Note 2 – Description of Business and Significant Accounting Policies

The Company develops, manufactures and sells marine seismic data acquisition equipment and underwater remotely operated robotic vehicles, and consists of four operating units (each a separate reportable segment): Bolt Technology Corporation (“Bolt”), A-G Geophysical Products, Inc. (“A-G”), Real Time Systems Inc. (“RTS”) and SeaBotix Inc. (“SBX”). The Bolt seismic energy sources segment develops, manufactures and sells marine seismic energy sources (air guns) and replacement parts. The A-G underwater cables and connectors segment develops, manufactures and sells underwater cables, connectors, hydrophones, depth and pressure transducers and seismic source monitoring systems. The RTS seismic energy source controllers segment develops, manufactures and sells air gun controllers/synchronizers, data loggers and auxiliary equipment. The SBX underwater robotic vehicles segment develops, manufactures and sells underwater remotely operated robotic vehicles used for a variety of underwater tasks.

Principles of Consolidation

The Consolidated Financial Statements (Unaudited) include the accounts of Bolt Technology Corporation and its subsidiary companies. All significant intercompany balances and transactions have been eliminated.

Cash and Cash Equivalents

The Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents.

Inventories

Inventories are valued at the lower of cost or market, with cost principally determined on an average cost method that approximates the first-in, first-out method. The Company maintains an inventory valuation reserve to provide for slow moving and obsolete inventory. Amounts are charged to the reserve when the Company scraps or disposes of inventory.

Goodwill, Intangible Assets with Indefinite Lives and Other Long-Lived Assets

Goodwill represents the unamortized excess cost over the value of net assets acquired in business combinations. The Financial Accounting Standards Board guidance for testing goodwill for impairment provides the option to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the estimated fair value of a reporting unit is less than its carrying amount. If an entity elects to perform a qualitative assessment and determines that an impairment is more likely than not, the entity is then required to perform a two-step quantitative impairment test, otherwise no further analysis is required. An entity also may elect not to perform the qualitative assessment and, instead, proceed directly to the two-step quantitative impairment test. The ultimate outcome of the goodwill impairment review for a reporting unit should be the same whether an entity chooses to perform the qualitative assessment or proceeds directly to the two-step quantitative impairment test.

The Company conducted an assessment of qualitative factors regarding the A-G reporting unit at June 30, 2013. The Company’s review of the A-G goodwill balance at June 30, 2013 did not identify any indicators of impairment.

For the RTS reporting unit, the Company performed the quantitative impairment test at June 30, 2013. The impairment test for the RTS reporting unit indicated no impairment of the goodwill balance at June 30, 2013.

For the SBX reporting unit, the Company performed the quantitative impairment test at December 31, 2013 using the capitalized cash flow method and the market price method, as well as the discounted cash flow method, and the test indicated no impairment of the goodwill balance. The Company’s review of the SBX goodwill balance at June 30, 2013 did not identify any indicators of impairment.

The Company reviewed A-G and RTS goodwill as of December 31, 2013 and no indicators of impairment were identified.

Intangible assets with indefinite lives must be tested annually or more frequently if there are indicators of impairment, to determine if events and circumstances still justify the carrying value of such asset. The test consists of a comparison of the fair value of the asset to its carrying amount. If the carrying amount exceeds the fair value, an impairment loss is recognized equal to the excess of the carrying amount over the fair value. Any such loss would be recognized in the period in which the impairment arose. The SBX intangible asset with an indefinite life was tested for impairment at December 31, 2013 and the test indicated no impairment.

The Company reviewed the SBX intangible asset with an indefinite life at June 30, 2013 and such review did not identify any indicators of impairment.

The Company reviewed the RTS intangible asset with an indefinite life at December 31, 2013 and June 30, 2013 and no indicators of impairment were identified.

The Company’s other long-lived assets consist of property, plant and equipment, other intangible assets with definite lives and other non-current assets. The Company reviews these assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The carrying amount is considered impaired when anticipated undiscounted cash flows expected to result from the use of the asset and its eventual disposition is less than its carrying amount. The Company’s reviews as of June 30, 2013 and December 31, 2013 did not identify any indicators of impairment.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States 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 financial statements, and the reported amounts of revenues and expenses during the reporting period. The most critical estimates made by the Company are those relating to inventory reserves, the potential impairment of goodwill and intangible assets with indefinite lives, other long-lived assets impairment, valuation of acquisitions, contingent earnout liability and realization of deferred tax assets. Actual results could differ from those estimates.

Contingent Earnout Liability

The Company is obligated under an earnout arrangement to make cash payments to the former SBX stockholders if certain revenue and gross profit margin targets are achieved. The Company recorded a contingent earnout liability at the acquisition date of SBX at its estimated fair value, which took into account the range and probability of projected future revenues of SBX over the earnout period. The Company revalues the contingent earnout liability at the close of each accounting period and records any change in the estimated fair value in the Consolidated Statement of Income as adjustment of contingent earnout liability.

Computation of Earnings Per Share

Basic earnings per share is computed by dividing net income by the weighted average number of common shares outstanding during the period. Diluted earnings per share is computed by dividing net income by the weighted average number of common shares outstanding during the period including common share equivalents (which includes stock option grants and restricted stock awards) assuming dilution. Unvested shares of restricted stock are included in computing basic earnings per share because they contain rights to receive non-forfeitable dividends.

The following is a reconciliation of basic earnings per share to diluted earnings per share for the three month and six month periods ended December 31, 2013 and 2012:

	Three Months Ended December 31,				Six Months Ended December 31,
	2013		2012		2013		2012

Net income available to common stockholders	$	3,018,000	$	1,701,000	$	5,381,000	$	3,405,000

Divided by:
Weighted average common shares		8,663,490		8,606,773		8,653,445		8,591,680
Weighted average common share equivalents		15,798		22		12,912		2,163
Total weighted average common shares and common share equivalents		8,679,288		8,606,795		8,666,357		8,593,843

Basic earnings per share	$	0.35	$	0.20	$	0.62	$	0.40
Diluted earnings per share	$	0.35	$	0.20	$	0.62	$	0.40

For the three month period ended December 31, 2013, the calculation included all options to acquire shares because they were all dilutive. For the three month period ended December 31, 2012, the calculation did not include options to acquire 40,250 shares, since the inclusion of these shares would have been anti-dilutive.

Recent Accounting Developments

None.