Document and Entity Information
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Document and Entity Information (USD $)
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12 Months Ended | ||
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Dec. 31, 2016
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Mar. 22, 2017
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Jun. 30, 2016
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| Document and Entity Information [Abstract] | |||
| Entity Registrant Name | ARRHYTHMIA RESEARCH TECHNOLOGY INC /DE/ | ||
| Entity Central Index Key | 0000819689 | ||
| Current Fiscal Year End Date | --12-31 | ||
| Entity Filer Category | Smaller Reporting Company | ||
| Document Type | 10-K | ||
| Document Period End Date | Dec. 31, 2016 | ||
| Document Fiscal Year Focus | 2016 | ||
| Document Fiscal Period Focus | FY | ||
| Amendment Flag | false | ||
| Entity Common Stock, Shares Outstanding | 2,820,999 | ||
| Entity Public Float | $ 17,660,327 | ||
| Entity Current Reporting Status | Yes | ||
| Entity Voluntary Filers | No | ||
| Entity Well-known Seasoned Issuer | No |
Consolidated Balance Sheets
Consolidated Balance Sheets (Parenthetical)
Consolidated Statements of Operations and Comprehensive Loss
Consolidated Statements of Operations and Comprehensive Loss (Parenthetical)
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Consolidated Statements of Operations and Comprehensive Loss (Parenthetical) (USD $)
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12 Months Ended | |
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Dec. 31, 2016
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Dec. 31, 2015
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| Consolidated Statements of Operations and Comprehensive Loss [Abstract] | ||
| Tax provision, discontinued operations | $ 0 | $ 0 |
Consolidated Statements of Changes in Shareholders' Equity
Consolidated Statements of Cash Flows
Description of Business
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Description of Business
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12 Months Ended |
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Dec. 31, 2016
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| Description of Business [Abstract] | |
| Description of Business | Arrhythmia Research Technology®, Inc., (“ART”), through its wholly-owned subsidiary, Micron Products®, Inc. ("Micron", and collectively with ART, the "Company") is a diversified contract manufacturing organization (“CMO”) that produces highly-engineered, innovative components requiring precision machining and thermoplastic injection molding. The Company also manufactures components, devices and equipment for military, law enforcement, automotive and consumer products applications. The Company's capabilities include 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. The Company’s machining operations produce quick-turn, high volume and patient-specific orthopedic implant components and instruments. The Company also has custom thermoplastic injection molding capabilities as well as a full array of design, engineering, production services and management. The Company competes globally, with nearly forty percent of its revenue derived from exports. The Company’s shares have traded on the NYSE MKT since 1992 under the symbol HRT. The Company has grown organically and through acquisitions. Today, the Company has diversified manufacturing capabilities with the capacity to participate in full product life-cycle activities from early stage development and engineering and prototyping to full scale manufacturing as well as packaging and product fulfillment services.
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 (see Note 12). Operating matters and liquidity The revolver under the Company's credit facility has a maturity date of June 2017 (see Note 5). At December 31, 2016, the outstanding balance on the revolver was $1,785,795. The Company believes that cash flows from its operations, together with its existing working capital, increased booked orders, the renewal of the revolver and other resources, will be sufficient to fund operations at current levels and repay debt obligations over the next twelve months and beyond; however, there can be no assurance that the Company will be able to do so. Assessment of going concern In 2016, the Company adopted new accounting standard ASU No. 2014-15, “Presentation of Financial Statements - Going Concern (Subtopic 205-40), Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern”. The new accounting standard requires management to evaluate whether there are conditions that give rise to substantial doubt as to the Company’s ability to continue as a going concern within one year from the date of issuance of these financial statements. Substantial doubt exists when conditions and events, considered in the aggregate, indicate that it is probable that a company will be unable to meet its obligations as they become due within one year after the financial statement issuance date. Management evaluations include identifying relevant conditions and events that were known and reasonably knowable as of the date these financial statements have been issued. The Company identified certain conditions and events which in the aggregate required management to perform an assessment of the Company’s ability to continue as a going concern. These conditions include the Company’s ability to renew the revolver which matures in June 2017, negative financial history and the Company’s limited liquidity to meet the working capital needs to support the Company’s operations. Management’s assessment included an analysis of the Company’s financial forecasts. Management’s assessment also considered the Company’s history of meeting financial covenants and being able to renew and refinance its debt obligations. Based on the anticipated renewal of the Company’s revolver, cash forecasts, expected fulfillment of booked orders from existing customers, new customer prospects, and the closing on the sale of certain real estate held for sale, the Company expects to continue to meet its financial covenants and its obligations for the next year.
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Accounting Policies
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Accounting Policies
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Dec. 31, 2016
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| Accounting Policies | 2. Accounting Policies Principles of consolidation The consolidated financial statements (the "financial statements") include the accounts of ART, Micron and WirelessDx. WirelessDx is presented herein as discontinued operations. All intercompany balances and transactions have been eliminated in consolidation. Use of estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting periods. Actual results could differ from those estimates. Revenue recognition Revenue is recorded when all criteria for revenue recognition have been satisfied. Revenue is recognized in the period when persuasive evidence of an arrangement with a customer exists, the products are shipped and title has transferred or when exclusive control has been transferred to the customer, the price is fixed or determinable and collection is probable. The Company has entered into supply agreements with certain foreign customers where revenue is not recognized when the product is shipped but instead is recognized when the customer consumes the product. The Company enters into arrangements containing multiple elements which may include a combination of the sale of molds, tooling, engineering and validation services ("tooling") and production units. The Company has determined that certain engineering and tooling arrangements, and the related production units, represent one unit of accounting, based on an assessment of the respective standalone value. When the Company determines that an arrangement represents one unit of accounting, the revenue is deferred over the estimated product life-cycle, based upon historical knowledge of the customer, which is generally one to three years. The Company carries the sales and tooling costs, associated with the related arrangement, as deferred revenue and other current and non-current assets, respectively, on the Company's balance sheet. As the deferred revenue is amortized to sales over the product lifecycle, the associated prepaid tooling costs are amortized to cost of sales. The Company cannot effectively predict short-term or long-term production volume in a consistent and meaningful manner, due to the nature of these molds and associated products. Therefore, the Company is unable to account for the transactions under the Units of Production method and management has determined the most appropriate amortization method to be the Straight-Line method. The Company may from time to time, at the customer's request, enter into a bill and hold arrangement. The Company evaluates the nature of the arrangement including, but not limited to (i) the customer's business purpose, (ii) the transfer of risk of ownership to the customer and (iii) the segregation of inventory, along with other elements in accordance with relevant accounting guidance to determine the appropriate method of revenue recognition for each arrangement. Revenue for software license sales is recognized when licenses are sold as the revenue cycle is completed with no warranty, returns or technical support to customers. Total revenue from software sales was immaterial in relation to consolidated revenues. Fair value of financial instruments The carrying amount reported in the balance sheets for cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities approximate their fair value due to the immediate or short-term nature of such instruments. The carrying value of debt approximates fair value since it provides for market terms and interest rates. Concentration of credit risk Financial instruments which potentially expose the Company to concentrations of credit risk consist primarily of accounts receivable and cash and cash equivalents. It is the Company’s policy to place its cash in high quality financial institutions. The Company does not believe significant credit risk exists above federally insured limits with respect to these institutions. Accounts receivable are customer obligations due under normal trade terms. A large portion of the Company's products are sold to large diversified medical, military and law enforcement product manufacturers. The Company does not generally require collateral for its sales; however, the Company believes that its terms of sale provide adequate protection against credit risk. While the Company has a strong record of collecting on its receivables, the Company maintains Accounts Receivables insurance in order to mitigate concentration of credit risk where our top five customers in revenue constituted 46% of the Accounts Receivables at December 31, 2016 as compared to 51% at December 31, 2015. During the year ended December 31, 2016, the Company had net sales to two customers constituting 19% and 12% of total 2016 net sales. Accounts receivable from these two customers at December 31, 2016 was 26% and 7%, respectively, of the total accounts receivable balance at year end. During the year ended December 31, 2015, the Company had net sales to two customers constituting 16% and 13%, respectively, of total 2015 net sales. Accounts receivable from the two customers at December 31, 2015 was 9% for each of the total accounts receivable balance at year end. Cash and cash equivalents Cash and cash equivalents consist of cash on hand and on deposit in high quality financial institutions with maturities of three months or less at the time of purchase. Accounts receivable and allowance for doubtful accounts Accounts receivable represent amounts invoiced by the Company. Management maintains an allowance for doubtful accounts based on information obtained regarding individual accounts and historical experience. Amounts deemed uncollectible are written off against the allowance for doubtful accounts. Bad debts have not had a significant impact on the Company’s financial position, results of operations and cash flows. The Company insures receivables for certain customers based upon several factors. Such factors include the customer’s payment terms, ordering patterns and volume requirements, the customer’s payment history, or general economic conditions of the region in which a customer is located. Inventories The Company values its inventory at the lower of average cost, first-in-first-out (FIFO) or net realizable value. The Company reviews its inventory for quantities in excess of production requirements, obsolescence and for compliance with internal quality specifications. A review of inventory on hand is made at least annually and obsolete inventory may be disposed of and/or recycled. Any adjustments to inventory would be equal to the difference between the cost of inventory and the estimated net market value based upon assumptions about future demand, market conditions and expected cost to distribute those products to market. The Company also has supply agreements with certain foreign customers to hold inventory at the customer’s warehouses. Property, plant and equipment Property, plant and equipment are recorded at cost and include expenditures which substantially extend their useful lives. Depreciation on property, plant and equipment is calculated using the straight-line method over the estimated useful lives of the assets. Expenditures for maintenance and repairs are charged to earnings as incurred. When equipment is retired or sold, the resulting gain or loss is reflected in earnings. Assets held for sale Property classified as held for sale is measured at the lower of its carrying value or fair value less cost to sell. Gains or losses are recognized for any subsequent changes to fair value less cost to sell; however, gains that may be recognized are limited by cumulative losses previously recognized. Property held for sale is not depreciated. Property is classified as held for sale in the period in which management with the appropriate authority commits to a plan to sell the asset; the asset is available for immediate sale in its present condition subject only to terms that are usual and customary for sales of such assets; an active program to locate a buyer and other actions required to complete the plan of sale have been initiated; the sale of the property or asset within one year is probable and will qualify for accounting purposes as a sale; the asset is being actively marketed for sale at a price that is reasonable in relation to its current fair value; and actions required to complete the plan of sale indicate that it is unlikely that significant changes to the plan will be made or that the plan will be withdrawn. Long-lived assets classified as held for sale are presented separately in the statement of financial position of the current period (see Note 4). Fair value hierarchy The Company groups its assets and liabilities generally measured at fair value in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value. Level 1 – Valuation is based on quoted prices in active markets for identical assets or liabilities. Valuations are obtained from readily available pricing sources. Level 2 – Valuation is based on observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; 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 – Valuation is based on unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Level 3 assets and liabilities include financial instruments whose value is determined using unobservable inputs to pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, the level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the investment. The Company recognizes transfers between levels at the end of the reporting period. There were no changes in levels in 2016. At December 31, 2016 and 2015, assets held for sale is the only item in the financial statements reflected at fair value. Assets held for sale are considered level 3. The fair value of assets held for sale was determined using the sales price per the amended purchase and sale agreement, less the estimated cost to sell (see Note 4). Long-lived and intangible assets The Company assesses the impairment of long-lived and intangible assets with finite lives annually or whenever events or changes in circumstances indicate that the carrying value may not be fully recoverable. Based upon the annual review, the Company recorded no impairment charges in 2016 and recorded $118,318 in impairment charges in 2015. In 2015, the Company reviewed unamortized costs for patents pending. As a result of this review, the Company determined that the patents pending related to the Triggering Recharging and Wireless Transmission of Remote Patient Monitoring Device, as well as the Seed-Beat Selection Method for Signal-Averaged Electrocardiography were no longer patentable and recorded an impairment charge of $103,287 for the full costs of these patents pending. Additionally, after a review of trade names, the Company determined that the Leominster Tool & Die name no longer provided any future economic benefit and recorded an impairment charge of $15,031 for the remaining unamortized balance of the trade names. Intangible assets consist of the following:
Amortization expense related to intangible assets, excluding the above noted 2015 impairment charges, was $1,757 and $3,235 in 2016 and 2015, respectively. Estimated future annual amortization expense for currently amortizing intangible assets is expected to approximate $1,757. Income taxes The Company recognizes deferred tax liabilities and assets for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred tax liabilities and assets are determined based on the difference between the financial statement and tax bases of assets and liabilities using tax rates in effect for the year in which the differences are expected to reverse. The Company follows the provisions of FASB ASC 740, “Accounting for Uncertainty in Income Taxes—An Interpretation of FASB No. 109.” FASB ASC 740 provides detailed guidance for the financial statement recognition, measurement and disclosure of uncertain tax positions recognized in the financial statements in accordance with SFAS No. 109. Tax positions must meet a “more-likely-than-not” recognition threshold at the effective date to be recognized upon the adoption of FASB ASC 740 and in subsequent periods. No interest and penalties related to uncertain tax positions were accrued at December 31, 2016. The Company’s primary operations are located in the US. Tax years ended December 31, 2013 or later remain subject to examination by the IRS and state taxing authorities. Share-based compensation Share-based compensation cost is measured at the grant date, based on the fair value of the award, and is recognized as an expense over the employee’s requisite service period (generally the vesting period of the share-based grant). Comprehensive loss In 2016 and 2015, the Company has other comprehensive loss of $0 and $42,502, respectively. In 2016, the change in comprehensive loss was a result of the bankruptcy of RMDDxUSA Corp. (see Note 12). Earnings per share data 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. Research and development Research and development expenses include costs directly attributable to conducting research and development programs primarily related to the development of a unique process to improve silver coating during the manufacturing processes, including the design and testing of specific process improvements for certain medical device components. Such costs include salaries, payroll taxes, employee benefit costs, materials, supplies, depreciation on research equipment, and services provided by outside contractors. All costs associated with research and development programs are expensed as incurred. Recently Issued Accounting Pronouncements In the normal course of business, management evaluates all new accounting pronouncements issued by the Financial Accounting Standard Board (“FASB”), Securities and Exchange Commission (“SEC”), Emerging Issues Task Force (“EITF”), or other authoritative accounting bodies to determine the potential impact they may have on the Company’s Consolidated Financial Statements. Based upon this review, except as noted below, management does not expect any of the recently issued accounting pronouncements, which have not already been adopted, to have a material impact on the Company’s consolidated financial statements. In August 2016, the FASB issued Accounting Standards Update (“ASU”) No. 2016-15, “Statement of Cash Flows (Topic 230) Classification of Certain Cash Receipts and Cash Payments”. This standard provides guidance for eight cash flow classification issues in current GAAP. The standard is effective for interim and annual reporting periods beginning after December 15, 2017. The Company is currently evaluating the impact that the standard will have on its consolidated financial statements. In March 2016, the FASB issued ASU No. 2016-09, “Compensation – Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting”. The standard is intended to simplify several areas of accounting for share-based compensation arrangements, including the income tax impact, classification on the statement of cash flows and forfeitures. The standard is intended to reduce the cost and complexity with maintaining or improving the usefulness of information provided to users of financial statements. The standard is effective for interim and annual reporting periods beginning after December 15, 2016 and early adoption is permitted. The Company is currently evaluating the impact that the standard will have on its consolidated financial statements. In February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842),” which requires companies to recognize all leases as assets and liabilities on the consolidated balance sheet. The standard retains a distinction between finance leases and operating leases, and the classification criteria for distinguishing between finance leases and operating leases are substantially similar to the classification criteria for distinguishing between capital leases and operating leases in the current accounting literature. The result of retaining a distinction between finance leases and operating leases is that under the lessee accounting model in Topic 842, the effect of leases in a consolidated statement of comprehensive income and a consolidated statement of cash flows is largely unchanged from previous GAAP. The amendments in this standard are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Earlier application is permitted. The Company is currently evaluating the impact that the adoption of this standard will have on its consolidated financial statements. In November 2015, the FASB issued ASU No. 2015-17, "Balance Sheet Classification of Deferred Taxes" which requires the presentation of deferred tax assets and deferred tax liabilities, and any related valuation allowances, as noncurrent on the consolidated balance sheets. The standard is effective for interim and annual reporting periods beginning after December 15, 2016 and early adoption is permitted. The Company is currently evaluating the impact that the standard will have on its consolidated financial statements. In July 2015, the FASB issued ASU No. 2015-11, “Simplifying the Measurement of Inventory,” which simplifies the subsequent measurement of inventory by requiring inventory to be measured at the lower of cost and net realizable value. Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. This standard is effective for public business entities for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years. The Company is currently assessing the impact of adopting this standard on its consolidated financial statements. In April 2015, the FASB issued ASU No. 2015-03, "Simplifying the Presentation of Debt Issuance Costs". ASU 2015-03 requires that debt issuance costs be presented as a direct deduction from the carrying amount of the related debt liability, consistent with the presentation of debt discounts. Prior to the issuance of ASU 2015-03, debt issuance costs were required to be presented as deferred charge assets, separate from the related debt liability. ASU 2015-03 does not change the recognition and measurement requirements for debt issuance costs. The Company adopted ASU 2015-03 as of December 31, 2016, and applied its provisions retrospectively. The adoption of ASU 2015-03 did not have an impact on the Company’s financial results nor did it represent a material change to the consolidated balances sheets. In August 2014, the FASB issued ASU No. 2014-15, “Presentation of Financial Statements - Going Concern (Subtopic 205-40), Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern”, which requires management to assess a company’s ability to continue as a going concern and to provide related footnote disclosures in certain circumstances. The standard provides guidance on evaluating whether there are conditions or events that raise substantial doubt about an entity’s ability to continue as a going concern. Substantial doubt exists when conditions or events, considered in the aggregate, indicate that it is probable that the entity will be unable to meet its obligations as they become due within one year after the date that the financial statements are issued. The new standard is effective for the annual and interim periods ending after December 15, 2016. The Company adopted the standard in 2016 and management’s assessment has determined that certain disclosures required are included in these statements (see Note 1). In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers” (“ASU 2014-09”). The core principle behind ASU No. 2014-09 is that an entity should recognize revenue in an amount that reflects the consideration to which the entity expects to be entitled in exchange for delivering goods and services. This model involves a five-step process that includes identifying the contract with the customer, identifying the performance obligations in the contract, determining the transaction price, allocating the transaction price to the performance obligations in the contract and recognizing revenue when the entity satisfies the performance obligations. This ASU allows two methods of adoption; a full retrospective approach where historical financial information is presented in accordance with the new standard, and a modified retrospective approach where this ASU is applied to the most current period presented in the financial statements. In August 2015, the FASB issued ASU No 2015-14 “Revenue from Contracts with Customers: Deferral of the Effective Date,” which deferred the effective date of ASU 2014-09 to annual reporting periods beginning after December 15, 2017, with earlier application permitted as of annual reporting periods beginning after December 15, 2016. The Company is currently assessing the financial impact of adopting ASU 2014-09 and the methods of adoption; however, given the scope of the new standard, the Company is currently unable to provide a reasonable estimate regarding the financial impact or which method of adoption will be elected. Reclassification of prior period balances Amounts in prior year financial statements are reclassified when necessary to conform to the current year presentation, most notably debt issuance costs in according with ASU 2015-03 as described more fully above.
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Inventories
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Inventories
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Dec. 31, 2016
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| Inventories | 3. Inventories Inventories consist of the following:
The total cost of silver in our inventory as raw materials, as work-in-process or as a plated surface on finished goods had an estimated cost of $521,746 and $313,738 at December 31, 2016 and 2015, respectively. The increase in inventory was due in part to increased finished goods inventory for sensors as a result of certain supply agreements with foreign customers.
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Property, Plant and Equipment, net
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Property, Plant and Equipment, net
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Dec. 31, 2016
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| Property, Plant and Equipment, net | 4. Property, Plant and Equipment, Net Property, plant and equipment, net consist of the following:
For the year ended December 31, 2016, the Company recorded $1,539,249 of depreciation expense compared to $1,461,353 for the year ended December 31, 2015. There are no commitments related to the completion of construction in process as of December 31, 2016. In December 2015, the Company entered into a Letter of Intent with a Buyer (collectively the “Parties”) to sell two unoccupied buildings, with a total of approximately 52,000 square feet, and land, at its Fitchburg, Massachusetts campus. Subsequently, in January 2016, the Parties entered into a Purchase and Sale Agreement (“Agreement”) for this real estate to close within twelve months from the date of the Agreement. As these buildings were under agreement to be sold at December 31, 2015 they were classified as Assets Held for Sale valued at $665,000 as of December 31, 2015. The carrying value approximated the fair value less the cost to sell. In December 2016, the Parties entered into a First Amendment to the Purchase and Sale Agreement (the “First Amendment”). The First Amendment extended the time to close to January 13, 2018. As consideration for extending the Agreement, the Buyer agreed to (i) release the $25,000 being held as a deposit to the Company; (ii) increase the purchase price by $25,000; (iii) pay the Company $4,000 per month as an extension fee beginning in January 2017 through January 2018, or the culmination of the Agreement, and (iv) pay the Company $7,500 per month for a 150 day additional extension, to June 2018, only for the purpose of the Buyer securing historical tax credits until the termination or culmination of the Agreement. The $25,000 deposit released to the Company is recorded as Other Income for the year ended December 31, 2016. In January 2017, the Parties entered into a Second Amendment to the Purchase and Sale Agreement (the “Second Amendment”). The Second Amendment (i) permits the Buyer to assign the Agreement to a third party; (ii) extends the term of the $4,000 per month extension fee from January 2018 to March 2018 and (iii) and amends the term of the additional extension fee of $7,500 per month to April 2018 through July 2018. As a result of the increase in sale price and other considerations, the Company determined the carrying value at December 31, 2016 to be $688,750. The increase in the carrying value is recorded as Other Income for the year ended December 31, 2016 and did not exceed the amount of previously recorded losses in accordance with appropriate accounting guidance.
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Debt
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Debt
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Dec. 31, 2016
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| Debt | 5. Debt The following tables set forth the items which comprise debt for the Company:
Bank Debt The Company has a multi-year credit facility with a Massachusetts based bank. At December 31, 2016 this credit facility consisted of a revolving line of credit (the "revolver"), a commercial term loan and an equipment line of credit. The debt is secured by substantially all assets of the Company with the exception of real property. At December 31, 2015 the credit facility included a revolver, a commercial term loan, two equipment term loans and an equipment line of credit. In June of 2016 the equipment line of credit converted to a term loan. In November 2016 these four borrowings, along with $500,000 from the revolver, were consolidated into a single commercial term loan as further described below. Revolver 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% (4.0% at December 31, 2016). The revolver has a maturity date of June 2017. Amounts available to borrow under the revolver are $727,156 at December 31, 2016. In November 2016 the Company refinanced and consolidated $500,000 from the revolver into a new term loan as further described below. Commercial term loan In November 2016, the Company refinanced its bank term debt, including the commercial term loan and three equipment term loans, along with $500,000 from the revolver, into a new $2,481,943 consolidated five year commercial term loan with a maturity date in November 2021. The interest rate on the loan is a fixed 4.65% per annum and the loan requires monthly payments of principal and interest of approximately $46,500. Equipment line of credit and equipment term loans In March 2013, 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 in March 2014 and the then outstanding balance on the equipment line of credit of $740,999 was converted to an equipment term loan with a five-year term, maturing in March 2019. In November 2016, the outstanding principal and accrued interest of $380,791 on the equipment term loan was refinanced and consolidated into a new term loan as described above. In June 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 in June 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 in June 2020. In November 2016, the outstanding principal and accrued interest of $315,272 on the equipment term loan was refinanced and consolidated into a new term loan as described above. In June 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. At December 31, 2015, the Company had drawn $336,850 on the equipment line of credit. The draw period ended in June 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 in June 2021. In November 2016, the outstanding principal and accrued interest of $832,420 on the equipment term loan was refinanced and consolidated into a new term loan as described above. In November 2016, the Company entered into a new equipment line of credit that allows for advances of up to $1.0 million under the Company's multi-year credit facility. At December 31, 2016, $102,500 has been drawn on the new equipment line of credit. The term of this equipment line of credit is six years, maturing in November 2022, 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. Debt issuance costs The amount of the commercial term loan presented in the table above is net of debt issuance costs of $45,858 and $45,929 at December 31, 2016 and 2015 respectively. Bank covenants The bank facility 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 was in compliance with all bank covenants as of December 31, 2016. Other debt 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 4.66% and require monthly payments of principal and interest totaling approximately $5,000 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 unsecured notes required quarterly interest-only payments at a rate of 10% per annum for the first two years. In December 2015, the interest rate increased to 12% per annum. The Company’s two largest beneficial owners of stock and a director participated in the private offering as follows: REF Securities, LLP, beneficial owner of approximately 13% of the Company’s common stock, invested $100,000 in the offering; the Chambers Medical Foundation (the “Foundation”), beneficial owner of approximately 10% of the Company’s common stock, invested $100,000 in the offering; and Mr. E.P. Marinos, a director, invested $50,000 in the offering. The Company’s Chairman of the Board is a co-trustee of the Foundation but has held no dispositive powers since his appointment as such.
In October 2016, the Company and six of the seven investors in the private offering, aggregating $450,000 of the notes, including the three related parties holding $250,000 of the notes, agreed to extend the maturity dates of the notes to December 31, 2018 at a rate of 10% per annum. One investor did not extend the maturity date and that $50,000 note was paid at maturity in December 2016. The notes are subordinated to all indebtedness of the Company pursuant to its multi-year bank credit facility. In connection with the subordinated promissory notes, the Company issued 100,000 warrants to purchase the Company's common stock, including 20,000 warrants to REF Securities, LLP, 20,000 warrants to the Foundation and 10,000 warrants to Mr. Marinos. The warrants were exercisable through December 2016 at an exercise price of $3.51 per share. In 2014, 30,000 warrants were exercised, including 20,000 by the Foundation. No warrants were exercised in 2015 or 2016. In October 2016, in connection with the extension of the maturity dates of the subordinated promissory notes, the expiration date of the remaining 70,000 warrants was extended to December 31, 2018. The exercise price remained unchanged at $3.51 per share. The 70,000 warrants remain unexercised at December 31, 2016. The Company calculated the incremental fair value of extending the expiration date of the Notes and Warrants and determined that the amendment represented a debt modification in accordance with the guidance outlined in ASC-470, “Debt”. Using the Black-Scholes model, and the 10% test, the Company determined that the incremental fair value of the warrants to be $18,310 which was recorded as a reduction against the Notes and an increase in Additional Paid-in Capital. Future maturities of debt for the years ending December 31 are as follows:
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Income Taxes
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Income Taxes
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Dec. 31, 2016
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| Income Taxes [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Income Taxes | 6. Income Taxes The income tax provision consists of the following:
The components of deferred income taxes are as follows:
In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax-planning strategies in making this assessment. As of December 31, 2016, the Company continues to maintain a valuation allowance against all of its deferred tax assets. In 2016, the Company adopted ASU No. 2015-17, "Balance Sheet Classification of Deferred Taxes". Under this new guidance the Company is required to present deferred tax assets and deferred tax liabilities, and any related valuation allowances, as noncurrent on the consolidated balance sheets. There was no cumulative effect of the change and no impact to shareholders’ equity, results of operations or cash flows. For the year ended December 31, 2016, the Company has federal and state net operating loss carryforwards totaling $9,124,000 and $10,780,000 respectively, which begin to expire in 2031. The Company also had federal and state tax credit carryovers of $305,800 and $188,000, respectively. The federal and state credits begin to expire in 2027 and 2016, respectively. The Company files a consolidated federal income tax return. The actual income tax provision differs from applying the Federal statutory income tax rate (34%) to the pre-income tax loss from continuing operations as follows:
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Employee Benefit Plans
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Employee Benefit Plans
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12 Months Ended |
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Dec. 31, 2016
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| Employee Benefit Plans [Abstract] | |
| Employee Benefit Plans | 7. Employee Benefit Plans The Company sponsors an Employee Savings and Investment Plan under Section 401(k) of the Internal Revenue Code covering all eligible employees of the Company. Employees can contribute up to 90% of their eligible compensation to the maximum allowable by the IRS. The Company’s matching contributions are at the discretion of the Company. The Company’s matching contributions in 2016 and 2015 were $41,072 and $47,858, respectively.
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Commitments and Contingencies
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Commitments and Contingencies
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12 Months Ended |
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Dec. 31, 2016
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| Commitments and Contingencies [Abstract] | |
| Commitments and Contingencies | 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. Operating lease agreements In 2016, the Company entered into two operating leases for office equipment. The Company’s leases require future minimum annual lease payments of $24,036 for fiscal years 2017 and 2018, respectively.
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Shareholders' Equity
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Shareholders' Equity
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Dec. 31, 2016
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| Shareholders' Equity | 9. Shareholders’ equity Common stock In 2016, 15,000 shares were issued out of treasury as a result of the exercise of stock options and no warrants were exercised. In 2015, 23,300 shares were issued out of treasury as a result of the exercise of stock options and no warrants were exercised. No dividends were declared or paid in 2016 or 2015. Warrants In connection with the subordinated promissory notes issued in December 2013 (see Note 5), the Company issued warrants to purchase 100,000 shares of the Company's common stock. The warrants were exercisable through December 2016 at an exercise price of $3.51 per share. In 2014, 30,000 warrants were exercised. No warrants were exercised in 2015 or 2016. In October 2016, in connection with the extension of the maturity dates of the subordinated promissory notes, the expiration date of the remaining 70,000 warrants was extended to December 31, 2018. The Company determined that the amendment represented a debt modification and did not constitute an extinguishment for accounting purposes (see Note 5). The exercise price remained unchanged at $3.51 per share. The 70,000 warrants remain unexercised at December 31, 2016. Stock options and Share-Based Incentive Plan In March 2010, the Company's Board of Directors adopted the Arrhythmia Research Technology, Inc. 2010 Equity Incentive Plan (the “Plan”). The Plan authorizes the issuance of an aggregate of 500,000 shares. The Plan provides the Company flexibility to award a mix of stock options, equity incentive grants, performance awards and other types of stock-based compensation to certain eligible employees, non-employee directors, or consultants and under which an aggregate of 500,000 shares have been reserved for such grants. The options granted have ten year contractual terms that vest annually between three to five-year terms. At December 31, 2016, there were options to acquire an aggregate of 214,500 shares outstanding. At December 31, 2016, there were 273,000 shares available for future grants under the Plan, after giving effect to shares which became available for reissuance due to expired or forfeited options. The fair value of each stock option award is estimated on the date of grant using the Black-Scholes option pricing model that uses the assumptions noted in the following table. Expected volatilities are based on historical volatility of the Common Stock using historical periods consistent with the expected term of the options. The expected term of options granted under the Company’s equity incentive plan, all of which qualify as “plain vanilla,” is based on the average of the contractual term and the vesting period as permitted under SEC Staff Accounting Bulletin Nos. 107 and 110. The risk-free rate is based on the yield of a U.S. Treasury security with a term consistent with the option. During 2016 and 2015 there were 45,000 and 62,500 new option grants, respectively. The assumptions used to measure the fair value of option grants in 2016 and 2015 were as follows:
The following table sets forth the stock option transactions for the year ended December 31, 2016:
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