It
em
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, 2015
.
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, 2015
, 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
the year ended
December 31, 2015
as filed with the SEC on March 10, 2016
.
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"), is a diversified contract manufacturing organization (“CMO”) that produces highly-engineered, innovative medical device components requiring precision machining and injection molding. The Company also manufactures components, devices and equipment for military, law enforcement, automotive and consumer product applications. The Company is engaged in the production and sale of silver/silver chloride coated and conductive resin sensors used as consumable 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's machining operations produce quick-turn, high volume patient-specific and off-the-shelf orthopedic implants and instruments. The Company’s machining operations also include laser marking, automated polishing, passivation and coating. The Company has thermoplastic injection molding capabilities as well, and provides a full array of design, engineering, production services and management. The Company competes globally, with approximately
thirty five
percent of its revenue derived from exports.
The Company's subsidiary, RMDDxUSA Corp. and its Prince Edward Island subsidiary RMDDx Corporation (collectively "WirelessDx"), discontinued operations in 2012, filed for relief under Chapter 7 (Liquidation) of the United States Bankruptcy Code in May 2014 and in March 2015, the Chapter 7 Order was formally discharged and the case was closed.
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.
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Three Months Ended
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Nine Months Ended
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September 30,
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September 30,
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2016
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%
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2015
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%
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2016
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%
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2015
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%
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Net sales
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100.0
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100.0
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100.0
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100.0
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Cost of sales
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82.8
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86.3
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83.5
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84.8
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Gross profit
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17.2
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13.7
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16.5
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15.2
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Selling and marketing
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6.4
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4.2
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6.1
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4.4
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General and administrative
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10.2
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12.5
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11.2
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10.9
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Research and development
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0.5
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0.9
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0.5
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1.2
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Other expense
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1.5
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1.2
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1.3
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1.2
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Income (loss) from continuing operations before
income taxes
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(1.4)
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(5.1)
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(2.6)
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(2.5)
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Income tax provision
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—
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—
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—
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—
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Income (loss) from continuing operations
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(1.4)
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(5.1)
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(2.6)
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(2.5)
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Income from discontinued operations
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—
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—
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—
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2.2
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Net income (loss)
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(1.4)
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%
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(5.1)
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%
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(2.6)
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%
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(0.3)
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%
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Net Sales
The Company's consolidated net sales for the
three months ended September 30, 2016
was
$4,713,123
, a decrease of
$513,012
, or
9.8%
, when compared to the consolidated net sales of
$5,226,135
for the
three months ended September 30, 2015
. The
decrease
in net sales for the
three months ended September 30, 2016
was due primarily to a decrease in net sales of orthopedic implants and instruments. Sales
o
f
sensors also decreased
.
Net sales of orthopedic implants and instruments for the three months ended
September
30, 2016 decreased
27.9
% due to lower than expected volume from a large customer as compared to the same period in 2015. The Company was notified by this customer at the end of second quarter that the demand for their product had decreased and to expect lower demand for the remainder of 2016. Partially offsetting the decrease i
n demand from this customer were
new orders from
multiple
new orthopedic implant customers.
Additionally, net sales of sensors decreased
13.0
% for the three months ended
September
30, 2016 when compared to the same period last year.
Sensor volume de
creased
16
%
when compared to the same quarter last year
due to customer mix, product mix and competitive pricing. Silver surcharge billed increased
6.3
% due to an increase
of 28.3%
in the weighted average price of silver for the three months ended
September
30, 2016, as compared to the same period in 2015.
Net sales of thermoplastic injection molding for the three months ended September 30, 2016 increased 3.1% due to
increased sales of automotive
components
and medical components. The increase was
partially offset by
lower sales of military and law enforcement components
when compared to the same period in 2015.
The Company's consolidated net sales for the
nine months ended September 30, 2016
was
$14,825,417
, a decrease of
$1,918,154
, or
11.5%
, when compared to the consolidated net sales of
$16,743,571
for the
nine months ended September 30, 2015
. The decrease in net sales for the
nine
months ended
September
30, 2016 was due primarily to a decrease in net sales of orthopedic implants and instruments. Sales
of sensors
also dec
reased
.
Net sales of orthopedic implants and instruments for the
nine
months ended
September
30, 2016 decreased
25.1
% due to lower than expected volume from a large customer as compared to the same period in 2015. The Company was notified by this customer
at the end of the second quarter
that the demand for their product had decreased and to expect lower demand for the remainder of 2016. Partially offsetting the decrease in demand from this customer were new orders from
multiple
new orthopedic implant customers beginning in the second quarter of 2016.
Additionally, net sales of sensors decreased 11.8% for the nine months ended September 30, 2016 when compared to the same period
last year. While sensor volume increased 1.0% over the same period last year, net sales decreased due to customer mix, product mix
and competitive pricing
. Silver surcharge billed decreased 7.1
%
also
due to product mix, despite a
net
4.7
%
in
crease in the weighted average price of silver for the nine months ended September 30, 2016, as compared to the same period in 2015.
Net sales of thermoplastic injection molding for the
nine
months ended
September
30, 2016
in
creased
slightly
due to
increased sales of automotive
components
and medical components. These combined increases were mostly offset by
lower sales of military and law enforcement components
when compared to the same period in 2015.
Gross Profit
The Company's gross profit for the
three months ended September 30, 2016
was
$810,760
, an in
crease of
$93,247
, or
13.0%
, when compared to gross profit of
$717,513
for the same period in 2015. Gross profit as a percentage of sales for the
three months ended September 30, 2016
increased to
17.2
%, or
3.5
points from 13.7
% for the
three months ended September 30, 2015
.
The increase in gross profit for the three months ended September 30, 2016 was primarily due to a
26.3
% increase in gross profit from sensors
. This was
due largely to increased gross profit from silver surcharge due to an increase in the weighted average price of silver when compared to the same prior year period. In addition, despite volume decreases, gross profit as a percentage of sales for sensors increased
6.7
points due primarily to customer and product mix.
Gross profit for the three months ended September 30, 2016 from thermoplastic injection
molding increased
13.0
% due primarily to
efficiency improvements from automation
,
operating leverage
and increased sales
of a
utomotive components
when compared to the same prior year period. The increase in gross profit was partially offset by
the decline in sales of military and law enforcement components
.
The
in
crease in gross profit for the three months ended
September
30, 2016 was
offset by a decrease of
31.1
%
in gross profit from orthopedic implants and instruments due to lower sales volume when compared to the same prior year period.
The
in
crease in gross profit for the three months ended
September
30, 2016
was
positively affected by
a decrease in expenses for
other
indirect
manufacturing overhead departments as adjustments were made in part as a result of lower sales as well as customer mix of orthopedic implants and instruments. Other manufacturing overhead as a percentage of sales decreased to
9
.9% for the three months ended
September 30, 2016 as compared to 10.4
% in the same period last year.
The Company's gross profit for the
nine months ended September 30, 2016
was
$2,440,629
, a decrease of
$105,434
, or
4.1%
, when compared to gross profit of
$2,546,063
for the same period in 2015. Gross profit as a percentage of sales for the
nine months ended September 30, 2016
increased to 16.
5
%, or
1.3
points from 15.
2
% for the
nine months ended September 30, 2015
.
The decrease in gross profit for the nine months ended September 30, 2016 was due in part to a decrease of 17.8% in gross profit from sensors due largely to price reductions as well as customer and product mix. When comparing the nine months ended September 30, 2016 to the nine months ended September 30, 2015, volumes were flat. Gross profit as a percentage of sales from sensors decreased 1.4 points due primarily to the reduction in net sales and selling price largely offset by increased gross profit from silver surcharge.
The decrease in gross profit for the nine months ended September 30, 2016 was also due in part to a decrease of 25.7% in gross profit from orthopedic implants and instruments largely due to lower volume. Gross profit as a percentage of sales from orthopedic implants and instruments decreased slightly due partly to lower net sales and product mix offset by improved efficiencies through automation.
Gross
profit for the nine months ended September 30, 2016 from thermoplastic injection molding increased
3.2
% from the same period in the prior year due to customer and product mix. Gross profit as a percentage of sales from thermoplastic injection molding increased
1.0
point
due to the product mix partly offset by improved efficiencies through automation.
The decrease in gross profit for the
nine
months ended
September
30, 2016 was offset by a decrease in expenses for
other
indirect
manufacturing overhead departments. The lower expenses were due to adjustments made in part as a result of lower sales as well as customer mix of orthopedic implants and instruments. Other manufacturing overhead
as a perc
entage of sales decreased to 8.9
% for the
nine
months ended
September
30, 2016 as compared to 10.4% in the same period last year.
Selling and Marketing
The Company's consolidated selling and marketing expenses amounted to
$303,279
(
6.4%
of net sales) for the
three months ended September 30, 2016
as compared to
$219,895
(
4.2%
of net sales) for the
three months ended September 30, 2015
, an
increase
of
$83,384
, or
37.9%
. For the
three months ended September 30, 2016
, the increase was primarily due to increased compensation of $
96,599
as a result of two additional salespersons hired in the fourth quarter of 2015. The increase was partially offset by a decrease in commissions of $
24,409
primarily due to
lower net sales from existing customers as compared to the same period in the prior year.
Travel expenses in
creased $
10,297
due
to increased customer visits
.
The Company's consolidated selling and marketing expenses amounted to
$900,189
(
6.1%
of net sales) for the
nine months ended September 30, 2016
as compared to
$740,476
(
4.4%
of net sales) for the
nine months ended September 30, 2015
, an increase of
$159,713
, or
21.6%
. For the
nine
months ended
September
30, 2016, the increase was primarily due to increased compensation of $
271,461
as a result of two additional salespersons hired in the fourth quarter of 2015. The increase was partially offset by a decrease in commissions of $
72,306
as a result of lower net sales as compared to the same period in the prior year. Marketing
expenses
decreased $49,1
77
due largely to lower
trade show costs and attendance. T
ravel expenses increased
$4,919
due to
increased
customer visits
.
General and Administrative
The Company's consolidated general and administrative expenses decreased to
$482,115
(
10.2%
of net sales) for the
three months ended September 30, 2016
as compared to
$651,669
(
12.5%
of net sales) for the
three months ended September 30, 2015
a decrease of
$169,554
, or
26.0%
. The decrease in general and administrative expenses is
mainly
due to
recording an impair
ment charge
and costs related to the analysis of merger and acquisition opportunities of $118,318 and
$
18,000, respectively,
for the three months ended September 30, 2015 compared to no
such
expenses
in the same period of 2016.
In addition, bad debt expense decreased $33,068 in the three months ended September 30, 20
16 due to additional payments on
the accounts receivable insurance claim related to an international customer in the second quarter of 2016 that offset the previously recorded expense.
The Company's consolidated genera
l and administrative expenses de
creased to
$1,664,182
(
11.2%
of net sales) for the
nine months ended September 30, 2016
as compared to
$1,825,473
(
10.9%
of net sales) for the
nine months ended September 30, 2015
a
de
crease of
$161,291
, or
8.8%
.
The decrease in general and administrative expenses is mainly due to recording an impairment charge and costs related to the analysis of merger and acquisition opportunities of $118,318 and
$
18,000, respectively, for the nine months ended September 30, 2015 compared to no
such
expenses in the same period of 2016. In addition,
compensation
decreased $51,854
due in part to executive officers’ voluntary 10% reduction in pay for the second quarter
in 2016
as well as the timing of replacement hires for three positions. Further decreases include accounting related expenses of $
19,906
due in part to savings realized from new SEC filing software and a year to date directors’ fees decrease of $8,500 due to the Board of Directors voluntarily waiving their second quarter
of 2016
fees, partially offset by the impact of a new director being added in April 2015, one in July 2015 and one in 2016.
Consulting fees related to environmental, health and safety
and investor relation fees both
additionally decreased
$
26,622
and $24,347, respectively, in the nine months ended September 30, 2016
due to bringing
these function in house.
In addition, bad debt expense decreased
a net of $17,622
in the
nine
months ended September 30, 20
16 due to additional payments on
the accounts receivable insurance claim related to an international customer in the second quarter of 2016 that offset the previously recorded expense.
The de
crease in general and administrative expenses
was partially offset by
$51,600 of recruiting agency fees related to the replacement of three positions in the first quarter
,
as well as increases in depreciation expense of $
27,743
, legal fees of $
17,064
, share-based compensation of $
11,669
, and bank fees of $
12,373
for the
nine
months ended
September
30, 2016 versus the same period in the prior year.
Research and Development
The Company's consolidated research and development expenses decreased to
$24,534
(
0.5%
of net sales) for the
three months ended September 30, 2016
as compared to
$48,007
(
0.9%
of net sales) for the
three months ended September 30, 2015
, a
decrease
of
$23,473
, or
48.9%
. The Company had a $26,5
73
decrease
due to the elimination of one position in 2015
.
The Company's consolidated research and development expenses decreased to
$74,792
(
0.5%
of net sales) for the
nine months ended September 30, 2016
as compared to
$202,792
(
1.2%
of net sales) for the
nine months ended September 30, 2015
, a decrease of
$128,000
, or
63.1%
. The Company had a $
77,975
decrease due to the elimination of one position in 2015, as well as a $
5
1
,206
decrease in internal research and development costs for the development of new products and capabilities related to medical device components when compared
to
the
nine
months ended
September
30, 2016.
Other Expense, net
Other expense, net decreased to
$69,394
for the
three months ended September 30, 2016
, as compared to
$63,569
, for
the
three months ended September 30, 2015
, a decrease of
$5,825
. The decrease in other expense was due in part to a gain on the sales of fixed assets of $
3,114
in 2015. In addition, other expense decreased $
2,994
in 2016 due primarily to
increased
interest expense related to servicing the term debt.
Other expense, net increased to
$192,063
for the
nine months ended September 30, 2016
, as compared to
$182,271
, for
the
nine months ended September 30, 2015
, an increase of
$9,792
. The increase in other expense was due to a gain on the sales of fixed assets of $
17,143
in 2015. In addition, other expense decreased $
9,043
in 2016 due primarily to reduced interest expense related to servicing the term debt.
Income Tax Provision
The tax provisions for the
three and nine months ended September 30, 2016 and 2015
attributable to the U.S. federal and state income taxes on our continuing operations are
zero
. The Company’s combined federal and state effective income tax rate from continuing operations for both the
three and nine months ended September 30, 2016 and 2015
of 0% is due to the deferred tax assets being fully reserved for with a valuation allowance.
Income from Discontinued Operations
The Company's subsidiary, RMDDxUSA Corp. and its Prince Edward Island subsidiary RMDDx Corporation (collectively "WirelessDx"), discontinued operations in 2012, filed for relief under Chapter 7 (Liquidation) of the United States Bankruptcy Code in 2014 and on March 20, 2015, the Chapter 7 Order was formally discharged and the case was closed.
For the
nine
months ended
September
30, 2015 net income of $362,610 was recorded from discontinued operations as a result of the write-off of the remaining liabilities of $320,056 and the reversal of accumulated other comprehensive income of $42,553 from cumulative translation adjustments from RMDDx Corporation.
Earnings (Loss) Per Share
Consolidated basic and diluted
loss
per share for the
three months ended September 30, 2016
was $0.02 per share as compared to basic and diluted
loss
of $0.
10
per share for the
same period in 2015, a de
crease of $0.
08
per share. The de
crease in
the
loss
per share for the
three months ended September 30, 2016
, is due largely to the
impairment of intangibles in 2015,
positively affected by
the
increased
g
ross profit
.
Consolidated basic and diluted loss per share for the
nine months ended September 30, 2016
was $0.1
4
per share as compared to basic and diluted
loss of $0.02
per share for the same period in 2015, a
n increase
of $0.1
2
per share. The
increase
in
loss
per share for the
nine months ended September 30, 2016
, is due largely to the decreased gross profit in orthopedic implants and instruments
and sensors
.
The
basic and diluted
loss
per share for the
nine
months ended
September
30, 2015 w
as positively
impacted by income from discontinued operations of RMDDxUSA which received relief under Chapter 7 of the United States Bankruptcy Code and was formally discharged in March 2015.
Off-Balance Sheet Arrangements
The Company consolidated operating leases on office equipment in the three months ended
September
30, 2016
. Lease expense under all operating leases was approximately
$6,009
and
$3,322
for the three months ended
September 30, 2016
and 2015, respectively. For the
nine months ended September 30, 2016
and 2015 the lease expense was
$14,444
and
$7,966
, respectively.
Liquidity and Capital Resources
Working capital was
$711,825
as of
September 30, 2016
, as compared to
$2,509,588
at
December 31, 2015
, a
decrease
of
$1,797,763
. The
decrease
is due to the reclassification of the revolving line of credit of $
1,546,495
from long term to current liabilities because the maturity date is June 30, 2017, as well as increases in accounts payable, accrued expenses and other current liabilities and customer deposits related to tooling. Partially offsetting the higher
current
liabilities is
an increase in inventory
which was mitigated by
a decrease in accounts receivable
and cash.
Cash and cash equivalents were
$206,619
and
$272,291
at
September 30, 2016
and
December 31, 2015
, respectively, a
decrease
of
$65,672
. Substantially all of these funds are maintained in bank deposit accounts.
Trade accounts receivable, net of allowance for doubtful accounts were
$2,367,370
and
$2,798,353
at
September 30, 2016
and
December 31, 2015
, respectively, a
decrease
of
$430,983
.
The decrease is primarily
due to the decrease in net sales for the month of September 2016 as compared to December 2015, as well as the timing of cash receipts.
Inventories were $
3,144,471
at
September
30, 2016, as compared to $2,118,712 at December 31, 2015, an increase of
$1,025,759
.
In the
second and
third quarter
s
of 2016
the Company entered into
multi-year
agreements with certain offshore customers resulting in increased inventory as of September 30, 2016.
In addition,
there is
increased work in progress related to tooling orders. Raw materials for custom injection mol
ding increased due to
strong
demand
from
a customer in the
automotive market. In addition, raw materials and work in progress increased for orthopedic implants and instruments
that did not ship in the quarter
.
Accounts payable increased $
411,278
due largely to the timing of disbursements
for the nine months ended September 30, 2016
as compared to December 31, 2015
.
Accrued expenses and other current liabilities increased $
34,613
for the nine months ended September 30, 2016
as compared to
December 31, 2015
. T
he increase is due to payroll accruals increase of $36,718 based on timing of quarter end and the
Company
has an
accrued
balance of
$
33,728 for
customer rebates. These increases were partially offset by a $
29,785
reduction in accrued commissions.
Customer deposits increased $
324,559
for the nine months ended September 30, 2016
as compared to December 31, 2015
due largely to an increase in recorded deposits due to an increase in tooling orders.
Capital equipment expenditures were
$1,069,325
for the
nine months ended September 30, 2016
, due to investments in machinery and equipment primarily for the contract manufacturing of orthopedic implants and instruments as well as custom injection molding as compared to $
1,072,347
in the same period in 2015.
At
September
30, 2016, the Company’s total debt was $
4,154,481
as compared to $4,031,767 at December 31, 2015, an increase of $
122,714
or
3.0
% due
primarily to a net
$544,851 of additional draws from the equipment line of credit, partially offset by payments
of $477,900
on term debt.
In addition, the revolver had net proceeds of $35,000.
The total outstanding balance of the Company’s term debt increased $
403,801
to $2,
114,088
at
September
30, 2016 as compared to $1,710,287 at December 31, 2015 due in part to the conversion of the equipment line of credit to term debt in June 2016. The Company also had a balance of $
493,898
of subordinated promissory notes as discussed in more detail below.
The Company has a multi-year credit facility with a Massachusetts bank. Under this credit facility the Company has a revolving line of credit (the "revolver"), commercial term loan, and three equipment term loans as detailed below. The bank facility contains both financial and non-financial covenants, all of which the Com
pany is in compliance with at September
30, 2016.
The revolver 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% (3.75% at
September
30, 2016). The balance outstanding on the revolver was $
1,546,495
as of
September 30, 2016
. The revolver has a maturity date of June 30, 2017. Amounts available to borrow under the revolver are
$
398,528
at
September
30, 2016.
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, and requires monthly payments of approximately $28,000. At
September 30, 2016
, the balance of the commercial term loan was $
483,908
.
The original 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 approximately $14,000 consisting of principal and interest at a fixed rate of 4.65%. The balance of this equipment term loan was $
392,37
2
as of
September 30, 2016
.
On June 26, 2014, the Company entered into an equipment line of credit that 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 June 26, 2015 and the then outstanding balance on the equipment line of credit of $415,785 was converted to an equipment term loan with a five-year term, maturing as of June 26, 2020. The equipment term loan requires monthly payments of approximately $8,000, consisting of principal and interest at a fixed rate of 4.67% beginning in July 2015. The balance of this equipment term loan was $
321,045
as of
September
30, 2016.
On June 19, 2015, the Company entered into an equipment line of credit that 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 June 20, 2016 and the then outstanding balance on the equipment line of credit of $881,701 was converted to an equipment term loan with a five-year term, maturing as of June 19, 2021. The equipment term loan requires monthly payments of approximately $17,000, consisting of principal and interest at a fixed rate of 4.68% beginning in July 2016. The balance of this equipment term loan was $
842,866
as of
September
30, 2016.
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. The Company is in compliance with all covenants at
September
30, 2016.
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 of approximately $5,000 over a five year term maturing in January 2018. The outstanding balance of these equipment notes at
September
30
, 2016
was $
73,897
.
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 currently req
uire quarterly interest-only payments at a rate of 1
2
% per annum
.
The
notes mature in December 201
6
at which point the outstanding balance is due in full. The subordinated promissory notes may be prepaid by the Company without penalty. The notes are subordinated to all indebtedness of the Company pursuant to the bank credit facility.
In October 2016, certain of these promissory notes and unexercised warrants were amended to extend their maturity dates to December 2018 (Note 11).
No dividends were declared or paid in the
nine months ended September 30, 2016 and 2015
.
The Company believes that cash flows from its operations, together with its existing working capital, the revolving line of credit and other resources, will be sufficient to fund operations at current levels and repay debt obligations over the next twelve months. 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. The Company is currently in negotiations with its bank on a new credit facility.
Summary of Changes in Cash Position
As of
September 30, 2016
, the Company had cash on hand of
$206,619
. For the
nine months ended September 30, 2016
, net cash
provided by
operating activities was
$850,552
. Net cash
used in
investing activities for the
nine months ended September 30, 2016
was
$1,069,325
. Net cash
provided by
financing activities for the
nine months ended September 30, 2016
was
$153,101
. All of the above were from continuing operations. The net cash flows for the
nine months ended September 30, 2016
are discussed in further detail below.
Operating Cash Flows
For the
nine months ended September 30, 2016
, net cash
provided by
operating activities was
$850,552
. Cash provided
by operating activities was
impacted by non-cash add-backs for depreciation and amortization of $
1,152,001
, share-based compensation of $
35,083
and non-cash interest expense of $
20,762
. The non-cash add-backs were offset by a decrease to allowance for doubtful accounts of $30,000.
Cash provided by operating activities for
a
ccounts payable was $411,278 due to raw material receipts and timing of payments, accrued expenses and other current liabilities
provided
$332,993
of
cash
from operating
activities due to the increase in custo
mer deposits for tooling orders and accounts receivable
provided
$460,983
of cash
due to the
timing of
sales
and cash collections
.
The cash provided
by
operating activities
was offset by a net loss of $
390,597
for the
nine
months ended
September
30, 2016 and cash used in inventory of $
1,025,759
, due to increased
finished goods and
work in process for orthopedic implants and instruments, and tooling.
Additionally, in the third quarter the Company entered into
multi-year
agreements with certain offshore customers resulting in increased inventory as of September 30, 2016.
Prepaid expenses and other current assets had $130,953 cash used in operating activities.
Investing Cash Flows
For the
nine months ended September 30, 2016
, net cash used in investing activities was
$1,069,325
. The net cash used was for capital expenditures of
$1,069,325
, largely for machinery and equipment, primarily for the contract manufacturing of orthopedic implants and instruments as well as custom injection molding equipment.
Financing Cash Flows
For the
nine months ended September 30, 2016
, net cash
provided by
financing activities was
$153,101
. Cash was provided by net proceeds of $
35,000
from the Company's revolver, proceeds of $544,851 from the equipment line of credit and proceeds of $51,150 from the exercise of stock options. These proceeds were offset by payments on term notes payable of $
477,900
.