|
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
various “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended,
and Section 21E of the Securities Exchange Act of 1934, as amended (the Exchange Act), which represent our expectations or
beliefs concerning future events. Forward-looking statements generally include words such as “anticipates,” “believes,”
“expects,” “planned,” “scheduled,” or similar expressions and statements. Although we believe
these forward-looking statements are based on reasonable assumptions, statements made regarding future results are subject to a
number of assumptions, uncertainties, and risks that could cause future results to be materially different from the results stated
or implied in this document. Uncertainties, risks, and other factors that may cause actual results or performance to differ materially
from any results of performance expressed or implied by forward-looking statements in this Form 10-Q include: (1) our ability
to manage our operating expenses and realize operating efficiencies; (2) our ability to maintain and grow our sales with existing
and new customers; (3) our ability to retain existing members of our senior management team and to attract additional management
employees; (4) our ability to manage fluctuations in the availability and cost of key materials and tools of production; (5) general
economic conditions that might impact demand for our products; (6) competition from existing or new participants in the pet
products industry; (7) our ability to design and bring to market new products on a timely and profitable basis; (8) challenges
to our patents or trademarks on existing or new products; (9) our ability to secure access to sufficient capital on favorable
terms to manage and grow our business; or (10) our ability to manage and fund claims resulting from our self-insurance program.
We caution that these risk factors are not exclusive. Additionally, we do not undertake to update any forward-looking statements
that may be made from time to time by or on behalf of us except as required by law.
OVERVIEW
We develop and market products for improving
the health, safety, comfort and enjoyment of pets. Our mission is “to exceed pet and pet parent/owner expectations with innovative
solutions.” Our dual-brand strategy is focused on OurPets® for the Pet Specialty channel and PetZone® for the food,
drug and mass retail channel. The products sold have increased from the initial Big Dog Feeder® to approximately 1,000 products
for dogs, cats and birds. Products are marketed under the OurPet’s®, Pet Zone®, Flappy®, SmartScoop®, Ecopure
Naturals®, Play-N-Squeak®, Durapet®, Clipnosis®, Go! Cat!Go!®, Festiva®, Cosmic Pet™, Intelligent
Pet Care®, and Switchgrass BioChar® Natural Cat Litter labels to domestic and international customers. The manufacturing
of these products is subcontracted to other entities, both domestic and international, based upon price, delivery and quality.
Packaged Facts, a leading publisher
in the United States of market studies on consumer products, recently published its report of the “U.S. Pet Market Outlook,
2018-2019.” It estimates the overall pet products and services market totaled $85.6 billion in 2017, up 4.9% from the prior
year. The pet supplies segment (OurPet’s segment) made up 20% of this market in 2017 and grew by 3.2% from the prior year.
U.S. retail channel sales of pet products, which includes pet food and pet supplies, were estimated at $50 billion in 2017, up
4% over 2016. Packaged Facts predicts similar growth patterns in the coming years with a compound annual growth rate of 4.2% over
the 2017-2022 period (U.S. Pet Market Outlook, 2018-2019).
Within the pet supplies segment, Packaged
Facts identifies technology-based products as a key differentiator, such as “items embedded with electronics, software, sensors,
and other components that enable the objects to connect and exchange data.” It also discusses the shifting retail trend of
consumers favoring the E-Commerce channel. It explains, “[P]et product shoppers are migrating online at a rapid pace, spiking
Internet sales and putting brick-and-mortar-based retailers on a critical offensive. With its virtual marketplace, e-commerce is
also pounding away at the already cracked wall between pet specialty and mass channels and accelerating the trend of mass premiumization”
(U.S. Pet Market Outlook, 2018-2019).
As discussed in “Liquidity and Capital
Resources” beginning on page 19, we funded our operations principally from the net cash provided from operating activities
for both the six-month periods ended June 30, 2018, and June 30, 2017. Net cash provided by operating activities for the six months
ended June 30, 2018 was $1,093,122.
Under credit facilities with our bank, we
can borrow up to $6,000,000 based on the level of qualifying accounts receivable and inventories. As of June 30, 2018, we had a
balance due of $1,813,728 under the line of credit with our bank at a variable interest rate of 30 Day LIBOR plus 2.25%.
RESULTS OF OPERATIONS
Three Months Ended June 30, 2018, Compared to Three Months
Ended June 30, 2017
In the following discussion, all references
to 2018 are for the three months ended June 30, 2018, and all references to 2017 are for the three months ended June 30, 2017.
Our net revenue is primarily derived from
sales of proprietary products for the retail pet business. In 2015, we completed the conversion of our brands to deliver products
that are specifically marketed to our three main channels. The OurPets® brand is sold to the “Pet Specialty” channel.
The Pet Zone brand is sold to the “Grocery, Drug, Mass Retail” channel. Both brands are sold to the “E-Commerce”
channel.
In 2018, net sales increased
approximately 5.7% to $6.5 million or $353,000 above second quarter 2017 sales of approximately $6.2 million. The FDM (Food
Drug and Mass retail) channel grew about 20%, which amounted to approximately $487,000, over the same quarter in 2017. Club
stores sales accounted for about $250,000 of the sales increase. Sales in the E-Commerce channel continued to grow increasing
by about 18%. Sales in the Value channel increased about 53%. These increases were offset by a decrease in sales to the Pet
Specialty channel of about 15% as that channel continues to struggle against all the other competing channels.
The retail landscape continues to shift
from brick and mortar traffic to E-Commerce and Value channels. We are maintaining a strong presence in the Food, Drug, Mass Retail
and Pet Specialty channels as they still comprise 44% and 29% of our total revenues respectively with E-Commerce now comprising
18%. Value channel sales grew to about 7% of second quarter 2018 sales with all other sales comprising about 2% of sales. In 2017,
FDM customers accounted for 39% of our sales, Pet Specialty for 36% of our sales and E-Commerce customers accounted for 16% of
our sales. The Value and Closeout channels made up 6% of our sales in 2017 with miscellaneous sales accounting for the remaining
3% of our revenue.
Of the approximately $184,000 sales growth
in the E-Commerce channel, about 62% came from increased sales of our Bowls/Feeders, 30% from increased sales of Toys and Accessories
products with the balance coming from increased sales of Waste/Odor and Health/ Wellness products. Offsetting these product category
increases were decreased sales of Housing products. Within the FDM channel, Bowls/Feeders sales increased about $493,000 from the
same quarter a year ago. This increase was mainly due to sales of a customized Designer Diner® and a private label auto waterer.
The 15% sales decrease in the “Pet Specialty” channel came mainly from decreased sales of Bowls/Feeders of about $371,000
which were offset by increased sales of Toys/Accessories of about $111,000. Major Pet Specialty customers continue to pursue direct
sourcing of bowls/feeders from Asian suppliers. Toys and Accessories increased due to our having a three-foot end cap featuring
our electronic cat toys at 700 locations for one of the national pet specialty retailers.
The approximately $158,000 increase in value
channel sales came from about $170,000 increased sales of Bowls/Feeders and about $4,000 increased sales of Edibles/Consumables
which were offset by a slight decrease ($16,000) of Toys/Accessories. Across all channels, sales to new customers provided approximately
$51,361 in additional net revenue during the first quarter of 2018.
Our net sales to international customers
generated about $698,000 in revenue or about 11% of total sales for the quarter. International sales increased by approximately
$29,000, or 4%, compared to a year ago, Canadian sales increased about 5% ($23,000) over the same quarter a year ago. About 67%
of our international sales came from Canada and about 17% from the United Kingdom. Sales to customers in the United Kingdom were
up by approximately $46,000 (61%) from a year ago. Sales to our customers in the Far East were down by approximately $71,000 from
a year ago mostly due to decreases in sales to Japan, Taiwan and South Korea.
Sales of our Bowls/Feeders were up by approximately
$340,000, or 13%, over a year ago. Over 90% of the increase came from increased sales of Raised Feeders, fueled by sales of our
Designer Diner®. Sales in the Stainless-Steel Bowls category increased primarily from sales of a new private label Auto Waterer
as well as sales of our hybrid stainless steel bowls with bonded rubber. Toys/Accessories sales increased about 5% over the same
period a year ago. Top Toys/Accessories product sales increases came from our Mouse Hunter®, our Play-N-Squeak® Toucan
wand and our Catty Whack® electronic cat toy. These product category increases were offset by a decrease of approximately $99,000
in our Waste/Odor product sales primarily due to decreased sales of our natural cat litter. Sales of our Edible/Consumable product
category increased about 12% over last year’s second quarter, driven by increased sales of our catnip. Across all product
categories, our top products were our Designer Diner® 3 height Adjustable Feeder, our hybrid stainless steel bowls and our
Play-n-Squeak Mouse Hunter toy. Our Private Label sales accounted for about 17% of total sales compared to about 11% of last year’s
sales with the increase due mainly to increased sales of our Bowls/Feeders products.
Sales of new products in the second quarter
of 2018 not sold previously were approximately $450,000 or 6.9% of total sales for the quarter. Most of these sales were from products
in the Bowls/Feeders category. Total sales were split about 51% to cat products, 45% to dog products with the remaining 4% of sales
to “universal” products.
Our costs of goods sold increased by approximately
$430,000 from a year ago and was 72.2% of net sales in 2018 compared to 69.4% of net sales in 2017. We accepted sales at lower
margins with our customers to generate growth and continue remaining competitive. Also, our material costs increased as our suppliers
either raised prices or reduced discounts available to be taken. We kept increases in our manufacturing overhead to a minimum,
which increased by about $40,000 or 0.6% of net sales from a year ago. The largest items of manufacturing overhead which increased
were depreciation of operating fixed assets of about $22,000 and salaries and wages of about $19,000. We also controlled costs
by better managing our inventory. We accrued about $46,000 less for the write-off of obsolete inventory and made fewer cycle count
adjustments of about $15,000 compared to a year ago.
Due to the increased costs and eroding margins,
our gross margin percentage decreased to 27.8% from a year ago when it was 30.6%. Although we expect that costs in general will
continue to increase, our sourcing specialist has identified many areas of product cost savings that we expect to start realizing
in the latter half of the year. Cost reductions will continue to be one of our strategic initiatives for 2018.
The increased sales were not quite enough
to completely offset the lower margins earned and resulted in gross profit dollars decreasing from $1,893,818 in 2017 to $1,816,638
in 2018 (a decrease of $77,180 or 4.1%).
Selling, general and administrative expenses
remained about the same as last year. In 2018, they were $1,584,418, a decrease of 0.8% or $13,215, from $1,597,633 in 2017. The
decrease was the net result of a number of changes: (1) a decrease in cash discounts taken of approximately $10,000; (2) a decrease
in the amount accrued for potential customer charge-backs of approximately $12,000; (3) a decrease in the amount accrued for bonus
arrangements of approximately $12,000; (4) a decrease in marketing expenses of approximately $15,000; (5) a decrease in the amount
accrued and paid for commissions of approximately $15,000; (6) a decrease in promotional spending of approximately $19,000; (7)
a decrease in travel and entertainment expenses of approximately $29,000; and (8) a net decrease of $3,000 in all other selling,
general and administrative expenses. These decreases were partially offset by (1) an increase in customer discounts and incentives
granted of approximately $64,000; (2) an increase in E-Commerce spending of approximately $42,000; (3) an increase in selling expenses
of approximately $14,000, primarily due to increased slotting fees; and (4) and an increase in company provided benefits of approximately
$8,000.
The decrease in gross profit on sales of
$77,180, which was offset partially by the decrease in selling, general and administrative expenses of $13,215, resulted in our
income from operations decreasing by $63,965 from $296,185 in 2017 to $232,220 in 2018.
We earned “other income” of
approximately $12,000 in 2018 and incurred “other expense” of approximately $4,000 in 2017. The $12,000 earned in 2018
was the net result of: $13,000 of royalty income, $11,000 of unrealized gain on investments classified as trading securities, $2,000
of interest and dividend income, $11,000 of royalty expense paid out, and investment fees of approximately $3,000. The $4,000 incurred
in 2017 was the net result of royalty payments made less royalty income from favorable patent litigation settlements.
Interest expense for 2018 was $31,016, an
increase of $8,102, from $22,914 in 2017. This increase was primarily the net result of additional interest owed of about $12,500
on a new bank term loan borrowed in December of 2017 offset by reduced interest owed on other borrowings. Interest on the line
of credit was about $3,600 less than a year ago due to its average balance being reduced by about $700,000, even though the rate
of interest on the line (2.25 plus 30-day LIBOR) increased by about 0.8% from a year ago. Interest on our other outstanding bank
term loan decreased by about $700 from paying down its balance.
We accrued income tax expense based on the
reduction of the federal corporate income tax rate to 21%, which was implemented with the passage of the Tax Cuts and Jobs Act
(the "TCJA"). Even with this reduced tax rate, though, we are not anticipating the same level of tax savings as last
year due to reduced transactions with our wholly owned subsidiaries. Therefore, we accrued approximately $25,000 more in income
tax expense than a year ago.
Net income for 2018 was $165,398 as compared
to net income of $246,619 for 2017, a decrease of $81,221, or 32.9%. This decrease was a result of the following changes from 2017
to 2018:
Net revenue increase of 5.7%
|
|
$
|
352,749
|
|
Cost of goods sold increase of 10.0%
|
|
|
(429,929
|
)
|
Gross profit decrease of 4.1%
|
|
|
(77,180
|
)
|
Selling, general, and administrative expenses decrease of 0.8%
|
|
|
13,215
|
|
Interest expense increase of 35.4%
|
|
|
(8,102
|
)
|
Increase in other income/ expense
|
|
|
16,167
|
|
Income tax expense increase
|
|
|
(25,321
|
)
|
Decrease in profitability
|
|
$
|
(81,221
|
|
Six Months Ended June 30, 2018, Compared to Six Months
Ended June 30, 2017
In the following discussion, all references
to 2018 are for the six months ended June 30, 2018, and all references to 2017 are for the six months ended June 30, 2017.
Net sales remained at the same level relatively
with a total of approximately $12.64 million versus $12.72 million last year (a decline of 0.6% or approximately $77,000). While
the E-Commerce, Value and the FDM (Food, Drug and Mass retail) channels all increased 18%, 11% and 5% respectively over the same
period a year ago, the Pet Specialty channel declined about 14%.
As noted in our Management and Discussion
analysis of the second quarter of 2018 the retail landscape is still shifting from brick and mortar traffic to E-Commerce and Value
channels. We continue to maintain a strong presence in both the FDM and Pet Specialty channels as they comprised 41% and 31% respectively
of total sales for the first six months of the year. E-Commerce sales accounted for about 18% of total sales and the Value channel
sales comprised 6% of the first six month’s 2018 sales. Close outs comprised another 2% of sales and miscellaneous sales
made up the remaining 2% of our 2018 sales. In 2017, the FDM channel accounted for 39% of our sales, Pet Specialty for 36% of our
sales, E-Commerce for about 15% of sales and the Value channel comprised about 5% of sales. Close out sales accounted for about
2% of our sales in 2017 with miscellaneous sales accounting for the remaining 3% of our revenue.
The 18% sales growth in the E-Commerce channel
or approximately $339,000, came mainly from a 41% increase in Bowls/Feeders, a 29% increase in Waste/Odor product sales and a $49,000
increase in Health/Wellness products. Offsetting these product category increases were a 3% decrease in Toys/Accessories and a
30% decrease in Housing product sales. Within the FDM channel, sales increased by approximately $265,000 or 5% compared to the
same period a year ago. Most of this increase came from higher sales (+$425,000) of Bowls/Feeders which were partially offset by
a $118,000 decrease in Toys/Accessories sales. The 14% sales decrease in the Pet Specialty channel came mainly from about $486,000
of decreased sales in Bowls/Feeders as the major retailers continued with their direct sourcing initiatives. The Pet Specialty
channel also showed about $98,000 of decreased sales of Edibles/Consumables, about $53,000 of decreased sales of Waste/Odor products
and about a $26,000 increase in Toys/Accessories sales.
The Value channel, which comprised about
6% of our overall sales in 2018, increased about 11% for the first six months of the year compared to the same period in 2017,
mainly due to increased sales of Bowls/Feeders. Sales to close-out customers increased by approximately 5% over last year to reduce
excess and slow-moving inventory. Across all channels, sales to new customers provided approximately $272,000 in additional net
revenue during the first six months of 2018.
Our net sales to international customers
generated about $1,290,440 in revenue or about 10% of total sales for the first six months of the year. International sales increased
by approximately $11,000, or 1%, compared to a year ago. Canadian sales are still being impacted by the strong U.S. dollar as evidenced
by the approximate $73,000 (9%) decrease from the same period a year ago. About 58% of our international sales came from Canada
and 18% from the United Kingdom. Sales to customers in the United Kingdom were up by approximately $55,000 (31%) from a year
ago. Sales to our customers in the Far East were down by approximately $5,000 from a year ago.
Sales of our Toys/Accessories were down
by approximately $127,000, or 2%, over a year ago. The sales decrease was partly due to one of our E-Commerce customers discontinuing
one electronic toy, which amounted to $172,000. Sales of Treat Dispensing toys in the E-Commerce channel also were down about $91,000
compared to last year. Offsetting these decreases, our Mouse Hunter® sales were up about $131,000. Top electronic toys sold
continue to be our Catty Whack® hide and seek action toy with random feather movement, our Bird in a Cage®, our Pounce
House® and our Fly By Spinner Toy®. Sales of our Bowls/ Feeders products were up approximately $312,000, or 6%, from first
six month’s sales in 2017. This increase was primarily from increased sales of our Designer Diner® Three Height Adjustable
Raised Feeder as well as our private label auto waterer. Offsetting this increase is the trend for our customers to continue establishing
their own direct order private label sources for Stainless Steel bowl products which had sales down about $3,000 for the first
six months compared to the same period in 2017. Sales of our Edible/Consumable product category decreased about $84,000 or 11%
over last year’s first six months sales with tuna flake and catnip products declining due to Pet Specialty customers discontinuing
our products and deciding to source direct. Sales of our waste and odor products decreased about $117,000 or 18% over last year’s
sales due to decreased sales of litter, accessories and odor control products. Across all product categories, our top products
were our large hybrid stainless steel bowls, our Designer Diner® 3 height Adjustable Feeder and our Play-n-Squeak® Mouse
Hunter® toy and our Play-n-Squeak® Ball of Furry Fury® cat toy. Our Private Label sales accounted for about 13% of
total sales compared to about 11% of last year’s sales with the increase mainly due to increased sales of Raised Feeders
and Stainless-Steel Bowls, which were partially offset by declines in sales of Toys/Accessories and Edibles/Consumables.
Sales of new products in the first six months
of 2018 not sold previously were approximately $771,000 or 6% of total sales for the half year. These sales were from products
in the Toys/Accessories and Bowls/Feeder categories, featuring our Pet Zone Play-n-Squeak® Toucan wand, our private label Auto
Waterer and a customized version of our Designer Diner®. Sales of cat products accounted for about 54% of total compared to
56% for the same six-month period a year ago. Dog products accounted for about 43% of sales both this year and last year and the
3% balance of sales in 2018 comprised of “universal” products compared to 1% in the first six months of 2017.
Our costs of goods sold increased by approximately
$476,000 from a year ago and was 72.6% of net sales in 2018 compared to 68.4% of net sales in 2017. To remain competitive, we offered
discounts and minimally increased prices on our products with existing customers. We also accepted lower margins than we have in
the past with a few new customers to gain shelf space and the possibility of future sales. At the same time, we experienced increased
costs and reduced discounts available from our suppliers. Our manufacturing overhead increased as well by about $127,000, or 1.0%
of net sales, from a year ago. The largest items of manufacturing overhead which increased were depreciation of operating fixed
assets of about $50,000 and salaries and wages of about $43,000. We offset some of these increased costs by better managing our
inventory. We accrued about $38,000 less for the write-off of obsolete inventory and made fewer cycle count adjustments of about
$67,000 compared to a year ago.
Due to the increased costs and eroding margins,
our gross margin percentage decreased to 27.4% from a year ago when it was 31.6%. Our gross margin dollars decreased by $552,405
to $3,466,181 from $4,018,586.
Selling, general and administrative expenses
decreased by approximately $80,000, or 2.5%, to about $3,162,000 from last year’s total of $3,242,000. The decrease was the
net result of a number of changes: (1) a decrease in depreciation related expenses of approximately $13,000; (2) a decrease in
cash discounts taken of approximately $15,000; (3) a decrease in professional expenses of approximately $21,000, due to less accrued
for investor relations; (4) a decrease in promotional spending of approximately $22,000; (5) a decrease in the amount accrued for
potential customer charge-backs of approximately $24,000; (6) a decrease in the amount accrued for bonus arrangements of approximately
$42,000; (7) a decrease in travel and entertainment expenses of approximately $56,000; (8) a decrease in amount accrued and paid
for commissions of approximately $61,000; and (9) a net decrease of $6,000 in all other selling, general and administrative expenses.
These decreases were partially offset by (1) an increase in E-Commerce spending of approximately $95,000; (2) an increase in customer
discounts and incentives granted of approximately $55,000; (3) an increase in Company provided benefits of approximately $17,000;
and (4) an increase in salaries and wages of approximately $13,000.
The decrease in gross profit on sales of
$552,405, which was offset partially by the decrease in selling, general and administrative expenses of $79,562, resulted in our
income from operations decreasing by $472,843 from $777,072 in 2017 to $304,229 in 2018.
We incurred “other expense”
of approximately $16,000 in 2018 and approximately $14,000 in 2017. The $16,000 incurred in 2018 was the net result of: $23,000
of royalty income, $4,000 of interest and dividend income, investment fees of approximately $3,000, $14,000 of unrealized loss
on investments classified as trading securities, and $26,000 of royalty expense paid out. The $14,000 incurred in 2017 was the
net result of a $5,000 loss on the exchange rate related to payments received from one UK customer, $23,000 of royalty expense
paid out, and $14,000 of royalty income.
Interest expense for 2018 was $57,354, an
increase of $12,595, from $44,759 in 2017. This increase was primarily the net result of additional interest owed of about $21,800
on a new bank term loan borrowed in December of 2017 offset by reduced interest owed on other borrowings. Interest on the line
of credit was about $7,500 less than a year ago due to its average balance being reduced by about $760,000, even though the rate
of interest on the line (2.25 plus 30-day LIBOR) increased by about 0.9% from a year ago. Interest on our other outstanding bank
term loan decreased by about $2,000 from paying down its balance.
We realized an income tax benefit of approximately
$120,000 in 2018 due to recording a reduction in our deferred tax liabilities in accordance with Tax Cuts and Jobs Act which reduced
our federal corporate tax rate from 34% to 21%. In 2018, we accrued income tax based on this reduced rate of 21% compared to using
a rate of 34% in 2017.
Net income for 2018 was $292,971 as compared
to net income of $629,996 for 2017, a decrease of $337,025, or 53.5%. This decrease was a result of the following changes from
2017 to 2018:
Net revenue decrease of 0.6%
|
|
$
|
(76,681
|
)
|
Cost of goods sold increase of 5.5%
|
|
|
(475,724
|
)
|
Gross profit decrease of 13.7%
|
|
|
(552,405
|
)
|
Selling, general, and administrative expenses decrease of 2.5%
|
|
|
79,562
|
|
Interest expense increase of 28.1%
|
|
|
(12,595
|
)
|
Decrease in other income/ expense
|
|
|
(2,209
|
)
|
Income tax expense decrease
|
|
|
150,622
|
|
Decrease in profitability
|
|
$
|
(337,025
|
)
|
LIQUIDITY AND CAPITAL RESOURCES
Our operating activities provide cash from
the sale of our products to customers. The principal uses of cash are payments to suppliers that manufacture our products and freight
charges for shipments to our warehouses and to our customers. Our investing activities use cash mostly for the acquisition of equipment
such as tooling, computers, and software. Our financing activities provide cash, if needed, under our lines of credit with our
bank, which had $3,704,787 in available funds as of June 30, 2018, based upon the balance of accounts receivable and inventories
at that date.
Our short-term and long-term liquidity will
continue to depend on our ability to achieve cash-flow break even on our operations and to increase sales of our products. In both
the first six months of 2018 and 2017, we funded our operating cash requirements primarily with net income. During the remainder
of 2018, we expect to be able to continue to fund our operating cash requirements with net income. Based on our bank’s loan
covenants we expect to comply with their Debt Service Coverage and Funded Debt to EBITDA ratios required by our bank to maintain
our line of credit through the end of 2018. We have no material commitments for capital expenditures. No changes were made to the
structure of our debt during the first half of 2018.
Outstanding Debt
As of June 30, 2018, we had $3,256,372 in principal
amount of indebtedness consisting of:
Bank line of credit - $6,000,000
|
|
30-day Libor plus 1.75-2.25%
|
|
$
|
1,813,728
|
|
Bank term note ($1,000,000 original balance)
|
|
30-day Libor plus 2.0-2.5%
|
|
|
833,333
|
|
Bank term note ($1,000,000 original balance)
|
|
30-day Libor plus 3.0%
|
|
|
450,000
|
|
Capitalized Lease
|
|
5.4%
|
|
|
81,588
|
|
Note Payable to Molor Products
|
|
Non-interest bearing
|
|
|
77,723
|
|
The $6,000,000 line of credit is a three-year
revolver and therefore is classified as a long-term liability on our balance sheet. Currently the line of credit has been renewed
by the bank through October 31, 2020. Under our agreement with the bank we are required to: (1) maintain a Fixed Charge coverage
ratio of at least 1.15:1.00 measured quarterly on a trailing 12-month basis; (2) maintain a Funded Debt to EBITDA ratio of
no greater than 2.75:1.00 up until the quarter ending June 30, 2018, then reducing to 2.50:1.00, and (3) obtain the bank’s
permission to incur additional indebtedness. As of June 30, 2018, we were in compliance with the covenant and default provisions
under the agreement with the bank. We had a Fixed Charge ratio of 2.07:1.00 and a Funded Debt to EBITDA ratio of 1.50:1.00.
Changes in Cash- First Six Months of 2018
Net cash provided by operating activities
for the six months ended June 30, 2018 was $1,093,122. Cash was provided by the net income for the six months of $292,971, as well
as the non-cash charges for depreciation of $300,411; unrealized loss on investments of $14,435; amortization of $29,707; and stock
option expense of $12,000.
Cash was provided by the net change of $443,597
in our operating assets and liabilities as follows:
Accounts Receivable decrease
|
|
$
|
830,295
|
|
Inventories increase
|
|
|
(121,289
|
)
|
Prepaid Expenses decrease
|
|
|
54,294
|
|
Amortizable Intangible Assets increase
|
|
|
(16,085
|
)
|
Deposits decrease
|
|
|
900
|
|
Accounts Payable increase
|
|
|
32,990
|
|
Accrued Expenses decrease
|
|
|
(233,851
|
)
|
Deferred Tax Liability decrease
|
|
|
(103,657
|
)
|
Net Change
|
|
$
|
443,597
|
|
Accounts receivable decreased due to lower
sales in the first six months of 2018 compared to the last six months of 2017 from seasonal fluctuations. Accrued expenses decreased
from paying bonus and profit sharing amounts related to last year and to a lesser extent from paying real estate taxes owed for
last year. These decreases were partially offset by accruing more for customer incentives and rebates. The deferred tax liability
account decreased mostly due to the change in the federal corporate tax rate. Inventories increased due to normal fluctuations
due to seasonal variations as well as due to bringing in some new product.
Net cash used for investing activities for
the six months ended June 30, 2018 was $860,729. Approximately $331,000 was used for the purchase of fixed assets with approximately
$226,000 spent on the purchase of new racking for the warehouse and most of the remaining balance spent on tooling charges. Approximately
$529,000 was used for the purchase of investments.
Cash used by financing activities for the
six months ended June 30, 2018, was $251,362 and consisted of: (1) net increased borrowing on the bank line of credit of $35,821;
(2) principal payments on long-term debt of $291,453: and (3) issuances of common stock of $4,270. No changes were made to the
structure of our debt during the first six months of 2018. All scheduled payments were made on time.
Changes in Cash- First Six Months of 2017
Net cash provided by operating activities
for the six months ended June 30, 2017 was $1,004,992. Cash was provided by the net income for the six months of $629,996, as well
as the non-cash charges for depreciation of $262,724, amortization of $29,780, stock option expense of $12,000, loss on fixed assets
of $995, and unrealized loss on investments of $62. Cash was provided by the net change of $69,435 in our operating assets and
liabilities.
Accounts receivable decreased due to lower
sales in the first six months of 2017 compared to the last six months of 2016. Inventories increased due to bringing in product
in preparation for launching new products later in the year. Accounts payable increased due to the increase in inventory. Accrued
expenses decreased from paying bonus and profit sharing amounts related to the previous year, offset by increased accruals for
customer incentive discounts and rebates.
Net cash used for investing activities for
the six months ended June 30, 2017 was $498,993. We invested $230,000 of the cash held by the wholly owned subsidiary named Series
OP. We spent the following on capital expenditures: approximately $190,000 on tooling/molds; approximately $57,000 for warehouse
equipment; approximately $18,000 on computer software and equipment; and approximately $8,000 towards leasehold improvements. In
addition, we sold a truck that was being used for the transport of goods between warehouses and that provided $4,000 in cash.
Net cash used by financing activities for
the six months ended June 30, 2017, was $34,209 and consisted of: (1) issuances of common stock for $188,647; (2) principal payments
on long-term debt of $121,010; (3) net increased payments on the bank line of credit of $73,824; and (4) dividends paid on preferred
stock of $28,022.
CRITICAL ACCOUNTING POLICIES/ESTIMATES
We prepare our consolidated financial statements
in accordance with United States generally accepted accounting principles. We have identified the accounting policies below as
critical to our business operations and understanding of our results of operations. For a detailed discussion on the application
of these and other accounting policies, see the summarized significant accounting policies accompanying our audited consolidated
financial statements included in our Form 10-K for the year ended December 31, 2017, filed on April 2, 2018. The application of
these policies may require management to make judgments and estimates that affect the reported amount of assets and liabilities,
disclosure of contingent assets and liabilities at the date of our financial statements, and the reported amounts of revenue and
expenses during the reporting period. Management uses historical experience and all available information to make these estimates
and judgments, and different amounts could be reported using different assumptions and estimates.
In our Form 10-K for the fiscal year ended
December 31, 2017, our most critical accounting policies and estimates upon which our financial status depends were identified
as those relating to: revenue recognition, research and development costs, income taxes, impairment of long lived assets, intangible
assets, product warranties, prepaid expenses, and inventories and inventory reserves. We reviewed our policies and determined that
those policies remain our most critical accounting policies for the six months ended June 30, 2018.
OFF-BALANCE SHEET ARRANGEMENTS
We have no off-balance sheet arrangements
that have or are likely to have a current or future effect on our financial condition, revenues or expenses, results of operations,
liquidity, capital expenditures, or capital resources.