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EX-31.HTM - CERTIFICATION PURSUANT TO SECTION 302 - ATRM Holdings, Inc.ex31w3.htm
EX-31.HTM - CERTIFICATION PURSUANT TO SECTION 302 - ATRM Holdings, Inc.ex31w2.htm
EX-10.HTM - COMMERCIAL LEASE - ATRM Holdings, Inc.ex10w1.htm
EX-31.HTM - CERTIFICATION PURSUANT TO SECTION 302 - ATRM Holdings, Inc.ex31w1.htm
EX-32.HTM - CERTIFICATIONS PURSUANT TO SECTION 906 - ATRM Holdings, Inc.ex32w1.htm

 
 

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C.  20549



FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934


For the quarterly period ended September 30, 2010

Commission File No. 000-22166


AETRIUM INCORPORATED
(Exact name of registrant as specified in its charter)


Minnesota
(State or other jurisdiction of incorporation or organization)
41-1439182
(I.R.S. Employer Identification No.)


2350 Helen Street, North St. Paul, Minnesota
( Address of principal executive offices)
55109
(Zip Code)


(651) 770-2000
(Registrant'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 Securities Exchange Act of 1934 during the preceding 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 RNo £
 
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 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 R

Indicate by a checkmark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes £ No R
 

Number of shares of Common Stock, $.001 par value, outstanding on October 30, 2010
10,781,451
 


 
 
 

 



AETRIUM INCORPORATED

INDEX

 
Page
PART I.  FINANCIAL INFORMATION

Item 1.
Financial Statements
 
     
 
Condensed Consolidated Balance Sheets (unaudited) as of September 30, 2010 and December 31, 2009
3
     
 
Condensed Consolidated Statements of Operations (unaudited) for the three and nine months ended September 30, 2010 and 2009
4
     
 
Condensed Consolidated Statements of Cash Flows (unaudited) for the nine months ended September 30, 2010 and 2009
5
     
 
Notes to unaudited condensed consolidated financial statements
6 -10
     
Item 2.
Management's Discussion and Analysis of Financial Condition and Results of Operations
11 -15
     
Item 4T.
Controls and Procedures
15

PART II.  OTHER INFORMATION

Item 1.
Legal Proceedings
16
     
Item 1A.
Risk Factors
16
     
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
16
     
Item 3.
Defaults Upon Senior Securities
16
     
Item 4.
Reserved
16
     
Item 5.
Other Information
16
     
Item 6.
Exhibits
16
     

SIGNATURES
17

EXHIBIT 10.1
EXHIBIT 31.1
EXHIBIT 31.2
EXHIBIT 31.3
EXHIBIT 32.1


 
2

 

PART 1. FINANCIAL INFORMATION

Item 1.  Financial Statements

AETRIUM INCORPORATED

CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(in thousands, except share data)

ASSETS

   
September 30,
   
December 31,
 
   
2010
   
2009
 
Current assets:
           
Cash and cash equivalents
  $ 10,021     $ 9,476  
Accounts receivable, net
    3,403       2,114  
Inventories
    7,557       7,472  
Other current assets
    130       234  
Total current assets
    21,111       19,296  
                 
Property and equipment:
               
Furniture and fixtures
    521       521  
Equipment
    1,221       1,178  
      1,742       1,699  
Less accumulated depreciation and amortization
    (1,644 )     (1,601 )
Property and equipment, net
    98       98  
                 
Noncurrent asset, other
    44        
                 
Total assets
  $ 21,253     $ 19,394  

LIABILITIES AND SHAREHOLDERS' EQUITY

Current liabilities:
           
Trade accounts payable
  $ 1,583     $ 707  
Accrued compensation
    242       268  
Other accrued liabilities
    431       401  
Total current liabilities
    2,256       1,376  
                 
                 
Commitments and contingencies
               
                 
Shareholders' equity:
               
Common stock, $.001 par value; shares authorized: 30,000,000; shares issued and outstanding: 10,781,451 at September 30, 2010 and 10,605,631 at December 31, 2009
        11           11  
Additional paid-in capital
    64,969       64,311  
Accumulated deficit
    (45,983 )     (46,304 )
Total shareholders' equity
    18,997       18,018  
                 
                 
Total liabilities and shareholders' equity
  $ 21,253     $ 19,394  



The accompanying notes are an integral part of the consolidated financial statements.

 
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AETRIUM INCORPORATED

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(in thousands, except per share data)

   
Three months ended
September 30,
   
Nine months ended
September 30,
 
   
2010
   
2009
   
2010
   
2009
 
                         
Net sales
  $ 4,957     $ 3,028     $ 14,591     $ 5,964  
Cost of goods sold
    2,679       1,648       7,922       3,747  
Gross profit
    2,278       1,380       6,669       2,217  
                                 
Operating expenses:
                               
Selling, general and administrative
    1,433       1,282       4,110       3,612  
Research and development
    841       647       2,350       1,651  
Total operating expenses
    2,274       1,929       6,460       5,263  
                                 
Income (loss) from operations
    4       (549 )     209       (3,046 )
Interest income, net
    21       29       55       113  
Income (loss) before income taxes
    25       (520 )     264       (2,933 )
Income tax benefit
          182       57       1,023  
Net income (loss)
  $ 25     $ (338 )   $ 321     $ (1,910 )


Income (loss) per share:
                       
Basic
  $ 0.00     $ (0.03 )   $ 0.03     $ (0.18 )
Diluted
  $ 0.00     $ (0.03 )   $ 0.03     $ (0.18 )
                                 
Weighted average common shares outstanding:
                               
Basic
    10,764       10,598       10,690       10,598  
Diluted
    10,844       10,598       10,849       10,598  



















The accompanying notes are an integral part of the consolidated financial statements.

 
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AETRIUM INCORPORATED

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)



   
Nine months ended
September 30,
 
   
2010
   
2009
 
Cash flows from operating activities:
           
Net income (loss)
  $ 321     $ (1,910 )
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
               
Depreciation expense
    43       51  
Share-based compensation expense
    385       485  
Deferred income taxes
          (1,025 )
Changes in assets and liabilities:
               
Accounts receivable, net
    (1,289 )     666  
Inventories
    (85 )     1,157  
Other current assets
    21       (263 )
Noncurrent asset, other
    (44 )     2  
Trade accounts payable
    876       (248 )
Accrued compensation
    (26 )     51  
Other accrued liabilities
    30       (182 )
Net cash provided by (used in) operating activities
    232       (1,216 )
                 
Cash flows from investing activities:
               
Purchase of property and equipment
    (43 )     (21 )
Collection of note receivable
    83       79  
Net cash provided by investing activities
    40       58  
                 
Cash flows from financing activities:
               
Proceeds from exercise of stock options
    314        
Repurchase of shares in connection with exercise of stock options
    (41 )      
Payments on long-term debt
          (12 )
Net cash provided by (used in) financing activities
    273       (12 )
                 
Net increase (decrease) in cash and cash equivalents
    545       (1,170 )
                 
Cash and cash equivalents at beginning of period
    9,476       11,629  
                 
Cash and cash equivalents at end of period
  $ 10,021     $ 10,459  












The accompanying notes are an integral part of the consolidated financial statements.


 
5

 


AETRIUM INCORPORATED

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


1.
BASIS OF PRESENTATION

The condensed consolidated balance sheet at December 31, 2009 has been derived from our audited financial statements. In the opinion of management, the unaudited interim condensed consolidated financial statements include all adjustments (consisting only of normal, recurring adjustments) necessary to present fairly the financial position, results of operations and cash flows for the interim periods presented. The results of operations for the three and nine months ended September 30, 2010 are not necessarily indicative of the operating results to be expected for the full year or any future period.
 
The accompanying unaudited condensed financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures, normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America, have been condensed or omitted, pursuant to such rules and regulations. Therefore, these financial statements should be read in conjunction with the consolidated financial statements and accompanying footnotes included in our Annual Report on Form 10-K for the year ended December 31, 2009.
 
The carrying amounts of financial instruments such as cash equivalents, accounts receivable, other current assets, accounts payable, accrued expenses and other current liabilities approximate the related fair values due to the short term maturities of these instruments.
 
2.
CASH AND CASH EQUIVALENTS

At September 30, 2010, our cash and cash equivalents balance of approximately $10.0 million consisted of demand deposits in bank checking and savings accounts. Occasionally we invest in cash equivalents, which are highly liquid investments with a maturity of three months or less when purchased. At December 31, 2009 our investments in cash equivalents amounted to $4.0 million and consisted of investments in bank certificates of deposit (CDs). Although we maintain our cash and cash equivalents at multiple financial institutions in order to increase the amounts covered by insurance of the Federal Deposit Insurance Corporation (FDIC), some portion of our cash and cash equivalents generally exceeds the insurance limits of the FDIC.
 
3.
NOTE RECEIVABLE

In connection with the sale of our Dallas operations to WEB Technology, Inc. (WEB) in 2006, we received a promissory note from WEB that provides for installment payments through December 2010. The note receivable balance amounted to $54,498 and $137,373 at September 30, 2010 and December 31, 2009, respectively and is included in the caption “Other current assets” in our consolidated balance sheet.
 
4.
SHARE-BASED COMPENSATION

Aetrium uses the fair value method to measure and recognize share-based compensation. We determine the fair value of share-based awards on the grant date using the Black-Scholes option valuation model. The weighted-average fair value of options granted during the nine months ended September 30, 2010 was determined to be $0.90. Weighted average assumptions used in applying the Black-Scholes option-pricing model to estimate the fair value of options granted were as follows:

 
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Expected stock price volatility
    50 %
Risk-free interest rate
    1.2 %
Expected dividend level
    0 %
Expected life of options (years)
    3.5  

 
Share-based compensation expense included in our consolidated statements of operations was as follows (in thousands):
 
   
Three months ended September 30,
   
Nine months ended September 30,
 
   
2010
   
2009
   
2010
   
2009
 
                         
Cost of goods sold
  $ 14     $ 21     $ 54     $ 69  
Selling, general and administrative
    66       97       257       326  
Research and development
    22       27       74       90  
Total share-based compensation expense
  $ 102     $ 145     $ 385     $ 485  

As of September 30, 2010, we had approximately $0.8 million of unrecognized pretax share-based compensation expense, which is expected to be recognized over a weighted average period of 2.9 years.
 
5.
INCOME (LOSS) PER COMMON SHARE

Basic income (loss) per common share is computed by dividing net income (loss) by the weighted-average number of common shares outstanding during each period. Diluted income per share is computed by dividing net income by the weighted-average number of common shares and common equivalent shares outstanding during each period. Common equivalent shares includes dilutive stock options computed using the treasury stock method. For loss periods, the computation of diluted loss per share excludes the impact of stock options because they would be antidilutive and diluted loss per share is therefore the same as basic loss per share.  A reconciliation of the number of shares used in the computations of basic and diluted income (loss) per share follows (in thousands):
 
   
Three months ended September 30,
   
Nine months ended September 30,
 
   
2010
   
2009
   
2010
   
2009
 
                         
Weighted average common shares outstanding, basic
    10,764       10,598       10,690       10,598  
Dilutive stock options
    80             159        
Weighted average common shares outstanding, diluted
    10,844       10,598       10,849       10,598  

For the three and nine month periods ended September 30, 2010, options to purchase approximately 225,000 and 129,000 common shares, respectively, were excluded from the diluted computations because their exercise prices exceeded the average market value of our common stock for the periods and they would therefore be antidilutive to income per share. For the three and nine month periods ended September 30, 2009, all stock options were excluded from the diluted computations because they would be antidilutive given the net losses recognized in those periods.
 
6.
RECENT ACCOUNTING PRONOUNCEMENTS

In January 2010, the Financial Accounting Standards Board (FASB) issued authoritative guidance for fair value measurements, which requires additional disclosures and clarifications to existing disclosures. This authoritative guidance requires a reporting entity to disclose separately the amounts of significant transfers in and out of Level 1 and Level 2 investments and describe the reasons for these transfers. This authoritative guidance also requires enhanced disclosure of
 

 
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activity in Level 3 investments. The new disclosures and clarifications of existing disclosures for Level 1 and Level 2 investments became effective for Aetrium in the first quarter of fiscal year 2010 and had no impact on our consolidated financial position, results of operations or cash flows. Disclosures regarding activity in Level 3 investments will become effective for Aetrium at the beginning of fiscal year 2011 and is not expected to impact our consolidated financial position, results of operations or cash flows.
 
7.
INVENTORIES

 Inventories are comprised of the following (in thousands):
 
   
September 30,
   
December 31,
 
   
2010
   
2009
 
             
Purchased parts and completed subassemblies
  $ 4,794     $ 4,550  
Work-in-process
    1,370       896  
Finished goods, including saleable demonstration equipment
    1,303       2,026  
Equipment shipped, subject to revenue deferral
    90        
Total inventories
  $ 7,557     $ 7,472  

8.
OTHER ACCRUED LIABILITIES

Other accrued liabilities are comprised of the following (in thousands):
 

   
September 30,
   
December 31,
 
   
2010
   
2009
 
             
Accrued commissions
  $ 153     $ 59  
Accrued warranty
    80       82  
Accrued health insurance costs
          79  
Other
    198       181  
Total other accrued liabilities
  $ 431     $ 401  

Changes in accrued warranty are summarized below (in thousands):
 
   
Three months ended September 30,
   
Nine months ended September 30,
 
   
2010
   
2009
   
2010
   
2009
 
Accrual balance, beginning of period
  $ 87     $ 82     $ 82     $ 115  
Accruals for warranties - included in selling, general and administrative expenses
    7       33       79       18  
Settlements made
    (14 )     (33 )     (81 )     (51 )
Accrual balance, end of period
  $ 80     $ 82     $ 80     $ 82  

9.
CREDIT AGREEMENT

We maintain a revolving credit line agreement with a bank that provides for borrowings up to $2.0 million and bears interest at the prime rate plus 1.0% with a minimum interest rate of 4.5%. The agreement is collateralized by substantially all of our assets. Advances under the agreement are at the sole discretion of the bank. The agreement expires in December 2010. We expect to renew the agreement, but there can be no assurances that the agreement will be renewed with terms favorable to us or at all or that funds will be available to us under the agreement. At September 30, 2010 and December 31, 2009, there were no borrowings outstanding under line of credit agreements.
 

 
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10.
LEGAL SETTLEMENT

In 2010, we settled a legal action we had filed against a subtenant of our former leased facility in Poway, California for nonpayment of rents. Pursuant to the settlement agreement, we received a cash payment of $175,000 from the subtenant. In addition, we reduced a related accrual for estimated legal costs by $15,000. We recorded a credit of $190,000 related to this settlement in the first quarter of 2010, which amount is included in “Selling, general and administrative expenses” in our consolidated statement of operations for the nine months ended September 30, 2010.
 
11.
HEADQUARTERS LEASE RENEWAL

In August 2010, we entered into an agreement to extend the lease of our headquarters facility in North St. Paul, Minnesota. The previous lease agreement was scheduled to expire in January 2011. The new agreement provides for a five year term commencing September 1, 2010. Base rent payments will average $21,943 per month over the term of the lease, including $21,734 per month for the first three years with slight increases in the fourth and fifth years. The agreement expires on August 31, 2015, at which time we have an option to extend the lease for an additional five-year term. In connection with the lease renewal, we agreed to pay a third-party consulting fee obligation of the lessor in exchange for reduced rent payments. The $56,000 payment was recorded as a prepaid expense and is being amortized to rent expense over the term of the lease. As of September 30, 2010, the prepaid rent balance was approximately $55,000, of which $11,000 is included in “Other current assets” and the remaining $44,000 is classified as “Noncurrent asset, other” in our consolidated balance sheet.
 
12.
STOCK OPTION PLANS

The following table summarizes stock option activity under our stock incentive plan for the nine months ended September 30, 2010:
 
   
 
Number
of Shares
   
Weighted Average
Exercise
Price
 
Weighted Average Remaining Contract Term
 
Aggregate Intrinsic Value (in thousands)
 
Outstanding, January 1, 2010
    1,721,521     $ 2.34          
Granted
    610,000       2.41          
Exercised
    (363,084 )     2.26          
Forfeited
    (21,459 )     2.27          
Expired
    (18,000 )     2.23          
Outstanding, September 30, 2010
    1,928,978     $ 2.38  
2.7 years
  $ 677  
                           
Exercisable, September 30, 2010
    1,100,346     $ 2.40  
1.5 years
  $ 375  

All stock options outstanding at September 30, 2010 are nonqualified options that expire five years after the grant date and become exercisable over four years from date of grant. The aggregate intrinsic value in the table above represents the total pretax intrinsic value (the difference between Aetrium’s closing stock price on September 30, 2010 and the option exercise price) of all in-the-money stock options that would have been received by the option holders had they exercised their options on September 30, 2010.
 
13.
INCOME TAXES

We record the benefit we will derive in future accounting periods from tax losses and credits and deductible temporary differences as “deferred tax assets” in our consolidated balance sheet.  In accordance with Accounting Standards Codification (ASC) 740, “Income Taxes,” we record a valuation allowance to reduce the carrying value of our deferred tax assets if, based on all available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized. In fiscal year 2009, we incurred losses such that our deferred tax assets increased to $25.7 million. At
 

 
9

 

December 31, 2009, we assessed the realizability of our deferred tax assets and the amount of our valuation allowance. Although our operating results improved in the second half of 2009, we incurred an operating loss in the fourth quarter that placed us in a three year cumulative loss position at December 31, 2009. Although we expected that our operating results would likely improve in 2010, we determined there was not sufficient positive evidence regarding our potential for future profits to outweigh the negative evidence of our three year cumulative loss position under the guidance provided in ASC 740.  Therefore, we determined that our valuation allowance should be increased to $25.7 million to fully reserve our deferred tax assets at December 31, 2009. We expect to continue to maintain a full valuation allowance until we determine that we can sustain a level of profitability that demonstrates our ability to realize these assets. To the extent we determine that the realization of some or all of these benefits is more likely than not based upon expected future taxable income, a portion or all of the valuation allowance will be reversed.  Such a reversal would be recorded as an income tax benefit and, for some portion related to deductions for stock option exercises, an increase in shareholders' equity.
 
We recorded an income tax benefit of $57,000 in the nine months ended September 30, 2010 related to a carryback claim filed in 2010 for a refund of federal alternative minimum taxes paid in prior years. No income tax expense was recorded in the three and nine month periods ended September 30, 2010 since we maintain a full valuation allowance against our deferred tax assets, including our net operating loss carryforwards. We recorded an income tax benefit of $182,000 and $1,023,000 in the three and nine month periods ended September 30, 2009, respectively, based on our then estimated annual effective tax rate of approximately 35%, which reflected the federal statutory rate of 34% plus estimated net state income taxes.
 

 
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AETRIUM INCORPORATED

Item 2.
Management's Discussion and Analysis of Financial Condition and Results of Operations

 
Overview
 
Aetrium designs, manufactures and markets a variety of electromechanical equipment used in the handling and testing of integrated circuits, or ICs, which constitute the highest revenue component of the semiconductor industry. Our primary focus is on high volume ICs and on the latest IC package designs. Our test handler products are purchased primarily by semiconductor manufacturers and their assembly and test subcontractors and are used in the test, assembly and packaging, or TAP, segment of semiconductor manufacturing. Our reliability test products are used to validate IC designs and monitor semiconductor wafer fabrication processes. Our products automate critical functions to improve manufacturing yield, raise quality levels, increase product reliability and reduce manufacturing costs.
 
As an equipment supplier to the semiconductor industry, Aetrium’s results are driven primarily by worldwide demand for ICs, which in turn depends on end-user demand for electronic products. The demand for our products can fluctuate significantly from period to period due to the direct or indirect impact of numerous factors, including but not limited to changes in the supply and demand for ICs, changes in IC manufacturing capacity, advancements in industry technologies, changes in U.S. and worldwide economic conditions and competitive factors.
 
Like many suppliers in the TAP segment of the semiconductor equipment industry, Aetrium’s business was severely impacted by the global recession and turmoil in the financial credit markets that began in fiscal year 2008 and continued into 2009. Significant decreases in the sales of electronic products led to reduced demand for ICs and IC manufacturing equipment during this period and resulted in one of the most abrupt and severe downturns ever in our industry. According to SEMI, a semiconductor equipment industry trade association, 2008 revenues for test related equipment declined approximately 32% from the prior year. General economic conditions began to improve in mid-2009 and the semiconductor industry began to recover as the demand for ICs increased. IC manufacturers increased production levels although by the end of the year they had not returned to their recent peak levels of third quarter 2008. As a result, the TAP segment of the semiconductor equipment industry continued its decline through 2009. According to SEMI, 2009 revenues for test related equipment declined approximately 55% from 2008 levels.
 
Aetrium’s operating results generally followed the semiconductor equipment industry trend. Our net sales decreased to $1.8 million and $1.2 million in the first and second quarters of 2009, respectively. In mid-year we began to see signs of increased demand for our customers' products and generally improving equipment utilization rates. Accordingly, our net sales increased to $3.0 million and $2.7 million in the third and fourth quarters of 2009, respectively.
 
General economic and industry business conditions continued to improve in 2010 and our operating results improved as well. Our net sales increased to $4.6 million, $5.0 million and $5.0 million in the first, second and third quarters of 2010, respectively. For the nine months ended September 30, 2010, our net sales were $14.6 million compared with $6.0 million for the same period in 2009, an increase of 145%. Some IC industry forecasters have recently suggested that IC unit shipments have exceeded underlying demand and that IC shipments volume may flatten or decrease in upcoming months, in which case the demand for semiconductor equipment may decline as well. These forecasters suggest that an industry correction, if it occurs, should be moderate and relatively brief and they
 

 
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continue to predict that 2011 will be a growth year for the semiconductor industry. However, there can be no assurance the positive industry conditions we have experienced in 2010 will continue or that changes in semiconductor industry conditions, general domestic and global economic conditions, and/or other factors will not adversely impact Aetrium’s future operating results.
 
Critical Accounting Policies
 
Aetrium’s critical accounting policies are disclosed in our most recent Annual Report on Form 10-K for the year ended December 31, 2009. There were no changes in such policies during the nine months ended September 30, 2010.

Results of Operations

Net Sales. Net sales for the nine months ended September 30, 2010 were $14.6 million compared with $6.0 million for the same period in 2009, a 145% increase. Net sales for the three months ended September 30, 2010 were $5.0 million compared with $3.0 million for the same period in 2009, a 64% increase. Net sales in 2010 increased across all our product lines as a result of improved economic conditions and a semiconductor industry recovery that began in the second half of 2009 and continued into 2010.  Sales of test handlers were $9.7 million in the first nine months of 2010 compared with $2.9 million for the same period in 2009, an increase of 241%. Sales of reliability test equipment products were $2.5 million in the first nine months of 2010 compared with $1.2 million for the same period in 2009, an increase of 105%. Sales of change kits and spare parts were $2.3 million in the first nine months of 2010 compared with $1.9 million for the same period in 2009, an increase of 24%.
 
Gross Profit. Aetrium’s gross profit as a percentage of net sales can fluctuate based on a number of factors, including but not limited to the mix of products sold, distribution channel mix, price discounting, product maturity, inventory writedowns, and the utilization of our manufacturing capacity associated with varying production levels. Gross profit was 45.7% of net sales in the nine months ended September 30, 2010 compared with 37.2% for the same period in 2009. Our gross margin increased in 2010 primarily due to efficiencies associated with significantly higher production and net sales levels over the prior year, partially offset by a less favorable product mix. Test handlers, which are generally lower margin sales than reliability test equipment and spares/change kits, represented 67% of total net sales in the first nine months of 2010 compared with 48% of total net sales for the same period in 2009. Reliability test equipment sales represented 17% of total net sales in the first nine months of 2010 compared with 21% of total sales for the same period in 2009 and spares/change kit sales represented 16% of total net sales in the first nine months of 2010 compared with 31% for the same period in 2009. Gross profit was 46.0% of net sales in the three months ended September 30, 2010 compared with 45.6% for the same period in 2009. The gross margin improvement in 2010 was primarily due to efficiencies associated with significantly higher production and net sales levels, partially offset by a less favorable product mix.
 
Selling, General and Administrative. Selling, general and administrative expenses for the nine months ended September 30, 2010 were $4.1 million compared with $3.6 million for the comparable period in 2009, a 14% increase. Commissions and travel expenses increased $0.5 million and $0.2 million, respectively, as a result of significantly increased sales and service activity. Employee compensation increased $0.2 million in part because employee wages that had been at reduced levels during the economic and industry downturn in 2009 were restored in 2010. These expense increases were partially offset by a credit of $0.2 million recorded in 2010 related to the settlement of a legal dispute with a subtenant of our former leased facility in Poway, California. Selling, general and administrative expenses for the three months ended September 30, 2010 were $1.4 million compared with $1.3 million for the comparable period in 2009, a 12% increase. Employee compensation increased $0.1 million primarily because employee wages that had been at reduced levels during the economic and industry downturn in 2009 were restored in 2010.
 

 
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Research and Development. Research and development expenses for the nine months ended September 30, 2010 were $2.4 million compared with $1.7 million for the comparable period in 2009, a 42% increase. Contract services, materials costs and employee compensation increased $0.5 million, $0.1 million, and $0.1 million, respectively. Research and development expenses for the three months ended September 30, 2010 were $0.8 million compared with $0.6 million for the comparable period in 2009, a 30% increase. Employee compensation and contract services each increased $0.1 million. Employee compensation increased in 2010 in part because employee wages that had been at reduced levels during the economic and industry downturn in 2009 were restored in 2010. Research and development expenses increased in 2010 over 2009 levels as we accelerated development activities for both our test handler and reliability test equipment product lines. Research and development expenses represented 16.1% of total net sales for the nine month period ended September 30, 2010 compared with 27.7% of total net sales for the comparable period in 2009. New product development is an essential part of our strategy to gain market share. Over time, we expect to invest approximately 12% to 15% of our revenues in research and development although we may exceed this range in periods of relatively low revenues.
 
Interest Income, net. Interest income, net, amounted to $55,000 and $113,000 for the nine months ended September 30, 2010 and 2009, respectively, and amounted to $21,000 and $29,000 for the three months ended September 30, 2010 and 2009, respectively. The decrease in interest income in 2010 reflects generally lower interest rates and lower average invested cash balances.
 
Income Taxes. We recorded an income tax benefit of $57,000 in the nine month period ended September 30, 2010 related to a carryback claim filed in 2010 for a refund of federal alternative minimum taxes paid in prior years. No income tax expense was recorded in the three and nine months ended September 30, 2010 since we maintain a full valuation allowance against our deferred tax assets, including our net operating loss carryforwards. We recorded an income tax benefit of $182,000 and $1,023,000 in the three and nine months ended September 30, 2009, respectively, based on our then estimated annual effective tax rate of approximately 35%, which reflected the federal statutory rate of 34% plus estimated net state income taxes.
 
We record the benefit we will derive in future accounting periods from tax losses and credits and deductible temporary differences as “deferred tax assets” in our consolidated balance sheet.  In accordance with Accounting Standards Codification (ASC) 740, “Income Taxes,” we record a valuation allowance to reduce the carrying value of our deferred tax assets if, based on all available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized. In fiscal year 2009, we incurred losses such that our deferred tax assets increased to $25.7 million. At December 31, 2009, we assessed the realizability of our deferred tax assets and the amount of our valuation allowance. Although our operating results improved in the second half of 2009, we incurred an operating loss in the fourth quarter that placed us in a three year cumulative loss position at December 31, 2009. Although we expected that our operating results would likely improve in 2010, we determined there was not sufficient positive evidence regarding our potential for future profits to outweigh the negative evidence of our three year cumulative loss position under the guidance provided in ASC 740.  Therefore, we determined that our valuation allowance should be increased to $25.7 million to fully reserve our deferred tax assets at December 31, 2009. We expect to continue to maintain a full valuation allowance until we determine that we can sustain a level of profitability that demonstrates our ability to realize these assets. To the extent we determine that the realization of some or all of these benefits is more likely than not based upon expected future taxable income, a portion or all of the valuation allowance will be reversed.  Such a reversal would be recorded as an income tax benefit and, for some portion related to deductions for stock option exercises, an increase in shareholders' equity.




 
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Financial Condition, Liquidity and Capital Resources

Cash and cash equivalents increased by approximately $0.5 million in the nine months ended September 30, 2010. We generated $0.2 million of cash from operating activities during this period. Cash generated from net income of $0.3 million and $0.4 million in non-cash depreciation and share-based compensation expense was partially offset by $0.5 million in working capital changes. Working capital changes using cash consisted primarily of a $1.3 million increase in accounts receivable and a $0.1 million increase in inventories, partially offset by a $0.9 million increase in accounts payable. Accounts receivable increased due to a significant increase in net sales in the third quarter of 2010 compared with the fourth quarter of 2009. Inventories increased primarily to support customer evaluations and initial shipments anticipated for our new eight site test handler. Accounts payable increased primarily due to higher levels of inventory purchases in the third quarter of 2010 compared with the fourth quarter of 2009. Net cash flows from investing activities for the nine months ended September 30, 2010 were insignificant. Net cash provided by financing activities for the nine months ended September 30, 2010 consisted of $0.3 million in net proceeds from employee stock option exercises.
 
Cash and cash equivalents decreased by approximately $1.2 million in the nine months ended September 30, 2009. We used $1.2 million of cash to fund operating activities during this period, which included our net loss of $1.9 million plus a $1.0 million non-cash income tax benefit, partially offset by $0.5 million of non-cash depreciation and share-based compensation expense and $1.2 million in working capital changes. Working capital changes contributing to cash consisted primarily of a $0.7 million decrease in accounts receivable and a $1.2 million decrease in inventories, partially offset by a $0.3 million increase in other current assets, a $0.2 million decrease in accounts payable and a $0.2 million decrease in other accrued liabilities. Accounts receivable decreased primarily due to a significant decrease in net sales in the third quarter of 2009 compared with the fourth quarter of 2008. Inventories and accounts payable decreased primarily due to significantly reduced inventory purchases in the third quarter of 2009 compared with the fourth quarter of 2008 in response to lower sales levels. The increase in other current assets consisted primarily of past due rents owing from a subtenant of our then-leased facility in Poway, CA.  The decrease in other accrued liabilities reflected the payment of severance benefits associated with a workforce reduction we implemented in December 2008 and a reduction in accrued warranty and accrued commissions due to lower sales volume.
 
Historically we have supported our capital expenditure and working capital needs with cash generated from operations and our existing cash and cash equivalents.  We believe our cash balance of $10.0 million at September 30, 2010 will be sufficient to meet capital expenditure and working capital requirements for at least the next twelve months. In addition, we have a revolving credit line agreement with a bank that provides for borrowings up to $2.0 million. Advances under the agreement are at the sole discretion of the bank. The agreement expires in December 2010. We expect to renew the agreement, but there can be no assurances that the agreement will be renewed with terms favorable to us or at all or that funds will be available to us under the agreement. There can also be no assurance the positive industry conditions we have experienced in 2010 will continue or that changes in semiconductor industry conditions, general domestic and global economic conditions, and/or other factors will not adversely impact Aetrium’s future operating results. Also, we may acquire other companies, product lines or technologies that are complementary to our business, and our working capital needs may change as a result of such acquisitions.
 
Recent Accounting Pronouncements
 
In January 2010, the FASB issued authoritative guidance for fair value measurements, which requires additional disclosures and clarifications to existing disclosures. This authoritative guidance requires a reporting entity to disclose separately the amounts of significant transfers in and out of Level 1 and Level 2 investments and describe the reasons for these transfers. This authoritative guidance also requires enhanced
 

 
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disclosure of activity in Level 3 investments. The new disclosures and clarifications of existing disclosures for Level 1 and Level 2 investments became effective for Aetrium in the first quarter of fiscal year 2010 and had no impact on our consolidated financial position, results of operations or cash flows. Disclosures regarding activity in Level 3 investments will become effective for Aetrium at the beginning of fiscal year 2011 and is not expected to impact our consolidated financial position, results of operations or cash flows.
 
Item 4T.
Controls and Procedures

Our Chief Executive Officer, our Chief Administrative Officer and our Treasurer conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Securities Exchange Act Rules 13a-15(e) and 15d-15(e)) as of September 30, 2010. Based on their evaluation, they concluded that our disclosure controls and procedures were effective and designed to give reasonable assurance that the information required to be disclosed by us in reports that we file or submit under the Exchange Act was made known to them by others and was recorded, processed, summarized and reported within the time periods specified in SEC rules and forms. There was no change in our internal controls that occurred during the period covered by this Quarterly Report on Form 10-Q that has materially affected, or is reasonably likely to affect, our internal controls over financial reporting.
 

 
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AETRIUM INCORPORATED

PART II.  OTHER INFORMATION

Item 1.
Legal Proceedings
   
 
None.
   
Item 1A.
Risk Factors
   
 
There have not been any material changes to the risk factors previously disclosed in our Form 10-K for the year ended December 31, 2009.
   
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
   
 
None.
   
Item 3.
Defaults on Senior Securities
   
 
None.
   
Item 4.
Reserved
   
Item 5.
Other Information
   
 
None.
   
Item 6.
Exhibits
 
 
10.1 Commercial Lease dated August 20, 2010 between Triple Shot, LLC and us.
 
31.1 Certification by Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
31.2 Certification by Chief Administrative Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
31.3 Certification by Treasurer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
32.1 Certifications pursuant to Section 906 of the Sarbanes-Oxley Act of 2002




 
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AETRIUM INCORPORATED


SIGNATURES




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.


AETRIUM INCORPORATED
(Registrant)



Date: November 5, 2010
By:
/s/ Joseph C. Levesque
   
Joseph C. Levesque
   
Chairman of the Board and Chief Executive Officer
     
Date: November 5, 2010
By:
/s/ Paul H. Askegaard
   
Paul H. Askegaard
   
Treasurer (principal financial and accounting officer)


 
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