MICRON SOLUTIONS INC /DE/ - Quarter Report: 2008 September (Form 10-Q)
UNITED
STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON,
D. C. 20549
FORM
10-Q
[ x
] Quarterly report
under Section 13 or 15(d) of the Securities Exchange Act of 1934
For the
quarterly period ended September
30, 2008 or
[ ]
Transition report under Section 13 or 15(d) of the Securities Exchange Act of
1934
For the
transition period from ______ to ______
001-9731
(Commission
file No.)
ARRHYTHMIA
RESEARCH TECHNOLOGY, INC.
(Exact
name of registrant as specified in its charter)
|
DELAWARE
|
72-0925679
|
|
(State
or other jurisdiction of incorporation or organization)
|
(I.R.S.
employer identification no.)
|
25
Sawyer Passway
Fitchburg,
Massachusetts 01420
(Address
of principal executive offices)
(978)
345-5000
(Issuer's
telephone number, including area code)
Indicate
by check whether the registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for
such shorter period that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90
days. Yes X No___.
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large Accelerated filer
[ ] Accelerated filer
[ ] Non-Accelerated filer
[ ] Smaller reporting company [ X
]
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes __ No X
As of
October 28, 2008 there were 2,711,680 shares of the Company’s common stock
outstanding.
TABLE OF
CONTENTS
FORM
10-Q
September
30, 2008
i
Consolidated Balance
Sheets
|
ASSETS
|
September
30, 2008
|
December
31,
2007
|
||||||
|
(Unaudited)
|
(Audited)
|
|||||||
|
Current
assets:
|
||||||||
|
Cash and cash
equivalents
|
$ | 2,062,770 | $ | 1,684,411 | ||||
|
Trade and other accounts
receivable, net of allowance for
doubtful accounts of $48,367
and $49,830
|
3,890,856 | 2,759,491 | ||||||
|
Inventories, net
|
3,704,398 | 3,001,520 | ||||||
|
Deferred income taxes,
net
|
46,000 | 46,000 | ||||||
|
Deposits, prepaid expenses and
other current assets
|
851,858 | 926,970 | ||||||
|
Total current
assets
|
10,555,882 | 8,418,392 | ||||||
|
Property
and equipment, net of accumulated depreciation of
$8,773,888 and
$7,872,887
|
7,300,881 | 7,610,258 | ||||||
|
Goodwill
|
1,564,966 | 1,564,966 | ||||||
|
Other
intangible assets, net
|
160,652 | 221,482 | ||||||
|
Other
assets
|
3,036 | 24,785 | ||||||
|
Total assets
|
$ | 19,585,417 | $ | 17,839,883 | ||||
|
LIABILITIES
AND SHAREHOLDERS’ EQUITY
|
||||||||
|
Current
liabilities:
|
||||||||
|
Accounts payable
|
$ | 2,070,863 | $ | 633,413 | ||||
|
Accrued expenses
|
429,888 | 352,194 | ||||||
|
Current portion of acquisition
note payable
|
- | 134,083 | ||||||
|
Short term loan
payable
|
661,164 | 735,655 | ||||||
|
Total current
liabilities
|
3,161,915 | 1,855,345 | ||||||
|
Long
term liabilities:
|
||||||||
|
Long
term deferred tax liability
|
149,000 | 139,000 | ||||||
|
Total long term
liabilities
|
149,000 | 139,000 | ||||||
|
Total
liabilities
|
3,310,915 | 1,994,345 | ||||||
|
Shareholders’
equity:
|
||||||||
|
Preferred stock, $1 par value;
2,000,000 shares authorized, none issued
|
-- | -- | ||||||
|
Common stock, $0.01 par value;
10,000,000 shares authorized,
3,926,491
shares issued, 2,711,680 outstanding
|
39,265 | 39,265 | ||||||
|
Additional
paid-in-capital
|
10,220,673 | 10,143,339 | ||||||
|
Common stock held in treasury,
1,214,811 shares at cost
|
(3,326,579 | ) | (3,326,579 | ) | ||||
|
Retained
earnings
|
9,341,143 | 8,989,513 | ||||||
|
Total shareholders’
equity
|
16,274,502 | 15,845,538 | ||||||
|
Total liabilities and
shareholders’ equity
|
$ | 19,585,417 | $ | 17,839,883 | ||||
The
accompanying notes are an integral part of the consolidated financial
statements.
1
Consolidated Statements of
Income
(Unaudited)
|
Three months ended
September 30,
|
Nine months ended
September 30,
|
|||||||||||||||
|
2008
|
2007
|
2008
|
2007
|
|||||||||||||
|
Revenue
|
$
|
5,838,390 |
$
|
4,457,688 |
$
|
17,724,252 |
$
|
14,867,182 | ||||||||
|
Cost
of sales
|
4,996,830 | 3,203,293 | 14,424,783 |
|
11,280,833 | |||||||||||
|
Gross profit
|
841,560 | 1,254,395 | 3,299,469 | 3,586,349 | ||||||||||||
|
Selling
and marketing
|
200,887 | 209,459 | 615,915 | 570,923 | ||||||||||||
|
General
and administrative
|
521,548 | 574,865 | 1,917,496 | 1,630,776 | ||||||||||||
|
Research
and development
|
35,682 | 14,594 | 248,355 | 44,971 | ||||||||||||
|
Total expense
|
758,117 | 798,918 | 2,781,766 | 2,246,670 | ||||||||||||
|
Income from
operations
|
83,443 | 455,477 | 517,703 | 1,339,679 | ||||||||||||
|
Other
income (expense), net
|
(5,304 | ) | (1,935 | ) | (6,073 | ) | (11,957 | ) | ||||||||
|
Income
before income taxes
|
78,139 | 453,542 | 511,630 | 1,327,722 | ||||||||||||
|
Income
tax provision
|
10,000 | 33,000 | 160,000 | 227,000 | ||||||||||||
|
Net income
|
$
|
68,139 |
$
|
420,542 |
$
|
351,630 |
$
|
1,100,722 | ||||||||
|
|
||||||||||||||||
|
Net
income per share – basic
|
$
|
0.03 |
$
|
0.16 |
$
|
0.13 |
$
|
0.41 | ||||||||
|
Net
income per share – diluted
|
$
|
0.03 |
$
|
0.15 |
$
|
0.12 |
$
|
0.40 | ||||||||
|
Weighted
average common shares
outstanding –
basic
|
2,711,680 | 2,711,680 | 2,711,680 | 2,709,973 | ||||||||||||
|
Weighted
average common shares
outstanding –
diluted
|
2,712,481 | 2,765,103 | 2,926,089 | 2,785,411 | ||||||||||||
The
accompanying notes are an integral part of the consolidated financial
statements.
2
Consolidated Statements of
Cash Flows
(Unaudited)
|
Nine
months Ended
September
30,
|
||||||||
|
2008
|
2007
|
|||||||
|
Cash
flows from operating activities:
|
||||||||
|
Net income
|
$
|
351,630 |
$
|
1,100,722 | ||||
|
Adjustments
to reconcile net income to net cash
provided
by operating activities:
|
||||||||
|
Depreciation and
amortization
|
1,044,334 | 837,163 | ||||||
|
Provision for doubtful
accounts
|
(1,463 | ) | 20,000 | |||||
| Deferred Income tax provision |
10,000
|
- | ||||||
|
Share based
compensation
|
77,334 | 32,325 | ||||||
|
Changes in operating assets and
liabilities:
|
||||||||
|
Trade and other accounts
receivable
|
(1,129,902 | ) | (100,419 | ) | ||||
|
Inventories
|
(702,878 | ) | (690,523 | ) | ||||
|
Deposits, prepaid expenses and
other assets
|
96,861 | (157,182 | ) | |||||
|
Accounts payable and accrued
expenses
|
1,515,144 | 256,282 | ||||||
|
Net cash provided by operating
activities
|
1,261,060 | 1,499,206 | ||||||
|
Cash
flows from investing activities:
|
||||||||
|
Capital expenditures, net of
disposals
|
(674,127 | ) | (1,417,210 | ) | ||||
|
Net cash used in investing
activities
|
(674,127 | ) | (1,417,210 | ) | ||||
|
Cash
flows from financing activities:
|
||||||||
|
Payments on acquisition note
payable
|
(134,083 | ) | (45,747 | ) | ||||
|
Payments on short term
equipment loan (obligation)
|
(74,491 | ) | - | |||||
|
Tax benefit from exercise of
stock options
|
- | 33,549 | ||||||
|
Proceeds from the exercise of
stock options
|
- | 59,160 | ||||||
|
Net cash provided by (used in)
financing activities
|
(208,574 | ) | 46,962 | |||||
|
Net
increase in cash and cash equivalents
|
378,359 | 128,958 | ||||||
|
Cash
and cash equivalents at beginning of period
|
1,684,411 | 2,065,645 | ||||||
|
Cash
and cash equivalents at end of period
|
$
|
2,062,770 |
$
|
2,194,603 | ||||
The
accompanying notes are an integral part of the consolidated financial
statements.
3
1.
Basis of Presentation:
The unaudited interim consolidated
financial statements and related notes have been prepared pursuant to the rules
and regulations of the Securities and Exchange
Commission. Accordingly, certain information and footnote disclosures
normally included in complete financial statements prepared in accordance with
generally accepted accounting principles have been omitted pursuant to such
rules and regulations. The accompanying unaudited interim
consolidated financial statements and related notes should be read in
conjunction with the consolidated financial statements and notes thereto
included in the Arrhythmia Research Technology, Inc. and subsidiary (the
“Company”) Annual Report on Form 10-K for the year ended December 31,
2007.
The information presented reflects, in
the opinion of the management of the Company, all adjustments necessary for a
fair presentation of the financial results for the interim period
presented.
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 the financial statements, and the reported amounts of
revenues and expenses during the reporting period. Actual results
could differ from those estimates. Operating results for interim
periods are not necessarily indicative of results that may be expected for the
entire fiscal year.
2. Inventories:
|
Inventories
consist of the following as of:
|
September
30,
2008
|
December
31,
2007
|
||||||
|
Raw materials
|
$ | 1,545,244 | $ | 872,758 | ||||
|
Work-in-process
|
633,736 | 538,309 | ||||||
|
Finished goods
|
1,525,418 | 1,590,453 | ||||||
|
Total
|
$ | 3,704,398 | $ | 3,001,520 | ||||
3.
Share-Based Compensation:
The Company accounts for share based
compensation under Statement of Financial Accounting Standards (SFAS) 123(R),
Share-Based Payment,
which accounts for equity instruments exchanged for employee
services. Under the provisions of SFAS 123(R), 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 equity grant).
The Company estimates the fair value of
stock options using the Black-Scholes valuation model. Key input
assumptions used to estimate the fair value of stock options include the
exercise price of the award, the expected option term, the expected volatility
of the Company’s stock over the option’s expected term, the risk-free interest
rate over the option’s expected term, and the Company’s expected annual dividend
yield. The Company believes that the valuation technique and the
approach utilized to develop the underlying assumptions are appropriate in
calculating the fair values of the Company’s stock options. Estimates
of fair value are not intended to predict actual future events or the value
ultimately realized by persons who receive equity awards.
The following assumptions were used to
estimate the fair market value of options granted using the Black Scholes
valuation method:
|
Nine
months Ended September 30,
|
||||||||
|
2008
|
2007
|
|||||||
|
Dividend
Yield
|
0%
|
0.44%
|
||||||
|
Expected
Volatility
|
40.65%
|
43%
|
||||||
|
Risk
Free Interest Rate
|
3.28%
|
5.5%
|
||||||
|
Expected
Option Terms (in years)
|
4.5
|
6
|
||||||
The Company recognized share-based
compensation expense of $77,334 and $32,325 in general and administrative
expense for the nine months ended September 30, 2008 and 2007,
respectively. Grants totaling 107,500 options to 24 persons,
including directors and management, were made during the nine months ended
September 30, 2008 compared with two grants totaling 20,000 for the same period
in 2007. The weighted average fair value of options at grant for the
nine months ended September 30, 2008 and 2007 was $2.74 and $8.83,
respectively.
4
Share-based Incentive Plan
At September
30, 2008, the Company has one stock option plan that includes both incentive
stock options and non-statutory stock options to be granted to certain eligible
employees, non-employee directors, or consultants of the Company. At
the annual shareholder meeting on May 11, 2007, the shareholders approved an
amendment to the plan adding an additional 200,000 shares for future
grant. The maximum number of shares reserved for issuance is 400,000
shares. The options granted have six-year contractual terms and
either vest immediately or vest annually over a five-year term.
At September 30, 2008, there were
133,000 shares available for future grants under the above stock option
plan. The weighted average exercise price of options outstanding was
$8.75 at September 30, 2008.
The following table presents the
average price and contractual life information about options outstanding and
exercisable at September 30, 2008:
|
Exercise
Price
|
Number
of
Outstanding
Shares
|
Weighted
Average
Remaining
Contractual
Life
(years)
|
Options
Currently
Exercisable
|
|||||||||||
|
$
|
4.85 | 25,000 | 0.83 | 25,000 | ||||||||||
| 7.15 | 100,000 | 5.26 | - | |||||||||||
| 9.86 | 69,000 | 3.22 | 69,000 | |||||||||||
| 12.42 | 10,000 | 3.84 | 4,000 | |||||||||||
| 23.10 | 10,000 | 4.43 | 2,000 | |||||||||||
The
aggregated intrinsic value of options outstanding and vested at September 30,
2008 was $0 and $20,400, respectively. The Company expects 95,900 of
the 114,000 unvested options to vest over their remaining life.
The following table summarizes the
status of Company’s non-vested options since December 31, 2007:
|
Non-Vested Options
|
||||||||
|
Number
of
Shares
|
Weighted
Average
Fair
Value
|
|||||||
|
Non-vested
at December 31, 2007
|
33,000 |
$
|
3.67 | |||||
|
Granted
|
107,500 | 2.74 | ||||||
|
Vested
|
(9,000 | ) | 3.95 | |||||
|
Forfeited
|
(17,500 | ) | 5.11 | |||||
|
Non-vested
at September 30, 2008
|
114,000 |
$
|
3.45 | |||||
At September
30, 2008, there was $328,293 of total unrecognized cost related to non-vested
share-based compensation arrangements granted under the Plan. This
cost is expected to be recognized over a weighted average period of 5.05
years.
4.
Income Taxes:
On January 1, 2007, the Company adopted
FASB Interpretation No. 48 (“FIN 48”), Accounting for Uncertainty in Income
Taxes which is an interpretation of SFAS No. 109, Accounting for Income
Taxes. FIN 48 requires management to perform a two-step
evaluation of all tax positions, ensuring that these tax return positions meet
the “more-likely than not” recognition threshold and can be measured with
sufficient precision to determine the benefit recognized in the financial
statements.
The Company files income
tax returns in the U.S. Federal jurisdiction and various state
jurisdictions. The periods from 2005 to 2007 remain open to
examination by the IRS, and 2004 to 2007 remain open in state
jurisdictions. The Company believes it is not subject to any
significant tax risk. As of the date of adoption of FIN No. 48, the
Company did not have any accrued interest or penalties associated with any
unrecognized tax benefits, nor was any interest expense recognized during the
nine months ended September 30, 2008.
5
5. Earnings per share:
In
accordance with SFAS No. 128, the basic earnings per share is computed by
dividing net income available to common stockholders by the weighted average
number of common shares outstanding. Diluted earnings per
share is computed similar to basic earnings per share except that the
denominator is increased to include the number of additional shares that would
have been outstanding if the potential shares had been issued and if the
additional shares were dilutive. At September 30, 2008, 209,500 of
the 231,500 in stock equivalents were anti-dilutive and excluded in the earnings
per share computation.
6.
Asset Impairment:
Asset
impairment charges of $22,378 were recorded in the nine months ended September
30, 2008. These charges were related to equipment used in the testing
of sensors in the assembly of electrodes. The equipment has been
written down to its estimated net realizable value.
7.
Subsequent Events:
In
October 2008 the Company’s board of directors authorized the repurchase in the
open market from time to time of up to $650,000 of the Company’s outstanding
common stock. No shares have been acquired to date.
8.
Recent Accounting Pronouncements:
In
December 2007, the SEC issued SAB No. 110. SAB 110 allows for the
continued use of a "simplified" method, as discussed in SAB No. 107, in
developing an estimate of expected term of "plain vanilla" share options in
accordance with SFAS 123 (revised 2004). Originally the SEC staff
stated in SAB 107 that it would not expect a company to use the simplified
method for share option grants after December 31, 2007. Accordingly,
the SEC staff will continue to accept, under certain circumstances, the use of
the simplified method beyond December 31, 2007. The Company will
continue the use of the simplified method for determining the value of options
granted as allowed by SAB 110.
In
December 2007, the FASB issued SFAS No. 141(R), Business
Combinations. SFAS No. 141(R) establishes principles and requirements
for how the acquirer of a business recognizes and measures in its financial
statements the identifiable assets acquired, the liabilities assumed, and any
noncontrolling interest in the acquiree. SFAS No. 141(R) also
provides guidance for recognizing and measuring the goodwill acquired in the
business combination and determines what information to disclose to enable users
of the financial statements to evaluate the nature and financial effects of the
business combination. The provisions of SFAS No. 141(R) are applicable to
business combinations consummated on or after December 15, 2008 with early
adoption prohibited.
In
December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in
Consolidated Financial Statements - an amendment of ARB No. 51. SFAS
No. 160 establishes accounting and reporting standards for the noncontrolling
interest in a subsidiary for the deconsolidation of a
subsidiary. SFAS No. 160 is effective for financial statements issued
for fiscal years beginning after December 15, 2008, and interim statements
within those fiscal years. The Company does not currently have any
noncontrolling interests.
Forward-Looking
Statements
Any
forward-looking statements made herein are based on current expectations of the
Company, involve a number of risks and uncertainties and should not be
considered as guarantees of future performance. The factors that
could cause actual results to differ materially include: fluctuations in
customer delivery schedules, interruptions or cancellation of existing
contracts, inability to integrate acquisitions, impact of competitive products
and pricing, product demand and market acceptance risks, the presence of
competitors with greater financial resources than the Company, product
development and commercialization risks, and changing economic conditions and an
inability to arrange additional debt or equity financing. More
information about factors that potentially could affect the Company's financial
results is included in the Company's filings with the Securities and Exchange
Commission, including its Annual Report on Form 10-K for the year ended December
31, 2007 filed on March 31, 2008.
Overview
Arrhythmia
Research Technology, Inc. (“ART”) is engaged in the licensing of medical
software, which acquires data and analyzes electrical impulses of the heart to
detect and aid in the treatment of potentially lethal
arrhythmias. Micron Products, Inc. (“Micron”), a wholly owned
subsidiary, is the primary source of consolidated revenues. Micron
manufactures disposable electrode sensors used as a component part in the
manufacture of integrated disposable electro-physiological
sensors. These disposable medical devices are used world wide in the
monitoring of electric signals in various medical
applications. Micron has expanded into custom plastic injection
molded products and product life cycle management. Revenues in this
sector are primarily custom injection molding, tooling, and end-to-end product
life cycle management through a comprehensive portfolio of value-added services
such as design, engineering, prototyping, manufacturing, machining, assembly and
packaging.
6
Results of
Operations
Revenue
for the three months ended September 30, 2008
was $5,838,390 versus $4,457,688 for the three months ended September 30, 2007,
an increase of 31%. Sales of sensors and snaps with silver surcharge
increased by $495,000 and high volume precision molded products and other
miscellaneous sales increased by $26,000. The increase in revenue of
sensors, snaps and high precision molded product sales was due, in part, to the
periodic fluctuations in customer production schedules. A decrease of
$47,000 in revenue from NEM’s custom molded products was offset by an increase
of $1,043,000 in revenue from MIT’s product life cycle management programs as a
direct result of the growing metal related business. This increase
includes $246,000 in precision medical machining and $1,207,000 in the sale of
imported forgings for a new customer. This was offset by a periodic
decrease of $410,000 in defense industry revenue. Revenue from the
Leominster Tool division decreased by $136,000 and does not include orthopedic
implant production and tools produced for customers of the other
divisions. Engineering and tooling revenue included above increased
by $4,600 as compared to the same period in 2007. Engineering and
tooling revenues typically occur at the beginning of a product life cycle or
when a customer changes its manufacturing source. After the design
and manufacture of the prototype and/or production tooling, the Company should
benefit from product sales as it begins to utilize the customer owned
tooling.
Revenue
for the nine months ended September 30, 2008 was $17,724,252 versus $14,867,182
for the nine months ended September 30, 2007, an increase of
19%. Sales of sensors and snaps with silver surcharge increased by
$316,000 and high volume precision molded products and other miscellaneous sales
increased by $63,000. A decrease of $164,000 in revenue from NEM’s
custom molded products was offset by an increase of $2,397,000 from MIT’s
product life cycle management programs as a direct result of the growing metal
related business. This increase includes but is not limited to
$670,000 in precision medical machining and $2,777,000 from the sale of imported
forgings for a new large customer, and offset by a decrease of $1,056.000 in
MIT’s defense industry revenue. The decrease in defense industry
revenue is due to the irregular delivery schedule of our customer and does not
reflect a change in the long term expectation of deliveries. Revenue
in the Leominster Tool division increased by $245,000 in revenues and does not
include orthopedic implant production and tools produced for customers of the
other divisions. Engineering and tooling revenue included above
increased by $242,000 as compared to the same period in
2007. Engineering and tooling revenues typically occur at the
beginning of a product life cycle or when a customer changes its manufacturing
source. After the design and manufacture of the prototype and/or
production tooling, the Company should benefit from product sales as it begins
to utilize the customer owned tooling. There were no sales of the
Company’s SAECG products in the first nine months of 2008 or 2007.
Revenue from domestic and foreign sales is as follows:
|
Three
Months Ending September 30,
|
Nine
months Ending September 30,
|
|||||||||||||||||||||||||||||||
|
2008
|
%
|
2007
|
%
|
2008
|
%
|
2007
|
%
|
|||||||||||||||||||||||||
|
United
States
|
$
|
3,532,956 | 61 |
$
|
2,653,515 | 60 |
$
|
10,472,345 | 59 |
$
|
8,358,543 | 56 | ||||||||||||||||||||
|
Canada
|
1,338,178 | 23 | 1,130,046 | 25 | 4,001,374 | 23 | 4,041,121 | 27 | ||||||||||||||||||||||||
|
Europe
|
729,500 | 12 | 506,457 | 11 | 2,442,681 | 14 | 1,884,500 | 13 | ||||||||||||||||||||||||
|
Pacific
Rim
|
115,349 | 2 | 72,939 | 2 | 351,711 | 2 | 278,189 | 2 | ||||||||||||||||||||||||
|
Other
|
122,407 | 2 |
|
94,731 | 2 | 456,141 | 2 | 304,829 | 2 | |||||||||||||||||||||||
|
Total
|
$
|
5,838,390 | 100 |
$
|
4,457,688 | 100 |
$
|
17,724,252 | 100 |
$
|
14,867,182 | 100 | ||||||||||||||||||||
Cost of sales was $4,996,830 or 85.6% of
revenue and $3,203,293 or 71.9% of revenue for the three months ended September
30, 2008 and 2007, respectively. Cost of sales was $14,424,783 or
81.4% for the nine months ended September 30, 2008 as compared to $11,280,833 or
75.9% for the same period in 2007. The stabilization of material
costs continues to be a major focus of management efforts. The forged
products in the MIT division have higher than expected costs as quality problems
from a subcontractor have required extensive internal time and
effort. All current products, services and programs, including those
in development, are being evaluated for contribution and value to our overall
business strategy and results. Products, services and programs that
are underperforming from an overall contribution standpoint and not expected to
improve will be phased out or discontinued so that the Company’s resources can
be put to use in developing those of more strategic value. Although
management has been successful in stabilizing a portion of the electricity costs
by negotiating a long-term purchase agreement, energy costs for the nine months
ended September 30, 2008 are $111,000 higher than the same period in
2007. Other manufacturing costs continue to rise adding pressure to
our margins. While some synergistic benefits will be realized in
2009, the integration of the Leominster Tool division into the Fitchburg complex
will add costs in the next interim period. Management continues to
investigate strategies to both stabilize and improve the overall gross margin
without sacrificing product quality and to expand higher margin product lines
and product lines with more stable demand
forecasts.
7
Selling and
marketing expense
was $200,887 or 3.4% of
revenue and $209,459 or 4.7% of revenue for the three months ended September 30,
2008 and 2007, respectively. Selling and marketing expense was
$615,915 or 3.5% for the nine months ended September 30, 2008 as compared to
$570,923 or 3.8% for the same period in 2007. Selling expenses are
expected to be stable as a percentage of
sales.
General and administrative
expense was
$521,548 or 8.9% of revenue and $574,865 or 12.9% of revenue for the three
months ended September 30, 2008 and 2007, respectively. General and
administrative expense was $1,917,496 or 10.8% for the nine months ended
September 30, 2008 as compared to $1,630,776 or 11% for the same period in
2007. Included in the increase of expense for the nine months ended
September 30, 2008 is a one time charge of $250,000 for costs associated with a
terminated acquisition following due diligence. During this same
period, the cost of additional administrative personnel of $32,000, and $71,000
of additional depreciation for the technology upgrades in preparation for
Section 404 of the Sarbanes-Oxley Act of 2002 compliance increased the expense
when compared to the similar period in 2007. Although the delay by
the SEC for outside auditor attestation requirements of Section 404 will limit a
previously expected increase in audit fees for the end of 2008, the costs
associated with internal control documentation with outside consultants cost
$69,000 for the nine months in 2008, and continues as planned. The
Company expects the new enterprise resource planning solution to improve data
collection and reporting in all aspects of the
business.
Research and development
expense was
$35,682 or 0.6% of revenue and $14,594 or 0.3% of revenue for the three months
ended September 30, 2008 and 2007, respectively. Research and
development expense was $248,355 or 1.4% of revenue for the nine months ended
September 30, 2008 as compared to $44,971 or 0.3% of revenue for the same period
in 2007. The nine months ended September 30, 2008 included $52,000 of
expense for equipment tested in a process improvement project with the sensor
product line as well as the impairment of equipment used for final product
testing. Other costs are related to ART’s product, Predictor®7. Although
base development work on Predictor 7 has been completed, expenses continue with
technical support of a National Institute of Health research project utilizing
ART’s proprietary Signal Averaged ECG products and patented
algorithms. The remaining portion of the research and development
expense is associated with continued work on patentable technologies on the
Micron sensor and snap product line. This work is expected to
continue through the end of
2008.
Other income (expense), net
was $5,304 in expense versus expense of $1,935 for the three months ended
September 30, 2008 and 2007, respectively. Other expense was $6,073
and $11,957 for the nine months ended September 30, 2008 and 2007,
respectively. Interest income of $25,987 and $20,921 in the nine
months ended September 30, 2008 and 2007 was offset by interest expense in the
same periods of $35,481 and $12,015 associated with acquisition and equipment
notes.
Income taxes as a
percent of income before income taxes were 12.8% and 31.3% for the three and
nine months ended September 30, 2008, and 7.3% and 17.1% for the three and nine
months ended September 30, 2007. The differences in effective tax
rate are a result of the timing of tax credits earned. Management
will continue to seek to implement any tax planning opportunities that could
effectively reduce the Company’s income tax provision in the
future.
Basic earnings
per share decreased to $0.03 from $0.16 for the three months ended
September 30, 2008 and 2007, respectively, and decreased to $0.13 from $0.41 for
the nine months ended September 30, 2008 and 2007, respectively. The
increase in expenses described above had a direct impact to the earnings per
share when comparing the three and nine months ended September 30, 2008 to the
same period in the prior year. The decrease in the nine months ended
September 30, 2008 includes non-recurring charges totaling $302,000, related to
the acquisition and research and development activities. This charge,
net of tax, decreased basic earnings per share during the nine months by
$0.07.
Liquidity
and Capital Resources
Working
capital was $7,393,967 at September 30, 2008 compared to $6,563,047 at December
31, 2007, an increase of $830,920. Operating cash flow is expected to
continue to increase faster than planned capital expenditure for the next nine
months. Capital investment could decrease working capital with any
significant investment resulting from future acquisition of assets or
businesses, significant expansion of production capacity, a medical study, or
further software development.
8
Net
capital expenditures were $674,127 for the nine months of 2008 as compared to
$1,417,210 for the same period in 2007. The capital expenditures
during the first nine months of 2008 and 2007 were for the acquisition of
additional production machinery and equipment, including upgrades in and
replacement of existing machinery and tooling. Included in the
capital expenditures for 2007 is the acquisition of an adjacent property to the
Company’s Fitchburg complex and technology upgrades for a new enterprise
resource planning solution.
The
Company has an unsecured $1,000,000 credit line with a large multinational
bank. No funds have been drawn down on the line as of September 30,
2008 or December 31, 2007. In September 2007, a one year note for
$813,000 at the fixed rate of 6.75% per annum for metal machining equipment was
drawn down by $383,000. A second payment of $383,000 was made in
January of 2008 for this equipment. This note was extended for a year
with a decrease in the fixed rate to 6.5% per annum. This equipment
note is amortized over six years with a balloon payment at September 15,
2009.
In
October 2008 the Company’s board of directors authorized the repurchase in the
open market from time to time of up to $650,000 of the Company’s outstanding
common stock. No shares have been acquired to date.
The
Company expects to meet cash demands for its operations at current levels with
current operating cash flows for the foreseeable future.
Critical
Accounting Policies
The
preparation of financial statements and related disclosures in conformity with
generally accepted accounting principles requires management to make judgments,
assumptions and estimates that affect the amounts reported. Certain
of these significant accounting policies are considered to be critical
accounting policies, as defined below.
A critical accounting policy is
defined as one that is both material to the presentation of the Company’s
financial statements and requires management to make difficult, subjective, and
complex judgments that could have a material effect on the Company’s financial
condition and results of operations. Specifically, critical
accounting estimates have the following attributes: 1) the Company is required
to make assumptions about matters that are highly uncertain at the time of the
estimate; and 2) different estimates the Company could reasonably have used, or
changes in the estimate that are reasonably likely to occur, would have a
material effect on the Company’s financial condition or results of
operations.
Estimates
and assumptions about future events and their effects cannot be determined with
certainty. The Company bases its estimates on historical experience
and on various other assumptions believed to be applicable and reasonable in the
circumstances. These estimates may change as new events occur, as
additional information is obtained and as the Company’s operating environment
changes. These changes have historically been minor and have been
included in the consolidated financial statements as soon as they became
known. In addition, management is periodically faced with
uncertainties, the outcomes of which are not within its control and will not be
known for prolonged periods of time. These uncertainties are
discussed in the section above entitled “Forward-looking
Statements.” Based on a critical assessment of its accounting
policies and the underlying judgments and uncertainties affecting the
application of those policies, management believes that the Company’s
consolidated financial statements are fairly stated in accordance with generally
accepted accounting principles, and present a meaningful presentation of the
Company’s financial condition and results of operations.
Management
believes that the following are critical accounting policies:
Revenue Recognition and Accounts
Receivable
Revenues
from the sale of products are recorded when the product is shipped, title and
risk of loss have transferred to the purchaser, payment terms are fixed or
determinable and payment is reasonably assured.
The
financing of customer purchased tooling utilizes the direct financing method of
revenue recognition. This requires the gain on the sale of the
tooling to be recorded at the time the tool is put into service while the
expected payments are reflected as a lease receivable.
Based
on management’s on-going analysis of accounts receivable balances, and after the
initial recognition of the revenue, if an event occurs which may adversely
affect the ultimate collectability of the related receivable, management will
record an allowance for the bad debt. Bad debts have not had a
significant impact on the Company’s financial condition, results of operations,
or cash flows.
9
Stock-Based
Compensation
The
Company accounts for share based compensation under SFAS No. 123R, “Share Based
Payment” (“FAS 123R”). FAS 123R requires that companies recognize and measure
compensation expense for all share-based payments at the grant date based on the
fair market value of the award. This share-based compensation expense
must be included in the Company’s statement of operations over the requisite
service period.
The
Company uses the Black-Scholes option pricing model which requires extensive use
of financial estimates and accounting judgment, including the expected
volatility of the Company’s common stock over the estimated term, and estimates
on the expected time period that employees will retain their vested options
prior to exercising them. The number of shares that are expected to
be forfeited before the options are vested are included in the calculation of
compensation expense. The use of alternative assumptions could
produce significantly different estimates of the fair value of the stock-based
compensation and as a result, provide significantly different amounts recognized
in the Company’s statement of operations.
Inventory and Inventory
Reserves
The
Company values its inventory at the lower of cost or market. The
Company reviews its inventory for quantities in excess of production
requirements, obsolescence and for compliance with internal quality
specifications. 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. If actual market conditions
are less favorable than those projected by management, additional inventory
reserves may be required.
The Company maintains a reserve
for excess, slow moving, and obsolete inventory as well as inventory with a
carrying value in excess of its net realizable value. A review of
inventory on hand is made at least annually and a provision for excess, slow
moving, and obsolete inventory is recorded, if necessary. The review
is based on several factors including a current assessment of future product
demand, historical experience, and product expiration.
Deferred Tax
Assets
The
Company assesses its deferred tax assets based upon a more likely than not to be
realized criteria. The Company considers future taxable income and
ongoing prudent and feasible tax planning strategies in assessing the need for
the valuation allowance. In accordance with FIN 48 we recognize the benefits of
a tax position if that position is more likely than not to be sustained on
audit, based on the technical merit of the position.
Asset Impairment –
Goodwill
The
Company reviews the valuation of goodwill and intangible assets to assess
potential impairments on an annual basis. The management evaluates
the carrying value of goodwill and other intangible assets in accordance with
the guidelines set forth in SFAS 142. The value assigned to
intangible assets is determined by a valuation based on estimates and judgment
regarding expectations for the success and life cycle of products and businesses
acquired. To test for impairment, present values of an estimate of
future discounted cash flows related to the intangible assets are calculated
compared to the value of the intangible asset. When impairment exists it could
have a material adverse effect on the Company’s business, financial condition
and results of operations. There was no impairment as of September
30, 2008.
Asset Impairment – Long Lived
Assets
The
Company assesses the impairment of long-lived assets whenever events or changes
in circumstances indicate that the carrying value may not be fully
recoverable. When it is determined that the carrying value of such
assets may not be recoverable, the Company generally measures any impairment
based on projected undiscounted future cash flows attributed to the asset and
its carrying value. If the carrying value exceeds the future
discounted cash flows, asset impairment would be recorded. In the
nine months ended September 30, 2008, a long lived asset used in research and
development was impaired for $22,378.
Not
applicable.
10
Evaluation
of Disclosure Controls and Procedures
As
of the end of the period covered by this Quarterly Report, the Company’s
management, with the participation of the Company’s Chief Executive Officer and
Chief Financial Officer (“the Certifying Officers”), conducted evaluations of
the Company’s disclosure controls and procedures. As defined under Sections 13a
– 15(e) and 15d – 15(e) of the Securities Exchange Act of 1934, as amended (the
“Exchange Act”), the term “disclosure controls and procedures” means controls
and other procedures of an issuer that are designed to ensure that information
required to be disclosed by the issuer in the reports that it files or submits
under the Exchange Act is recorded, processed, summarized and reported, within
the time periods specified in the Commission’s rules and forms. Disclosure
controls and procedures include without limitation, controls and procedures
designed to ensure that information required to be disclosed by an issuer in the
reports that it files or submits under the Exchange Act is accumulated and
communicated to the issuer’s management, included the Certifying Officers, to
allow timely decisions regarding required disclosures. Based on this evaluation,
the Certifying Officers have concluded that the Company’s disclosure controls
and procedures were effective to ensure that material information is recorded,
processed, summarized and reported by management of the Company on a timely
basis in order to comply with the Company’s disclosure obligations under the
Exchange Act and the rules and regulations promulgated thereunder.
Changes
in Internal Control over Financial Reporting
Further,
there were no changes in the Company’s internal control over financial reporting
during the Company’s third fiscal quarter that materially affected, or are
reasonably likely to materially affect, the Company’s internal control over
financial reporting.
In
addition to the other information set forth in this Quarterly Report on Form
10-Q, one should carefully consider the factors discussed in Part I, “Item 1A.
Risk Factors” in our Annual Report on Form 10-K for the year ended December 31,
2007.
Large
OEM customers can change their demand on short notice, further adding to the
unpredictability of our quarterly sales and earnings.
Our
quarterly results have in the past and may in the future vary due to the lack of
dependable long-term demand forecasts from our larger OEM
customers. In addition to this risk, many of our OEM customers have
the right to change their demand schedule, either up or down, within a
relatively short time horizon. These changes may result in us
incurring additional working capital costs and causing increased manufacturing
expenses due to these short-term fluctuations. In particular, our
quarterly operating results have in the past fluctuated as a result of some of
the larger OEM customers changing their orders within a fiscal
quarter. Our expense levels and inventory, to a large extent, are
based on shipment expectations in the quarter. If sales levels fall
below these expectations, through a delay in orders or otherwise, operating
results are likely to be adversely affected. Although we have tried
to lessen our dependency on a few large customers, this is the nature of the OEM
customers that we serve and we can provide no assurance that we will be able to
materially alter this dependency in the immediate future, if at
all.
11
|
(a)
|
Exhibits
|
| 3.0 | Articles of Incorporation(a) | |
|
|
3.1
|
By-laws(b)
|
| 10.43* | Employment agreement between James E. Rouse and the Company dated December 26th, 2006.(d) | |
| 10.44* | Employment agreement between David A. Garrison and the Company dated January 1st, 2007.(d) | |
| 31.1 | Certification of the CEO pursuant to Rule 13a-14(a) or Rule 15(d)-14(a) on page X-1. | |
| 31.2 | Certification of the CFO pursuant to Rule 13a-14(a) or Rule 15(d)-14(a) on page X-2. | |
| 32.1 | Certification pursuant to 18 U.S.C. § 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 on page X-3. | |
| 32.2 | Certification pursuant to 18 U.S.C. § 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 on Page X-4. | |
| 99.1 | Press release dated October 6, 2008, re stock buy back program. |
|
|
__________________________
|
|
|
*
Indicates a management contract or compensatory plan required to be filed
as an exhibit.
|
|
(a)
|
Incorporated
by reference from the Company’s Registration Statement on Form S-18 as
filed with the Commission in April 1988, Registration Statement No.
33-20945-FW
|
|
(b)
|
Incorporated
by reference from the Company’s Form 8-K as filed with the Commission in
December 2007.
|
|
(c)
|
Incorporated
by reference from the Company’s Form 8-K as filed with the Commission on
May 21, 2004.
|
|
(d)
|
Incorporated
by reference from the Company’s Form 10-KSB for period ended December 31,
2006 as filed with the Commission in March of
2007.
|
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
|
ARRHYTHMIA
RESEARCH TECHNOLOGY, INC.
|
|
|
Dated:
November 14, 2008
|
By: /s/ James
E.
Rouse
|
|
James E. Rouse
|
|
|
President and Chief Executive
Officer
|
|
|
(Principal Executive
Officer)
|
|
|
By: /s/ David
A.
Garrison
|
|
|
David A.
Garrison
|
|
|
Executive Vice President and
Chief Financial Officer
|
|
|
(Principal Financial and
Accounting Officer)
|
12
Index to
Exhibits