MICRON SOLUTIONS INC /DE/ - Quarter Report: 2009 May (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,
2009 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)
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DELAWARE
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72-0925679
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(State
or other jurisdiction of incorporation
or organization)
|
(I.R.S.
employer identification no.)
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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 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 May
10, 2009 there were 2,688,291 shares of the Company’s common stock
outstanding.
ARRHYTHMIA
RESEARCH TECHNOLOGY, INC.
TABLE OF
CONTENTS
FORM
10-Q
March 31,
2009
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ARRHYTHMIA
RESEARCH TECHNOLOGY, INC. AND SUBSIDIARY
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ASSETS
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March
31,
2009
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December
31,
2008
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||||||
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Current
assets:
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(Unaudited)
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(Audited)
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||||||
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Cash
and cash
equivalents
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$ | 2,501,971 | $ | 2,320,467 | ||||
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Trade
and other accounts receivable, net of allowance for doubtful
accounts of $51,619 and
$45,619
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3,215,112 | 2,705,145 | ||||||
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Inventories,
net
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3,818,900 | 3,727,492 | ||||||
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Deferred
income taxes,
net
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16,000 | 21,000 | ||||||
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Prepaid
tax
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239,500 | 309,000 | ||||||
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Deposits,
prepaid expenses and other current
assets
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217,624 | 392,209 | ||||||
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Total
current
assets
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10,009,107 | 9,475,313 | ||||||
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Property
and equipment, net of accumulated depreciation of $9,435,604
and
$9,111,067
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7,164,363 | 7,305,278 | ||||||
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Goodwill
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1,564,966 | 1,564,966 | ||||||
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Other
intangible assets,
net
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131,229 | 143,010 | ||||||
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Total
assets
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$ | 18,869,665 | $ | 18,488,567 | ||||
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LIABILITIES
AND SHAREHOLDERS’ EQUITY
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Current
liabilities:
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Accounts
payable
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$ | 1,383,663 | $ | 1,106,974 | ||||
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Accrued
expenses
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323,940 | 289,527 | ||||||
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Short
term loan
payable
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614,543 | 638,091 | ||||||
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Total
current
liabilities
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2,322,146 | 2,034,592 | ||||||
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Long
term liabilities:
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||||||||
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Long
term deferred tax liability,
net
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295,000 | 315,500 | ||||||
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Total
long term
liabilities
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295,000 | 315,500 | ||||||
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Total
liabilities
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2,617,146 | 2,350,092 | ||||||
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Shareholders’
equity:
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||||||||
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Preferred
stock, $1 par value; 2,000,000 shares authorized, none
issued
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- | - | ||||||
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Common
stock, $0.01 par value; 10,000,000 shares authorized, 3,926,491
shares issued, 2,688,291
outstanding
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39,265 | 39,265 | ||||||
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Additional
paid-in-capital
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10,275,838 | 10,243,568 | ||||||
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Common
stock held in treasury, 1,238,200 shares at cost
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(3,380,554 | ) | (3,380,554 | ) | ||||
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Retained
earnings
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9,317,970 | 9,236,196 | ||||||
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Total
shareholders’
equity
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16,252,519 | 16,138,475 | ||||||
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Total
liabilities and shareholders’
equity
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$ | 18,869,665 | $ | 18,488,567 | ||||
The
accompanying notes are an integral part of the consolidated financial
statements.
1
ARRHYTHMIA
RESEARCH TECHNOLOGY, INC. AND SUBSIDIARY
(Unaudited)
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Three months ended
March 31,
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2009
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2008
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Revenue
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$ | 4,683,454 | $ | 5,459,742 | |||||
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Cost
of sales
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3,739,132 | 4,348,304 | |||||||
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Gross profit
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944,322 | 1,111,438 | |||||||
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Selling
and marketing
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150,449 | 190,374 | |||||||
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General
and administrative
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575,505 | 616,864 | |||||||
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Research
and development
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68,758 | 83,622 | |||||||
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Total expense
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794,712 | 890,860 | |||||||
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Income from
operations
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149,610 | 220,578 | |||||||
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Other
income (expense), net
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(13,836 | ) | 4,794 | ||||||
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Income
before income taxes
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135,774 | 225,372 | |||||||
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Income
tax provision
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54,000 | 76,000 | |||||||
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Net income
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$ | 81,774 | $ | 149,372 | |||||
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Net
income per share – basic
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$ | 0.03 | $ | 0.06 | |||||
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Net
income per share – diluted
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$ | 0.03 | $ | 0.05 | |||||
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Weighted
average common shares
Outstanding –
basic
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2,688,291 | 2,711,680 | |||||||
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Weighted
average common shares
Outstanding –
diluted
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2,688,291 | 2,719,385 | |||||||
The
accompanying notes are an integral part of the consolidated financial
statements.
ARRHYTHMIA
RESEARCH TECHNOLOGY, INC. AND SUBSIDIARY
(Unaudited)
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Three Months Ended
March 31,
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2009
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2008
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Cash
flows from operating activities:
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Net income
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$ | 81,774 | $ | 149,372 | ||||
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Adjustments
to reconcile net income to net cash provided by
(used
in) operating activities:
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Depreciation and
amortization
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346,628 | 358,482 | ||||||
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Share based
compensation
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32,270 | 26,970 | ||||||
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Provision for doubtful
accounts
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6,000 | 17,500 | ||||||
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Deferred tax
assets
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(15,500 | ) | - | |||||
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Changes in operating assets and
liabilities:
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Trade and other accounts
receivable
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(515,967 | ) | (1,528,599 | ) | ||||
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Inventories
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(91,408 | ) | (837,465 | ) | ||||
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Deposits, prepaid expenses and
other assets
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244,085 | (99,068 | ) | |||||
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Accounts payable and accrued
expenses
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311,102 | 1,853,844 | ||||||
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Net cash provided by (used in)
operating activities
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398,984 | (58,964 | ) | |||||
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Cash
flows from investing activities:
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Capital expenditures, net of
disposals
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(193,932 | ) | (157,272 | ) | ||||
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Net cash used in investing
activities
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(193,932 | ) | (157,272 | ) | ||||
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Cash
flows from financing activities:
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||||||||
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Payments on acquisition note
payable
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(23,548 | ) | (160,034 | ) | ||||
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Net cash used in financing
activities
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(23,548 | ) | (160,034 | ) | ||||
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Net
increase (decrease) in cash and cash equivalents
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181,504 | (376,270 | ) | |||||
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Cash
and cash equivalents at beginning of period
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2,320,467 | 1,684,411 | ||||||
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Cash
and cash equivalents at end of period
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$ | 2,501,971 | $ | 1,308,141 | ||||
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.
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:
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Inventories
consist of the following as of:
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March
31,
2009
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December
31, 2008
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Raw materials
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$ | 1,142,754 | $ | 1,099,876 | ||||||||
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Work-in-process
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875,041 | 773,245 | ||||||||||
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Finished goods
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1,801,105 | 1,854,371 | ||||||||||
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Total
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$ | 3,818,900 | $ | 3,727,492 | ||||||||
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:
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Three
Months Ended
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March
31, 2008
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Dividend
Yield
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0%
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Expected
Volatility
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40.65%
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Risk
Free Interest Rate
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3.28%
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Expected
Option Terms (in years)
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4.5
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The Company recognized share-based
compensation expense of $32,270 and $26,970 in general and administrative
expense for the three months ended March 31, 2009 and 2008,
respectively. A grant totaling 107,500
options to 24 persons including directors and management was made during the
three months ended March 31, 2008. No grants were made in
the first three months of 2009.
Share-based
Incentive Plan
At March 31, 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 March 31, 2009, there were 140,000
shares available for future grants under the above stock option
plan. The weighted average exercise price of options outstanding was
$8.76 at March 31, 2009.
The following table presents the
average price and contractual life information about options outstanding and
exercisable at March 31, 2009:
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Exercise
Price
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Number
of Outstanding Shares
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Weighted
Average Remaining Contractual Life (years)
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Options
Currently Exercisable
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Average
Fair Value at Grant Date
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$ 4.85
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25,000
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0.33
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25,000
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$ 0.66
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7.15
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96,000
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4.76
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19,200
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2.74
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9.86
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69,000
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2.72
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66,000
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4.22
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12.42
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10,000
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3.35
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4,000
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5.38
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14.10
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10,000
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4.18
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--
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6.88
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23.10
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10,000
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3.93
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4,000
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10.77
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The aggregated intrinsic value of
options outstanding and vested at March 31, 2009 was $0. The Company
expects 73,000 of the 88,800 options to vest over their remaining
life.
The following table summarizes the
status of Company’s non-vested options since December 31, 2008:
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Non-Vested Options
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Number
of Shares
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Weighted
Average Fair Value
|
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Non-vested
at December 31, 2008
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111,000
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$ 3.46
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Granted
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-
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-
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Vested
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(21,200)
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3.50
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Forfeited
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(1,000)
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2.74
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Non-vested
at March 31, 2009
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88,800
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$ 3.48
|
At March 31, 2009, there was $277,974
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 4.47 years.
4.
Income Taxes:
The Company accounts for income taxes
in accordance with 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 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, nor was any interest expense recognized during the three months
ended March 31, 2009.
5.
Recent Accounting Pronouncements:
In March 2008, the Financial Accounting
Standards Board (“FASB”) issued SFAS No. 161, “Disclosures about Derivative
Instruments and Hedging Activities—an amendment of FASB Statement
No. 133.”
SFAS No. 161 amends and expands the disclosure requirements of SFAS No. 133,
“Accounting for Derivative
Instruments and Hedging Activities,” to provide improved transparency
into the uses and financial statement impact of derivative instruments and
hedging activities. The adoption of SFAS No. 161 will not have a
material impact on our Financial Statements.
In April
2008, the FASB issued FASB Staff Position (“FSP”) FAS No. 142-3,
“Determination of the Useful Life of Intangible Assets” (“FSP FAS 142-3”). This
pronouncement amends FASB Statement of Financial Accounting Standards (“SFAS”)
No. 142, “Goodwill and Other Intangible Assets” (“SFAS No. 142”), regarding the
factors that should be considered in developing the useful lives for intangible
assets with renewal or extension provisions. FSP FAS 142-3 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. FSP FAS 142-3 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. FSP FAS 142-3 will be effective for
qualifying intangible assets acquired by the Company on or after July 1, 2009.
The application of FSP FAS 142-3 is not expected to 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.
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
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 our
expectations are based on reasonable assumptions, we can give no assurance that
our expectations will materialize. Many factors could cause actual
results to differ materially from our 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 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 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.
Results of
Operations
Revenue
for the three months ended March 31, 2009 was $4,683,454 versus $5,459,742 for
the three months ended March 31, 2008, a decrease of 14%. Revenues associated
with Micron’s medical sensors and snaps with silver surcharge decreased by
$271,100 and high volume precision molded products and other miscellaneous sales
decreased by $21,400. The change in revenues from sensors and snaps
is due to price concessions to several large customers. Revenue from
the Micron Integrated Technology’s (MIT) product life cycle management programs
decreased $438,000 partially a result of eliminating the distribution of an
unprofitable forging product. The MIT division in Micron Products
includes the custom manufacturing and product life cycle
businesses. The revenue is derived from the custom molding, precision
metal machining and mold making activities. Other sales, including
the snap attaching machine business unit, decreased $45,700 when compared to the
same period in 2008. There were no sales of the Company’s SAECG
products in the first three months of 2009 or 2008.
Revenue
from domestic and foreign sales for the first three months is as
follows:
|
Three
Months Ending March 31,
|
||||||||||||||||
|
2009
|
%
|
2008
|
%
|
|||||||||||||
|
United
States
|
$ | 2,615,989 | 56 | $ | 3,066,751 | 56 | ||||||||||
|
Canada
|
946,678 | 20 | 1,341,015 | 25 | ||||||||||||
|
Europe
|
801,546 | 17 |
|
793,608 |
14
|
|||||||||||
|
Pacific
Rim
|
151,430 | 3 | 99,653 | 2 | ||||||||||||
|
Other
|
167,811 | 4 | 158,715 | 3 | ||||||||||||
|
Total
|
$ | 4,683,454 | 100 | $ | 5,459,742 | 100 | ||||||||||
The decrease in domestic sales was
largely a result of the MIT division’s elimination of an unprofitable forging
product. Canadian 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 $3,739,132 for the three months ended March 31, 2009 as compared to
$4,348,304 for the same period in 2008. The cost of sales percentage
was 80% of revenue for the three months ended March 31, 2009 and for the same
period in 2008. Cost of manufacturing has been stabilized with recent
success of a company-wide cost reduction team. The stabilization and
reduction of costs remains a priority of management efforts. The
inability to increase our sensor prices in the competitive global marketplace
hinders passing additional material and utility cost increases to our customers,
excluding the escalating cost of silver. Management continues to
investigate ways to improve the overall gross margin by elimination of low
contribution products while expanding higher margin product
lines. Increased investment in automated equipment necessary to lower
manufacturing costs and improve gross margin is planned for the balance of
2009.
Selling and
marketing expense
was $150,449 for the three months ended March 31, 2009 as compared to $190,374
for the same period in 2008. The selling and marketing expense was
3.2% of sales in the three months ended March 31, 2009 and 3.5% for the same
period in 2008. Selling expenses continue to be stable as a
percentage of sales. The decrease in selling expenses reflect a
decrease in personnel and travel costs. Selling expenses as a
percentage of sales has been and is expected to remain stable in
2009.
General and
administrative expense was $575,505 for the three months ended March 31,
2009 as compared to $616,864 for the same period in 2008. The general
and administrative expense was 12% of sales in the three months ended March 31,
2009 and 11% for the same period in 2008. The decrease in expense
included a net reduction in personnel cost from the same period in 2008 as well
as lower period over period costs related to Section 404 of the Sarbanes-Oxley
Act of 2002 compliance.
Research and
development expense was $68,758 for the three months ended March 31, 2009
as compared to $83,622 for the same period in 2008. The research and
development expense was 1.5% of sales in the three months ended March 31, 2009
and in the same period in 2008. Approximately 11% 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 process improvements to Micron
sensor and snap product line. This work is expected to continue
through the end of 2009.
Other expense,
net was $13,836 versus income of $4,794 for the three months ended March
31, 2009 and 2008, respectively. Interest income in the period ended
March 31, 2009 was offset by a loss on disposal of assets of $9,304 and interest
expense of $10,253 associated with an equipment note compared with $12,353
interest expense in the period ended March 31, 2008.
Income taxes
as a percent of income before income taxes were 40% for the three months
ended March 31, 2009 as compared to 34% for the same period in
2008. This difference was the result of tax credits earned in
2008. 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 $7,686,961 at March 31, 2009 compared to $7,440,721 at December 31,
2008, an increase of $246,240. The increase resulted from the
operational cash flows exceeding our capital investment and reduction of
debt. Capital investment will 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. Capital investment in automation
equipment is expected to reduce working capital over the next 6 months of
2009.
Net
capital expenditures were $193,932 for the first three months of 2009 as
compared to $157,272 for the same period in 2008. The largest portion of the
capital expenditures in the first three months of 2009 resulted from the routine
replacement of tooling on our sensor product line. In addition, 2009
capital expenditures included deposits on production equipment to be installed
in the second and third quarters. Included in the capital
expenditures for the same period in 2008 was 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. Capital expenditures for the three months ended March 31,
2009 were made with cash on hand.
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, 2009
or December 31, 2008. The Company has a one year term note secured by
equipment with a limit of $813,000. The loan was drawn down by
$383,000 for equipment delivered and installed in October 2007. A
second payment of $383,000 was made in January of 2008 for this
equipment. In the third quarter of 2008 the equipment note was
extended for one year with a decrease in the fixed rate from 6.75% to 6.5% per
annum. The equipment note is amortized over 6 years with a balloon
payment for the remaining balance at September 15, 2009. 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.
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. No
purchases were made in the first three months 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 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. As of March 31, 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.
Item 3. Quantitative and Qualitative Disclosure About Market
Risks
Not applicable.
Item 4. Controls and Procedures
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.
PART
II - OTHER INFORMATION
Item 5. Other Information
The
Company’s annual meeting of stockholders will be conducted on June 19, 2009 in
Leominster, MA. A record date of April 24, 2009 has been set for the
meeting.
Item 6. Exhibits
|
(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.
|
|
|
__________________________
|
|
|
*
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.
|
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.
|
|
|
May
11, 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)
|
Index to
Exhibits
|
Number
|
Exhibit
|
|