Item 1. Condensed Consolidated Financial Statements (unaudited)
|
Arrhythmia Research Technology, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2014
|
|
December 31, 2013
|
|
Assets
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
232,024
|
|
|
$
|
749,766
|
|
|
Restricted cash
|
|
—
|
|
|
1,000,000
|
|
|
Trade accounts receivable, net of allowance for doubtful accounts of $50,000 at June 30, 2014 and $40,000 at December 31, 2013
|
|
3,876,966
|
|
|
3,803,853
|
|
|
Inventories, net
|
|
3,087,557
|
|
|
2,335,291
|
|
|
Prepaid expenses and other current assets
|
|
627,375
|
|
|
513,197
|
|
|
Assets from discontinued operations
|
|
—
|
|
|
1,509
|
|
|
Total current assets
|
|
7,823,922
|
|
|
8,403,616
|
|
|
Property, plant and equipment, net
|
|
7,672,749
|
|
|
7,579,556
|
|
|
Intangible assets, net
|
|
178,293
|
|
|
184,517
|
|
|
Other assets
|
|
119,467
|
|
|
185,595
|
|
|
Total assets
|
|
$
|
15,794,431
|
|
|
$
|
16,353,284
|
|
|
|
|
|
|
|
|
Liabilities and Shareholders’ Equity
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
Revolving line of credit
|
|
$
|
2,296,495
|
|
|
$
|
—
|
|
|
Equipment line of credit, current portion
|
|
—
|
|
|
85,387
|
|
|
Term notes payable, current portion
|
|
479,719
|
|
|
335,760
|
|
|
Accounts payable
|
|
1,758,083
|
|
|
2,156,031
|
|
|
Accrued expenses & other current liabilities
|
|
773,870
|
|
|
436,775
|
|
|
Customer deposits
|
|
903,126
|
|
|
341,465
|
|
|
Deferred revenue, current
|
|
229,337
|
|
|
248,559
|
|
|
Performance guarantee liability
|
|
—
|
|
|
1,000,000
|
|
|
Liabilities from discontinued operations, current
|
|
320,056
|
|
|
319,787
|
|
|
Total current liabilities
|
|
6,760,686
|
|
|
4,923,764
|
|
|
Long-term liabilities:
|
|
|
|
|
|
|
|
Revolving line of credit
|
|
—
|
|
|
2,774,495
|
|
|
Equipment line of credit, non-current portion
|
|
—
|
|
|
538,707
|
|
|
Term notes payable, non-current portion
|
|
1,577,895
|
|
|
1,179,709
|
|
|
Subordinated promissory notes
|
|
431,610
|
|
|
417,769
|
|
|
Deferred revenue, non-current
|
|
121,255
|
|
|
172,316
|
|
|
Total long-term liabilities
|
|
2,130,760
|
|
|
5,082,996
|
|
|
Total liabilities
|
|
8,891,446
|
|
|
10,006,760
|
|
|
|
|
|
|
|
|
Commitments and Contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders’ equity
:
|
|
|
|
|
|
|
|
Preferred stock, $1 par value; 2,000,000 shares authorized, none issued
|
|
—
|
|
|
—
|
|
|
Common stock, $.01 par value; 10,000,000 shares authorized; 3,926,491 issued, 2,731,839 outstanding at June 30, 2014 and 3,926,491 issued,
2,722,239 outstanding at December 31, 2013
|
|
39,265
|
|
|
39,265
|
|
|
Additional paid-in-capital
|
|
11,282,665
|
|
|
11,236,236
|
|
|
Treasury stock at cost, 1,194,652 shares at June 30, 2014 and 1,204,252 at December 31, 2013
|
|
(3,259,954
|
)
|
|
(3,272,808
|
)
|
|
Accumulated other comprehensive income
|
|
42,502
|
|
|
42,502
|
|
|
Accumulated deficit
|
|
(1,201,493
|
)
|
|
(1,698,671
|
)
|
|
Total shareholders’ equity
|
|
6,902,985
|
|
|
6,346,524
|
|
|
Total liabilities and shareholders’ equity
|
|
$
|
15,794,431
|
|
|
$
|
16,353,284
|
|
|
See accompanying notes to condensed consolidated financial statements.
|
Arrhythmia Research Technology, Inc.
and Subsidiaries
Condensed Consolidated Statements of Operations
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30,
|
|
Six months ended June 30,
|
|
|
|
2014
|
|
2013
|
|
2014
|
|
2013
|
|
Net sales
|
|
$
|
6,253,757
|
|
|
$
|
4,880,445
|
|
|
$
|
12,283,600
|
|
|
$
|
10,523,634
|
|
|
Cost of sales
|
|
5,119,734
|
|
|
4,322,779
|
|
|
9,838,291
|
|
|
9,013,820
|
|
|
Gross profit
|
|
1,134,023
|
|
|
557,666
|
|
|
2,445,309
|
|
|
1,509,814
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling and marketing
|
|
240,408
|
|
|
246,839
|
|
|
532,080
|
|
|
487,214
|
|
|
General and administrative
|
|
543,235
|
|
|
585,345
|
|
|
1,137,866
|
|
|
1,309,475
|
|
|
Research and development
|
|
85,694
|
|
|
61,293
|
|
|
182,521
|
|
|
120,695
|
|
|
Total operating expenses
|
|
869,337
|
|
|
893,477
|
|
|
1,852,467
|
|
|
1,917,384
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations
|
|
264,686
|
|
|
(335,811
|
)
|
|
592,842
|
|
|
(407,570
|
)
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
(70,529
|
)
|
|
(196,999
|
)
|
|
(140,678
|
)
|
|
(207,545
|
)
|
|
Other income (expense), net
|
|
46,687
|
|
|
7,905
|
|
|
48,998
|
|
|
7,769
|
|
|
Total other expense, net
|
|
(23,842
|
)
|
|
(189,094
|
)
|
|
(91,680
|
)
|
|
(199,776
|
)
|
|
Income (loss) from continuing operations before income taxes
|
|
240,844
|
|
|
(524,905
|
)
|
|
501,162
|
|
|
(607,346
|
)
|
|
Income tax provision
|
|
1,030
|
|
|
2,352,478
|
|
|
2,207
|
|
|
2,267,969
|
|
|
Net income (loss) from continuing operations
|
|
239,814
|
|
|
(2,877,383
|
)
|
|
498,955
|
|
|
(2,875,315
|
)
|
|
Discontinued Operations:
|
|
|
|
|
|
|
|
|
|
Income (loss) from discontinued operations, net of tax provisions of $0 and $5,031 for the three months ended June 30, 2014 and 2013, respectively and net of tax provisions of $0 and $5,031 for the six months ended June 30, 2014 and 2013, respectively
|
|
646
|
|
|
(12,808
|
)
|
|
(1,779
|
)
|
|
(20,546
|
)
|
|
Net income (loss)
|
|
$
|
240,460
|
|
|
$
|
(2,890,191
|
)
|
|
$
|
497,176
|
|
|
$
|
(2,895,861
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) per share - basic
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$
|
0.09
|
|
|
$
|
(1.06
|
)
|
|
$
|
0.18
|
|
|
$
|
(1.06
|
)
|
|
Discontinued operations
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(0.01
|
)
|
|
Income (loss) per share - basic
|
|
$
|
0.09
|
|
|
$
|
(1.06
|
)
|
|
$
|
0.18
|
|
|
$
|
(1.07
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) per share - diluted
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$
|
0.09
|
|
|
$
|
(1.06
|
)
|
|
$
|
0.18
|
|
|
$
|
(1.06
|
)
|
|
Discontinued operations
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(0.01
|
)
|
|
Income (loss) per share - diluted
|
|
$
|
0.09
|
|
|
$
|
(1.06
|
)
|
|
$
|
0.18
|
|
|
$
|
(1.07
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding - basic
|
|
2,723,582
|
|
|
2,704,239
|
|
|
2,722,914
|
|
|
2,704,239
|
|
|
Weighted average common shares outstanding - diluted
|
|
2,815,578
|
|
|
2,704,239
|
|
|
2,798,163
|
|
|
2,704,239
|
|
See accompanying notes to condensed consolidated financial statements.
Arrhythmia Research Technology, Inc.
and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
Six months ended June 30,
|
|
2014
|
|
2013
|
|
Cash flows from operating activities:
|
|
|
|
|
|
Net income (loss)
|
|
$
|
497,176
|
|
|
$
|
(2,895,861
|
)
|
|
Loss from discontinued operations
|
|
1,779
|
|
|
20,546
|
|
|
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
|
|
|
|
|
|
|
|
(Gain) loss on sale of property, plant and equipment
|
|
(24,500
|
)
|
|
—
|
|
|
Depreciation and amortization
|
|
750,616
|
|
|
688,089
|
|
|
Non-cash interest expense
|
|
13,842
|
|
|
—
|
|
|
Change in allowance for doubtful accounts
|
|
10,000
|
|
|
(77,098
|
)
|
|
Deferred income taxes
|
|
—
|
|
|
2,267,969
|
|
|
Share-based compensation expense
|
|
26,548
|
|
|
27,746
|
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
Accounts receivable
|
|
(83,113
|
)
|
|
(39,618
|
)
|
|
Inventories
|
|
(752,266
|
)
|
|
(36,105
|
)
|
|
Prepaid expenses and other current assets
|
|
(107,017
|
)
|
|
132,438
|
|
|
Other non-current assets
|
|
66,128
|
|
|
(94,558
|
)
|
|
Accounts payable
|
|
(397,948
|
)
|
|
(211,992
|
)
|
|
Accrued expenses and other current liabilities
|
|
879,531
|
|
|
242,612
|
|
|
Other non-current liabilities
|
|
(51,060
|
)
|
|
(38,195
|
)
|
|
Net cash provided by (used in) operating activities of continuing operations
|
|
829,716
|
|
|
(14,027
|
)
|
|
Net cash provided by (used in) operating activities of discontinued operations
|
|
(1,509
|
)
|
|
(310,301
|
)
|
|
Net cash provided by (used in) operating activities
|
|
828,207
|
|
|
(324,328
|
)
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
Purchases of property, plant and equipment
|
|
(834,971
|
)
|
|
(703,737
|
)
|
|
Proceeds from sale of property, plant and equipment
|
|
24,500
|
|
|
—
|
|
|
Cash paid for patents and trademarks
|
|
(2,613
|
)
|
|
(31,385
|
)
|
|
Net cash provided by (used in) investing activities from continuing operations
|
|
(813,084
|
)
|
|
(735,122
|
)
|
|
Net cash provided by (used in) investing activities from discontinued operations
|
|
—
|
|
|
320,518
|
|
|
Net cash provided by (used in) investing activities
|
|
(813,084
|
)
|
|
(414,604
|
)
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
(Payments on) proceeds from revolving line of credit, net
|
|
(478,000
|
)
|
|
2,174,493
|
|
|
Payments on demand line of credit
|
|
—
|
|
|
(800,000
|
)
|
|
Proceeds from equipment line of credit
|
|
116,905
|
|
|
—
|
|
|
Proceeds from term notes payable
|
|
—
|
|
|
1,500,000
|
|
|
Payments on term notes payable
|
|
(198,854
|
)
|
|
(1,273,742
|
)
|
|
Proceeds from stock option exercises
|
|
25,575
|
|
|
—
|
|
|
Restricted cash
|
|
—
|
|
|
(1,000,000
|
)
|
|
Net cash provided by (used in) financing activities from continuing operations
|
|
(534,374
|
)
|
|
600,751
|
|
|
Net cash provided by (used in) financing activities from discontinued operations
|
|
—
|
|
|
(55,002
|
)
|
|
Net cash provided by (used in) financing activities
|
|
(534,374
|
)
|
|
545,749
|
|
|
|
|
|
|
|
|
Net decrease in cash and cash equivalents
|
|
(519,251
|
)
|
|
(193,183
|
)
|
|
Cash and cash equivalents
, beginning of period
|
|
751,275
|
|
|
508,590
|
|
|
Cash and cash equivalents
, end of period
|
|
232,024
|
|
|
315,407
|
|
|
Less: cash and cash equivalents of discontinued operations at end of period
|
|
—
|
|
|
2,495
|
|
|
Cash and cash equivalents of continuing operations at end of period
|
|
$
|
232,024
|
|
|
$
|
312,912
|
|
|
(continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six months ended June 30,
|
|
Supplemental Cash Flow Information (unaudited)
|
|
2014
|
|
2013
|
|
Cash paid for interest
|
|
$
|
119,229
|
|
|
$
|
40,593
|
|
|
Non-cash activities:
|
|
|
|
|
|
Acquisition of equipment with equipment notes
|
|
$
|
—
|
|
|
$
|
272,500
|
|
|
Equipment line of credit converted to term notes payable
|
|
$
|
740,999
|
|
|
$
|
—
|
|
|
Reduction of restricted cash offset by performance guarantee
|
|
$
|
975,430
|
|
|
$
|
—
|
|
|
|
|
|
|
|
See accompanying notes to condensed consolidated financial statements.
Arrhythmia Research Technology, Inc. and Subsidiaries
Period Ended June 30, 2014
Notes to the Condensed Consolidated Financial Statements (unaudited)
1. Basis of Presentation
The consolidated financial statements (the "financial statements") include the accounts of Arrhythmia Research Technology, Inc (“ART”) and its subsidiary, Micron Products, Inc. ("Micron" and together with ART, the “Company”). ART’s wholly owned Pennsylvania subsidiary, RMDDxUSA Corp. (“RMDDxUSA”) and that subsidiary’s Prince Edward Island subsidiary, RMDDx Corporation (“RMDDx” and collectively with RMDDxUSA,“WirelessDx”) discontinued operations in the third quarter of 2012. The WirelessDx results are presented herein as discontinued operations. All intercompany balances and transactions have been eliminated in consolidation.
The unaudited interim consolidated financial statements and related notes have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (the "SEC"). Accordingly, certain information and footnote disclosures normally included in complete financial statements prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP") have been omitted pursuant to such rules and regulations. These financial statements and related notes should be read in conjunction with the consolidated financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the year ended
December 31, 2013
filed with the SEC on March 21, 2014. Certain reclassifications have been made to prior period amounts to conform to the current year presentation.
The results of operations for interim periods are not necessarily indicative of the results to be expected for the full year. The Company's balance sheet at
December 31, 2013
has been derived from the audited financial statements at that date, but does not include all the information and footnotes required by GAAP for complete financial statements.
The information presented reflects, in the opinion of the management of the Company, all adjustments necessary for a fair presentation of the financial results for the interim periods presented. The preparation of financial statements in conformity with GAAP 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.
2. Operating Matters and Liquidity
The Company experienced net operating losses in 2013 and 2012, primarily as a result of the discontinued WirelessDx operations. The Company believes that cash flows from its operations, together with its existing working capital and other resources, will be sufficient to fund operations at current levels and repay debt obligations over the next twelve months and beyond. The Company continues to develop opportunities within new and existing channels where the Company can maximize its return on investments in capital equipment, research and development, marketing and human resources.
On June 26, 2014, the Company entered into a new equipment line of credit for
$1.0 million
under the Company's multi-year credit facility entered into on March 29, 2013 with a Massachusetts bank (see Note 6).
3. Earnings per Share ("EPS")
Basic earnings (loss) per share is computed by dividing net income (loss) available to common shareholders by the weighted average number of common shares outstanding. The computation of diluted earnings (loss) per share is similar to the computation of basic earnings (loss) per share except that the denominator is increased to include the average number of additional common shares that would have been outstanding if the dilutive potential common shares had been issued. In addition, the numerator is adjusted for any changes in net income (loss) that would result from the assumed conversions of those potential shares.
The following table presents the calculation of both basic and diluted EPS.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30,
|
Six months ended June 30,
|
|
|
2014
|
2013
|
2014
|
2013
|
|
Income (loss) from continuing operations
|
$
|
239,814
|
|
$
|
(2,877,383
|
)
|
$
|
498,955
|
|
$
|
(2,875,315
|
)
|
|
Income (loss) from discontinued operations, net of tax
|
646
|
|
(12,808
|
)
|
(1,779
|
)
|
(20,546
|
)
|
|
Net income (loss) available to common shareholders
|
$
|
240,460
|
|
$
|
(2,890,191
|
)
|
$
|
497,176
|
|
$
|
(2,895,861
|
)
|
|
|
|
|
|
|
|
Basic EPS:
|
|
|
|
|
|
Weighted average common shares outstanding
|
2,723,582
|
|
2,704,239
|
|
2,722,914
|
|
2,704,239
|
|
|
|
|
|
|
|
|
Income (loss) per share - basic
|
|
|
|
|
|
Continuing operations
|
$
|
0.09
|
|
$
|
(1.06
|
)
|
$
|
0.18
|
|
$
|
(1.06
|
)
|
|
Discontinued operations
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
$
|
(0.01
|
)
|
|
Consolidated basic EPS
|
$
|
0.09
|
|
$
|
(1.06
|
)
|
$
|
0.18
|
|
$
|
(1.07
|
)
|
|
|
|
|
|
|
|
Diluted EPS:
|
|
|
|
|
|
Weighted average common shares outstanding
|
2,723,582
|
|
2,704,239
|
|
2,722,914
|
|
2,704,239
|
|
|
Assumed conversion of net common shares issuable under stock option plans
|
53,492
|
|
—
|
|
44,028
|
|
—
|
|
|
Assumed conversion of net common shares issuable under warrants
|
38,504
|
|
—
|
|
31,221
|
|
—
|
|
|
Weighted average common and common equivalent shares outstanding, diluted
|
2,815,578
|
|
2,704,239
|
|
2,798,163
|
|
2,704,239
|
|
|
|
|
|
|
|
|
Income (loss) per share - diluted
|
|
|
|
|
|
|
|
Continuing operations
|
$
|
0.09
|
|
$
|
(1.06
|
)
|
$
|
0.18
|
|
$
|
(1.06
|
)
|
|
Discontinued operations
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
$
|
(0.01
|
)
|
|
Consolidated diluted EPS
|
$
|
0.09
|
|
$
|
(1.06
|
)
|
$
|
0.18
|
|
$
|
(1.07
|
)
|
Inventories consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2014
|
|
December 31, 2013
|
|
Raw materials
|
|
$
|
915,578
|
|
|
$
|
947,765
|
|
|
Work-in-process
|
|
827,759
|
|
|
266,431
|
|
|
Finished goods
|
|
1,344,220
|
|
|
1,121,095
|
|
|
Total
|
|
$
|
3,087,557
|
|
|
$
|
2,335,291
|
|
The cost of silver in inventory that is included in raw materials, work-in-process and finished goods had an estimated cost of
$480,600
and
$382,332
as of
June 30, 2014
and
December 31, 2013
, respectively. Work-in-process increased
$561,328
from
December 31, 2013
to
June 30, 2014
. This increase is primarily due to in-process tooling of
$431,660
.
|
|
|
|
5.
|
Property, Plant and Equipment, Net
|
Property, plant and equipment consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset Lives (in years)
|
|
June 30, 2014
|
|
December 31, 2013
|
|
Machinery and equipment
|
|
3
|
to
|
15
|
|
$
|
13,932,828
|
|
|
$
|
13,734,528
|
|
|
Building and improvements
|
|
|
20
|
|
|
4,357,247
|
|
|
4,303,156
|
|
|
Vehicles
|
|
3
|
to
|
5
|
|
90,713
|
|
|
94,227
|
|
|
Furniture, fixtures, computers and software
|
|
3
|
to
|
5
|
|
1,338,793
|
|
|
1,317,189
|
|
|
Land
|
|
|
|
|
|
202,492
|
|
|
202,492
|
|
|
Construction in progress
|
|
|
|
|
|
583,154
|
|
|
177,473
|
|
|
Total property, plant and equipment
|
|
|
|
|
|
20,505,227
|
|
|
19,829,065
|
|
|
Less: accumulated depreciation
|
|
|
|
|
|
(12,832,478
|
)
|
|
(12,249,509
|
)
|
|
Property, plant and equipment, net
|
|
|
|
|
|
$
|
7,672,749
|
|
|
$
|
7,579,556
|
|
For the three and
six months ended June 30, 2014
, the Company recorded
$364,264
and
$741,779
of depreciation expense, respectively, as compared to
$361,152
and
$697,895
for the three and
six months ended June 30, 2013
, respectively.
The following tables set forth the items which comprise debt for the Company:
Lines of credit
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2014
|
December 31, 2013
|
|
Revolving line of credit, current
|
$
|
2,296,495
|
|
$
|
—
|
|
|
Revolving line of credit, non-current
|
$
|
—
|
|
$
|
2,774,495
|
|
|
Equipment line of credit, current portion
|
$
|
—
|
|
$
|
85,387
|
|
|
Equipment line of credit, non-current portion
|
$
|
—
|
|
$
|
538,707
|
|
Long-term debt and promissory notes
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2014
|
December 31, 2013
|
|
Term notes payable
|
|
|
|
Commercial term loan
|
$
|
1,153,131
|
|
$
|
1,293,378
|
|
|
Equipment term loan
|
707,944
|
|
—
|
|
|
Equipment notes
|
196,539
|
|
222,091
|
|
|
Term notes payable
|
2,057,614
|
|
1,515,469
|
|
|
Less: current portion
|
479,719
|
|
335,760
|
|
|
Long-term notes payable
|
$
|
1,577,895
|
|
$
|
1,179,709
|
|
|
|
|
|
|
|
Subordinated promissory notes
|
$
|
431,610
|
|
$
|
417,769
|
|
The revolving line of credit, equipment line of credit, equipment term loan and the commercial term loan are all under the terms of a multi-year credit facility with a bank entered into on March 29, 2013. The bank facility contains both financial and non-financial covenants.
Revolving line of credit
The revolving line of credit provides for borrowings up to
80%
of eligible accounts receivable and
50%
of eligible raw materials inventory. The interest rate on the revolver is calculated at the bank's prime rate plus 0.25% (
3.50%
at
June 30, 2014
). The revolver has a maturity date of June 2015.
Equipment line of credit and equipment term loan
The equipment line of credit allowed for advances of up to
$1.0 million
and included a one-year draw period during which payments were interest only. The draw period ended March 29, 2014 and the then outstanding balance on the equipment line of credit of
$740,999
was converted to a five-year term loan with monthly payments of
$13,890
, consisting of principal and interest at a fixed rate of
4.65%
.
On June 26, 2014, the Company entered into a new equipment line of credit for
$1.0 million
under the Company's multi-year credit facility. This equipment line of credit is for the purchase of capital equipment. As of the date of this filing, no amounts have been drawn on the equipment line. The term of this equipment line is six years, maturing on June 26, 2020, inclusive of a maximum one year draw period. Repayment shall consist of monthly interest only payments, equal to the bank's prime rate plus
0.25%
as to each advance commencing on the date of the loan through the earlier of: (i) one year from the date of the loan or (ii) the date upon which the equipment line of credit is fully advanced (the “Conversion Date”). On the Conversion Date, principal and interest payments will be due and payable monthly in an amount sufficient to pay the loan in full based upon an amortization schedule commensurate with the remaining term of the loan.
Commercial term loan
The commercial term loan has a five year term with a maturity date in March 2018. The interest rate on the loan is a fixed
4.25%
per annum.
Equipment notes
In January 2013, the Company entered into two equipment notes totaling
$272,500
with a financing company to acquire production equipment. The notes bear interest at the fixed rate of
4.66%
and require monthly payments of principal and interest over the term of five years.
Subordinated promissory notes
In December 2013, the Company completed a private offering in which the Company sold an aggregate of
$500,000
in subordinated promissory notes. The notes are unsecured and require quarterly interest-only payments at a rate of
10%
per annum. On the second anniversary following issuance, the interest rate increases to
12%
per annum. The notes mature in December 2016 at which point the outstanding balance is due in full. The subordinated promissory notes may be prepaid by the Company at any time following the first anniversary thereof without penalty. The notes are subordinated to all indebtedness of the Company pursuant to the bank credit facility.
In connection with the subordinated promissory notes, the Company issued warrants to purchase the Company's common stock. The proceeds were allocated between the notes and warrants on a relative fair value basis resulting in
$416,950
allocated to the notes and
$83,050
allocated to the warrants as part of Additional-Paid-in-Capital. The total discount on the notes is being recognized as non-cash interest expense over the term of the notes. For the three and
six months ended June 30, 2014
, the Company recorded
$6,921
and
$13,842
of non-cash interest expense, respectively, related to the amortization of the discount. The unamortized discount which is net against the outstanding balance of the subordinated promissory notes is
$68,390
at
June 30, 2014
and
$82,231
at
December 31, 2013
.
7. Income Taxes
The tax provisions
for the three and six months ended June 30, 2014
and
2013
are attributable to the U.S. Federal, state and foreign income taxes on our continuing operations.
The tax provision for the three and six months ended June 30, 2013 also includes the impact on tax expense of
$2,267,969
associated with the establishment of a full valuation allowance of the Company’s beginning of the year deferred tax assets.
The Company has a full valuation allowance against its deferred tax assets at both
June 30, 2014
and
December 31, 2013
.
8. Commitments and Contingencies
Legal matters
In the ordinary course of its business, the Company is involved in various legal proceedings involving a variety of matters. The Company does not believe there are any pending legal proceedings that will have a material impact on the Company’s financial position or results of operations. With respect to a specific matter, a third party had asserted a claim of approximately
$100,000
against the Company as of
December 31, 2013
. On April 22, 2014 the case was dismissed with no judgment issued against the Company.
Severance agreements
In September 2013, the Company's former Chief Financial Officer resigned and entered into a severance agreement with the Company. The Company accrued the full amount of the severance package in the amount of
$92,061
(salary and benefits) in the third quarter of 2013. The severance agreement provides for payments through September 2014 and the balance outstanding as of
June 30, 2014
and
December 31, 2013
is
$20,169
and
$69,673
and is included within accrued expenses.
9. Stock Options and Share-Based Incentive Plan
The following table sets forth the stock option transactions for the
six months ended June 30, 2014
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of options
|
|
Weighted average Exercise Price
|
|
Weighted average remaining contractual term (in years)
|
|
Aggregate Intrinsic Value
|
|
Outstanding at December 31, 2013
|
|
256,500
|
|
|
$
|
5.61
|
|
|
5.3
|
|
—
|
|
|
Granted
|
|
—
|
|
|
—
|
|
|
—
|
|
—
|
|
|
Exercised
|
|
(9,600
|
)
|
|
3.41
|
|
|
—
|
|
—
|
|
|
Forfeited/expired
|
|
(56,500
|
)
|
|
7.15
|
|
|
—
|
|
—
|
|
|
Outstanding at June 30, 2014
|
|
190,400
|
|
|
5.26
|
|
|
6.6
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at June 30, 2014
|
|
83,400
|
|
|
$
|
5.90
|
|
|
4.9
|
|
$
|
118,476
|
|
|
Exercisable at December 31, 2013
|
|
120,000
|
|
|
$
|
6.34
|
|
|
2.5
|
|
$
|
8,850
|
|
For the three and
six months ended June 30, 2014
, share-based compensation expense related to stock options amounted to
$15,298
and
$26,548
, respectively, and is included in general and administrative expenses.
For the three and
six months ended June 30, 2014
,
9,600
stock options were exercised generating proceeds of
$25,575
and
$7,161
of other receivables on the Company's balance sheet.
10. Discontinued Operations
There was no revenue from discontinued operations
for the three and six months ended June 30, 2014
or
2013
, respectively. Activity during the above note periods consisted primarily of legal and other fees incurred offset by minor reversals.
At
December 31, 2013
, the Company had a
$1.0 million
liability for an unmet performance obligation related to the discontinued operations. This performance obligation was secured by
$1.0 million
of restricted cash. The performance guarantee liability was carried on the balance sheet of continuing operations, as the liability was guaranteed by ART.
In May 2014,
$975,430
was drawn from the restricted cash, satisfying the guarantee on the performance obligation. The balance of
$24,570
was returned to ART and recorded as other income (expense) on the condensed consolidated statements of operations.
The assets and liabilities of the discontinued operations are listed below:
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2014
|
December 31, 2013
|
|
Cash
|
$
|
—
|
|
$
|
1,509
|
|
|
Total current assets from discontinued operations
|
—
|
|
1,509
|
|
|
Total assets from discontinued operations
|
$
|
—
|
|
$
|
1,509
|
|
|
|
|
|
|
Accounts payable and accrued expenses
|
$
|
320,056
|
|
$
|
319,787
|
|
|
Total current liabilities from discontinued operations
|
320,056
|
|
319,787
|
|
|
Total liabilities from discontinued operations
|
$
|
320,056
|
|
$
|
319,787
|
|
On May 8, 2014, RMDDxUSA filed a voluntary petition for relief under Chapter 7 (Liquidation) of the United States Bankruptcy Code in the District of Massachusetts. A trustee was assigned to review the assets and liabilities of the company. The trustee conducted the statutory Meeting of Creditors on June 16, 2014. There has been no further activity in the bankruptcy proceeding.
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Forward-Looking Statements
This Quarterly Report on Form 10-Q contains forward-looking statements that involve a number of risks and uncertainties. There are a number of factors that could cause the Company’s actual results to differ materially from those forecasted or projected in such forward-looking statements. Readers are cautioned not to place undue reliance on these forward-looking statements which speak only as of the date hereof. The Company is under no obligation and does not intend to update, revise or otherwise publicly release any revisions to these forward-looking statements to reflect events or circumstances after the date hereof or to reflect the occurrence of any unanticipated events. More information about factors that potentially could affect the Company's financial results is included in the Company's filings with the SEC, including its Annual Report on Form 10-K for the year ended December 31, 2013.
Critical Accounting Policies
The critical accounting policies utilized by the Company in preparation of the accompanying financial statements are set forth in Part II, Item 7 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2013, under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations”. There have been no material changes to these policies since December 31, 2013.
Overview
Arrhythmia Research Technology
®
, Inc., a Delaware corporation ("ART"), through its wholly-owned Massachusetts subsidiary, Micron Products
®
, Inc. (“Micron” and together with ART, the "Company") manufactures components, devices and equipment for medical, military, law enforcement, automotive and other industrial applications. The Company's manufacturing operations include the production and sale of silver/silver chloride coated and conductive resin sensors used as component parts in the manufacture of integrated disposable electrophysiological sensors. These disposable medical devices are used worldwide in the monitoring of electrical signals in various medical applications. The Company also performs custom thermoplastic injection molding and provides a full array of design, engineering and production services and management. The Company's orthopedic implant machining operation produces quick-turn, high volume and patient-specific, finished orthopedic implants.
ART's wholly-owned Pennsylvania subsidiary, RMDDxUSA Corp. ("RMDDxUSA") and that subsidiary's Prince Edward Island subsidiary, RMDDx Corporation ("RMDDx" and collectively with RMDDxUSA, “WirelessDx”) discontinued operations in the third quarter of 2012. The results of WirelessDx are presented as discontinued operations throughout the financial statements and footnotes in this Form 10-Q. On May 8, 2014, RMDDxUSA filed a voluntary petition for relief under Chapter 7 (Liquidation) of the United States Bankruptcy Code in the District of Massachusetts. A trustee was assigned to review the assets and liabilities of the company. The trustee conducted the statutory Meeting of Creditors on June 16, 2014. There has been no further activity in the bankruptcy proceeding.
Results of Operations
The following table sets forth for the periods indicated, the percentages of the net sales represented by certain items reflected in the Company's statements of operations.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30,
|
Six months ended June 30,
|
|
|
2014
|
2013
|
2014
|
2013
|
|
Net sales
|
100.0
|
|
%
|
100.0
|
|
%
|
100.0
|
|
%
|
100.0
|
|
%
|
|
Cost of sales
|
81.9
|
|
|
88.6
|
|
|
80.1
|
|
85.7
|
|
|
Gross profit
|
18.1
|
|
%
|
11.4
|
|
%
|
19.9
|
%
|
14.3
|
%
|
|
Selling and marketing
|
3.8
|
|
|
5.1
|
|
|
4.3
|
|
4.6
|
|
|
General and administrative
|
8.7
|
|
|
12.0
|
|
|
9.3
|
|
12.4
|
|
|
Research and development
|
1.4
|
|
|
1.3
|
|
|
1.5
|
|
|
1.1
|
|
|
|
Other expense
|
(0.4
|
)
|
|
(3.8
|
)
|
|
(0.8
|
)
|
|
(1.9
|
)
|
|
|
Income (loss) before income tax provision and discontinued operations
|
3.8
|
|
|
(10.8
|
)
|
|
4.0
|
|
(5.7
|
)
|
|
|
Income tax provision
|
—
|
|
|
48.2
|
|
|
—
|
|
|
21.6
|
|
|
Income (loss) from continued operations
|
3.8
|
|
|
(59.0
|
)
|
|
4.0
|
|
(27.3
|
)
|
|
|
Income (loss) from discontinued operations
|
—
|
|
|
(0.2
|
)
|
|
—
|
|
|
(0.2
|
)
|
|
|
Net income (loss)
|
3.8
|
|
%
|
(59.2
|
)
|
%
|
4.0
|
%
|
(27.5
|
)
|
%
|
Net Sales
The Company's consolidated net sales for the
three months ended June 30, 2014
were $
6,253,757
,
an increase
of $
1,373,312
, or
28.1%
, when compared to the total net sales of $
4,880,445
for the
three months ended June 30, 2013
. The increase in net sales was due to
increased
sales for the
three months ended June 30, 2014
in sensors of $
803,437
, or
32.7%
, over the same period in
2013
. Excluding the impact of silver surcharge billed, sensor sales
increased
$
738,959
, or
48.5%
, for the
three months ended June 30, 2014
as compared to the same period in
2013
while silver surcharge billed increased
$64,478
, or
6.9%
. The increase in total sensor sales was due primarily to a 43.2% increase in volume, partially offset by a 17.7% decrease in the average price of silver for the
three months ended June 30, 2014
as compared to the same period in
2013
. In addition, sales of machined orthopedic implants increased $
732,067
, or
81.7%
for the
three months ended June 30, 2014
as compared to the same period in
2013
due to increased order volume.
For the
six months ended June 30, 2014
the Company's consolidated net sales were
$12,283,600
, an increase of
$1,759,966
, or
16.7%
, as compared to total net sales of $
10,523,634
for the
six months ended June 30, 2013
. The increase in net sales was due to
increased
sales for the
six months ended June 30, 2014
over
2013
in machined orthopedic implants of
$1,735,100
, or
105.9%
, due to increased order volume, as well as
increased
sensor sales of
$291,644
or
5.1%
. Excluding the impact of silver surcharge billed, sensor sales
increased
$
819,679
, or
25.3%
, for the
six months ended June 30, 2014
as compared to the same period in
2013
while silver surcharge billed
decreased
$528,035
, or
21.7%
. The increase in total sensor sales was due primarily to a 19.7% increase in volume, partially offset by a 32.5% decrease in the average price of silver for the
six months ended June 30, 2014
as compared to the same period in
2013
. These increases were partially offset by decreased sales of custom thermoplastic injection molding and tooling.
Cost of Sales
The Company's consolidated cost of sales for the
three months ended June 30, 2014
was $
5,119,734
(
81.9
% of net sales) as compared to $
4,322,779
(
88.6
% of net sales) for the
three months ended June 30, 2013
;
an increase
of $
796,955
or
18.4%
. The increase was largely due to increased materials and labor costs due to increased net sales partially offset by improved cost control and efficiencies which drove the improved gross margin. Cost of sales for machined orthopedic implants of $
1,015,829
(62.4% of net orthopedic sales) for the
three months ended June 30, 2014
,
increased
$
281,006
, or
38.2%
as compared to the same period in
2013
. The increase in cost of sales of machined orthopedic implants was due to the increase in net sales as well as increased costs for quality inspection and regulatory requirements. Cost of sales for total sensors increased
25.5%
due largely to increased sales volume partially offset by a lower average cost of silver.
For the
six months ended June 30, 2014
the Company's consolidated cost of sales was $
9,838,291
(
80.1%
of net sales) as compared to $
9,013,820
(
85.7%
of net sales) for the
six months ended June 30, 2013
;
an increase
of $
824,471
or
9.1%
. The increase is largely due to increased net sales. Cost of sales for machined orthopedic implants of
$2,253,642
(66.8% of net orthopedic sales) for the
six months ended June 30, 2014
,
increased
$889,971
, or
65.3%
as compared to the same period in
2013
. The increase in cost of sales of machined orthopedic implants was due to the increase in net sales as well as increased costs for quality inspection and regulatory requirements. Cost of sales for total sensors increased
3.2%
due largely to increased sales volume partially offset by a lower average cost of silver.
Selling and Marketing
The Company's consolidated selling and marketing expenses amounted to $
240,408
(
3.8
% of net sales) for the
three months ended June 30, 2014
as compared to $
246,839
(
5.1
% of net sales) for the
three months ended June 30, 2013
;
a decrease
of $
6,431
or
2.6%
. For the
three months ended June 30, 2014
, advertising, trade show and travel related expenses increased $13,959 due to a new marketing campaign related to the Company's machined orthopedic implants. This increase was offset by decreases in other selling and marketing expenditures.
For the
six months ended June 30, 2014
the Company's consolidated selling and marketing expenses
increased
to $
532,080
(
4.3%
of net sales) as compared to $
487,214
(
4.6%
of net sales) for the
six months ended June 30, 2013
;
an increase
of $
44,866
or
9.2%
. In
2014
, advertising, trade show and travel related expenses increased $53,382 due to a new marketing campaign related to the Company's machined orthopedic implants.
General and Administrative
The Company's consolidated general and administrative expenses
decreased
to $
543,235
(
8.7
% of net sales) for the
three months ended June 30, 2014
as compared to $
585,345
(
12.0
% of net sales) for the
three months ended June 30, 2013
;
a decrease
of $
42,110
or
7.2%
The Company's consolidated general and administrative expenses
decreased
to $
1,137,866
(
9.3%
of net sales) for the
six months ended June 30, 2014
as compared to $
1,309,475
(
12.4%
of net sales) for the
six months ended June 30, 2013
;
a decrease
of $
171,609
or
13.1%
.
The decreases in consolidated general and administrative expenses for both the three and six months ended June 30, 2014 and 2013, respectively, were due in part to decreased wages, taxes, benefits and travel of $49,474 and $97,017, respectively, due
primarily to the resignations of both the former Interim CEO and former Chief Financial Officer in 2013. Legal fees decreased $27,235 and $20,433, respectively, due primarily to the wind down of RMDDx, and accounting fees were lower by $17,417 and $60,074 by eliminating audit overruns. Additionally, director fees decreased $7,500, and $15,000, respectively, as a result of the resignation of a member of the Board of Directors in September 2013. Additional decreases occurred in expenses for seminars, recruiting fees and depreciation. These decreases were partially offset by a net increase of $67,760 in the allowance for doubtful accounts for both the three and
six months ended June 30, 2014
and
2013
.
Research and Development
The Company's consolidated research and development expenses
increased
to $
85,694
(
1.4
% of net sales) for the
three months ended June 30, 2014
as compared to $
61,293
(
1.3
% of net sales) for the
three months ended June 30, 2013
;
an increase
of $
24,401
, or
39.8%
.
The Company's consolidated research and development expenses
increased
to $
182,521
(
1.5%
of net sales) for the
six months ended June 30, 2014
as compared to $
120,695
(
1.1%
of net sales) for the
six months ended June 30, 2013
;
an increase
of $
61,826
, or
51.2%
.
The increases
for the three and six months ended June 30, 2014
were each due to additional resources dedicated to the development of new products in the Company's medical device, military and law enforcement lines of business.
Other Income (Expense)
Other expense, net was $23,842 for the three months ended June 30, 2014 as compared to $189,094 for the three months ended June 30, 2013, a decrease of $165,252, primarily as a result of a decrease in interest expense. For the six months ended June 30, 2014, Other expense, net was $91,679 as compared to $199,776 for the six months ended June 30, 2013, a decrease of $108,097 also due primarily as a result of a decrease in interest expense.
The decrease in interest expense for both the three and six months ended June 30, 2014 as compared to the same period in 2013 was primarily due to $111,989 of interest expense in 2013 from the payoff of equipment notes and operating leases as part of entering into the new credit facility in March 2013.
Income Tax Provision
The tax provisions
for the three and six months ended June 30, 2014
and
2013
are attributable to the U.S. Federal, state and foreign income taxes on our continuing operations. The Company’s combined federal and state effective income tax rate from continuing operations for the
three months ended June 30, 2014
and
2013
was 0.4% and 81.8%, respectively. The effective income tax rate from continuing operations for the
six months ended June 30, 2014 and 2013
was 0.4% and 78.9%, respectively.
In the second quarter of 2013, the Company made the determination that the utilization of the deferred tax assets no longer met the more-likely-than-not recognition threshold and recorded a full valuation allowance against its deferred tax assets. The tax provision for the three and six months ended June 30, 2013 includes the impact on tax expense of $2,267,969 associated with the establishment of a full valuation allowance of the Company's beginning of the year deferred tax assets.
The change in the income tax provision
for the three and six months ended June 30, 2014
as compared to the same period in
2013
is primarily due to the establishment of a full valuation allowance against deferred tax assets.
The Company has federal, state and foreign net operating loss carryforwards totaling $7,420,000, $10,471,000 and $1,039,000 respectively, which begin to expire in 2030. The Company also had federal and state tax credit carryovers of $243,000 and $188,900, respectively. The federal and state tax credits begin to expire in 2026 and 2014, respectively.
Income (Loss) from Discontinued Operations
There was no revenue from discontinued operations
for the three and six months ended June 30, 2014
or
2013
, respectively. Activity during the above note periods consisted primarily of legal and other fees incurred offset by minor reversals.
At
December 31, 2013
, the Company had a $1.0 million liability for an unmet performance obligation related to the discontinued operations. This performance obligation was secured by $1.0 million of restricted cash. The performance guarantee liability was carried on the balance sheet of continuing operations, as the liability was guaranteed by ART.
In May 2014, $975,430 was drawn from the restricted cash, satisfying the guarantee on the performance obligation. The balance of $24,570 was returned to ART and recorded as other income (expense) on the condensed consolidated statements of operations.
Earnings (Loss) Per Share
The basic and diluted earnings per share, from continuing operations, for the
three months ended June 30, 2014
was
$0.09
as compared to basic and diluted loss per share from continuing operations of
$(1.06)
for the same period in
2013
, and increase in earnings per share of
$1.15
, or
108.5%
.
The basic and diluted earnings per share, from continuing operations, for the
six months ended June 30, 2014
was
$0.18
as compared to basic and diluted loss per share from continuing operations of
$(1.06)
for the same period in
2013
, and increase in earnings per share of
$1.24
, or
117.0%
.
Off-Balance Sheet Arrangements
In March 2013 all operating leases were paid in full and closed as part of the new credit facility. Lease expense under all operating leases for
three months ended June 30, 2014
and
2013
was $0. Lease expense for the
six months ended June 30, 2014
was $0 as compared to $51,898 for the same period in
2013
.
Liquidity and Capital Resources
Working capital was
$1,063,236
as of
June 30, 2014
as compared to
$3,479,852
at
December 31, 2013
. The decrease is due largely to the revolving line of credit becoming a short term obligation due to its June 2015 expiration date. The Company intends to work with the bank to renew the revolving line of credit prior to its maturity in June 2015.
Cash and cash equivalents from continuing operations were
$232,024
and
$749,766
at
June 30, 2014
and
December 31, 2013
, respectively. Substantially all of these funds are maintained in bank deposit accounts.
Inventories were
$3,087,557
at
June 30, 2014
as compared to $
2,335,291
at
December 31, 2013
, an increase of
$752,266
. This increase was due largely to increased work-in-progress in tooling.
Capital equipment expenditures were
$834,971
for the
six months ended June 30, 2014
due to investments in machinery and equipment largely for molding equipment.
I
n March 2013, the Company entered into a multi-year credit facility with a Massachusetts bank. The new credit facility includes a revolving line of credit ("revolver") of up to $4.0 million, a commercial term loan of $1.5 million and an equipment line of credit of $1.0 million.
The revolving line of credit provides for borrowings up to 80% of eligible accounts receivable and 50% of eligible raw materials inventory. The interest rate on the revolver is calculated at the bank's prime rate plus 0.25% (3.50% at
June 30, 2014
). The revolver has a maturity date of June 2015. The balance outstanding on the revolver was
$2,296,495
as of
June 30, 2014
.
The commercial term loan has a five year term with a maturity date in March 2018. The interest rate on the loan is a fixed 4.25% per annum. At
June 30, 2014
, the balance of the term loan was
$1,153,131
.
The equipment line of credit allowed for advances of up to $1.0 million and included a one-year draw period during which payments were interest only. The draw period ended March 28, 2014 and the then outstanding balance on the equipment line of credit of $740,999 was converted to a five-year term loan with monthly payments of principal and interest of 4.65%. The balance of the equipment term loan was
$707,944
as of
June 30, 2014
.
On June 26, 2014, the Company entered into a new equipment line of credit for $1.0 million under the Company's multi-year credit facility entered into on March 29, 2013 with the Massachusetts based bank. The equipment line of credit is for the purchase of capital equipment. As of the date of this filing, no amounts have been drawn on the equipment line. The term of this equipment line is six years, maturing on June 26, 2020, inclusive of a maximum one year draw period. Repayment shall consist of monthly interest only payments, equal to the banks prime rate plus 0.25% (3.5% at
June 30, 2014
)as to each advance commencing on the date of the loan through the earlier of: (i) one year from the date of the loan or (ii) the date upon which the equipment line of credit is fully advanced (the “Conversion Date”). On the Conversion Date, principal and interest payments will be due and payable monthly in an amount sufficient to pay the loan in full based upon an amortization schedule commensurate with the remaining term of the loan.
In January 2013, the Company entered into two equipment notes totaling $272,500 with a financing company to acquire production equipment. The notes bear interest at 4.66% and require monthly payments of principal and interest over the term of five years. The outstanding balance of these equipment notes at
June 30, 2014
was
$196,539
.
In December 2013, the Company completed a private offering in which the Company sold an aggregate of $500,000 in subordinated promissory notes. The notes are unsecured and require quarterly interest-only payments at a rate of 10% per annum. On the second anniversary following issuance, the interest rate increases to 12% per annum. The notes mature in December 2016 at which point the outstanding balance is due in full. The subordinated promissory notes may be prepaid by the Company at any time following the first anniversary thereof without penalty. The notes are subordinated to all indebtedness of the Company pursuant to the bank credit facility.
In connection with the subordinated promissory notes, the Company issued warrants to purchase the Company's common stock. The proceeds were allocated between the notes and warrants on a relative fair value basis, resulting in $416,950 allocated to the notes and $83,050 allocated to the warrants. The total discount on the notes is being recognized as non-cash interest expense over the term of the notes. For the three and
six months ended June 30, 2014 and 2013
, the Company recorded $6,921 and $
13,842
of non-cash interest expense, respectively, related to the amortization of the discount. The unamortized discount which is net
against the outstanding balance of the subordinated promissory notes is $68,390 at
June 30, 2014
and
$82,231
at
December 31, 2013
.
The borrowing agreement, under the bank facility as described above, contains both financial and non-financial covenants. The financial covenants include maintaining certain debt coverage and leverage ratios. The non-financial covenants relate to various matters including notice prior to executing further borrowings and security interests, mergers or consolidations, acquisitions, guarantees, sales of assets other than in the normal course of business, leasing, changes in ownership and payment of dividends.
At December 31, 2013, the Company had a $1.0 million liability for an unmet performance obligation related to the discontinued operations. This performance obligation was secured by $1.0 million of restricted cash. The performance guarantee liability was carried on the balance sheet of continuing operations, as the liability was guaranteed by ART.
In May 2014, $975,430 was drawn from the restricted cash, satisfying the guarantee on the performance obligation. The balance of $24,570 was returned to ART and recorded as other income (expense) on the condensed consolidated statements of operations. At June 30, 2014 and December 31, 2013, the Company had $0 and $1,000,000 of restricted cash, respectively.
No dividends were declared or paid in the three or
six months ended June 30, 2014 and 2013
, respectively.
The Company believes that cash flows from its operations, together with its existing working capital and other resources, will be sufficient to fund operations at current levels and repay debt obligations over the next twelve months and beyond. The Company continues to develop opportunities within new and existing channels where the Company can maximize its return on investments in capital equipment, research and development, marketing and human resources.
Summary of Changes in Cash Position
As of
June 30, 2014
, the Company had cash on hand of
$232,024
. For the
six months ended June 30, 2014
, net cash
provided by
operating activities of continuing operations was
$829,716
, while net cash
used in
operating activities of discontinued operations was
$1,509
. Net cash
used in
investing activities for the
six months ended June 30, 2014
was
$813,084
, all from continuing operations. Net cash
used in
financing activities for the
six months ended June 30, 2014
was
$534,374
, all from continuing operations. The net cash flows for the
six months ended June 30, 2014
are discussed in further detail below.
As of
June 30, 2013
, the Company had cash on hand of
$312,912
. For the
six months ended June 30, 2013
, net cash
used in
operating activities totaled
$324,328
. Net cash
used in
operating activities of continuing operations was
$14,027
, while net cash
used in
operating activities of discontinued operations of
$310,301
. Net cash
used in
investing activities was
$414,604
comprised of net cash
used in
investing activities of continuing operations of
$735,122
and net cash
provided by
investing activities of discontinued operations of
$320,518
. Net cash
provided by
financing activities was
$545,749
comprised of net cash
provided by
financing activities of continuing operations of
$600,751
and net cash
used in
financing activities of discontinued operations of
$55,002
.
Operating Cash Flows
For the
six months ended June 30, 2014
, net cash
provided by
operating activities was
$828,207
. Net cash
provided by
operating activities from continuing operations of
$829,716
. Cash provided by operating activities was due largely to an increase in accrued expenses and other current liabilities of
$879,531
due primarily to increased customer deposits of $561,661 as well as accrued expenses payable of $277,045 and accrued payroll, taxes and benefits of $35,374. Additional cash was provided by net income of
$497,176
as well as a non-cash addback for depreciation and amortization of
$750,616
. These were partially offset by an increase in inventory of
$752,266
, in part due to work-in-process related to tooling, as well as a decrease in accounts payable of
$397,948
. Additionally deposit, prepaid expenses and other assets increased
$107,017
and trade accounts receivable increased by
$83,113
.
Investing Cash Flows
For the
six months ended June 30, 2014
, net cash
used in
investing activities was
$813,084
, all from continuing operations. The net cash used was primarily for capital expenditures of
$834,971
largely for machinery and equipment primarily molding equipment. The capital expenditures were partially offset by
$24,500
of proceeds from the sale of fixed assets.
Financing Cash Flows
For the
six months ended June 30, 2014
, net cash
used in
financing activities was
$534,374
, all from continuing operations. Net cash
used in
financing activities included the change in restricted cash to unrestricted for the purpose of satisfying the performance guarantee obligation as mentioned in Operating Cash Flows above. Additional sources of funds include
$116,905
of proceeds from draws on the equipment line of credit as well as
$25,575
of proceeds from the exercise of stock options. These items were partially offset by net payments of
$478,000
on the Company's revolver and payments on term notes payable of
$198,854
.