NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The
condensed consolidated balance sheet at December 31, 2013 has been derived from our audited financial statements. In the opinion
of management, the unaudited interim condensed consolidated financial statements include all adjustments (consisting only of normal,
recurring adjustments) necessary to present fairly the financial position, results of operations and cash flows for the interim
periods presented. The results of operations for the three months ended March 31, 2014 are not necessarily indicative of the operating
results to be expected for the full year or any future period.
The
accompanying unaudited condensed financial statements have been prepared pursuant to the rules and regulations of the Securities
and Exchange Commission. 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. Therefore, these financial statements should be read in conjunction with the consolidated financial statements
and accompanying footnotes included in our Annual Report on Form 10-K for the year ended December 31, 2013.
Aetrium
has incurred significant operating losses and, as of March 31, 2014, we had an accumulated deficit of approximately $62 million.
In recent years, the losses have been primarily attributed to the operations of our Test Handler product line and significant
legal expenses related to litigation. We have taken aggressive actions to reduce our expenses and preserve cash, including salary
reductions for executive officers, pay freezes and reductions in workforce. In addition, since July of 2013, we have implemented
several strategic initiatives intended to stabilize the company and return us to profitability. In July 2013, as described in
Note 2, we sold the assets related to our Reliability Test Products (RTP) line of products and received proceeds of approximately
$1.7 million net of transaction expenses, plus future potential holdback and contingent earn-out consideration. In April 2014,
as described in Note 10, we acquired a business that manufactures modular housing units for commercial and residential applications
and we issued $6.5 million of promissory notes to finance this acquisition. Also in April 2014, we entered into an agreement to
transfer the assets related to our Test Handler product line to a larger semiconductor equipment company in exchange for future
royalty payments. There can be no assurance that these strategic initiatives will lead to sufficient revenue in the future to
cover our expenses and achieve profitability for Aetrium on a consistent basis or at all. Also, there can be no assurance that
our existing cash reserves, together with funds generated by our operations and any future financings, will be sufficient to satisfy
our debt payment obligations. Our inability to generate funds or obtain financing sufficient to satisfy our debt payment obligations
may result in such obligations being accelerated by our lenders, which would likely have a material adverse effect on our business,
financial condition and results of operations. Given these uncertainties, there can be no assurance that our existing cash reserves
will be sufficient to avoid liquidity issues and/or fund operations beyond this fiscal year.
2.
|
DISCONTINUED
OPERATIONS
|
In
July 2013, we sold the assets related to our RTP line of products. The RTP product line includes test equipment that provides
semiconductor manufacturers with structural performance data to aid in the evaluation and improvement of IC designs and manufacturing
processes to increase IC yield and reliability.
The
purchase price included $1.9 million cash plus up to $1.5 million in holdback and future contingent consideration. The contingent
consideration included the following:
|
●
|
$500,000
holdback amount to secure Aetrium’s obligations related to representations, warranties and covenants. $300,000 of the
holdback amount is payable on July 31, 2014 and $200,000 is payable on January 15, 2015, subject to indemnity claims by the
purchaser.
|
|
|
|
|
●
|
Up
to $1,000,000 contingent earn-out payment. If RTP net revenues for the nine months ended April 30, 2014 are in the range of
$2,250,000 to $3,750,000 or more, a pro rata earn-out payment will be payable to Aetrium on May 31, 2014. Based on monthly
revenue reports received from the purchaser, we estimate we will receive an earn-out payment of approximately $400,000 by
May 31, 2014.
|
The
receivables related to holdbacks are included in our condensed consolidated balance sheet as follows: the current portion ($500,000
at March 31, 2014 and $300,000 at December 31, 2013) is included in the caption “Other current assets”. See Note 6.
The noncurrent portion ($0 at March 31, 2014 and $200,000 at December 31, 2013) is included in the caption “Other assets”.
We expect to collect 100% of the holdback amounts.
Condensed
results from discontinued operations included in our condensed consolidated statement of operations for the three months ended
March 31, 2013 are summarized below (in thousands).
Net sales
|
|
$
|
729
|
|
Cost of goods sold
|
|
|
220
|
|
Gross profit
|
|
|
509
|
|
Operating expenses
|
|
|
429
|
|
Income before income taxes
|
|
|
80
|
|
Income tax expense
|
|
|
28
|
|
Income from discontinued operations
|
|
$
|
52
|
|
Operating
results from discontinued operations exclude building rent, property taxes, and other facility-related and administrative costs
that continued to be incurred following the disposition of the product line.
Basic
and diluted loss per common share is computed by dividing net loss by the weighted-average number of common shares outstanding
during each period. The computation of diluted loss per share excludes the impact of stock options because they would be antidilutive.
4.
|
FAIR
VALUE MEASUREMENTS
|
We
measure fair value for financial reporting purposes in accordance with ASC 820, “
Fair Value Measurement and Disclosures.
”
ASC 820 provides a framework for measuring fair value. The framework includes a fair value hierarchy that prioritizes the inputs
to valuation techniques used to measure fair value. The three levels of the fair value hierarchy defined in ASC 820 include the
following:
|
●
|
Level
1 – Quoted prices in active markets for identical assets or liabilities.
|
|
|
|
|
●
|
Level
2 – Observable inputs other than quoted prices in active markets for identical assets and liabilities, quoted prices
for identical or similar assets or liabilities in inactive markets, or other inputs that are observable or can be corroborated
by observable market data for substantially the full term of the assets or liabilities.
|
|
|
|
|
●
|
Level
3 – Inputs that are generally unobservable and typically reflect management’s estimate of assumptions that market
participants would use in pricing the asset or liability.
|
Financial
assets reported at fair value on a recurring basis include the following at March 31, 2014 (in thousands):
Level 1
|
|
$
|
—
|
|
Level 2
|
|
|
—
|
|
Level 3 (contingent earn-out receivable)
|
|
|
400
|
|
Total
|
|
$
|
400
|
|
The
contingent earn-out receivable is related to the sale of our RTP line of products on July 31, 2013. The sale agreement provides
that if RTP net revenues for the nine months ended April 30, 2014 are in the range of $2,250,000 to $3,750,000 or more, a pro
rata earn-out payment of up to $1.0 million will be payable to Aetrium on May 31, 2014. We determined the fair value of the contingent
earn-out receivable as of the closing date and re-assess the fair value each quarter. Changes to the fair value are included in
current period earnings. We estimate the fair value of the earn-out receivable using discounted cash flow techniques based on
information available at the time, including reported revenues, reported unshipped orders and time remaining in the earn-out period.
The following table summarizes the activity for our Level 3 contingent earn-out receivable (in thousands):
|
|
Level
3
|
|
Balance at December 31, 2013
|
|
$
|
325
|
|
Add – increase in contingent earn-out receivable
based on re-assessment at March 31, 2014 (included in earnings)
|
|
|
75
|
|
Balance at March 31, 2014
|
|
$
|
400
|
|
Quantitative
information about Level 3 fair value measurements at March 31, 2014 is summarized in the table below:
Fair
Value Asset
|
|
Valuation
Technique
|
|
Unobservable
Input
|
|
Amount
|
Earn-out
receivable
|
|
Discounted
cash flow
|
|
Performance
risk factor
|
|
0
percent
|
Inventories
are comprised of the following (in thousands):
|
|
March
31, 2014
|
|
|
December
31, 2013
|
|
|
|
|
|
|
|
|
|
|
Purchased parts and completed subassemblies
|
|
$
|
375
|
|
|
$
|
563
|
|
Work-in-process
|
|
|
332
|
|
|
|
439
|
|
Finished goods, including saleable demonstration equipment
|
|
|
490
|
|
|
|
1,073
|
|
Total inventories
|
|
$
|
1,197
|
|
|
$
|
2,075
|
|
Other
current assets are comprised of the following (in thousands):
|
|
March
31, 2014
|
|
|
December
31, 2013
|
|
|
|
|
|
|
|
|
|
|
Holdback receivable – see Note 2
|
|
$
|
500
|
|
|
$
|
300
|
|
Other
|
|
|
91
|
|
|
|
38
|
|
Total other current assets
|
|
$
|
591
|
|
|
$
|
338
|
|
7.
|
OTHER
ACCRUED LIABILITIES
|
Other
accrued liabilities are comprised of the following (in thousands):
|
|
March 31, 2014
|
|
|
December 31, 2013
|
|
|
|
|
|
|
|
|
|
|
Accrued severance benefits
|
|
$
|
148
|
|
|
$
|
—
|
|
Accrued retirement benefits
|
|
|
70
|
|
|
|
96
|
|
Accrued warranty
|
|
|
23
|
|
|
|
16
|
|
Customer deposit
|
|
|
26
|
|
|
|
108
|
|
Other
|
|
|
61
|
|
|
|
39
|
|
Total other current accrued liabilities
|
|
$
|
328
|
|
|
$
|
259
|
|
In
January 2014, in exchange for voiding a previously executed change of control agreement, we entered into an agreement with an
employee that provided the employee will receive payments equal to twelve months’ of base salary plus reimbursement of the
employer portion of group medical and group dental premiums under COBRA continuation coverage if we terminated employment without
cause at any time, or if the employee voluntarily terminated employment at any time that is six months or more after the effective
date of the agreement. We recorded a charge of $148,000 in the quarter ended March 31, 2014 related to the agreement. In April
2014, we terminated the employee. Pursuant to the terms of the agreement, severance payments will be made in equal bi-weekly installments
through April 2015.
The
accrued retirement benefit was granted to a former officer in fiscal year 2010. The remaining benefit owing amounted to $70,300
at March 31, 2014 and $96,200 at December 31, 2013. The $70,300 balance at March 31, 2014 is scheduled to be paid in equal bi-weekly
installments through December 2014.
Changes
in accrued warranty are summarized below (in thousands):
|
|
Three
months ended March 31,
|
|
|
|
|
2014
|
|
|
2013
|
|
Accrual balance, beginning of period
|
|
$
|
16
|
|
|
$
|
12
|
|
Accruals for warranties
|
|
|
21
|
|
|
|
6
|
|
Settlements made
|
|
|
(14
|
)
|
|
|
(6
|
)
|
Accrual balance, end of period
|
|
$
|
23
|
|
|
$
|
12
|
|
8.
|
STOCK
INCENTIVE PLAN AND SHARE-BASED COMPENSATION
|
The
following table summarizes stock option activity under our stock incentive plan for the three months ended March 31, 2014:
|
|
Number
of Shares
|
|
|
Weighted
Average
Exercise Price
|
|
|
Weighted
Average
Remaining
Contract Term
|
|
|
Aggregate
Intrinsic Value
(in thousands)
|
|
Outstanding, January 1, 2014
|
|
|
88,384
|
|
|
$
|
10.96
|
|
|
|
|
|
|
|
|
|
Options expired
|
|
|
(19,883
|
)
|
|
|
10.02
|
|
|
|
|
|
|
|
|
|
Outstanding, March 31, 2014
|
|
|
68,501
|
|
|
$
|
11.05
|
|
|
|
2.80
years
|
|
|
$
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable, March 31, 2014
|
|
|
60,631
|
|
|
$
|
11.49
|
|
|
|
2.76
years
|
|
|
$
|
0
|
|
All
stock options outstanding at March 31, 2014 are nonqualified options. As explained in Note 10, sixteen of our employees were hired
by Boston Semi Automation LLC (BSA) on April 22, 2014 in connection with the transfer of our Test Handler product line to BSA.
Outstanding options held by certain of these former employees at March 31, 2014 (30,001 options) will expire on July 22, 2014
if not exercised. The remaining options outstanding at March 31, 2014 (38,500 options) will expire at the end of their respective
remaining terms if not exercised. The aggregate intrinsic values in the table above are zero because the option exercise prices
for all outstanding options exceeded Aetrium’s closing stock price on March 31, 2014.
Aetrium
uses the fair value method to measure and recognize share-based compensation. We determine the fair value of share-based awards
on the grant date using the Black-Scholes option valuation model and recognize the compensation expense on a straight-line basis
over the vesting period of the applicable awards. In March 2013, we entered into an agreement with an activist shareholder group
pursuant to which our board of directors was reconstituted to include three incumbent directors and three members of the shareholder
group. As a result of this change of control, unvested stock options held by certain of our officers at that time became immediately
and fully exercisable pursuant to the terms of change of control agreements with such officers. Share-based compensation of approximately
$77,000 was recorded in the three months ended March 31, 2013 as a result of the accelerated vesting of such options.
Share-based
compensation expense included in our condensed consolidated statements of operations was as follows (in thousands):
|
|
Three
months ended
March 31,
|
|
|
|
2014
|
|
2013
|
|
|
|
|
|
|
Cost
of goods sold
|
|
$
|
1
|
|
|
$
|
2
|
|
Selling, general
and administrative
|
|
|
1
|
|
|
|
125
|
|
Research and
development
|
|
|
2
|
|
|
|
5
|
|
Income
from discontinued operations
|
|
|
—
|
|
|
|
10
|
|
Total
share-based compensation expense
|
|
$
|
5
|
|
|
$
|
142
|
|
As
of March 31, 2014, unrecognized pretax share-based compensation expense was not significant.
We
record the benefit we will derive in future accounting periods from tax losses and credits and deductible temporary differences
as “deferred tax assets.” In accordance with ASC 740, “
Income
Taxes
,” we record a valuation
allowance to reduce the carrying value of our deferred tax assets if, based on all available evidence, it is more likely than
not that some or all of the deferred tax assets will not be realized. Since 2009, we have maintained a valuation allowance to
fully reserve our deferred tax assets. We recorded a full valuation allowance in 2009 because we determined there was not sufficient
positive evidence regarding our potential for future profits to outweigh the negative evidence of our three year cumulative loss
position at that time under the guidance provided in ASC 740. We expect to continue to maintain a full valuation allowance until
we determine that we can sustain a level of profitability that demonstrates our ability to realize these assets. To the extent
we determine that the realization of some or all of these benefits is more likely than not based upon expected future taxable
income, a portion or all of the valuation allowance will be reversed. Such a reversal would be recorded as an income tax benefit
and, for some portion related to deductions for stock option exercises, an increase in shareholders’ equity.
|
●
|
Securities
Purchase Agreement
|
On
April 1, 2014, in order to finance the acquisition of KBS described below, we entered into a Securities Purchase Agreement (the
“LSV Financing Agreement”) with Lone Star Value Investors, LP (“LSV”) pursuant to which LSV purchased
for $6.5 million in cash, (i) an unsecured promissory note made by Aetrium in the principal amount of $6.0 million (the “LSV
Promissory Note”), bearing interest at 10.0% per annum, with interest payable semiannually and any unpaid principal and
interest due on April 1, 2019, and (ii) an unsecured convertible promissory note made by Aetrium in the principal amount of $0.5
million (the “LSV Convertible Promissory Note”, and together with the “LSV Promissory Note”, the “LSV
Notes”), bearing interest at 5.0% per annum, with interest payable semiannually and any unpaid principal and interest due
on April 1, 2019. At any time after July 30, 2014, at LSV’s option, the unpaid principal amount of the LSV Convertible Promissory
Note may be converted into shares of our common stock at $4.66 per share. Aetrium may prepay the LSV Notes at any time after a
specified amount of advance notice to LSV.
The
LSV Notes provide for customary events of default, the occurrence of any of which may result in the principal and unpaid interest
then outstanding becoming immediately due and payable. Additionally, pursuant to the LSV Financing Agreement, we agreed to enter
into a registration rights agreement with LSV on usual and customary terms and conditions approved by the parties in their reasonable
discretion.
LSV
owns 60,588 shares of our common stock, or approximately 5.6% of the shares outstanding. Jeffrey E. Eberwein, Aetrium’s
Chairman of the Board, is the founder and chief executive officer of Lone Star Value Management, LLC, the investment manager of
LSV, and is the manager of Lone Star Value Investors GP, LLC, the general partner of LSV. LSV was granted a waiver under our Tax
Benefits Preservation Plan to permit the purchase and conversion of the LSV Convertible Promissory Note.
Aetrium’s
entry into the LSV Financing Agreement was approved by a Special Committee of our Board of Directors consisting solely of independent
directors.
On
April 2, 2014, Aetrium and KBS Builders, Inc., a wholly-owned subsidiary of Aetrium (“KBS Builders”), entered into
an Asset Purchase Agreement (the “KBS Purchase Agreement”) with KBS Building Systems, Inc., Maine Modular Haulers,
LLC, All-Set, LLC (d/b/a KBS Homes), Paris Holdings, LLC (collectively, “KBS”), and the principal owner of KBS, pursuant
to which we purchased substantially all of KBS’s assets related to its business of manufacturing, selling, and distributing
modular housing units for residential and commercial use. Consideration for the acquisition included (i) $5.0 million in cash,
(ii) an unsecured promissory note issued to KBS by KBS Builders in the principal amount of $5.5 million, bearing interest at 4.0%
per annum with all principal and interest due on October 1, 2014 (the “KBS Note”), (iii) the assumption and payoff
of approximately $1.4 million of debt and (iv) the assumption of certain other liabilities of KBS related to the purchased assets.
The
KBS Purchase Agreement contains representations, warranties and covenants customary for transactions of this type. Under the KBS
Purchase Agreement, Aetrium guarantees performance by KBS Builders of its obligations under the KBS Purchase Agreement, the KBS
Note and related agreements, and the principal owner of KBS guarantees its performance of its obligations. The KBS Note provides
for customary events of default, as well as an event of default if we fail to perform under the KBS Purchase Agreement, the occurrence
of any of which may result in the principal and unpaid interest then outstanding becoming immediately due and payable.
|
●
|
Transfer
of Test Handler Product Line
|
On
April 22, 2014, we entered into an agreement (the “Agreement”) in which we transferred the assets related to our business
of designing, manufacturing, marketing and servicing equipment used in the handling of integrated circuits to BSA, a wholly owned
subsidiary of Boston Semi Equipment LLC (“BSE”). The Agreement contains representations, warranties and covenants
customary for transactions of this type.
The
Agreement provided for the following:
|
●
|
BSA
will pay to Aetrium a royalty on all revenue related to the Test Handler product line over five years (April 22, 2014 through
December 31, 2018) that will start at 15% and decline over time to 3%, subject to certain qualifications and adjustments.
|
|
|
|
|
●
|
Aetrium
transferred all inventories, certain equipment, intellectual property, and certain other assets associated with the Test Handler
product line to BSA.
|
|
|
|
|
●
|
BSA
assumed certain liabilities related to the Test Handler product line, including certain accounts payable, accrued expenses
and product support and warranty obligations.
|
|
|
|
|
●
|
BSA
and Aetrium executed a sublease and transition services agreement providing for BSA to continue to operate the Test Handler
product line in approximately 15,000 square feet within Aetrium’s leased facility in North St. Paul, MN and for each
party to provide certain administrative services to the other. The sublease provides for initial monthly rental payments of
$19,930 and the term extends through August 31, 2015.
|
|
|
|
|
●
|
Sixteen
of Aetrium’s employees that were associated with the Test Handler product line were hired by BSA.
|
We
are in the process of fully evaluating the fair value of our contingent consideration, but we expect to record a pre-tax gain
of approximately $0.9 million on the transfer of the Test Handler product line, estimated as follows (in thousands):
Proceeds:
|
|
|
Fair value of contingent consideration (royalty
stream)
|
|
$
|
2,000
|
|
|
|
|
|
|
Carrying value of net assets transferred:
|
|
|
|
|
Inventories
|
|
|
1,230
|
|
Equipment
|
|
|
26
|
|
Accounts payable
|
|
|
(116
|
)
|
Accrued liabilities
|
|
|
(82
|
)
|
Total net assets transferred
|
|
|
1,058
|
|
|
|
|
|
|
Gain on sale
|
|
$
|
942
|
|
As
of March 31, 2014, the decision to sell the Test Handler product line was not considered probable. As such, the operating results
of the Test Handler product line were not included in discontinued operations.
|
●
|
Employee
Claim for Severance Benefits
|
On
April 25, 2014, we received notice that an employee is seeking to obtain severance benefits pursuant to a change of control agreement
with Aetrium. We intend to vigorously challenge the employee’s claim for such benefits. We estimate the charges we may incur
in the future related to this claim are in the range of $0 to $290,000.
AETRIUM
INCORPORATED