MICRON SOLUTIONS INC /DE/ - Quarter Report: 2008 March (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 March
31,
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)
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 May
10, 2008 there were 2,711,680 shares of the Company’s common stock
outstanding.
TABLE OF
CONTENTS
FORM
10-Q
March 31,
2008
i
Consolidated Balance
Sheets
|
ASSETS
|
March
31, 2008
|
December
31,
2007
|
||||||
|
Current
assets:
|
(Unaudited)
|
(Audited)
|
||||||
|
Cash and cash
equivalents
|
$ | 1,308,141 | $ | 1,684,411 | ||||
|
Trade and other accounts
receivable, net of allowance for
doubtful accounts of $67,330
and $49,830
|
4,270,590 | 2,759,491 | ||||||
|
Inventories, net
|
3,838,985 | 3,001,520 | ||||||
|
Deferred income taxes,
net
|
46,000 | 46,000 | ||||||
|
Deposits, prepaid expenses and
other current assets
|
1,031,547 | 926,970 | ||||||
|
Total current
assets
|
10,495,263 | 8,418,392 | ||||||
|
Property
and equipment, net of accumulated depreciation of
$8,133,736 and
$7,872,887
|
7,432,303 | 7,610,258 | ||||||
|
Goodwill
|
1,564,966 | 1,564,966 | ||||||
|
Other
intangible assets, net
|
198,227 | 221,482 | ||||||
|
Other
assets
|
19,276 | 24,785 | ||||||
|
Total assets
|
$ | 19,710,035 | $ | 17,839,883 | ||||
|
LIABILITIES
AND SHAREHOLDERS’ EQUITY
|
||||||||
|
Current
liabilities:
|
||||||||
|
Accounts payable
|
$ | 2,167,128 | $ | 633,413 | ||||
|
Accrued expenses
|
672,323 | 352,194 | ||||||
|
Current portion of acquisition
note payable
|
- | 134,083 | ||||||
|
Short term loan
payable
|
709,704 | 735,655 | ||||||
|
Total current
liabilities
|
3,549,155 | 1,855,345 | ||||||
|
Long
term liabilities:
|
||||||||
|
Long
term deferred tax liability
|
139,000 | 139,000 | ||||||
|
Total long term
liabilities
|
139,000 | 139,000 | ||||||
|
Total
liabilities
|
3,688,155 | 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
|
10,170,309 | 10,143,339 | ||||||
|
Common stock held in treasury,
1,214,811 shares at cost
|
(3,326,579 | ) | (3,326,579 | ) | ||||
|
Retained
earnings
|
9,138,885 | 8,989,513 | ||||||
|
Total shareholders’
equity
|
16,021,880 | 15,845,538 | ||||||
|
Total liabilities and
shareholders’ equity
|
$ | 19,710,035 | $ | 17,839,883 | ||||
The
accompanying notes are an integral part of the consolidated financial
statements.
1
Consolidated Statements of
Income
(Unaudited)
|
Three months
ended
March
31,
|
|||||||||
|
2008
|
2007
|
||||||||
|
Revenue
|
$
|
5,459,742 | $ | 5,009,276 | |||||
|
Cost
of sales
|
4,348,304 | 3,946,347 | |||||||
|
Gross profit
|
1,111,438 | 1,062,929 | |||||||
|
Selling
and marketing
|
190,374 | 183,673 | |||||||
|
General
and administrative
|
616,864 | 505,294 | |||||||
|
Research
and development
|
83,622 | 13,852 | |||||||
|
Total expense
|
890,860 | 702,819 | |||||||
|
Income from
operations
|
220,578 | 360,110 | |||||||
|
Other
income (expense), net
|
4,794 | (10,330 | ) | ||||||
|
Income
before income taxes
|
225,372 | 349,780 | |||||||
|
Income
tax provision
|
76,000 | 116,000 | |||||||
|
Net income
|
$ | 149,372 | $ | 233,780 | |||||
|
Net
income per share – basic
|
$ | 0.06 | $ | 0.09 | |||||
|
Net
income per share – diluted
|
$ | 0.05 | $ | 0.08 | |||||
|
Cash
dividends declared per share
|
$ | 0.00 | $ | 0.00 | |||||
|
Weighted
average common shares
Outstanding –
basic
|
2,711,680 | 2,706,502 | |||||||
|
Weighted
average common shares
Outstanding –
diluted
|
2,719,385 | 2,778,961 | |||||||
The
accompanying notes are an integral part of the consolidated financial
statements.
2
Consolidated Statements of
Cash Flows
(Unaudited)
|
Three Months
Ended
March
31,
|
||||||||
|
2008
|
2007
|
|||||||
|
Cash
flows from operating activities:
|
||||||||
|
Net income
|
$ | 149,372 | $ | 233,780 | ||||
|
Adjustments
to reconcile net income to net cash provided by
(used
in) operating activities:
|
||||||||
|
Depreciation and
amortization
|
358,482 | 256,773 | ||||||
|
Share based
compensation
|
26,970 | 8,696 | ||||||
|
Provision for doubtful
accounts
|
17,500 | - | ||||||
|
Changes in operating assets and
liabilities:
|
||||||||
|
Trade and other accounts
receivable
|
(1,528,599 | ) | (333,791 | ) | ||||
|
Inventories
|
(837,465 | ) | (246,436 | ) | ||||
|
Deposits, prepaid expenses and
other assets
|
(99,068 | ) | (113,577 | ) | ||||
|
Accounts payable and accrued
expenses
|
1,853,844 | 187,534 | ||||||
|
Net cash used in operating
activities
|
(58,964 | ) | (7,021 | ) | ||||
|
Cash
flows from investing activities:
|
||||||||
|
Capital expenditures, net of
disposals
|
(157,272 | ) | (360,932 | ) | ||||
|
Net cash used in investing
activities
|
(157,272 | ) | (360,932 | ) | ||||
|
Cash
flows from financing activities:
|
||||||||
|
Payments on acquisition note
payable
|
(160,034 | ) | (14,936 | ) | ||||
|
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
|
(160,034 | ) | 77,773 | |||||
|
Net
decrease in cash and cash equivalents
|
(376,270 | ) | (290,180 | ) | ||||
|
Cash
and cash equivalents at beginning of period
|
1,684,411 | 2,065,645 | ||||||
|
Cash
and cash equivalents at end of period
|
$ | 1,308,141 | $ | 1,775,465 | ||||
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:
|
March
31,
2008
|
December
31,
2007
|
||||||
|
Raw materials
|
$ | 1,210,628 | $ | 872,758 | ||||
|
Work-in-process
|
856,806 | 538,309 | ||||||
|
Finished goods
|
1,771,551 | 1,590,453 | ||||||
|
Total
|
$ | 3,838,985 | $ | 3,001,520 | ||||
3.
Share-Based Compensation:
The Company accounts for non-cash share
based compensation under Statement of Financial Accounting Standards (SFAS) No.
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:
|
Three
Months Ended March 31,
|
||||||||
|
2008
|
2007
|
|||||||
|
Dividend
Yield
|
0 | % | 0.44 | % | ||||
|
Expected
Volatility
|
40.65 | % | 41.66 | % | ||||
|
Risk
Free Interest Rate
|
3.28 | % | 5.25 | % | ||||
|
Expected
Option Terms (in years)
|
4.5 | 6 | ||||||
The Company recognized share-based
compensation expense of $26,970 and $8,696 in general and administrative expense
for the three months ended March 31, 2008 and 2007,
respectively. A grant totaling 107,500
options to 24 persons including directors and management was made during the
three months ended March 31, 2008 compared with one grant of 10,000 for the same
period in 2007.
4
Share-based
Incentive Plan
At March 31, 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 March 31, 2008, there were 115,500
shares available for future grants under the above stock option
plan. The weighted average exercise price of options outstanding was
$8.93 at March 31, 2008.
The following table presents the
average price and contractual life information about options outstanding and
exercisable at March 31, 2008:
|
Exercise
Price
|
Number
of Outstanding Shares
|
Weighted
Average Remaining Contractual Life (years)
|
Options
Currently Exercisable
|
Average
Fair Value at Grant Date
|
||||||||||||||
| $ | 4.85 | 25,000 | 1.33 | 20,000 |
$
|
0.66 | ||||||||||||
| 7.15 | 107,500 | 5.76 | -- | 2.74 | ||||||||||||||
| 9.86 | 69,000 | 3.72 | 69,000 | 4.22 | ||||||||||||||
| 12.42 | 10,000 | 4.34 | 2,000 | 5.38 | ||||||||||||||
| 14.10 | 10,000 | 5.18 | -- | 6.88 | ||||||||||||||
| 23.10 | 10,000 | 4.93 | 2,000 | 10.77 | ||||||||||||||
The aggregated intrinsic value of
options outstanding and vested at March 31, 2008 was $31,250 and $25,000,
respectively. The Company expects 124,110 of the 138,500 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
|
(2,000 | ) | 10.77 | |||||
|
Forfeited
|
- | - | ||||||
|
Non-vested
at March 31, 2008
|
138,500 | $ | 3.58 | |||||
At March 31, 2008, there was $451,920
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 4.07 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 2004 to 2007 remain open to
examination by the IRS and 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 three months ended March 31, 2008.
5
5.
Recent Accounting Pronouncements:
In September 2006, the FASB issued
SFAS No. 157, Fair
Value Measurements. SFAS No. 157 prescribes a single
definition of fair value as the price that would be received to sell an asset or
paid to transfer a liability in an orderly transaction between market
participants at the measurement date. The adoption of
SFAS No. 157 did not have a material impact on its financial condition
or results of operations.
In February 2007, the FASB issued
SFAS No. 159, The
Fair Value Option for Financial Assets and Financial
Liabilities. This statement permits entities to choose to
measure many financial instruments and certain other items at fair
value. The objective is to improve financial reporting by providing
entities with the opportunity to mitigate volatility in reported earnings caused
by measuring related assets and liabilities differently without having to apply
complex hedge accounting provisions. The adoption of
SFAS No. 159 did not have a material impact on its financial condition
or results of operations.
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 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
to 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.
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: 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 in developing
countries 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.
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, 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.
Results of
Operations
Revenue
for the three months ended March 31, 2008 was $5,459,742 versus $5,009,276 for
the three months ended March 31, 2007, an increase of 9%. Micron’s medical
sensors and snaps with silver surcharge increased by $11,200 and high volume
precision molded products and other miscellaneous sales decreased by
$99,400. The change in sensors, snaps and high precision molded
product sales was primarily due to the periodic fluctuations in customer
production schedules. Revenue from the New England Molders Division’s
(NEM) custom molded products and Micron Integrated Technology Division’s (MIT)
product life cycle management programs increased $375,000 as a result of growing
metal related business. This includes the medical product machining,
and the importation of forgings for a new large customer. The
Leominster Tool division’s contribution decreased by $29,000 in revenues and
does not include orthopedic implant production and tools produced for customers
of the other divisions. Non-recurring engineering and tooling revenue
increased by $156,800 as compared to the same period in
2007. Engineering and tooling revenues typically occur at the
beginning of a product life cycle when a customer chooses or 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. Other
sales, including the snap attaching machine business unit, had an increase of
revenue of $31,900. There were no sales of the Company’s SAECG
products in the first three months of 2008 or 2007.
6
Revenue
from domestic and foreign sales for the first three months is as
follows:
|
Three
Months Ending March 31,
|
||||||||||||||||
|
2008
|
%
|
2007
|
%
|
|||||||||||||
|
United
States
|
$ | 3,066,751 | 56 | $ | 2,766,622 | 55 | ||||||||||
|
Canada
|
1,341,015 | 25 | 1,302,770 | 26 | ||||||||||||
|
Europe
|
793,608 | 14 | 737,683 | 15 | ||||||||||||
|
Pacific
Rim
|
99,653 | 2 | 93,800 | 2 | ||||||||||||
|
Other
|
158,715 | 3 | 108,401 | 2 | ||||||||||||
|
Total
|
$ | 5,459,742 | 100 | $ | 5,009,276 | 100 | ||||||||||
The increase in domestic sales was a
result of the MIT division’s sales. Canadian and European sales
increases are the result of the increased value of silver surcharge collected
for Micron’s electrophysiological sensor and snap product lines.
Cost of sales
was 80% of revenue for the three months ended March 31, 2008 compared to
79% of revenue for the same period in 2007. Costs of manufacturing
continue to rise as utility costs, specifically electricity, have increased
dramatically. Although management has been successful in stabilizing
a portion of the utility costs by negotiating a new long-term purchase agreement
for electricity, the rate remains significantly higher than in previous
years. The inability to increase our sensor prices in the competitive
global marketplace hinders passing material and utility cost increases to our
customers, excluding the escalating cost of silver. The Leominster
Tool division has not yet been fully integrated to take advantage of some of the
expected synergistic benefits. This integration is expected to be
completed by the end of the third quarter of 2008. 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.
Selling and
marketing expense
was $190,374 for the three months ended March 31, 2008 as compared to $183,673
for the same period in 2007. The selling and marketing expense was
3.5% of sales in the three months ended March 31, 2008 and 3.7% for the same
period in 2007. Selling expenses continue to be stable as a
percentage of sales. The selling efforts include increased personnel,
travel expenses, and trade show attendance. This cost as a percentage
of sales is expected to remain stable and begin to decrease as revenues from
development efforts begin to be realized in late 2008.
General and
administrative expense was $616,864 for the three months ended March 31,
2008 as compared to $505,294 for the same period in 2007. The general
and administrative expense was 11% of sales in the three months ended March 31,
2008 and 10% for the same period in 2007. The increase was related to
additional management personnel and technology upgrades for Section 404 of the
Sarbanes-Oxley Act of 2002 compliance. The increased costs associated
with the internal control documentation which began in the fourth quarter of
2007 will continue through the third quarter of 2008, as the Company implements
a new enterprise resource planning solution to improve data collection and
reporting in all aspects of the business associated with Section 404 compliance
efforts.
Research and
development expense was $83,622 for the three months ended March 31, 2008
as compared to $13,852 for the same period in 2007. The research and
development expense was 1.5% of sales in the three months ended March 31, 2008
and 0.3% for the same period in 2007. Approximately 25% of the
expense was related to ART’s product, Predictor®7. Although
base development work on Predictor 7 has been completed, product testing costs
were expended to support 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.
7
Other income, net
was $4,794 versus an expense of $10,330 for the three months ended March
31, 2008 and 2007, respectively. Interest income in the period ended
March 31, 2008 was offset by interest expense of $12,353 associated with the
acquisition and equipment notes compared with $3,934 interest expense and a loss
on disposal of assets of $12,671 in the period ended March 31,
2007.
Income taxes
as a percent of income before income taxes were 33% for the three months
ended March 31, 2008 and 2007, as a result 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.
Liquidity and Capital
Resources
Working
capital was $6,946,108 at March 31, 2008 compared to $6,563,047 at December 31,
2007, an increase of $383,061. The increase reflects the increase in
revenues leading to higher trade receivables and the net of the increased
inventory and accounts payable. The large increase in receivables was
the result of higher shipments later in the quarter, while longer terms on
purchased components associated with those shipments dramatically increased
payables. Higher inventory levels are the net of the
previous sentence as well as new inventory items associated with a new
customer. 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.
Net
capital expenditures were $157,272 for the first three months of 2008 as
compared to $360,932 for the same period in 2007. The largest portion of the
capital expenditures in the first three months of 2008 was for the continued
installation of the Enterprise Resource Planning software, including shop floor
bar code acquisition devices, as well as upgrades to and replacement of existing
machinery and tooling. Included in the capital expenditures for the
same period in 2007 was the acquisition of additional production
equipment.
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 March 31, 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. Payments on the note are amortized over seven years with a
balloon payment at September 30, 2008, for the remaining balance. The
acquisition note related to the acquisition of Leominster Tool in December of
2006 was paid in full in March 2008.
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.
8
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.
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 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 income.
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. Our annual testing was completed
and no impairment as of March 31, 2008 was required.
9
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.
Not applicable.
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 first 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, you 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 filed March 31, 2008.
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, to
a large extent, are based on shipment expectations in the quarter. If sales
levels fall below these expectations, 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.
As we
previously reported on our Current Report on Form 8-K filed with the SEC on
December 19, 2007, effective December 14, 2007, our Board of Directors amended
our By-laws. The amendment of the By-laws was undertaken to comply
with American Stock Exchange (the “AMEX”) listing standards requiring all
securities listed on the AMEX to be eligible for the Direct Registration System
by January 1, 2008, and, among other things, to update the By-laws regarding
electronic notices and meetings. During that process, we clarified
the nomination process set forth in the By-laws by adding Section 3 of Article
III, Directors, to replace Section D of Article II, Stockholders. As
amended, the By-laws require that advance notice for director nominations must
be provided by stockholders not later than 90 days nor earlier than the 120th day
prior to the anniversary of the prior year’s annual meeting; provided, however,
that for the annual meeting of stockholders in 2008, a stockholder’s notice must
have been received not later than the close of business on January 5, 2008 as
reported in our prior proxy statement. Previously, the By-laws
required notice 90 days prior to a stockholder meeting. No
modification was made with respect to the information required to be provided by
a stockholder.
10
|
(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) |
| 10 | .45* | Employment agreement between Michael F. Nolan and the Company dated June 4, 2007. (e) |
| 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. |
|
|
*
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 10-Q for period ended September 30,
2002 as filed with the Commission in November
2002.
|
|
(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.
|
|
(e)
|
Incorporated
by reference from the Company’s Form 10-QSB for period ended June 30, 2007
as filed with the Commission in August 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.
|
|
|
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)
|
11
Index to
Exhibits