MICRON SOLUTIONS INC /DE/ - Quarter Report: 2009 October (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, 2009 or
[ ]
Transition report under Section 13 or 15(d) of the Securities Exchange Act of
1934
For the
transition period from ______ to ______
001-09731
(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 mark 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 has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such
files). Yes __ 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 23, 2009 there were 2,675,481 shares of the Company’s common stock
outstanding.
ARRHYTHMIA
RESEARCH TECHNOLOGY, INC.
TABLE OF
CONTENTS
FORM
10-Q
September
30, 2009
ARRHYTHMIA
RESEARCH TECHNOLOGY, INC. AND SUBSIDIARY
|
ASSETS
|
September
30, 2009
|
December
31,
2008
|
||||||
| (Unaudited) | (Audited) | |||||||
|
Current
assets:
|
|
|||||||
|
Cash and cash
equivalents
|
$ | 2,519,865 | $ | 2,320,467 | ||||
|
Trade and other accounts
receivable, net of allowance for
doubtful accounts of $47,082
and
$45,619
|
3,471,464 | 2,705,145 | ||||||
|
Inventories,
net
|
3,262,414 | 3,727,492 | ||||||
|
Deferred income taxes,
net
|
12,500 | 21,000 | ||||||
|
Prepaid
tax
|
242,789 | 309,000 | ||||||
|
Deposits, prepaid expenses and
other current assets
|
397,389 | 392,209 | ||||||
|
Total current
assets
|
9,906,421 | 9,475,313 | ||||||
|
Property
and equipment, net of accumulated depreciation of
$10,050,568 and
$9,111,067
|
7,112,443 | 7,305,278 | ||||||
|
Goodwill
|
1,564,966 | 1,564,966 | ||||||
|
Other
intangible assets,
net
|
107,668 | 143,010 | ||||||
|
Total
assets
|
$ | 18,691,498 | $ | 18,488,567 | ||||
|
LIABILITIES
AND SHAREHOLDERS’ EQUITY
|
||||||||
|
Current
liabilities:
|
||||||||
|
Accounts
payable
|
$ | 1,505,797 | $ | 1,106,974 | ||||
|
Accrued
expenses
|
335,129 | 289,527 | ||||||
|
Short term loan
payable
|
- | 638,091 | ||||||
|
Total current
liabilities
|
1,840,926 | 2,034,592 | ||||||
|
Long
term liabilities:
|
||||||||
|
Long
term deferred tax liability,
net
|
421,000 | 315,500 | ||||||
|
Total long term
liabilities
|
421,000 | 315,500 | ||||||
|
Total
liabilities
|
2,261,926 | 2,350,092 | ||||||
|
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, 2,675,481 and 2,688,291 outstanding
|
39,265 | 39,265 | ||||||
|
Additional
paid-in-capital
|
10,299,828 | 10,243,568 | ||||||
|
Common stock held in treasury,
1,251,010 and 1,238,200 shares at cost
|
(3,413,742 | ) | (3,380,554 | ) | ||||
|
Retained
earnings
|
9,504,221 | 9,236,196 | ||||||
|
Total shareholders’
equity
|
16,429,572 | 16,138,475 | ||||||
|
Total liabilities and
shareholders’
equity
|
$ | 18,691,498 | $ | 18,488,567 | ||||
The
accompanying notes are an integral part of the consolidated financial
statements.
1
ARRHYTHMIA
RESEARCH TECHNOLOGY, INC. AND SUBSIDIARY
(Unaudited)
|
Three months ended
September 30,
|
Nine months ended
September 30,
|
|||||||||||||||
|
2009
|
2008
|
2009
|
2008
|
|||||||||||||
|
Revenue
|
$ | 5,457,377 | $ | 5,838,390 | $ | 15,512,270 | $ | 17,724,252 | ||||||||
|
Cost
of sales
|
4,576,068 | 4,996,830 | 12,811,506 | 14,424,783 | ||||||||||||
|
Gross profit
|
881,309 | 841,560 | 2,700,764 | 3,299,469 | ||||||||||||
|
Selling
and marketing
|
173,323 | 200,887 | 507,501 | 615,915 | ||||||||||||
|
General
and administrative
|
509,037 | 521,548 | 1,596,933 | 1,917,496 | ||||||||||||
|
Research
and development
|
54,444 | 35,682 | 180,918 | 248,355 | ||||||||||||
|
Total expense
|
736,804 | 758,117 | 2,285,352 | 2,781,766 | ||||||||||||
|
Income from
operations
|
144,505 | 83,443 | 415,412 | 517,703 | ||||||||||||
|
Other
expense, net
|
(15,291 | ) | (5,304 | ) | (34,504 | ) | (6,073 | ) | ||||||||
|
Income
before income taxes
|
129,214 | 78,139 | 380,908 | 511,630 | ||||||||||||
|
Income
tax provision
|
21,000 | 10,000 | 114,000 | 160,000 | ||||||||||||
|
Net income
|
$ | 108,214 | $ | 68,139 | $ | 266,908 | $ | 351,630 | ||||||||
|
Net
income per share – basic
|
$ | 0.04 | $ | 0.03 | $ | 0.10 | $ | 0.13 | ||||||||
|
Net
income per share – diluted
|
$ | 0.04 | $ | 0.03 | $ | 0.10 | $ | 0.12 | ||||||||
|
Weighted
average common shares
Outstanding –
basic
|
2,675,481 | 2,711,680 | 2,679,371 | 2,711,680 | ||||||||||||
|
Weighted
average common shares
Outstanding –
diluted
|
2,675,481 | 2,712,481 | 2,679,371 | 2,926,089 | ||||||||||||
The
accompanying notes are an integral part of the consolidated financial
statements.
ARRHYTHMIA
RESEARCH TECHNOLOGY, INC. AND SUBSIDIARY
(Unaudited)
|
Nine Months Ended
September 30,
|
||||||||
|
2009
|
2008
|
|||||||
|
Cash
flows from operating activities:
|
||||||||
|
Net income
|
$ | 266,908 | $ | 351,630 | ||||
|
Adjustments
to reconcile net income to net cash provided by
(used
in) operating activities:
|
||||||||
|
Depreciation and
amortization
|
1,049,113 | 1,044,334 | ||||||
|
Share based
compensation
|
56,260 | 77,334 | ||||||
|
Provision for doubtful
accounts
|
1,463 | (1,463 | ) | |||||
|
Deferred tax
assets
|
114,000 | 10,000 | ||||||
|
Changes in operating assets and
liabilities:
|
||||||||
|
Trade and other accounts
receivable
|
(767,782 | ) | (1,129,902 | ) | ||||
|
Inventories
|
465,078 | (702,878 | ) | |||||
|
Deposits, prepaid expenses and
other assets
|
61,031 | 96,861 | ||||||
|
Accounts payable and accrued
expenses
|
443,307 | 1,515,144 | ||||||
|
Net cash provided by operating
activities
|
1,689,378 | 1,261,060 | ||||||
|
Cash
flows from investing activities:
|
||||||||
|
Capital expenditures, net of
disposals
|
(818,701 | ) | (674,127 | ) | ||||
|
Net cash used in investing
activities
|
(818,701 | ) | (674,127 | ) | ||||
|
Cash
flows from financing activities:
|
||||||||
|
Payments on acquisition note
payable
|
- | (134,083 | ) | |||||
|
Payments on short term
equipment loan
|
(638,091 | ) | (74,491 | ) | ||||
|
Purchase of treasury
stock
|
(33,188 | ) | - | |||||
|
Net cash used in financing
activities
|
(671,279 | ) | (208,574 | ) | ||||
|
Net
increase in cash and cash equivalents
|
199,398 | 378,359 | ||||||
|
Cash
and cash equivalents at beginning of period
|
2,320,467 | 1,684,411 | ||||||
|
Cash
and cash equivalents at end of period
|
$ | 2,519,865 | $ | 2,062,770 | ||||
The
accompanying notes are an integral part of the consolidated financial
statements.
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, 2008 filed
March 25, 2009.
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
September 30, 2009 and management’s review of subsequent events up to October
30, 2009.
The preparation of financial statements
in conformity with accounting principles generally accepted in the United States
of America requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements, and the reported
amounts of 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, 2009
|
December
31, 2008
|
||||||
|
Raw materials
|
$ | 1,081,483 | $ | 1,099,876 | ||||
|
Work-in-process
|
493,599 | 773,245 | ||||||
|
Finished goods
|
1,687,332 | 1,854,371 | ||||||
|
Total
|
$ | 3,262,414 | $ | 3,727,492 | ||||
3.
Share-Based Compensation:
The Company accounts for non-cash share
based compensation under Accounting Standards Codification (“ASC”) 718 (Formerly
known as “SFAS No. 123(R)”) “Stock Compensation”. Accordingly,
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
|
|
|
Dividend
Yield
|
0%
|
|
Expected
Volatility
|
40.65%
|
|
Risk
Free Interest Rate
|
3.28%
|
|
Expected
Option Terms (in years)
|
4.5
|
Included in general and administrative
expense the Company recognized share-based compensation expense of $56,260 and
$77,334 for the nine months ended September 30, 2009 and 2008,
respectively. A grant totaling 107,500
options to 24 persons including directors and management was made during the
nine months ended September 30, 2008. No grants were made in the
first nine months of 2009.
Share-based
Incentive Plan
At September 30, 2009, 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. 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, 2009, there were
165,000 shares available for future grants under the above stock option
plan. The weighted average exercise price of options outstanding was
$9.30 at September 30, 2009.
The following table presents the
average price and contractual life information about options outstanding and
exercisable at September 30, 2009:
|
Exercise
Price
|
Number
of Outstanding Shares
|
Weighted
Average Remaining Contractual Life (years)
|
Options
Currently Exercisable
|
Average
Fair Value at Grant Date
|
|
$
7.15
|
96,000
|
4.26
|
19,200
|
$ 2.74
|
|
9.86
|
66,000
|
2.22
|
66,000
|
4.22
|
|
12.42
|
10,000
|
2.84
|
6,000
|
5.38
|
|
23.10
|
10,000
|
3.43
|
4,000
|
10.77
|
The aggregated intrinsic value of
options outstanding and vested at September 30, 2009 was $0. The
Company expects 71,350 of the 86,800 options to vest over their remaining
life.
The following table summarizes the
status of Company’s non-vested options since December 31, 2008:
|
Non-Vested Options
|
||
|
Number
of Shares
|
Weighted
Average Fair Value
|
|
|
Non-vested
at December 31, 2008
|
111,000
|
$ 3.46
|
|
Granted
|
-
|
-
|
|
Vested
|
(23,200)
|
3.66
|
|
Forfeited
|
(1,000)
|
2.74
|
|
Non-vested
at September 30, 2009
|
86,800
|
$ 3.42
|
At September 30, 2009, there was
$238,876 of total unrecognized cost related to non-vested share-based
compensation arrangements granted under the Plan. This non-cash
expense is expected to be recognized over a weighted average period of 3.99
years.
4.
Income Taxes:
The Company accounts for income taxes
in accordance with ASC 740 (formerly known as “FIN 48” and
“SFAS No. 109”). ASC 740 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 2006 to 2008 remain open to
examination by the IRS and state jurisdictions. The Company
believes it is not subject to any significant tax risk. The Company
does not have any accrued interest or penalties associated with any unrecognized
tax benefits. Interest and penalties for a state jurisdiction audit
of revenue and sales tax over a 3 year period resulted in $1,685 of interest
expense recognized during the nine months ended September 30, 2009.
5.
Earnings per share:
In accordance with ASC 260 (formerly
known as “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, 2009, all of the stock options 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.
Recent Accounting Pronouncements:
In
December 2007, the Financial Accounting Standards Board (FASB) issued ASC 805-10
(formerly “SFAS No. 141(R)”), “Business Combinations,” which retains the
purchase method of accounting for acquisitions, but requires a number of
changes, including changes in the way assets and liabilities are recognized in
the purchase method of accounting. It changes the recognition of assets acquired
and liabilities assumed arising from contingencies, requires the capitalization
of in-process research and development at fair value, and requires the expensing
of acquisition-related costs as incurred. The provisions of this standard will
apply prospectively to business combinations occurring in our fiscal year
beginning January 1, 2009 and the adoption did not have an impact on our
financial position or results of operations; however, it could impact future
transactions entered into by the Company.
In April
2008, the FASB issued ASC 350-30, (formerly “FSP FAS 142-3”), “General
Intangibles Other Than Goodwill,” which details the factors that should be
considered in developing the useful lives for intangible assets with renewal or
extension provisions. ASC 350-30 requires an entity to consider its
own historical experience in renewing or extending similar arrangements,
regardless of whether those arrangements have explicit renewal or extension
provisions, when determining the useful life of an intangible
asset. In the absence of such experience, an entity shall consider
the assumptions that market participants would use about renewal or extension,
adjusted for entity-specific factors. ASC 350-30 also requires an
entity to disclose information regarding the extent to which the expected future
cash flows associated with an intangible asset are affected by the entity’s
intent and/or ability to renew or extend the arrangement. ASC 350-30
will be effective for qualifying intangible assets acquired by the Company on or
after July 1, 2009. The application of ASC 350-30 did not have a
material impact on the Company’s results of operations, cash flows or financial
positions; however, it could impact future transactions entered into by the
Company.
In May
2009, the FASB issued ASC 855-10 (formerly SFAS No. 165), “Subsequent Events,”
which establishes general standards of accounting for and disclosure of events
that occur after the balance sheet date but before financial statements are
issued or are available to be issued. We adopted this standard upon
issuance with no impact on our financial position or results of
operations.
In June
2009, the FASB issued ASC 105-10 (formerly SFAS No. 168), “Accounting Standards
Codification™ and the Hierarchy of Generally Accepted Accounting Principles
(GAAP).” The FASB Accounting Standards Codification (“Codification”) has become
the source of authoritative accounting principles recognized by the FASB to be
applied by nongovernmental entities in the preparation of financial statements
in accordance with GAAP. All existing accounting standard documents are
superseded by the Codification and any accounting literature not included in the
Codification will not be authoritative. However, rules and interpretive
releases of the SEC issued under the authority of federal securities laws will
continue to be the source of authoritative generally accepted accounting
principles for SEC registrants. Effective September 30, 2009, all
references made to GAAP in our consolidated financial statements will include
the new Codification numbering system along with original references. The
Codification does not change or alter existing GAAP and, therefore, will not
have an impact on our financial position, results of operations or cash
flows.
Forward-Looking
Statements
Any
forward looking statements made herein are based on current expectations of the
Company that involve a number of risks and uncertainties and should not be
considered as guarantees of future performance. These statements are
made under the Safe Harbor Provisions of the Private Securities Litigation
Reform Act of 1995. Forward looking statements may be identified by
the use of words such as “expect,” “anticipate,” “believe,” “intend,” “plans,”
“predict,” or “will”. Although the Company believes that its
expectations are based on reasonable assumptions, the Company can give no
assurance that its expectations will materialize. Many factors could
cause actual results to differ materially from the forward looking
statements. Several of these factors include, without limitation: our
ability to maintain our current pricing model and/or decrease our cost of sales;
continued availability of supplies or materials used in manufacturing at
competitive prices; volatility in commodity and energy prices and our ability to
offset higher costs with price increases; the costs inherent with complying with
new or revised statutes and regulations applicable to public reporting
companies, such as the Sarbanes-Oxley Act of 2002; variability of
customer delivery requirements; our ability to efficiently integrate future
acquisitions and other new lines of business that the Company may enter in the
future, if any; and other risks referenced from time to time elsewhere in this
report and in our filings with the SEC.
The
Company is under no obligation and does not intend to update, revise or
otherwise publicly release any revisions to these forward-looking statements to
reflect events or circumstances after the date hereof or to reflect the
occurrence of any unanticipated events. 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,
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
electrodes. These disposable medical devices are used worldwide in
the monitoring of electric signals in various medical
applications. Micron also manufactures custom plastic injection
molded products and provides 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.
Results of
Operations
Revenue
was $5,457,377 for the three months ended September 30, 2009 as compared to
$5,838,390 for the same period in 2008, a decrease of 6.5% or
$381,013. Sales of Micron’s medical sensors and snaps with silver
surcharge decreased by $377,292, while the volume increased by
1%. Management continues to focus on the protection and growth of its
sensor market share. In addition, miscellaneous sales decreased by
$64,529. Revenue from Micron Integrated Technology’s (MIT) custom
manufactured and assembled products increased by $60,812. The
increase in MIT is net of the decrease in revenues from the discontinued
unprofitable forging product that totaled $1,206,520 in the three months ended
September 30, 2008. The MIT division of Micron Products includes the
custom manufacturing and product life cycle businesses. This
division’s revenue is derived from the custom molding, precision metal
machining, assembly and mold making activities.
Revenue was $15,512,270 for the nine
months ended September 30, 2009 as compared to $17,724,252 for the same period
in 2008, a decrease of 12.5% or $2,211,982. Sales of Micron’s medical
sensors and snaps with silver surcharge decreased by $1,039,351, while the
associated volume increased by 9.6%. High volume precision molded
products and other miscellaneous sales decreased by $72,380. The snap
attaching machine business unit decreased $46,083 when compared to the same
period in 2008. Despite a decrease from a discontinued unprofitable
forging product of $2,684,501, MIT’s custom manufactured and assembled products
only decreased by $1,054,168. The offsetting increase of $1,630,333
is for continued growth of MIT’s custom products for the nine months ended
September 30, 2009 as compared to the same period in 2008. There were
no sales of the Company’s SAECG products in the first nine months of 2009 or
2008.
Revenue
from domestic and foreign sales for the first nine months is as
follows:
|
Three
Months Ending September 30,
|
Nine
Months Ending September 30,
|
|||||||||||||||||||||||||||||||
|
2009
|
%
|
2008
|
%
|
2009
|
%
|
2008
|
%
|
|||||||||||||||||||||||||
|
United
States
|
$ | 3,620,010 | 66 | $ | 3,532,956 | 61 | $ | 9,741,678 | 63 | $ | 10,472,345 | 59 | ||||||||||||||||||||
|
Canada
|
865,622 | 16 | 1,338,178 | 23 | 2,685,721 | 17 | 4,001,374 | 23 | ||||||||||||||||||||||||
|
Europe
|
678,763 | 13 | 729,500 | 12 | 2,051,400 | 13 | 2,442,681 | 14 | ||||||||||||||||||||||||
|
Pacific
Rim
|
120,953 | 2 | 115,349 | 2 | 448,428 | 3 | 351,711 | 2 | ||||||||||||||||||||||||
|
Other
|
172,029 | 3 | 122,407 | 2 | 585,043 | 4 | 456,141 | 2 | ||||||||||||||||||||||||
|
Total
|
$ | 5,457,377 | 100 | $ | 5,838,390 | 100 | $ | 15,512,270 | 100 | $ | 17,724,252 | 100 | ||||||||||||||||||||
The change in domestic sales was the
net result of the MIT division’s elimination of an unprofitable forging product
and increases in custom medical and defense industry
products. Canadian and European sales decrease is the result of price
concessions and a decrease in silver surcharge collected for Micron’s
electrophysiological sensor product lines.
Cost of sales
was $4,576,068 or 83.9% for the three months ended September 30, 2009 as
compared to $4,996,830 or 85.6% for the same period in 2008. Cost of
sales was $12,811,506 or 82.6% for the nine months ended September 30, 2009 as
compared to $14,424,783 or 81.4% for the same period in 2008. Cost of
manufacturing has stabilized due to an ongoing company-wide cost reduction
effort. The reduction and stabilization of costs remains a priority
of management. The inability to increase our sensor prices in the
competitive global marketplace hinders passing additional material, utility, and
other miscellaneous cost increases to our customers, excluding the escalating
cost of silver. Management continues its efforts to improve the
overall gross margin by elimination of low contribution products while expanding
higher margin product lines. The investment in automated equipment is
ongoing with the full benefit expected to begin the fourth quarter of
2009.
Selling and
marketing expense
was $173,323 or 3.2% of sales in the three months ended September 30, 2009 as
compared to $200,887 or 3.4% for the same period in 2008. Selling and
marketing expense was $507,501 or 3.3% of sales for the nine months ended
September 30, 2009 as compared to $615,915 or 3.5% of sales for the same period
in 2008 a decrease of 17.6%. Selling expenses continue to be
stable as a percentage of sales. The decrease in selling expenses
reflects a decrease in personnel and travel costs. Selling expenses
as a percentage of sales has been and is expected to remain stable for the
remainder of 2009.
General and
administrative expense was $509,037 or 9.3% of sales for the three months
ended September 30, 2009 as compared to $521,548 or 8.9% of sales for
the same period in 2008. General and administrative expense was
$1,596,933 or 10.3% of sales for the nine months ended September 30, 2009 as
compared to $1,917,496 or 10.8% of sales for the same period in
2008. Included in the expense for the nine months ended
September 30, 2008 was a one time charge of $250,000 for costs associated with a
terminated acquisition following due diligence. The general and
administrative expense is expected to remain stable. The auditor
attestation requirement in Section 404 of the Sarbanes-Oxley Act of 2002 was
delayed until 2010; therefore the expense associated with the attestation will
be delayed until 2010.
Research and
development expense was $54,444 or 0.9% of sales for the three months
ended September 30, 2009 as compared to $35,682 or 0.6% of sales for
the same period in 2008. Research and development expense was
$180,918 or 1.2% of sales for the nine months ended September 30, 2009
as compared to $248,355 or 1.4% of sales in the same period in
2008. 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. The proportion of expense related to ART’s product,
Predictor®7 was
$3,041 and $14,691 for the three and nine months ended
September 30, 2009, compared to $11,446 and $51,487 for the same
periods in 2008. Although base development work on Predictor 7 has
been completed, costs were incurred to support a National Institutes 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 process improvements to
the Micron sensor and snap product lines and new processes in
MIT. This work is expected to continue through the end of 2009 and
beyond.
Other expense,
net was $15,291 for the three months ended September 30, 2009
as compared to $5,304 for the same period in 2008. Other expense, net
was $34,504 for the nine months ended September 30, 2009 as compared
to $6,073 for the same period in 2008. Interest income of $8,919 in
the nine months ended September 30, 2009 compared to $25,987 for the
same period in 2008. Interest expense associated with an equipment
note was $31,699 and $35,481 for in the nine months ended September 30, 2009 and
2008, respectively. Other income of $6,915 was offset by a loss on disposal of
assets of $18,639 for the nine months ended September 30, 2009 and other
income of $3,421 in the same period in 2008.
Income taxes
as a percent of income before income taxes were 30% for the nine months
ended September 30, 2009 as compared to 31% for the same period in
2008. This difference was the result of tax credits earned in
2009. Management will continue to seek to implement any tax planning
opportunities that could effectively reduce the Company’s income tax obligations
in the future.
Liquidity and Capital
Resources
Working
capital was $8,065,495 at September 30, 2009 compared to $7,440,721 at December
31, 2008, an increase of $624,774. The increase resulted from the
operational cash flows exceeding expenditures for capital investment, reduction
of debt and stock repurchase program. Working capital will
decrease with any significant investment in acquisition of assets or
businesses, expansion of production capacity, a medical study, or
further software development.
Net
capital expenditures were $818,701 for the first nine months of 2009 as compared
to $674,127 for the same period in 2008. The largest portion of the
capital expenditures in the first nine months of 2009 resulted from adding
automation equipment to our sensor product line. Some of the
expenditures were in the form of deposits on production equipment to be
installed in the fourth quarter. At least an additional $225,000 will
be invested in this automation project before the end of
2009. Included in the capital expenditures for the same period in
2008 was the 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. Capital expenditures
for the nine months ended September 30, 2009 were made with cash from
operations.
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,
2009 or December 31, 2008. The Company had a one year term note
secured by equipment with a balance at December 31, 2008 of
$638,091. The note was paid in full during the quarter ended
September 30, 2009. An 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 requirements for its operations at current levels
with current operating cash flows for the foreseeable future.
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
stock. An aggregate of 23,389 shares were purchased in the fourth
quarter of 2008 under the program for an aggregate of $53,975. An
additional aggregate purchase of 12,810 shares was made in the second quarter of
2009 under the program for $33,188. No purchases were made in the
third quarter of 2009.
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.
Stock-Based Compensation
The
Company accounts for share based compensation under ASC 718, “Stock
Compensation” (“ASC 718”). ASC 718 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 ASC 740 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 ASC 350. 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. As of September 30, 2009, no
impairment of goodwill was required.
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 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, 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,
2008.
Failure
to comply with Quality System Regulations or industry standards could result in
a material adverse effect on our business and results of
operations.
The
Company’s Quality Management System complies with the requirements of ISO
9001:2000. In addition, many of our products are also subject to
industry-defined standards. If we are not able to comply with the
Quality Management System or industry-defined standards, we may not be able to
fill customer orders to the satisfaction of our customers. Failure to
produce products compliant with these standards could lead to loss of customers
which would have an adverse impact on our business and results of
operations.
The
initiatives that we are implementing in an effort to improve our manufacturing
productivity could be unsuccessful, which could harm our business and results of
operations.
In an
effort to improve our manufacturing productivity, we have implemented several
strategic initiatives focusing on improving our manufacturing processes and
procedures. We believe these initiatives should improve customer
satisfaction as well as our revenue and income. However, in the event
these initiatives are not successful, due to our failure to fully embrace the
concepts and maximize the benefits of the investments of equipment and
technology, the results of operations will not improve as expected.
|
(a)
|
Exhibits
|
3.0 Articles
of Incorporation(a)
|
|
3.1
|
Amended
and Restated By-laws(b)
|
|
|
10.43*
|
Employment
agreement between James E. Rouse and the Company dated December 26th,
2006.(c)
|
|
|
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.
|
|
|
__________________________
|
|
|
*
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
May 8, 2009.
|
|
(c)
|
Incorporated
by reference from the Company’s Form 8-K as filed with the Commission on
December 8, 2006.
|
|
(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.
|
|
|
October
30, 2009
|
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)
|
|
Number
|
Exhibit
|
Page
|
31.1 Certification
of the CEO pursuant to Rule 13a-14(a) or Rule
15(d)-14(a)
X-1
31.2 Certification
of the CFO pursuant to Rule 13a-14(a) or Rule
15(d)-14(a)
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
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 X-4