of cash was derived from its operations, an underwritten follow-on public offering of 5,551,423 ordinary shares, including the underwriters’ over-allotment option, for net proceeds of $36.5 million, and proceeds from a $30 million long-term syndicate loan facility further described below under “Cash Flow from Operations, Investing and Financing Activities”. While operating cashflow supported strong growth during the period, proceeds from the equity issuance were used to finance our joint venture with Saint-Gobain. The primary difference between both periods is associatednew syndicate facility was mainly used to reprofile debt into a longer tenor and a lower interest rate.

As of June 30, 2019, the Company had $15.8 million of borrowings available under several facilities with relationship banks, as most of the outstanding balances under such lines were repaid with the uselong-term syndicate loan facility issued in April of this year.

Capital Resources

On January 11, 2019, we entered into a joint venture agreement with Saint-Gobain, a world leader in the production of float glass, a key component of our manufacturing process, whereby we acquired a 25.8% minority ownership interest in Vidrio Andino Holdings S.A.S, a Colombia-based subsidiary of Saint-Gobain. The purchase price for our interest in this entity was $45 million, $34.1 million were paid in cash, and a $10.9 million lot of land near our facility in Barranquilla, which will be contributed on our behalf by our Chief Executive Officer and Chief Operating Officer, José M. Daes and Christian T. Daes with a third-party valuation to be conducted. Vidrio Andino’s float glass plant located in the outskirts of Bogota, Colombia, had been one of our main suppliers of raw glass. We believe this transaction solidifies our vertical integration strategy by acquiring an interest in the first stage of our production chain, while securing ample glass supply for our expected production needs. The acquisition was consummated on May 3, 2019, and under the joint venture agreement, Saint Gobain will retain a majority ownership position and will have control over the operations of Vidrio Andino Holdings SAS and as such, the transaction is being accounted for under the equity method.

The joint venture agreement also includes plans to build a new plant in Galapa, Colombia that will be located approximately 20 miles from our main manufacturing facility, in which we will also have a 25.8% interest. The new plant will be funded with proceeds from the original cash contribution made by the Company, operating cashflows from the Bogota plant, debt incurred at the joint venture level that will not consolidate into the Company and an additional contribution by us of approximately $12.5 million to be paid between 2020 and 2021.

Additionally, the Company is carrying out enhancements at its glass and aluminum facilities to increase production capacity and automate operations. The Company anticipates that these high return investments will speed up production processes in response to strong customer demand, especially for aluminum products. The Company expects to improve efficiency in its glass production by automating certain processes to increase capacity on the transformed glass tempering lines by approximately 2.5 times, while reducing material waste and overall lead times. In its aluminum operations, the Company intends to benefit from a 25% increase in capacity and favorable operating leverage with the addition of an aluminum furnace and a new extrusion line, along with working capital requiredimprovements through the automation of warehousing systems. The Company completed this aluminum capacity expansion in the middle of July of 2019 and expects the full implementation of its automation initiatives by the end of 2019, with a total anticipated investment of approximately $20 million with this funding being executed since the end of 2018 and expected to support inventory purchases in anticipationbe completed by the first quarter of a higher amount of sales and2020 (as some payments are expected post completion based on certain performance conditions). The Company expects to continue funding these capital investments mainly with the interest payment of our Senior notes during the quarter. The Company’s primary sources of liquidity to support its working capital needs and short-term capital expenditures will be its readily available cash balance, cash generated from financing activities and moderating cash flow used in operating activities.on hand.

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Cash Flow from Operations, Investing and Financing Activities

 

 Six months ended June,  Six months ended June 30, 
 2018 2017  2019  2018 

Cash Flow (used in) provided by Operating Activities

 $(6,449) $12,194 
Cash Flow provided by (used in) Operating Activities $9,048  $(6,449)
Cash Flow used in Investing Activities  (11,184)  (12,537)  (47,916)  (11,184)
Cash Flow from Financing Activities  5,774   17,658   53,303   5,774 
Effect of exchange rates on cash and cash equivalents  861   (551)  163   861 
Cash Balance - Beginning of Period  40,923   26,918   33,040   40,923 
Cash Balance - End of Period $29,925  $43,682  $47,638  $29,925 

 

During the six months ended June 30, 2018 and 2017, $6.4 million and $12.2 million were used in and provided by2019 operating activities respectively.generated $9.0 million, in contrast to a use of $6.5 million during the six months ended June 30, 2018.

While growing sales 25.5% year-over-year during the first half of 2019, the Company was able to generate cashflow from operating activities through careful management of inventories, receivables and better supplier terms. The main source of operating cashflow during the first half of 2019 was trade accounts payable, generating $8.6 million, in contrast with a use of $2.3 million in 2018, mostly related to more purchases of raw materials to supply our growing operation. Despite this, inventory levels have remained relatively stable and even generated moderate $2.1 million as a result of our efforts to streamline our vertically integrated operation and speed up inventory turnover.

Main use of cash inwithin operating activities in the six-month period ended June 30, 2018 provides for the working capital required during the period in order to support incremental inventory purchasing and a higher amount of receivables associated with the Company´s ongoing revenue growth.

Tradewas trade accounts receivable, which used $4.0$16.8 million during the six-month period ended June 30, 2018, which in large part is related to the revenue growth experienced between the last twelve-month comparable period. Whereas2019. Despite the nominal amountbalance of receivables (including the nettingincreasing as of Contract Assets and LiabilitiesJune 30, 2019 relative to make a “like for like” comparison that adjusts for the inception of ASC 606) has increased during thefiscal year theend, Days Sales Outstanding ratio has presented a slight improvement givenremained flat, at 90 days as of June 30, 2019 and December 31, 2018. Comparably, trade accounts receivable used $4.0 million during the reductionfirst half of receivables associated to retainage which inherently carry a longer collection period. As2018. Contract assets and liabilities used $9.8 million, as per industry common practice, retainage receivables are associated with installation work, are built up throughout the life of a project and released upon completion. Despite the apparent decrease of trade account receivables on the Consolidated Balance sheet relative to fiscal year end at December 31, 2017, trade accounts receivableComparably, contract assets and liabilities used cash because of the effect of adopting the new ASC 606 revenue recognition accounting standard for fiscal year end. Under this new standard, retainage receivables are now presented within “Contract Assets and Liabilities”, which also contains unbilled receivables and advances from customers. Comparably, trade accounts receivable (including retainage receivables) generated $5.8 million during the first six months of 2017 which was a period of much more tempered growth.

Inventory purchases used $7.3 million as the Company’s inventories grew in relation to the short term expected growth; nevertheless improving inventory turnover by 5 days at quarter end relative to fiscal year end. While it is expected that the Company will have working capital needs as it undergoes continued growth, management continues to seek ways of optimizing the collection of its receivables and its inventory procurement.

Taxes payable are main use of operating cash flow during both periods ended June 30, 2018 and 2017 as the Company’s operating subsidiaries have filed and paid their tax obligations for the preceding fiscal year, using $10.6 million and $15.1 million during the six months periods ended June 30, 2018 and 2017 respectively.

During the six months ended June 30, 2018, cash used in investing activities decreased to $11.2 million compared with $12.5 million during the same period of 2017. Capital expenditures remain moderate at $4.9 million and $4.3$3.8 million during the six months ended June 30, 2018 and 2017, respectively, as we expect that current installed capacity will be enough to service our backlog and expected sales through the year 2018. During both periods, the Company paid $6.0 million and $7.9 million, respectively, for the acquisition of businesses, primarily GM&P, of which $6.0 million where paid in cash during each of the two periods and the remainder of the purchase price settled with the issuance of shares and a note payable.

 

Cash provided by financing activities, decreased from $17.7 millionThe main source of cash during the six months of 2017 to $5.8 million during the six months of 2018. During the six months ended June 2018,30, 2019 was from Financing Activities, which generated $53.3 million. In March, 2019, the Company closed an underwritten follow-on public offering of 5,551,423 ordinary shares, including the underwriters’ over-allotment option, for net proceeds of $36.5 million. Additionally, the Company generated proceeds of debt generated $9.1for $36.7 million, through shortmostly related to a $30 million five year term facility, proceeds which were mostly used to repay then existing short-term debt the Company had accumulated to financefund working capital required during a periodto support nine quarters with consecutive quarter-over-quarter sales growth. Net of growing sales. In 2017,repayments, we generated $19.0 million from debt while continuing the significant sourcedecrease of cash was associated to a U.S. dollar denominated, $210 million offering of a 5-year senior unsecured note at a coupon rate of 8.2% inits leverage metrics given the international debt capital markets under Rule 144A of the Securities Act to Qualified Institutional Buyers issued by the Company in January 23, 2017. Company´s continued growth and income from operations.

The Company used approximately $182.2$47.9 million and $11.2 million in investing activities during the six months ended June 30, 2019 and 2018. Main use of cash in investing activities was a payment for the proceedsacquisition of 25.8% equity interest in Vidrio Andino Holding, a joint-venture with Saint-Gobain described above under Capital Resources. Additionally, during the first half of 2019, the company paid $13.8 million to repay outstanding indebtednessacquire property plant and equipment, which in combination with $1.4 million acquired under credit, amount to total Capital Expenditures of $15.2 million as a result achieved a lower costpart of debt and strengthened its capital structure givenour high return investment plan further described above in the non-amortizing structure of the new facility. Cash proceeds in excess of the amount used to pay down outstanding debt have been used to support ongoing growth and general corporate purposes.Capital Resources section.

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Off-Balance Sheet Arrangements

 

None

 

Item 3. Quantitative and Qualitative Disclosures about Market Risk

 

We are exposed to ongoing market risk related to changes in interest rates and foreign currency exchange rates.None

A rise in interest rates could negatively affect the cost of financing for a portion of our debt with variable interest rates. If interest rates were to increase by 200 basis points, net earnings would decrease by approximately $0.5 million over a six-month period. Conversely, if interest rates were to decrease by 200 basis points, net earnings would increase by approximately $0.5 million over a six-month period. We currently do not use derivative financial instruments to manage interest rate risk.

We are also subject to market risk due to changes in the value of foreign currencies in relation to our reporting currency, the U.S. dollar. Two of our subsidiaries with significant operations are based in Colombia, and primarily transact business in local currency. A significant portion of the revenues and costs of these subsidiaries are generally denominated in Colombian pesos, thereby mitigating some of the risk associated with changes in foreign exchange rates. As of the six months ended June 30, 2018, a 1% devaluation of the Colombian Peso would result in our revenues decreasing by $0.4 million and our expenses decreasing by approximately $0.6 million, resulting in a $0.2 million increase to net earnings during the six-month period. A strengthening of the Colombian Peso by 1% would increase our revenues by $0.4 million and expenses by $0.6 million resulting in $0.2 lower earnings during the six-month period.

Similarly, a significant portion of the monetary assets and liabilities of these subsidiaries are generally denominated in US Dollars, while their functional currency is the Colombian peso, thereby resulting in gains or losses from remeasurement of assets and liabilities using end of period spot exchange rate. These subsidiaries have both monetary assets and monetary liabilities denominated in US Dollars, thereby mitigating some of the risk associated with changes in foreign exchange rate. However, the Colombian subsidiaries’ US Dollar denominated monetary liabilities exceed their monetary assets by $152.4 million, such that a 1% devaluation of the Colombian peso will result in a loss of $1.5 million recorded in the Company’s Consolidated Statement of Operations. Conversely, an appreciation of the peso would result in a gain to be recorded as a Foreign exchange gain within the consolidated statement of operations (based on the same relation of monetary assets and liabilities).

Additionally, the results of the foreign subsidiaries have to be translated into US Dollar, our reporting currency, in the Company’s consolidated financial statements. The currency translation of the financial statements using different exchange rates, as appropriate, for different parts of the financial statements generates a translation adjustment which is recorded within other comprehensive income on the Company’s Consolidated Statement of Comprehensive Income and Consolidated Balance Sheet.

 

Item 4. Controls and Procedures

 

Evaluation of Disclosure Controls and Procedures

 

We performed an evaluation required by Rules 13a-15 and 15d-15 of the Securities Exchange Act of 1934, as amended, under the supervision and with the participation of our management, including our Principal Executive Officerprincipal executive officer and Principal Financial Officer,principal financial officer, of Tecnoglass, Inc.’s´s design and operating effectiveness of the internal controls over financial reporting as of the end of the period covered by this Quarterly Report. Based on this evaluation, our Principal Executive Officerprincipal executive officer and Principal Financial Officer haveprincipal financial officer concluded that, becausedue to the material weakness described on our Annual Report on form 10-K for the year ended December 31, 2018, our internal controls over financial reporting were not effective as of June 30, 2019. Notwithstanding the material weakness in our internal control over financial reporting described below, our disclosure controls and procedures were not effective as of June 30, 2018. Notwithstanding the material weakness,referenced above, we believe the condensed consolidated financial statements are fairly stated in all material respects in accordance with generally accepted accounting principles in the United States of America for each of the periods presented herein.

 

As of June 30, we haveWe identified a deficiency in our internal control over financial reporting related the Company’s valuation, accuracy and presentation of deferred income tax balances that would have resulted in understating net income by $1.2 million for the three and six-month period ended June 30, 2018. Specifically, the Company’s monitoring and control activities on the valuation and presentation of our interim deferred income tax due to unrealized foreign exchange and on the accuracy of the effective tax rate were ineffective. This deficiency in internal control over financial reporting, could result indisclosed a material misstatementweakness in the accounting for income taxes as of the Company’s annual or interim financial statements that would not be prevented or detected on a timely basis. Accordingly,December 31, 2018, and have started to design and implement certain remediating controls gradually. We intend to continue our management has determined that this control deficiency constitutes aremediation plan to address the material weakness.

 

The Company intends to strengthen the existing internal controls related to estimatingWe currently have most of our enhanced review procedures and accounting for deferred income taxesdocumentation standards in place and determining the effective tax rate so that this deficiencyoperating. Our main objective is remediated. We expect to remediate this prior tomaterial weakness by the end of fiscal year 2018.2019, in order to have enough opportunities to conclude, through our testing, that the enhanced monitoring and control activities are operating effectively as of year-end.

 

Changes in Internal Control over Financial Reporting

 

As discussed inFor the section above,quarter ended June 30, 2019, there werehave been no changes in our internal control over financial reporting during the quarter ended June 30, 2018.that have materially affected, or are reasonably likely to materially affect our internal control over financial reporting.

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PART II. OTHER INFORMATION

 

Item 1. Legal Proceedings

 

General Legal Matters

 

From time to time, the Company is involved in legal matters arising in the ordinary course of business. While management believes that such matters are currently not material, there can be no assurance that matters arising in the ordinary course of business for which the Company is, or could be, involved in litigation, will not have a material adverse effect on its business, financial condition or results of operations.

 

Item 6. Exhibits

 

Exhibit No. Description
   
31.1 Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
   
31.2 Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
   
32 Certification of Chief Executive Officers pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
   
101 Financial statements from the Quarterly Report on Form 10-Q of Tecnoglass Inc. for the quarter ended March 31, 2018,June 30, 2019, formatted in XBRL: (i) Condensed Consolidated Balance Sheets, (ii) Condensed Consolidated Statements of Operations, (iii) Condensed Consolidated Statement of Changes in Stockholders’ Equity, (iv) Condensed Consolidated Statement of Cash Flows and (v) Notes to Unaudited Condensed Consolidated Financial Statements, as blocks of text and in detail.
   
101.INS 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

 

2431
 

 

SIGNATURES

 

In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

 TECNOGLASS INC.
   
 By:/s/ Jose M. Daes
  Jose M. Daes
  Chief Executive Officer
  (Principal executive officer)
   
 By:/s/ Santiago Giraldo
  Santiago Giraldo
  Chief Financial Officer
  (Principal financial and accounting officer)
   
Date: August 10, 20189, 2019  

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