10-Q

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended September 30, 2014

OR

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

Commission File Number 1-10367

Advanced Environmental Recycling Technologies, Inc.

(Exact name of registrant as specified in its charter)

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

914 N. Jefferson Street   Springdale, Arkansas  (Address of principal executive offices) 72764  (Zip Code)

(479) 756-7400

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  YES: þ NO: o

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: þ NO: o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer   o                                                           Accelerated filer  o

Non-accelerated filer  o                                                              Smaller reporting company  þ

(Do not check if a smaller reporting company)

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date. As of September 30, 2014, the number of shares outstanding of the Registrant’s Class A common stock, which is the class registered under the Securities Exchange Act of 1934, was 89,541,289.  As of September 30, 2014 there were 89,873 outstanding shares of the Registrant’s Class B Common Stock.

ADVANCED ENVIRONMENTAL RECYCLING TECHNOLOGIES, INC.

FORM 10-Q

TABLE OF CONTENTS

PART I – FINANCIAL INFORMATION	2
Item 1. Financial Statements	2
BALANCE SHEETS	2
BALANCE SHEETS (continued)	3
STATEMENTS OF OPERATIONS	4
STATEMENTS OF CASH FLOWS	5
NOTES TO FINANCIAL STATEMENTS	6
Note 1: Unaudited Information	6
Note 2: Description of the Company	6
Note 3: Statements of Cash Flows	7
Note 4: Significant Accounting Policies	7
Note 5: Income Taxes	9
Note 6: Earnings Per Share	10
Note 7: Line of Credit	11
Note 8:  Related Party Transactions	12
Note 9: Commitments and Contingencies	12
Note 10:  New Accounting Pronouncements	12
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.	13
Item 4. Controls and Procedures.	19
PART II – OTHER INFORMATION	20
Item 1. Legal Proceedings	20
Item 6. Exhibits.	20
SIGNATURES	21
INDEX TO EXHIBITS	22

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

ADVANCED ENVIRONMENTAL RECYCLING TECHNOLOGIES, INC.

BALANCE SHEETS

(Unaudited)

(in thousands)

	September 30, 2014		December 31, 2013
Assets
Current assets:
Cash	$	577	$	124
Trade accounts receivable, net of allowance of $46 and $44 at September 30, 2014 and December 31, 2013, respectively		3,555		3,095
Accounts receivable - related party		30		55
Inventories		11,654		13,150
Prepaid expenses		1,581		522
Total current assets		17,397		16,946
Land, buildings and equipment:
Land		2,220		2,220
Buildings and leasehold improvements		16,991		16,972
Machinery and equipment		50,035		47,479
Construction in progress		2,944		3,962
Total land, buildings and equipment		72,190		70,633
Less accumulated depreciation		44,577		41,808
Net land, buildings and equipment		27,613		28,825
Other assets:
Debt issuance costs, net of accumulated amortization of $912 and $634 at September 30, 2014 and December 31, 2013, respectively		575		853
Other assets		380		380
Total other assets		955		1,233
Total assets	$	45,965	$	47,004

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

2

ADVANCED ENVIRONMENTAL RECYCLING TECHNOLOGIES, INC.

BALANCE SHEETS (continued)

(Unaudited)

(in thousands, except share and per share data)

	September 30, 2014			December 31, 2013
Liabilities and Stockholders' Deficit
Current liabilities:
Accounts payable – trade	$	4,251		$	3,993
Accounts payable – related parties		85			13
Current maturities of long-term debt		1,729			1,209
Accruals related to expected settlement of class action lawsuit		-			133
Other accrued liabilities		3,903			3,859
Working capital line of credit		-			5,135
Total current liabilities		9,968			14,342
Long-term debt, less current maturities		36,017			34,972
Commitments and Contingencies (See Note 9)
Series E cumulative convertible preferred stock, $0.01 par value; 30,000 shares authorized, 20,524 shares issued and outstanding at September 30, 2014 and December 31, 2013, including accrued unpaid dividends of $4,816 and $3,709 at September 30, 2014 and December 31, 2013, respectively		25,340			24,233
Stockholders' deficit:
Class A common stock, $.01 par value; 525,000,000 shares authorized; 89,541,289 shares issued and outstanding at September 30, 2014 and 88,165,632 shares issued and outstanding at December 31, 2013		896			882
Class B convertible common stock, $.01 par value; 7,500,000 shares authorized; 89,873 shares issued and outstanding at September 30, 2014 and 1,465,530 shares issued and outstanding at December 31, 2013		1			15
Additional paid-in capital		53,660			53,660
Accumulated deficit		(79,917	)		(81,100	)
Total stockholders' deficit		(25,360	)		(26,543	)
Total liabilities and stockholders' deficit	$	45,965		$	47,004

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

3

ADVANCED ENVIRONMENTAL RECYCLING TECHNOLOGIES, INC.

STATEMENTS OF OPERATIONS

(Unaudited)

(in thousands, except share and per share data)

	Three Months Ended						Nine Months Ended
	September 30, 2014			September 30, 2013			September 30, 2014			September 30, 2013
Net sales	$	20,724		$	14,705		$	61,961		$	57,588
Cost of goods sold		15,639			14,362			48,682			46,353
Gross margin		5,085			343			13,279			11,235
Selling and administrative costs		3,027			2,772			9,037			8,867
Gain from asset disposition		(50	)		(3	)		(64	)		(4	)
Operating income (loss)		2,108			(2,426	)		4,306			2,372
Other income and expenses:
Other income or (expense)		12			(76	)		11			(61	)
Income from insurance proceeds		-			2,500			-			2,500
Gain (loss) from involuntary conversion of non-monetary assets due to fire		(500	)		-			345			-
Net interest expense		(779	)		(726	)		(2,372	)		(2,174	)
Net income (loss)		841			(728	)		2,290			2,637
Dividends on preferred stock		(375	)		(353	)		(1,107	)		(1,043	)
Net income (loss) applicable to common stock	$	466		$	(1,081	)	$	1,183		$	1,594
Income (loss) per share of common stock (basic and diluted)	$	0.00		$	(0.01	)	$	0.00		$	0.01
Weighted average common shares outstanding (basic and diluted)		424,165,483			89,631,162			419,275,834			400,217,173

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

4

ADVANCED ENVIRONMENTAL RECYCLING TECHNOLOGIES, INC.

STATEMENTS OF CASH FLOWS

(Unaudited)

(in thousands)

	Nine months ended
	September 30, 2014			September 30, 2013
Cash flows from operating activities:
Net income applicable to common stock	$	1,183		$	1,594
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		3,070			3,726
Dividends on preferred stock		1,107			1,043
Accrued interest converted to long-term debt		1,917			1,751
Gain from asset disposition		(64	)		(4	)
Increase in accounts receivable allowance		2			23
Income from insurance proceeds		-			(2,500	)
Gain from involuntary conversion of non-monetary assets due to fire		(345	)		-
Change in other assets		-			(20	)
Changes in other current assets and current liabilities		1,162			(1,693	)
Net cash provided by operating activities		8,032			3,920
Cash flows from investing activities:
Purchases of land, buildings and equipment		(1,587	)		(2,756	)
Proceeds from assets disposition		71			11
Insurance proceeds from involuntary conversion of non-monetary assets due to fire		418			-
Net cash used in investing activities		(1,098	)		(2,745	)
Cash flows from financing activities:
Payments on notes		(1,346	)		(1,318	)
Net payments on line of credit		(5,135	)		(126	)
Debt issuance costs		-			(32	)
Net cash used in financing activities		(6,481	)		(1,476	)
Increase (decrease) in cash		453			(301	)
Cash, beginning of period		124			346
Cash, end of period	$	577		$	45

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

5

NOTES TO FINANCIAL STATEMENTS

Unaudited

Note 1: Unaudited Information

     Advanced Environmental Recycling Technologies, Inc. (the Company or AERT) has prepared the financial statements included herein without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (SEC). However, all adjustments have been made to the accompanying financial statements, which are, in the opinion of the Company’s management, necessary for a fair presentation of the Company’s operating results. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to such rules and regulations.  Although the Company believes that the disclosures are adequate to make the information presented herein not misleading, it is recommended that these financial statements be read in conjunction with the financial statements and the notes thereto included in the Company’s latest annual report on Form 10-K.

Note 2: Description of the Company

AERT, founded in 1988, recycles polyethylene plastic and develops, manufactures, and markets composite building materials that are used in place of traditional wood or plastic products for exterior applications in building and remodeling homes and for certain other industrial or commercial building purposes. The Company’s products are made primarily from approximately equal amounts of waste wood fiber, which have been cleaned, sized and reprocessed, and recycled polyethylene plastics which have been cleaned, processed, and reformulated utilizing our patented and proprietary technologies. Its products have been extensively tested, and are sold by leading national companies such as BlueLinx Corporation (BlueLinx), Lowe’s Companies, Inc. (Lowe’s) and Therma-Tru Corporation. The Company’s products are primarily used in renovation and remodeling by consumers, homebuilders, and contractors as an exterior environmentally responsible building alternative for decking, railing, and trim products.

While BlueLinx Corporation is currently the Company’s primary distributor for its ChoiceDek® products, which are sold exclusively by Lowe’s, two new customers are distributing to Lowe’s in the western United States.

The Company currently manufactures all of its composite products at extrusion facilities in Springdale, Arkansas. The Company operates a plastic recycling, blending and storage facility in Lowell, Arkansas, where it also leases warehouses and land for inventory storage. AERT also maintains a facility at Watts, Oklahoma where it cleans, reformulates, and recycles polyethylene plastic scrap as a means to reduce the Company’s costs of recycled plastics.

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Note 3: Statements of Cash Flows

In order to determine net cash provided by operating activities, net income has been adjusted by, among other things, changes in current assets and current liabilities, excluding changes in cash, current maturities of long-term debt and current notes payable. Those changes, shown as an (increase) decrease in current assets and an increase (decrease) in current liabilities, are as follows (in thousands):

	Nine Months Ended
	September 30, 2014			September 30, 2013
Receivables	$	(510	)	$	74
Inventories		1,109			(589	)
Prepaid expenses		322			426
Accounts payable - trade and related parties		330			(805	)
Accrued liabilities		(89	)		(799	)
Change in current assets and liablilites	$	1,162		$	(1,693	)
Cash paid for interest	$	453		$	422

Supplemental Disclosures of Non-Cash Investing and Financing Activities (in thousands):

	Nine Months Ended
	September 30, 2014		September 30, 2013
Notes payable for financing insurance policies	$	994	$	727

Note 4: Significant Accounting Policies

Revenue Recognition Policy

The Company recognizes revenue when the title and risk of loss have passed to the customer, there is persuasive evidence of an arrangement, shipment has occurred or services have been rendered, the sales price is determinable and collectability is reasonably assured. The Company typically recognizes revenue at the time product is shipped or when segregated and billed under a bill and hold arrangement. Sales are recorded net of discounts, rebates and returns, which were $2.6 million for the nine months ended September 30, 2013 and 2014.

Estimates of expected sales discounts are calculated by applying the appropriate sales discount rate to all unpaid invoices that are eligible for the discount. The Company’s sales prices are determinable given that its sales discount rates are fixed and given the predictability with which customers take sales discounts.

Shipping and Handling

The Company records shipping fees billed to customers in net sales and records the related expenses in cost of goods sold.

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Inventories

Inventories are stated at the lower of cost (first-in, first-out method) or market. Material, labor, and factory overhead necessary to produce the inventories are included at their cost. Inventories consisted of the following (in thousands):

	September 30, 2014		December 31, 2013
Raw materials	$	5,388	$	5,100
Work in process		1,511		2,337
Finished goods		4,755		5,713
Total inventory	$	11,654	$	13,150

Accounts Receivable

Accounts receivable are uncollateralized customer obligations due under normal trade terms generally requiring payment within thirty days from the invoice date. Trade accounts are stated at the amount management expects to collect from outstanding balances. Payments of accounts receivable are allocated to the specific invoices identified on the customers’ remittance advice.

Accounts receivable are carried at original invoice amounts less an estimated reserve provided for returns and discounts based on a review of historical rates of returns and expected discounts. The carrying amount of accounts receivable is reduced, if needed, by a valuation allowance that reflects management’s best estimate of the amounts that will not be collected. Management individually reviews all overdue accounts receivable balances and, based on an assessment of current creditworthiness, estimates the portion, if any, of the balance that will not be collected. Management provides for probable uncollectible amounts through a charge to earnings and a credit to an allowance account based on its assessment of the current status of the individual accounts. Balances which remain outstanding after management has used reasonable collection efforts are written off through a charge to the valuation allowance and a credit to trade accounts receivable. Recoveries of trade receivables previously written off are recorded when received.

 Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Concentration Risk

Credit Risk

       The Company extends unsecured credit to its customers. The Company’s concentration in the building materials industry has the potential to impact its exposure to credit risk because changes in economic or other conditions in the construction industry may similarly affect the Company’s customers. The Company derived most of its revenue from BlueLinx, its distributor of ChoiceDek® products.

8

Major Customers

The Company’s revenues are derived principally from national and regional building products distributors. BlueLinx is the Company’s largest single customer, distributing both the ChoiceDek® brand of decking products sold exclusively at Lowe’s as well as the Company’s MoistureShield® decking products in select geographies. For the nine months ended September 30, 2014 and the nine months ended September 30, 2013, BlueLinx represented approximately 60% of the Company’s revenue. A loss of this customer, or a major reduction in their business, could cause a significant reduction in our liquidity.  We are currently working to increase our distribution network that will reduce this customer’s concentration.

The Company has significant customer concentration, with one customer representing approximately 50% of our accounts receivable at September 30, 2014, as compared to approximately 80% at December 31, 2013. A loss of this customer, or a major reduction in their business, could cause a significant reduction in our liquidity. We are currently working to expand our distribution network, which will reduce this customer’s concentration.

Cash

  The Company maintains bank accounts that are insured by the Federal Deposit Insurance Corporation (FDIC) up to $250,000. At times, cash balances may be in excess of the FDIC limit. The Company believes no significant concentrations of risk exist with respect to its cash.

Note 5: Income Taxes

As of September 30, 2014, the Company had net operating loss (NOL) carryforwards for federal income tax purposes, which are available to reduce future taxable income. If not utilized, the NOL carryforwards will expire between 2017 and 2031. In March 2011, H.I.G. AERT, LLC acquired a controlling interest in the Company, which resulted in a significant restriction on the utilization of the Company’s net operating loss carryforwards. It is estimated that the utilization of future NOL carryforwards will be limited (per IRC 382) to approximately $0.8 million per year for the next 18 years. The impact of this limitation is approximately $27.0 million in NOL’s, which will expire before the Company can use them. The estimated annual effective income tax rate for 2014 is 0% due to the use of net operating loss carryforwards.

As there is insufficient evidence that the Company will be able to generate adequate future taxable income to enable it to realize its net operating loss carryforwards prior to expiration, the Company maintains a valuation allowance to recognize its deferred tax assets only to the extent of its deferred tax liabilities.

Based upon a review of its income tax filing positions, the Company believes that its positions would be sustained upon an audit and does not anticipate any adjustments that would result in a material change to its financial position. Therefore, no reserves for uncertain income tax positions have been recorded. The Company recognizes interest related to income taxes as interest expense and recognizes penalties as operating expense.

The Company is subject to routine audits by various taxing jurisdictions. The examination by the Internal Revenue Service (the Service) of the Company’s 2010 federal tax return yielded changes that did not affect the tax that was reported on the return; therefore, the Service has accepted the return. The Company is no longer subject to income tax examinations by taxing authorities for years before 2011, except in the States of California and Texas, for which the 2010 tax year is still subject to examination.

9

Note 6: Earnings Per Share

The Company utilizes the two-class method for computing and presenting earnings per share. The Company currently has two classes of common stock (the Common Stock) and one class of cumulative participating preferred stock, Series E (the Preferred Stock). Pursuant to the Series E Designation, holders of the Series E Preferred Stock are entitled to receive per share dividends equal to 6% per annum of the stated value of $1,000 per share of Series E Preferred Stock when declared by the Company’s Board of Directors. In addition, holders of the Series E Preferred Stock are entitled to participate in any dividends declared on shares of the Company’s Common Stock on an as-converted basis. Therefore, the Preferred Stock is considered a participating security requiring the two-class method for the computation and presentation of net income per share – basic.

The two-class computation method for each period segregates basic earnings per common and participating share into two categories: distributed earnings per share (i.e., the Preferred Stock stated dividend) and undistributed earnings per share, which allocates earnings after subtracting the Preferred Stock dividend to the total of weighted average common shares outstanding plus equivalent converted common shares related to the Preferred Stock. Basic earnings per common and participating share exclude the effect of Common Stock equivalents, and are computed using the two-class computation method.

In computing diluted EPS, only potential common shares that are dilutive—those that reduce earnings per share or increase loss per share—are included. The exercise of options or conversion of convertible securities is not assumed if the result would be antidilutive, such as when a loss from continuing operations is reported. As a result, if there is a loss from continuing operations, diluted EPS would be computed in the same manner as basic EPS is computed, even if an entity has net income after adjusting for discontinued operations, an extraordinary item or the cumulative effect of an accounting change.

10

The following presents the two-class method for the three and nine months ended September 30, 2014 and 2013:

BASIC AND DILUTED EARNINGS PER SHARE

(in thousands, except share and per share data)

	Three Months Ended					Nine Months Ended
	September 30, 2014		September 30, 2013			September 30, 2014		September 30, 2013
Net income (loss) applicable to common stock	$	466	$	(1,081	)	$	1,183	$	1,594
Preferred stock dividend		375		353			1,107		1,043
Income (loss) before dividends	$	841	$	(728	)	$	2,290	$	2,637
Per share information:
Basic earnings per common and participating share:
Distributed earnings per share:
Common	$	0.00	$	0.00		$	0.00	$	0.00
Preferred	$	0.00	$	0.00		$	0.00	$	0.00
Earned, unpaid dividends per share:
Preferred	$	18.27	$	17.19		$	53.93	$	50.81
Undistributed earnings (losses) per share:
Common	$	0.00	$	(0.01	)	$	0.00	$	0.00
Preferred	$	17.91		-		$	45.30	$	60.28
Total basic earnings (losses) per common and participating share:
Common	$	0.00	$	(0.01	)	$	0.00	$	0.00
Preferred	$	36.18	$	17.19		$	99.23	$	111.09
Basic weighted average common shares:
Common weighted average number of shares		89,631,162		89,631,162			89,631,162		89,631,162
Participating preferred shares - if converted		334,534,321		315,175,913			329,644,672		310,586,011
Total weighted average number of shares		424,165,483		404,807,075			419,275,834		400,217,173
Total weighted average number of preferred shares		20,524		20,524			20,524		20,524

Note 7: Line of Credit

The Company has an $8.0 million line of credit (Revolver) loan with the AloStar Bank of Commerce, subject to a reserve of $1.0 million. Interest is assessed at the greater of (a) 1.0% (minimum) plus 4%, or (b) the LIBOR rate as shown in the Wall Street Journal on such day for United States dollar deposits for the one month delivery of funds in an amount approximately equal to the principal amount of the Revolver.  If the LIBOR cannot be determined, the interest will be calculated using the prime lending rate plus 2%.  Because LIBOR was less than 1% on September 30, 2014, the interest rate was determined to be 5%. The Revolver is secured by 85% of accounts receivable after a reduction for amounts owed by international customers.  The Revolver is also secured by 60% of the eligible inventory or 85% of the net orderly liquidation value of the inventory.  There were no outstanding borrowings on the Revolver at September 30, 2014.  The proceeds available to draw down on the Revolver at September 30, 2014 were $7.0 million.

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Note 8:  Related Party Transactions

Advisory Services

The Company entered into an Advisory Services Agreement between H.I.G. Capital, L.L.C. and the Company (the Advisory Services Agreement) on March 18, 2011 that provides for an annual monitoring fee between $250,000 and $500,000 (the Monitoring Fee) and reimbursement of all other out-of-pocket fees and expenses incurred by H.I.G. Capital, L.L.C.

Note 9: Commitments and Contingencies

AERT is involved from time to time in litigation arising from the normal course of business that is not disclosed in its filings with the SEC. In management's opinion, this litigation is not expected to materially impact the Company's results of operations or financial condition.

Class Action Lawsuits

The U.S. District Court, Western District of Washington (Seattle Division) approved a class action settlement in January 2009 related to a purported class action lawsuit seeking to recover on behalf of purchasers of ChoiceDek® composite decking for damages allegedly caused by mold and mildew stains on their decks. The settlement includes decking material purchased from January 1, 2004 through December 31, 2007, along with decking material purchased after December 31, 2007 that was manufactured before October 1, 2006, the date a mold inhibitor was introduced into the manufacturing process.

In 2008, the Company accrued an estimated $2.9 million for resolving claims. In the third quarter of 2009, the Company increased its estimate of costs to be incurred in resolving claims under the settlement by $5.1 million. The estimate was revised due to events that occurred and information that became available after the second quarter of 2009 concerning primarily the number of claims received. The deadline for submitting new claims has now passed. The claim resolution process had an annual net cost limitation to the Company of $2.0 million. The claims resolution process is now completed.

Note 10:  New Accounting Pronouncements

In May 2014, the FASB issued Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers (ASU 2014-09), which supersedes nearly all existing revenue recognition guidance under U.S. GAAP. The core principle of ASU 2014-09 is to recognize revenues when promised goods or services are transferred to customers in an amount that reflects the consideration to which an entity expects to be entitled for those goods or services. ASU 2014-09 defines a five step process to achieve this core principle and, in doing so, more judgment and estimates may be required within the revenue recognition process than are required under existing U.S. GAAP.

The standard is effective for annual periods beginning after December 15, 2016, and interim periods therein, using either of the following transition methods: (i) a full retrospective approach reflecting the application of the standard in each prior reporting period with the option to elect certain practical expedients, or (ii) a retrospective approach with the cumulative effect of initially adopting ASU 2014-09 recognized at the date of adoption (which includes additional footnote disclosures).  We are currently evaluating the impact of our pending adoption of ASU 2014-09 on our financial statements and have not yet determined the transition method we will utilize upon adoption of the standard in 2017.

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

Three Months Ended September 30, 2014 Compared to Three Months Ended September 30, 2013

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

	Three Months Ended
	September 30, 2014			September 30, 2013			% Change
Net sales	$	20,724		$	14,705			40.9	%
Cost of goods sold		15,639			14,362			8.9	%
% of net sales		75.5	%		97.7	%
Gross margin		5,085			343			*
% of net sales		24.5	%		2.3	%
Gain from asset disposition		(50	)		(3	)		*
Selling and administrative costs		3,027			2,772			9.2	%
% of net sales		14.6	%		18.8	%
Operating income (loss)		2,108			(2,426	)		186.9	%
% of net sales		10.2	%		(16.5	%)
Other income:
Other income (expense)		12			(76	)		115.8	%
Income from insurance proceeds		-			2,500			*
Gain on involuntary conversion of non-monetary assets due to fire		(500	)		-			*
Net interest expense		(779	)		(726	)		7.3	%
Net income (loss)		841			(728	)		215.5	%
% of net sales		4.1	%		(5.0	%)
Dividends on preferred stock		(375	)		(353	)		6.2	%
Net income (loss) applicable to common stock	$	466		$	(1,081	)		143.1	%
% of net sales		2.2	%		(7.4	%)

Net Sales

Third quarter 2014 net sales were up $6.0 million or 40.9% from third quarter 2013. Sales for the third quarter of 2013 were uncharacteristically low due to lost production as a result of the fire in the extrusion plant in Springdale in July 2013.  Sales were also up in the third quarter 2014 due to the new capstock product line.

Cost of Goods Sold and Gross Margin

The total cost of goods sold for the third quarter of 2014 increased 8.9% from the third quarter of 2013. As a percent of net sales, gross margin increased 22.2 percentage points as production costs normalized during the third quarter of 2014.  Third quarter 2013 cost of goods sold as a percentage of net sales was higher than the third quarter 2014 reflecting fixed manufacturing overhead costs, in addition to direct labor costs incurred due to the retention of our skilled labor forces during the time of lost production due to the fire that occurred in July 2013.

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Selling and Administrative Costs

Selling and administrative costs increased 9.2% for the third quarter of 2014 as compared to the third quarter of 2013. The increase was due primarily to increased commissions, advertising and promotions due to increased sales.  As a percentage of sales, selling and administrative costs were down 4.2% for the third quarter 2014 compared to the third quarter 2013.

Earnings

Net income improved $1.5 million for the third quarter of 2014 compared to third quarter 2013.  This improvement is primarily due to a return to more typical sales compared to the significantly reduced third quarter 2013 sales that were negatively impacted by the July 2013 fire.

Interest costs increased 7.3% compared to the third quarter of 2013 largely due to increased payment in kind (PIK) interest on the H.I.G. Series A and Series B notes.

Nine Months Ended September 30, 2014 Compared to Nine Months Ended September 30, 2013

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

	Nine Months Ended
	September 30, 2014			September 30, 2013			% Change
Net sales	$	61,961		$	57,588			7.6	%
Cost of goods sold		48,682			46,353			5.0	%
% of net sales		78.6	%		80.5	%
Gross margin		13,279			11,235			18.2	%
% of net sales		21.4	%		19.5	%
Gain from asset disposition		(64	)		(4	)		*
Selling and administrative costs		9,037			8,867			1.9	%
% of net sales		14.6	%		15.4	%
Operating income		4,306			2,372			81.5	%
% of net sales		6.9	%		4.1	%
Other income:
Other income (expense)		11			(61	)		118.0	%
Income from insurance proceeds		-			2,500			*
Gain on involuntary conversion of non-monetary assets due to fire		345			-			*
Net interest expense		(2,372	)		(2,174	)		9.1	%
Net income		2,290			2,637			(13.2	%)
% of net sales		3.7	%		4.6	%
Dividends on preferred stock		(1,107	)		(1,043	)		6.1	%
Net income applicable to common stock	$	1,183		$	1,594			(25.8	%)
% of net sales		1.9	%		2.8	%

*not meaningful as a percentage change

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Net Sales

Sales for the nine months ended September 30, 2014 were up $4.4 million or 7.6% from the same period in 2013 due to increased sales of ChoiceDek®, MoistureShield® and Original Equipment Manufacturer (OEM) lines.  Sales were depressed as a result of the July 2013 Springdale fire during the comparative periods.  In 2014, MoistureShield® sales reflected the introduction of the new capstock line.

Cost of Goods Sold and Gross Margin

Total cost of goods sold for the first nine months of 2014 increased 5.0% over the same period in 2013 as a result of increased sales.  As a percentage of sales, the cost of goods sold decreased by 1.9 percentage points.  The gross margin increased for the first nine months of 2014 over the same period in 2013.  The lower 2013 gross margin was primarily due to lost production in 2013 that resulted from the fire.

Selling and Administrative Costs

Selling and administrative costs were up $0.2 million in the first nine months of 2014 compared to the first nine months of 2013. The increase was primarily due to increased commissions, advertising and promotions due to increased sales.

Earnings

Operating income was up $1.9 million for the nine months ended September 30, 2014 as compared to the same period in 2013 due to increased sales and improved manufacturing processes.  The nine months ended September 30, 2013 reflects lost sales as a result of reduced production due to the fire in our Springdale extrusion plant.  The insurance company advanced $2.5 million in early October 2013 that was included in other income for the nine months ended September 30, 2013.

Interest costs were up 9.1% primarily due to the paid in kind (PIK) interest on the H.I.G. Series A and Series B notes that increased the principal and increased borrowing on the line of credit.

Liquidity and Capital Resources

The Revolver Loan with AloStar Bank of Commerce is used to cover operating expenses as needed. At September 30, 2014, $7.0 million was available for drawdown.

The Company plans to structure its operations to grow its business, improve its margins and generate net income for 2014 in order to maximize shareholder value. The Company is currently working to improve its liquidity by:

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

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

15

Cash Flows

Cash Flows from Operations

Cash provided by operations for the first nine months of 2014 was $8.0 million, an increase of $4.1 million from the first nine months of 2013. This change is primarily due to a change in current assets and liabilities of $2.9 million due to the following:

· Accounts receivable increased $0.5 million in the first nine months of 2014 as compared to a decrease of $0.1 million in the first nine months of 2013 due to increased sales.

· 2014 inventory levels for the first nine months decreased $1.1 million as compared to an increase of $0.6 million in the first nine months of 2013.

· Accounts payable increased $0.3 million in 2014 compared to a decrease of $0.8 million in the first nine months of 2013 due to increased purchases related to increased production.

· Accrued liabilities decreased $0.1 million the first nine months of 2014 compared to a decrease of $0.8 million in the first nine months of 2013 due to the settlement of class action claims.

In the third quarter 2013, anticipated proceeds of $2.5 million from the insurers for estimated losses sustained from the July 2013 fire at the Springdale extrusion plant were recorded as receivable, which reduced net cash provided by operations for that period.  The funds were subsequently received in October 2013.

Changes to our revenue and cost of raw materials significantly impact the Company’s liquidity. We are in the remodeling industry that was depressed as a result of the reduction in home prices in recent years. Our business is dependent upon the economy and we cannot accurately predict cyclical economic changes or the impact on consumer buying.

The Company has significant customer concentration, with one customer representing approximately 60% of our revenue. A loss of this customer, or a major reduction in their business, would cause a significant reduction in our liquidity. We are currently working to broaden our distribution network by adding new distributors, which would reduce this customer’s concentration.

Cash Flows from Investing Activities

Cash used in investing activities in the first nine months of 2014 was $1.1 million compared to cash used in investing activities of $2.7 million for the same period in 2013. This change was primarily due to decreased capital expenditures offset by insurance proceeds from the Lowell fire of 2013 that were recovered in 2014.

Cash Flows from Financing Activities

Cash used in financing activities was $6.5 million for the first nine months of 2014 compared to cash used in financing activities of $1.5 million in 2013. The change was primarily due to paying down the credit line in the first nine months of 2014.

Working Capital

At September 30, 2014, the Company had working capital of $7.4 million compared to working capital of $2.6 million at December 31, 2013. The increase in working capital was primarily due to a decrease in borrowing on the line of credit reflecting the seasonality of the business.  The spring and summer seasons are the prime deck-building seasons.

Buildings and Equipment

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

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

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

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

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

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

· loss of legal ownership or title to an asset;

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

· the impact of significant negative industry or economic trends.

For the nine months ended September 30, 2014, the Company has determined that there were no events or circumstances indicating the carrying value may not be recoverable.

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

Debt

Oklahoma Energy Program Loan

On July 14, 2010, the Company entered into a loan agreement with the Oklahoma Department of Commerce (ODOC) under award number 14215 SSEP09, whereby ODOC agreed to a 15-year, $3.0 million loan to AERT at a fixed interest rate of 3.0%. The balance on the loan at September 30, 2014 was $2.4 million.

H.I.G. Long Term Debt

In 2011, the Company consummated related recapitalization transactions (the Transactions) with H.I.G. AERT, LLC, an affiliate of H.I.G. Capital L.L.C. (H.I.G.). H.I.G. exchanged secured debt in the Company for a combination of new debt and equity. In exchange for $6.9 million of additional new capital available to the Company, H.I.G. was issued:

1. a Series A Term Note in the aggregate principal amount of $10,000,000,

2. a Series B Senior Term Note in the aggregate principal amount of $9,000,000 (or such lesser amount as is actually borrowed thereunder), and

3. 20,524.149 shares of Series E Convertible Preferred Stock, par value $0.01 per share, of the Company (the Series E Preferred Stock).

As a result, H.I.G. owns approximately 80% of the outstanding common equity securities of the Company on a fully diluted, as converted basis.

17

The Series A Note matures on March 17, 2017 and, at the Company’s option, either (i) bears cash interest at 8.0% per annum or (ii) bears cash interest at 4.0% per annum, plus a rate of interest equal to 4.0% per annum payable in kind and added to the outstanding principal amount of the Series A Note (with the latter option only being available until March 17, 2013, after which time, the Series A Note will bear cash interest at 8.0% per annum). Payment of cash interest has been waived until January 1, 2015.

The Series B Note matures on March 17, 2017 and, at the Company’s option, either (i) bears cash interest at 10.0% per annum or (ii) bears cash interest at 4.0% per annum, plus a rate of interest equal to 6.0% per annum payable in kind and added to the outstanding principal amount of the Series B Term Note. The Series B Note ranks equally to the Series A Note.  Payment of cash interest has been waived until January 1, 2015.

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

Debt Covenants

The Company’s Revolver Loan with AloStar and the Company’s Credit Agreement with H.I.G. contain covenant restrictions, as defined in the respective agreements.

		September 30, 2014	Covenant	Compliance
AloStar
Adjusted EBITDA	=	$7.8M	=>$6.0M	Yes
Fixed Charge Coverage Ratio	=	2.0	> 1.10:1.00	Yes
Adjusted Consolidated EBITDA / Consolidated Fixed Charges
Capital Expenditures	=	$1.6M	< $3.5M1	Yes
HIG:
Adjusted EBITDA	=	$7.8M	=>$9.5M	No, Waived
Fixed Charge Coverage Ratio	=	2.3	> 1.50:1.00	Yes
Adjusted Consolidated EBITDA / Consolidated Fixed Charges
Leverage Ratio	=	4.87	= < 3.1:1.00	No, Waived
Consolidated Indebtedness / Consolidated EBITDA
Capital Expenditures	=	$1.6M	< $2.5M2	Yes
1Annual covenant, adjusted with bank approval
22014 annual covenant

On October 15, 2014, H.I.G. AERT LLC, the holder of all of the issued and outstanding shares of Series E Convertible Preferred Stock, waived the Specified Events of Default as a result of AERT failing to have achieved a Leverage Ratio of below 3.1 to 1.0 for the four Fiscal Quarters ending September 30, 2014. H.I.G. AERT, LLC also waived the Specified Events of Default as a result of AERT having failed to attain required EBITDA of $9.5 million. In addition, on October 15, 2014, H.I.G. AERT LLC waived its right to deliver a Triggering Event Redemption Notice on the Series E stock solely as a result of the Specified Events of Default.

Uncertainties, Issues and Risks

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

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Forward-Looking Information

An investment in our securities involves a high degree of risk. Prior to making an investment, prospective investors should carefully consider the following factors, among others, and seek professional advice. In addition, this Form 10-Q contains certain “forward-looking statements” within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act. Such forward-looking statements, which are often identified by words such as “believes”, “anticipates”, “expects”, “estimates”, “should”, “may”, “will” and similar expressions, represent our expectations or beliefs concerning future events. Numerous assumptions, risks, and uncertainties could cause actual results to differ materially from the results discussed in the forward-looking statements. Prospective purchasers of our securities should carefully consider the information contained herein or in the documents incorporated herein by reference.

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

Item 4. Controls and Procedures.

Our Chief Executive Officer, Timothy D. Morrison, who is our principal executive officer, and our Chief Financial Officer, J. R. Brian Hanna, who is our principal financial and accounting officer, have reviewed and evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the Exchange Act)) as of September 30, 2014. Based upon this evaluation, our Chief Executive Officer and our Chief Financial Officer have concluded that, as of September 30, 2014, the end of the period covered by this report, AERT’s disclosure controls and procedures are effective in recording, processing, summarizing and reporting, on a timely basis, information required to be disclosed by AERT in the reports that it files or submits under the Exchange Act and are effective in ensuring that information required to be disclosed by AERT in the reports that it files or submits under the Exchange Act is accumulated and communicated to AERT’s management, including AERT’s Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

During the nine months ended September 30, 2014, there have been no changes in our internal controls over financial reporting that have materially affected, or that are reasonably likely to materially affect, our internal controls over financial reporting.

19

PART II – OTHER INFORMATION

Item 1. Legal Proceedings – (See Note 9: Commitments and Contingencies)

Item 6. Exhibits.

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

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SIGNATURES

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

ADVANCED ENVIRONMENTAL

RECYCLING TECHNOLOGIES, INC.

By: /s/ TIMOTHY D. MORRISON

Timothy D. Morrison,

Chief Executive Officer and Director

(principal executive officer)

/s/ J. R. BRIAN HANNA

J. R. Brian Hanna,

Chief Financial Officer & Principal Accounting Officer

Date:  November 6, 2014

21

INDEX TO EXHIBITS

10.1	Waiver of Default - H.I.G. Credit Agreement dated October 15, 2014**
10.2	Waiver of "Special Events Default" per Series A Term Loan Interest dated July 15, 2014**
10.3	Waiver of "Special Events Default" per Series E Convertible Preferred Stock Rights dated October 15, 2014**
31.1	Certification per Sarbanes-Oxley Act of 2002 (Section 302) by the Company's chief executive and principal executive officer**
31.2	Certification per Sarbanes-Oxley Act of 2002 (Section 302) by the Company’s chief financial and principal accounting officer **
32.1	Certification per Sarbanes-Oxley Act of 2002 (Section 906) by the Company's chief executive and principal executive officer**
32.2	Certification per Sarbanes-Oxley Act of 2002 (Section 906) by the Company's chief financial and principal accounting officer**
101.IN	XBRL Instance Document
101.SCH	XBRL Taxonomy Extension Schema Document
101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF	XBRL Taxonomy Extension Definition Linkbase Document
101.LAB	XBRL Taxonomy Extension Label Linkbase Document
101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document

22

EX-10.1

Exhibit 10.1

WAIVER

October 15, 2014

Advanced Environmental Recycling Technologies, Inc.

914 N. Jefferson

Springdale, Arkansas 72764

Attention:  Chief Executive Officer

Ladies and Gentlemen:

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

As you are aware, Borrower has failed to perform obligations owed to the Lender Group under the terms and conditions of the Credit Agreement as a result of Borrower’s failure to comply with Sections 6.10(a) of the Credit Agreement, which require Borrower to have (i) a Leverage Ratio of below 3.10 to 1.00 and (ii) a Minimum EBITDA of $9.5 million, respectively (collectively, the “Specified Events of Default”) for four Fiscal Quarters (as defined in the Credit Agreement) ending September 30, 2014.  The Specified Events of Default represent Events of Default under the Notes (as defined in the Company’s Certificate of Designations, Preferences and Rights of the Series E Convertible Preferred Stock of Advanced Environmental Recycling Technologies, Inc. dated March 17, 2011 (the “Certificate of Designation”)) resulting in the occurrence of a Triggering Event (as defined in the Certificate of Designation) under Section 5(a)(ii) of the Certificate of Designation.

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

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

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

This Waiver shall constitute a Credit Document for all purposes.

[remainder of page intentionally left blank]

2

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

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

Acknowledged and agreed to

as of the date first written above:

ADVANCED ENVIRONMENTAL

RECYCLING TECHNOLOGIES, INC.,

a Delaware corporation

By: /s/ J.R. Brian Hanna

Name: J.R. Brian Hanna

Title: Chief Financial Officer & Principal Accounting Officer

EX-10.2

Exhibit 10.2

WAIVER

July 15, 2014

Advanced Environmental Recycling Technologies, Inc.

914 N. Jefferson

Springdale, Arkansas 72764

Attention:  Chief Executive Officer

Ladies and Gentlemen:

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

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

As a result of the Specified Events of Default, Events of Default have occurred and are currently continuing under the Credit Agreement.  You have requested that the Lender Group waive the Specified Events of Default until January 1, 2015, at which time all interest on the Series A Term Loan will bear cash interest at 8.0% per annum (collectively, the “Series A Interest Rate”) and the Series B Term Loan will bear cash interest at 4.0% per annum (collectively, the “Series B Interest Rate”).  This letter (this “Waiver”) is to advise you that the Lender Group hereby waives the Specified Events of Default and their rights and remedies under the Credit Agreement arising as a result of the Specified Events of Default.

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

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

This Waiver shall constitute a Credit Document for all purposes.

[remainder of page intentionally left blank]

2

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

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

Acknowledged and agreed to

as of the date first written above:

ADVANCED ENVIRONMENTAL

RECYCLING TECHNOLOGIES, INC.,

a Delaware corporation

By: /s/ J.R. Brian Hanna

Name:    J.R. Brian Hanna

Title:     Chief Financial Officer & Principal Accounting Officer

EX-10.3

Exhibit 10.3

October 15, 2014

Advanced Environmental Recycling Technologies, Inc.

914 N. Jefferson

Springdale, Arkansas 72764

Attention:  Chief Executive Officer

Ladies and Gentlemen:

The undersigned, being the holder of all of the issued and outstanding shares of Series E Convertible Preferred Stock of Advanced Environmental Recycling Technologies, Inc., a Delaware corporation (the “Company”), hereby acknowledges that the Company has failed to have (i) a Leverage Ratio (as defined in that certain Credit Agreement, dated as of March 18, 2011, as amended by that certain First Amendment to Credit Agreement, dated as of May 23, 2011, and as further amended by that certain Second Amendment to Credit Agreement, dated as of October 20, 2011 (as further amended, restated, supplemented or otherwise modified from time to time, the “Credit Agreement”), by and among the Company, the lenders from time to time parties thereto and H.I.G. AERT, LLC) of below 3.10 to 1.00 and (ii) a Minimum EBITDA of $9.5 million, respectively (collectively, the “Specified Events of Default”) for four Fiscal Quarters (as defined in the Credit Agreement) ending September 30, 2014. The Specified Events of Default represent Events of Default under the Notes (as defined in the Company’s Certificate of Designations, Preferences and Rights of the Series E Convertible Preferred Stock of Advanced Environmental Recycling Technologies, Inc. dated March 17, 2011 (the “Certificate of Designation”)) resulting in the occurrence of a Triggering Event (as defined in the Certificate of Designation) under Section 5(a)(ii) of the Certificate of Designation.

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

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

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

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

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

Acknowledged and agreed to

as of the date first written above:

ADVANCED ENVIRONMENTAL

RECYCLING TECHNOLOGIES, INC.,

a Delaware corporation

By: /s/ J.R. Brian Hanna

Name: J.R. Brian Hanna

Title: Chief Financial Officer & Principal Accounting Officer

EX-31.1

Exhibit 31.1

CERTIFICATION

I, Timothy D. Morrison, certify that:

1.	I have reviewed this quarterly report on Form 10-Q of Advanced Environmental Recycling Technologies, Inc.;
2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.	The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
	(a)	Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
	(b)	Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
	(c)	Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
	(d)	Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5.	The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
	(a)	All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
	(b)	Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date:  November 6, 2014

/s/ Timothy D. Morrison 

TIMOTHY D. MORRISON

Chief Executive Officer and Director

(Principal Executive Officer)

EX-31.2

Exhibit 31.2

CERTIFICATION

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

1.	I have reviewed this quarterly report on Form 10-Q of Advanced Environmental Recycling Technologies, Inc.;
2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.	The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
	(a)	Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
	(b)	Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
	(c)	Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
	(d)	Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5.	The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
	(a)	All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
	(b)	Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date:  November 6, 2014

/s/ J. R. Brian Hanna

J. R. BRIAN HANNA

Chief Financial Officer and

Principal Accounting Officer

EX-32.1

Exhibit 32.1

OFFICER CERTIFICATION

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

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the quarterly report of Advanced Environmental Recycling Technologies, Inc. (the “Company”) on Form 10-Q for the nine months ended September 30, 2014, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Timothy D. Morrison, certify pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to the best of my knowledge:

(1)	The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2)	The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Date:  November 6, 2014

/s/ Timothy D. Morrison 

TIMOTHY D. MORRISON

Chief Executive Officer and Director

(Principal Executive Officer)

EX-32.2

Exhibit 32.2

OFFICER CERTIFICATION

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

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the quarterly report of Advanced Environmental Recycling Technologies, Inc. (the “Company”) on Form 10-Q for the nine months ended September 30, 2014, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, J. R. Brian Hanna, certify pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to the best of my knowledge:

(1)	The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2)	The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Date:  November 6, 2014

/s/ J. R. Brian Hanna

J. R. BRIAN HANNA

Chief Financial Officer and

Principal Accounting Officer

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Note 6 - Earnings Per Share (Details) (Series E Preferred Stock [Member], USD $)	9 Months Ended
	Sep. 30, 2014
Series E Preferred Stock [Member]
Note 6 - Earnings Per Share (Details) [Line Items]
Preferred Stock, Dividend Rate, Percentage	6.00%
Preferred Stock, Par or Stated Value Per Share	$ 1,000

XML

Note 4 - Significant Accounting Policies

9 Months Ended

Sep. 30, 2014

Accounting Policies [Abstract]

Significant Accounting Policies [Text Block]

Note 4: Significant Accounting Policies

Revenue Recognition Policy

The Company recognizes revenue when the title and risk of loss have passed to the customer, there is persuasive evidence of an arrangement, shipment has occurred or services have been rendered, the sales price is determinable and collectability is reasonably assured. The Company typically recognizes revenue at the time product is shipped or when segregated and billed under a bill and hold arrangement. Sales are recorded net of discounts, rebates and returns, which were $2.6 million for the nine months ended September 30, 2013 and 2014.

Estimates of expected sales discounts are calculated by applying the appropriate sales discount rate to all unpaid invoices that are eligible for the discount. The Company’s sales prices are determinable given that its sales discount rates are fixed and given the predictability with which customers take sales discounts.

Shipping and Handling

The Company records shipping fees billed to customers in net sales and records the related expenses in cost of goods sold.

Inventories

Inventories are stated at the lower of cost (first-in, first-out method) or market. Material, labor, and factory overhead necessary to produce the inventories are included at their cost. Inventories consisted of the following (in thousands):

	September 30, 2014		December 31, 2013
Raw materials	$	5,388	$	5,100
Work in process		1,511		2,337
Finished goods		4,755		5,713
Total inventory	$	11,654	$	13,150

Accounts Receivable

Accounts receivable are uncollateralized customer obligations due under normal trade terms generally requiring payment within thirty days from the invoice date. Trade accounts are stated at the amount management expects to collect from outstanding balances. Payments of accounts receivable are allocated to the specific invoices identified on the customers’ remittance advice.

Accounts receivable are carried at original invoice amounts less an estimated reserve provided for returns and discounts based on a review of historical rates of returns and expected discounts. The carrying amount of accounts receivable is reduced, if needed, by a valuation allowance that reflects management’s best estimate of the amounts that will not be collected. Management individually reviews all overdue accounts receivable balances and, based on an assessment of current creditworthiness, estimates the portion, if any, of the balance that will not be collected. Management provides for probable uncollectible amounts through a charge to earnings and a credit to an allowance account based on its assessment of the current status of the individual accounts. Balances which remain outstanding after management has used reasonable collection efforts are written off through a charge to the valuation allowance and a credit to trade accounts receivable. Recoveries of trade receivables previously written off are recorded when received.

 Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Concentration Risk

Credit Risk

       The Company extends unsecured credit to its customers. The Company’s concentration in the building materials industry has the potential to impact its exposure to credit risk because changes in economic or other conditions in the construction industry may similarly affect the Company’s customers. The Company derived most of its revenue from BlueLinx, its distributor of ChoiceDek® products.

Major Customers

The Company’s revenues are derived principally from national and regional building products distributors. BlueLinx is the Company’s largest single customer, distributing both the ChoiceDek® brand of decking products sold exclusively at Lowe’s as well as the Company’s MoistureShield® decking products in select geographies. For the nine months ended September 30, 2014 and the nine months ended September 30, 2013, BlueLinx represented approximately 60% of the Company’s revenue. A loss of this customer, or a major reduction in their business, could cause a significant reduction in our liquidity.  We are currently working to increase our distribution network that will reduce this customer’s concentration.

The Company has significant customer concentration, with one customer representing approximately 50% of our accounts receivable at September 30, 2014, as compared to approximately 80% at December 31, 2013. A loss of this customer, or a major reduction in their business, could cause a significant reduction in our liquidity. We are currently working to expand our distribution network, which will reduce this customer’s concentration.

Cash

  The Company maintains bank accounts that are insured by the Federal Deposit Insurance Corporation (FDIC) up to $250,000. At times, cash balances may be in excess of the FDIC limit. The Company believes no significant concentrations of risk exist with respect to its cash.

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Note 9 - Commitments and Contingencies (Details) (USD $) In Millions, unless otherwise specified	Sep. 30, 2014	Sep. 30, 2009	Dec. 31, 2008
Commitments and Contingencies Disclosure [Abstract]
Loss Contingency, Estimate of Possible Loss		$ 5.1	$ 2.9
Loss Contingency, Range of Possible Loss, Maximum	$ 2.0

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Note 8 - Related Party Transactions (Details) (USD $)	1 Months Ended
	Mar. 18, 2011
Minimum [Member]
Note 8 - Related Party Transactions (Details) [Line Items]
Monitoring Fees	$ 250,000
Maximum [Member]
Note 8 - Related Party Transactions (Details) [Line Items]
Monitoring Fees	$ 500,000

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Note 3 - Statements of Cash Flows

9 Months Ended

Sep. 30, 2014

Supplemental Cash Flow Elements [Abstract]

Cash Flow, Supplemental Disclosures [Text Block]

Note 3: Statements of Cash Flows

In order to determine net cash provided by operating activities, net income has been adjusted by, among other things, changes in current assets and current liabilities, excluding changes in cash, current maturities of long-term debt and current notes payable. Those changes, shown as an (increase) decrease in current assets and an increase (decrease) in current liabilities, are as follows (in thousands):

	Nine Months Ended
	September 30, 2014			September 30, 2013
Receivables	$	(510	)	$	74
Inventories		1,109			(589	)
Prepaid expenses		322			426
Accounts payable - trade and related parties		330			(805	)
Accrued liabilities		(89	)		(799	)
Change in current assets and liablilites	$	1,162		$	(1,693	)
Cash paid for interest	$	453		$	422

Supplemental Disclosures of Non-Cash Investing and Financing Activities (in thousands):

	Nine Months Ended
	September 30, 2014		September 30, 2013
Notes payable for financing insurance policies	$	994	$	727

XML

Balance Sheets (unaudited) (USD $) In Thousands, unless otherwise specified	Sep. 30, 2014	Dec. 31, 2013
Current assets:
Cash	$ 577	$ 124
Trade accounts receivable, net of allowance of $46 and $44 at September 30, 2014 and December 31, 2013, respectively	3,555	3,095
Accounts receivable - related party	30	55
Inventories	11,654	13,150
Prepaid expenses	1,581	522
Total current assets	17,397	16,946
Land, buildings and equipment:
Land	2,220	2,220
Buildings and leasehold improvements	16,991	16,972
Machinery and equipment	50,035	47,479
Construction in progress	2,944	3,962
Total land, buildings and equipment	72,190	70,633
Less accumulated depreciation	44,577	41,808
Net land, buildings and equipment	27,613	28,825
Debt issuance costs, net of accumulated amortization of $912 and $634 at September 30, 2014 and December 31, 2013, respectively	575	853
Other assets	380	380
Total other assets	955	1,233
Total assets	45,965	47,004
Current liabilities:
Accounts payable – trade	4,251	3,993
Accounts payable – related parties	85	13
Current maturities of long-term debt	1,729	1,209
Accruals related to expected settlement of class action lawsuit		133
Other accrued liabilities	3,903	3,859
Working capital line of credit		5,135
Total current liabilities	9,968	14,342
Long-term debt, less current maturities	36,017	34,972
Additional paid-in capital	53,660	53,660
Accumulated deficit	(79,917)	(81,100)
Total stockholders' deficit	(25,360)	(26,543)
Total liabilities and stockholders' deficit	45,965	47,004
Series E Convertible Preferred Stock [Member]
Current liabilities:
Series E cumulative convertible preferred stock, $0.01 par value; 30,000 shares authorized, 20,524 shares issued and outstanding at September 30, 2014 and December 31, 2013, including accrued unpaid dividends of $4,816 and $3,709 at September 30, 2014 and December 31, 2013, respectively	25,340	24,233
Common Class A [Member]
Current liabilities:
Class of stock, common stock, value	896	882
Convertible Common Stock [Member]
Current liabilities:
Class of stock, common stock, value	$ 1	$ 15

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Note 1 - Unaudited Information

9 Months Ended

Sep. 30, 2014

Unaudited Information [Abstract]

Unaudited Information [Text Block]

Note 1: Unaudited Information

     Advanced Environmental Recycling Technologies, Inc. (the Company or AERT) has prepared the financial statements included herein without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (SEC). However, all adjustments have been made to the accompanying financial statements, which are, in the opinion of the Company’s management, necessary for a fair presentation of the Company’s operating results. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to such rules and regulations.  Although the Company believes that the disclosures are adequate to make the information presented herein not misleading, it is recommended that these financial statements be read in conjunction with the financial statements and the notes thereto included in the Company’s latest annual report on Form 10-K.

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Note 4 - Significant Accounting Policies (Details) (USD $) In Millions, unless otherwise specified	9 Months Ended					12 Months Ended
	Sep. 30, 2014	Sep. 30, 2013	Sep. 30, 2014 BlueLinx [Member] Sales Revenue, Net [Member] Customer Concentration Risk [Member]	Sep. 30, 2013 BlueLinx [Member] Sales Revenue, Net [Member] Customer Concentration Risk [Member]	Sep. 30, 2014 Accounts Receivable [Member] Customer Concentration Risk [Member]	Dec. 31, 2013 Accounts Receivable [Member] Customer Concentration Risk [Member]
Note 4 - Significant Accounting Policies (Details) [Line Items]
Sales Discounts, Returns and Allowances, Goods (in Dollars)	$ 2.6	$ 2.6
Concentration Risk, Percentage			60.00%	60.00%	50.00%	80.00%

XML

Note 5 - Income Taxes (Details) (USD $)	9 Months Ended
	Sep. 30, 2014
Note 5 - Income Taxes (Details) [Line Items]
Deferred Tax Assets, Operating Loss Carryforwards, Subject to Expiration	$ 27,000,000
Effective Income Tax Rate Reconciliation, Percent	0.00%
Unrecognized Tax Benefits	0
Domestic Tax Authority [Member] | Internal Revenue Service (IRS) [Member]
Note 5 - Income Taxes (Details) [Line Items]
Open Tax Year	2011
State and Local Jurisdiction [Member] | States of California and Texas [Member]
Note 5 - Income Taxes (Details) [Line Items]
Open Tax Year	2010
Amount Recognized Per Year [Member]
Note 5 - Income Taxes (Details) [Line Items]
Deferred Tax Assets, Operating Loss Carryforwards, Subject to Expiration	$ 800,000

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Note 2 - Description of the Company

9 Months Ended

Sep. 30, 2014

Disclosure Text Block [Abstract]

Business Description and Basis of Presentation [Text Block]

Note 2: Description of the Company

AERT, founded in 1988, recycles polyethylene plastic and develops, manufactures, and markets composite building materials that are used in place of traditional wood or plastic products for exterior applications in building and remodeling homes and for certain other industrial or commercial building purposes. The Company’s products are made primarily from approximately equal amounts of waste wood fiber, which have been cleaned, sized and reprocessed, and recycled polyethylene plastics which have been cleaned, processed, and reformulated utilizing our patented and proprietary technologies. Its products have been extensively tested, and are sold by leading national companies such as BlueLinx Corporation (BlueLinx), Lowe’s Companies, Inc. (Lowe’s) and Therma-Tru Corporation. The Company’s products are primarily used in renovation and remodeling by consumers, homebuilders, and contractors as an exterior environmentally responsible building alternative for decking, railing, and trim products.

While BlueLinx Corporation is currently the Company’s primary distributor for its ChoiceDek® products, which are sold exclusively by Lowe’s, two new customers are distributing to Lowe’s in the western United States.

The Company currently manufactures all of its composite products at extrusion facilities in Springdale, Arkansas. The Company operates a plastic recycling, blending and storage facility in Lowell, Arkansas, where it also leases warehouses and land for inventory storage. AERT also maintains a facility at Watts, Oklahoma where it cleans, reformulates, and recycles polyethylene plastic scrap as a means to reduce the Company’s costs of recycled plastics.

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Balance Sheets (unaudited) (Parentheticals) (USD $) In Thousands, except Share data, unless otherwise specified	Sep. 30, 2014	Dec. 31, 2013
Trade accounts receivable, allowance (in Dollars)	$ 46	$ 44
Debt issuance costs, accumulated amortization (in Dollars)	912	634
Series E cumulative convertible preferred stock, accrued unpaid dividends (in Dollars)	$ 4,816	$ 3,709
Series E Convertible Preferred Stock [Member]
Series E convertible preferred stock, par value (in Dollars per share)	$ 0.01	$ 0.01
Series E convertible preferred stock, shares authorized	30,000	30,000
Series E convertible preferred stock, shares issued	20,524	20,524
Series E convertible preferred stock, shares outstanding	20,524	20,524
Common Class A [Member]
Class of stock, common stock, par value (in Dollars per share)	$ 0.01	$ 0.01
Class of stock, common stock, shares authorized	525,000,000	525,000,000
Class of stock, common stock, shares issued	89,541,289	88,165,632
Class of stock, common stock, shares outstanding	89,541,289	88,165,632
Convertible Common Stock [Member]
Class of stock, common stock, par value (in Dollars per share)	$ 0.01	$ 0.01
Class of stock, common stock, shares authorized	7,500,000	7,500,000
Class of stock, common stock, shares issued	89,873	1,465,530
Class of stock, common stock, shares outstanding	89,873	1,465,530

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Note 3 - Statements of Cash Flows (Tables)

9 Months Ended

Sep. 30, 2014

Supplemental Cash Flow Elements [Abstract]

Cash Flow, Operating Capital [Table Text Block]

	Nine Months Ended
	September 30, 2014			September 30, 2013
Receivables	$	(510	)	$	74
Inventories		1,109			(589	)
Prepaid expenses		322			426
Accounts payable - trade and related parties		330			(805	)
Accrued liabilities		(89	)		(799	)
Change in current assets and liablilites	$	1,162		$	(1,693	)
Cash paid for interest	$	453		$	422

Schedule of Cash Flow, Supplemental Disclosures [Table Text Block]

	Nine Months Ended
	September 30, 2014		September 30, 2013
Notes payable for financing insurance policies	$	994	$	727

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Document And Entity Information	9 Months Ended
	Sep. 30, 2014
Document Information [Line Items]
Entity Registrant Name	ADVANCED ENVIRONMENTAL RECYCLING TECHNOLOGIES INC
Document Type	10-Q
Current Fiscal Year End Date	--12-31
Amendment Flag	false
Entity Central Index Key	0000849706
Entity Current Reporting Status	Yes
Entity Voluntary Filers	No
Entity Filer Category	Smaller Reporting Company
Entity Well-known Seasoned Issuer	No
Document Period End Date	Sep. 30, 2014
Document Fiscal Year Focus	2014
Document Fiscal Period Focus	Q3
Common Class A [Member]
Document Information [Line Items]
Entity Common Stock, Shares Outstanding	89,541,289
Common Class B [Member]
Document Information [Line Items]
Entity Common Stock, Shares Outstanding	89,873

XML

Note 4 - Significant Accounting Policies (Tables)

9 Months Ended

Sep. 30, 2014

Accounting Policies [Abstract]

Schedule of Inventory, Current [Table Text Block]

	September 30, 2014		December 31, 2013
Raw materials	$	5,388	$	5,100
Work in process		1,511		2,337
Finished goods		4,755		5,713
Total inventory	$	11,654	$	13,150

XML

Statements of Operations (unaudited) (USD $) In Thousands, except Share data, unless otherwise specified	3 Months Ended		9 Months Ended
	Sep. 30, 2014	Sep. 30, 2013	Sep. 30, 2014	Sep. 30, 2013
Net sales	$ 20,724	$ 14,705	$ 61,961	$ 57,588
Cost of goods sold	15,639	14,362	48,682	46,353
Gross margin	5,085	343	13,279	11,235
Selling and administrative costs	3,027	2,772	9,037	8,867
Gain from asset disposition	(50)	(3)	(64)	(4)
Operating income (loss)	2,108	(2,426)	4,306	2,372
Other income and expenses:
Other income or (expense)	12	(76)	11	(61)
Income from insurance proceeds		2,500		2,500
Gain (loss) from involuntary conversion of non-monetary assets due to fire	(500)		345
Net interest expense	(779)	(726)	(2,372)	(2,174)
Net income (loss)	841	(728)	2,290	2,637
Dividends on preferred stock	(375)	(353)	(1,107)	(1,043)
Net income (loss) applicable to common stock	$ 466	$ (1,081)	$ 1,183	$ 1,594
Income (loss) per share of common stock (basic and diluted) (in Dollars per share)	$ 0.00	$ (0.01)	$ 0.00	$ 0.01
Weighted average common shares outstanding (basic and diluted) (in Shares)	424,165,483	89,631,162	419,275,834	400,217,173

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Note 7 - Line of Credit

9 Months Ended

Sep. 30, 2014

Line Of Credit [Abstract]

Line Of Credit [Text Block]

Note 7: Line of Credit

The Company has an $8.0 million line of credit (Revolver) loan with the AloStar Bank of Commerce, subject to a reserve of $1.0 million. Interest is assessed at the greater of (a) 1.0% (minimum) plus 4%, or (b) the LIBOR rate as shown in the Wall Street Journal on such day for United States dollar deposits for the one month delivery of funds in an amount approximately equal to the principal amount of the Revolver.  If the LIBOR cannot be determined, the interest will be calculated using the prime lending rate plus 2%.  Because LIBOR was less than 1% on September 30, 2014, the interest rate was determined to be 5%. The Revolver is secured by 85% of accounts receivable after a reduction for amounts owed by international customers.  The Revolver is also secured by 60% of the eligible inventory or 85% of the net orderly liquidation value of the inventory.  There were no outstanding borrowings on the Revolver at September 30, 2014.  The proceeds available to draw down on the Revolver at September 30, 2014 were $7.0 million.

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Note 6 - Earnings Per Share

9 Months Ended

Sep. 30, 2014

Earnings Per Share [Abstract]

Earnings Per Share [Text Block]

Note 6: Earnings Per Share

The Company utilizes the two-class method for computing and presenting earnings per share. The Company currently has two classes of common stock (the Common Stock) and one class of cumulative participating preferred stock, Series E (the Preferred Stock). Pursuant to the Series E Designation, holders of the Series E Preferred Stock are entitled to receive per share dividends equal to 6% per annum of the stated value of $1,000 per share of Series E Preferred Stock when declared by the Company’s Board of Directors. In addition, holders of the Series E Preferred Stock are entitled to participate in any dividends declared on shares of the Company’s Common Stock on an as-converted basis. Therefore, the Preferred Stock is considered a participating security requiring the two-class method for the computation and presentation of net income per share – basic.

The two-class computation method for each period segregates basic earnings per common and participating share into two categories: distributed earnings per share (i.e., the Preferred Stock stated dividend) and undistributed earnings per share, which allocates earnings after subtracting the Preferred Stock dividend to the total of weighted average common shares outstanding plus equivalent converted common shares related to the Preferred Stock. Basic earnings per common and participating share exclude the effect of Common Stock equivalents, and are computed using the two-class computation method.

In computing diluted EPS, only potential common shares that are dilutive—those that reduce earnings per share or increase loss per share—are included. The exercise of options or conversion of convertible securities is not assumed if the result would be antidilutive, such as when a loss from continuing operations is reported. As a result, if there is a loss from continuing operations, diluted EPS would be computed in the same manner as basic EPS is computed, even if an entity has net income after adjusting for discontinued operations, an extraordinary item or the cumulative effect of an accounting change.

The following presents the two-class method for the three and nine months ended September 30, 2014 and 2013:

	Three Months Ended					Nine Months Ended
	September 30, 2014		September 30, 2013			September 30, 2014		September 30, 2013
Net income (loss) applicable to common stock	$	466	$	(1,081	)	$	1,183	$	1,594
Preferred stock dividend		375		353			1,107		1,043
Income (loss) before dividends	$	841	$	(728	)	$	2,290	$	2,637
Per share information:
Basic earnings per common and participating share:
Distributed earnings per share:
Common	$	0.00	$	0.00		$	0.00	$	0.00
Preferred	$	0.00	$	0.00		$	0.00	$	0.00
Earned, unpaid dividends per share:
Preferred	$	18.27	$	17.19		$	53.93	$	50.81
Undistributed earnings (losses) per share:
Common	$	0.00	$	(0.01	)	$	0.00	$	0.00
Preferred	$	17.91		-		$	45.30	$	60.28
Total basic earnings (losses) per common and participating share:
Common	$	0.00	$	(0.01	)	$	0.00	$	0.00
Preferred	$	36.18	$	17.19		$	99.23	$	111.09
Basic weighted average common shares:
Common weighted average number of shares		89,631,162		89,631,162			89,631,162		89,631,162
Participating preferred shares - if converted		334,534,321		315,175,913			329,644,672		310,586,011
Total weighted average number of shares		424,165,483		404,807,075			419,275,834		400,217,173
Total weighted average number of preferred shares		20,524		20,524			20,524		20,524

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Note 4 - Significant Accounting Policies (Details) - Components of Inventory (unaudited) (USD $) In Thousands, unless otherwise specified	Sep. 30, 2014	Dec. 31, 2013
Components of Inventory (unaudited) [Abstract]
Raw materials	$ 5,388	$ 5,100
Work in process	1,511	2,337
Finished goods	4,755	5,713
Total inventory	$ 11,654	$ 13,150

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Note 6 - Earnings Per Share (Tables)

9 Months Ended

Sep. 30, 2014

Earnings Per Share [Abstract]

Schedule of Earnings Per Share, Basic and Diluted [Table Text Block]

	Three Months Ended					Nine Months Ended
	September 30, 2014		September 30, 2013			September 30, 2014		September 30, 2013
Net income (loss) applicable to common stock	$	466	$	(1,081	)	$	1,183	$	1,594
Preferred stock dividend		375		353			1,107		1,043
Income (loss) before dividends	$	841	$	(728	)	$	2,290	$	2,637
Per share information:
Basic earnings per common and participating share:
Distributed earnings per share:
Common	$	0.00	$	0.00		$	0.00	$	0.00
Preferred	$	0.00	$	0.00		$	0.00	$	0.00
Earned, unpaid dividends per share:
Preferred	$	18.27	$	17.19		$	53.93	$	50.81
Undistributed earnings (losses) per share:
Common	$	0.00	$	(0.01	)	$	0.00	$	0.00
Preferred	$	17.91		-		$	45.30	$	60.28
Total basic earnings (losses) per common and participating share:
Common	$	0.00	$	(0.01	)	$	0.00	$	0.00
Preferred	$	36.18	$	17.19		$	99.23	$	111.09
Basic weighted average common shares:
Common weighted average number of shares		89,631,162		89,631,162			89,631,162		89,631,162
Participating preferred shares - if converted		334,534,321		315,175,913			329,644,672		310,586,011
Total weighted average number of shares		424,165,483		404,807,075			419,275,834		400,217,173
Total weighted average number of preferred shares		20,524		20,524			20,524		20,524

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Note 10: New Accounting Pronouncements

9 Months Ended

Sep. 30, 2014

Disclosure Text Block [Abstract]

Description of New Accounting Pronouncements Not yet Adopted [Text Block]

Note 10:  New Accounting Pronouncements

In May 2014, the FASB issued Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers (ASU 2014-09), which supersedes nearly all existing revenue recognition guidance under U.S. GAAP. The core principle of ASU 2014-09 is to recognize revenues when promised goods or services are transferred to customers in an amount that reflects the consideration to which an entity expects to be entitled for those goods or services. ASU 2014-09 defines a five step process to achieve this core principle and, in doing so, more judgment and estimates may be required within the revenue recognition process than are required under existing U.S. GAAP.

The standard is effective for annual periods beginning after December 15, 2016, and interim periods therein, using either of the following transition methods: (i) a full retrospective approach reflecting the application of the standard in each prior reporting period with the option to elect certain practical expedients, or (ii) a retrospective approach with the cumulative effect of initially adopting ASU 2014-09 recognized at the date of adoption (which includes additional footnote disclosures).  We are currently evaluating the impact of our pending adoption of ASU 2014-09 on our financial statements and have not yet determined the transition method we will utilize upon adoption of the standard in 2017.

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Note 8 - Related Party Transactions

9 Months Ended

Sep. 30, 2014

Related Party Transactions [Abstract]

Related Party Transactions Disclosure [Text Block]

Note 8:  Related Party Transactions

Advisory Services

The Company entered into an Advisory Services Agreement between H.I.G. Capital, L.L.C. and the Company (the Advisory Services Agreement) on March 18, 2011 that provides for an annual monitoring fee between $250,000 and $500,000 (the Monitoring Fee) and reimbursement of all other out-of-pocket fees and expenses incurred by H.I.G. Capital, L.L.C.

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Note 9 - Commitments and Contingencies

9 Months Ended

Sep. 30, 2014

Commitments and Contingencies Disclosure [Abstract]

Commitments and Contingencies Disclosure [Text Block]

Note 9: Commitments and Contingencies

AERT is involved from time to time in litigation arising from the normal course of business that is not disclosed in its filings with the SEC. In management's opinion, this litigation is not expected to materially impact the Company's results of operations or financial condition.

Class Action Lawsuits

The U.S. District Court, Western District of Washington (Seattle Division) approved a class action settlement in January 2009 related to a purported class action lawsuit seeking to recover on behalf of purchasers of ChoiceDek® composite decking for damages allegedly caused by mold and mildew stains on their decks. The settlement includes decking material purchased from January 1, 2004 through December 31, 2007, along with decking material purchased after December 31, 2007 that was manufactured before October 1, 2006, the date a mold inhibitor was introduced into the manufacturing process.

In 2008, the Company accrued an estimated $2.9 million for resolving claims. In the third quarter of 2009, the Company increased its estimate of costs to be incurred in resolving claims under the settlement by $5.1 million. The estimate was revised due to events that occurred and information that became available after the second quarter of 2009 concerning primarily the number of claims received. The deadline for submitting new claims has now passed. The claim resolution process had an annual net cost limitation to the Company of $2.0 million. The claims resolution process is now completed.

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Accounting Policies, by Policy (Policies)

9 Months Ended

Sep. 30, 2014

Accounting Policies [Abstract]

Revenue Recognition, Policy [Policy Text Block]

Revenue Recognition Policy

The Company recognizes revenue when the title and risk of loss have passed to the customer, there is persuasive evidence of an arrangement, shipment has occurred or services have been rendered, the sales price is determinable and collectability is reasonably assured. The Company typically recognizes revenue at the time product is shipped or when segregated and billed under a bill and hold arrangement. Sales are recorded net of discounts, rebates and returns, which were $2.6 million for the nine months ended September 30, 2013 and 2014.

Estimates of expected sales discounts are calculated by applying the appropriate sales discount rate to all unpaid invoices that are eligible for the discount. The Company’s sales prices are determinable given that its sales discount rates are fixed and given the predictability with which customers take sales discounts.

Shipping and Handling Cost, Policy [Policy Text Block]

Shipping and Handling

The Company records shipping fees billed to customers in net sales and records the related expenses in cost of goods sold.

Inventory, Policy [Policy Text Block]

Inventories

Inventories are stated at the lower of cost (first-in, first-out method) or market. Material, labor, and factory overhead necessary to produce the inventories are included at their cost. Inventories consisted of the following (in thousands):

	September 30, 2014		December 31, 2013
Raw materials	$	5,388	$	5,100
Work in process		1,511		2,337
Finished goods		4,755		5,713
Total inventory	$	11,654	$	13,150

Receivables, Policy [Policy Text Block]

Accounts Receivable

Accounts receivable are uncollateralized customer obligations due under normal trade terms generally requiring payment within thirty days from the invoice date. Trade accounts are stated at the amount management expects to collect from outstanding balances. Payments of accounts receivable are allocated to the specific invoices identified on the customers’ remittance advice.

Accounts receivable are carried at original invoice amounts less an estimated reserve provided for returns and discounts based on a review of historical rates of returns and expected discounts. The carrying amount of accounts receivable is reduced, if needed, by a valuation allowance that reflects management’s best estimate of the amounts that will not be collected. Management individually reviews all overdue accounts receivable balances and, based on an assessment of current creditworthiness, estimates the portion, if any, of the balance that will not be collected. Management provides for probable uncollectible amounts through a charge to earnings and a credit to an allowance account based on its assessment of the current status of the individual accounts. Balances which remain outstanding after management has used reasonable collection efforts are written off through a charge to the valuation allowance and a credit to trade accounts receivable. Recoveries of trade receivables previously written off are recorded when received.

Use of Estimates, Policy [Policy Text Block]

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Major Customers, Policy [Policy Text Block]

Concentration Risk

Credit Risk

       The Company extends unsecured credit to its customers. The Company’s concentration in the building materials industry has the potential to impact its exposure to credit risk because changes in economic or other conditions in the construction industry may similarly affect the Company’s customers. The Company derived most of its revenue from BlueLinx, its distributor of ChoiceDek® products.

Major Customers

The Company’s revenues are derived principally from national and regional building products distributors. BlueLinx is the Company’s largest single customer, distributing both the ChoiceDek® brand of decking products sold exclusively at Lowe’s as well as the Company’s MoistureShield® decking products in select geographies. For the nine months ended September 30, 2014 and the nine months ended September 30, 2013, BlueLinx represented approximately 60% of the Company’s revenue. A loss of this customer, or a major reduction in their business, could cause a significant reduction in our liquidity.  We are currently working to increase our distribution network that will reduce this customer’s concentration.

The Company has significant customer concentration, with one customer representing approximately 50% of our accounts receivable at September 30, 2014, as compared to approximately 80% at December 31, 2013. A loss of this customer, or a major reduction in their business, could cause a significant reduction in our liquidity. We are currently working to expand our distribution network, which will reduce this customer’s concentration.

Cash and Cash Equivalents, Policy [Policy Text Block]

Cash

  The Company maintains bank accounts that are insured by the Federal Deposit Insurance Corporation (FDIC) up to $250,000. At times, cash balances may be in excess of the FDIC limit. The Company believes no significant concentrations of risk exist with respect to its cash.

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Note 3 - Statements of Cash Flows (Details) - Supplemental Disclosures of Non-Cash Investing and Financing Activities (unaudited) (USD $) In Thousands, unless otherwise specified	9 Months Ended
	Sep. 30, 2014	Sep. 30, 2013
Supplemental Disclosures of Non-Cash Investing and Financing Activities (unaudited) [Abstract]
Notes payable for financing insurance policies	$ 994	$ 727

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Note 6 - Earnings Per Share (Details) - Basic and Diluted Earnings Per Share (Unaudited) (USD $) In Thousands, except Share data, unless otherwise specified	3 Months Ended		9 Months Ended
	Sep. 30, 2014	Sep. 30, 2013	Sep. 30, 2014	Sep. 30, 2013
Note 6 - Earnings Per Share (Details) - Basic and Diluted Earnings Per Share (Unaudited) [Line Items]
Net income (loss) applicable to common stock (in Dollars)	$ 466	$ (1,081)	$ 1,183	$ 1,594
Preferred stock dividend (in Dollars)	375	353	1,107	1,043
Income (loss) before dividends (in Dollars)	$ 841	$ (728)	$ 2,290	$ 2,637
Basic weighted average common shares:
Weighted average number of shares (in Shares)	424,165,483	404,807,075	419,275,834	400,217,173
Common Stock [Member]
Distributed earnings per share:
Distributed earnings per share	$ 0.00	$ 0.00	$ 0.00	$ 0.00
Undistributed earnings (losses) per share:
Total basic earnings per common and participating share	$ 0.00	$ (0.01)	$ 0.00	$ 0.00
Undistributed earnings per share	$ 0.00	$ (0.01)	$ 0.00	$ 0.00
Basic weighted average common shares:
Weighted average number of shares (in Shares)	89,631,162	89,631,162	89,631,162	89,631,162
Preferred Stock [Member]
Distributed earnings per share:
Distributed earnings per share	$ 0.00	$ 0.00	$ 0.00	$ 0.00
Earned, unpaid dividends per share:
Preferred	$ 18.27	$ 17.19	$ 53.93	$ 50.81
Undistributed earnings (losses) per share:
Total basic earnings per common and participating share	$ 36.18	$ 17.19	$ 99.23	$ 111.09
Undistributed earnings per share	$ 17.91		$ 45.30	$ 60.28
Basic weighted average common shares:
Weighted average number of shares (in Shares)	20,524	20,524	20,524	20,524
Participating Preferred Shares [Member]
Basic weighted average common shares:
Weighted average number of shares (in Shares)	334,534,321	315,175,913	329,644,672	310,586,011

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Statements of Cash Flows (unaudited) (USD $) In Thousands, unless otherwise specified	9 Months Ended
	Sep. 30, 2014	Sep. 30, 2013
Net income applicable to common stock	$ 1,183	$ 1,594
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	3,070	3,726
Dividends on preferred stock	1,107	1,043
Accrued interest converted to long-term debt	1,917	1,751
Gain from asset disposition	(64)	(4)
Increase in accounts receivable allowance	2	23
Income from insurance proceeds		(2,500)
Gain from involuntary conversion of non-monetary assets due to fire	(345)
Change in other assets		(20)
Changes in other current assets and current liabilities	1,162	(1,693)
Net cash provided by operating activities	8,032	3,920
Cash flows from investing activities:
Purchases of land, buildings and equipment	(1,587)	(2,756)
Proceeds from assets disposition	71	11
Insurance proceeds from involuntary conversion of non-monetary assets due to fire	418
Net cash used in investing activities	(1,098)	(2,745)
Cash flows from financing activities:
Payments on notes	(1,346)	(1,318)
Net payments on line of credit	(5,135)	(126)
Debt issuance costs		(32)
Net cash used in financing activities	(6,481)	(1,476)
Increase (decrease) in cash	453	(301)
Cash, beginning of period	124	346
Cash, end of period	$ 577	$ 45

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Note 5 - Income Taxes

9 Months Ended

Sep. 30, 2014

Income Tax Disclosure [Abstract]

Income Tax Disclosure [Text Block]

Note 5: Income Taxes

As of September 30, 2014, the Company had net operating loss (NOL) carryforwards for federal income tax purposes, which are available to reduce future taxable income. If not utilized, the NOL carryforwards will expire between 2017 and 2031. In March 2011, H.I.G. AERT, LLC acquired a controlling interest in the Company, which resulted in a significant restriction on the utilization of the Company’s net operating loss carryforwards. It is estimated that the utilization of future NOL carryforwards will be limited (per IRC 382) to approximately $0.8 million per year for the next 18 years. The impact of this limitation is approximately $27.0 million in NOL’s, which will expire before the Company can use them. The estimated annual effective income tax rate for 2014 is 0% due to the use of net operating loss carryforwards.

As there is insufficient evidence that the Company will be able to generate adequate future taxable income to enable it to realize its net operating loss carryforwards prior to expiration, the Company maintains a valuation allowance to recognize its deferred tax assets only to the extent of its deferred tax liabilities.

Based upon a review of its income tax filing positions, the Company believes that its positions would be sustained upon an audit and does not anticipate any adjustments that would result in a material change to its financial position. Therefore, no reserves for uncertain income tax positions have been recorded. The Company recognizes interest related to income taxes as interest expense and recognizes penalties as operating expense.

The Company is subject to routine audits by various taxing jurisdictions. The examination by the Internal Revenue Service (the Service) of the Company’s 2010 federal tax return yielded changes that did not affect the tax that was reported on the return; therefore, the Service has accepted the return. The Company is no longer subject to income tax examinations by taxing authorities for years before 2011, except in the States of California and Texas, for which the 2010 tax year is still subject to examination.

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Note 7 - Line of Credit (Details) (Revolving Credit Facility [Member], AloStar Bank of Commerce [Member], USD $)	9 Months Ended
	Sep. 30, 2014
Note 7 - Line of Credit (Details) [Line Items]
Line of Credit Facility, Maximum Borrowing Capacity (in Dollars)	$ 8,000,000
Revolver Loan Reserve (in Dollars)	1,000,000
Debt Instrument, Interest Rate, Stated Percentage Rate Range, Minimum	1.00%
Debt Instrument, Basis Spread on Variable Rate	4.00%
Debt Instrument, Interest Rate, Stated Percentage	5.00%
Debt Instrument, Secured By Accounts Reveivable, Percentage	85.00%
Long-term Line of Credit (in Dollars)	0.60
Debt Instrument, Secured By Net Orderly Liquidation of Inventory, Percentage	85.00%
Line of Credit Facility, Remaining Borrowing Capacity (in Dollars)	$ 7,000,000
Prime Rate [Member]
Note 7 - Line of Credit (Details) [Line Items]
Debt Instrument, Basis Spread on Variable Rate	2.00%

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Note 3 - Statements of Cash Flows (Details) - Changes in Operating Assets and Liability Accounts (unaudited) (USD $) In Thousands, unless otherwise specified	9 Months Ended
	Sep. 30, 2014	Sep. 30, 2013
Changes in Operating Assets and Liability Accounts (unaudited) [Abstract]
Receivables	$ (510)	$ 74
Inventories	1,109	(589)
Prepaid expenses	322	426
Accounts payable - trade and related parties	330	(805)
Accrued liabilities	(89)	(799)
Change in current assets and liablilites	1,162	(1,693)
Cash paid for interest	$ 453	$ 422