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EX-31.2 - 10Q MAR 2011 CFO - ARRHYTHMIA RESEARCH TECHNOLOGY INC /DE/ex31210qmar2011cfo.htm
EX-32.1 - 10Q MAR 2011 CEO - ARRHYTHMIA RESEARCH TECHNOLOGY INC /DE/ex32110qmar2011ceo.htm
EX-31.1 - 10Q MAR 2011 CEO - ARRHYTHMIA RESEARCH TECHNOLOGY INC /DE/ex31110qmar2011ceo.htm
EX-32.2 - 10Q MAR 2011 CFO - ARRHYTHMIA RESEARCH TECHNOLOGY INC /DE/ex32210qmar2011cfo.htm
 


 
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, 2011 or
 
[    ] Transition report under Section 13 or 15(d) of the Securities Exchange Act of 1934
For the transition period from ______ to ______
 
 
001-9731
(Commission file No.)
 
ARRHYTHMIA RESEARCH TECHNOLOGY, INC.
(Exact name of registrant as specified in its charter)
 
 
DELAWARE
 
72-0925679
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. employer identification no.)
 
 
25 Sawyer Passway
Fitchburg, Massachusetts  01420
(Address of principal executive offices)
 
 
(978) 345-5000
(Issuer's telephone number, including area code)
 
 
 
  
Check whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes   X   No___.
 
Indicate by check mark whether the registrant 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 9, 2011 there were 2,790,514 shares of the Company’s common stock outstanding.

 

ARRHYTHMIA RESEARCH TECHNOLOGY, INC.
 
TABLE OF CONTENTS
 
FORM 10-Q
 
March 31, 2011
 
 
 
 
             Consolidated Balance Sheets
 
 
 
 
Item 7.  Exhibits                                                                        
 
 
  
Exhibit 31.1
 
Certification of Chief Executive Officer pursuant to section 302 of the Sarbanes-Oxley Act of 2002
 
X-1
Exhibit 31.2
 
Certification of Chief Financial Officer pursuant to section 302 of the Sarbanes-Oxley Act of 2002
 
X-2
Exhibit 32.1
 
Certification of Chief Executive Officer pursuant to section 906 of the Sarbanes-Oxley Act of 2002
 
X-3
Exhibit 32.2
 
Certification of Chief Financial Officer pursuant to section 906 of the Sarbanes-Oxley Act of 2002
 
X-4

 

PART I - FINANCIAL INFORMATION
 
Item 1.  Consolidated Financial Statements
 
 

ARRHYTHMIA RESEARCH TECHNOLOGY, INC. AND SUBSIDIARIES
 
Consolidated Balance Sheets 
ASSETS
March 31, 2011
 
December 31,
2010
Current assets:
(Unaudited)
 
(Audited)
Cash and cash equivalents                                                                                      
$
2,447,436
 
 
$
3,962,454
 
Trade and other accounts receivable, net of allowance for doubtful accounts
          of $88,976 and $83,976                                                                                
4,307,432
 
 
3,819,361
 
Inventories, net                                                                                      
3,126,680
 
 
3,069,177
 
Deferred income taxes, net                                                                                      
44,000
 
 
44,000
 
Prepaid tax                                                                                      
49,194
 
 
166,694
 
Deposits, prepaid expenses and other current assets                                                                                      
406,667
 
 
397,010
 
Total current assets                                                                                   
10,381,409
 
 
11,458,696
 
 
 
 
 
Property and equipment, net of accumulated depreciation of
             $9,477,160 and $9,101,732                                                                                      
6,719,638
 
 
6,691,817
 
Goodwill                                                                                         
1,564,966
 
 
1,564,966
 
Other intangible assets, net                                                                                         
98,074
 
 
96,446
 
Restricted cash
520,696
 
 
517,571
 
Total assets                                                                                      
$
19,284,783
 
 
$
20,329,496
 
 
 
 
 
LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 
 
 
 
 
 
 
 
Current liabilities:
 
 
 
 
 
Accounts payable                                                                                      
$
1,307,980
 
 
$
2,280,992
 
Accrued expenses                                                                                      
379,762
 
 
275,197
 
Total current liabilities                                                                                   
1,687,742
 
 
2,556,189
 
Long term liabilities:
 
 
 
 
 
Long term deferred tax liability, net                                                                                      
233,500
 
 
330,000
 
Long term portion of deferred gain on lease                                                                                      
16,751
 
 
17,868
 
Total long term liabilities                                                                                   
250,251
 
 
347,868
 
Total liabilities
1,937,993
 
 
2,904,057
 
 
 
 
 
Shareholders’ equity:
 
 
 
 
 
Preferred stock, $1 par value; 2,000,000 shares authorized, none issued
 
 
 
Common stock, $0.01 par value; 10,000,000 shares authorized,
          3,926,491 shares issued, 2,790,514 outstanding                                                                                  
39,265
 
 
39,265
 
Additional paid-in-capital                                                                                      
10,690,445
 
 
10,653,210
 
Common stock held in treasury, 1,135,977 shares at cost
(3,099,842
)
 
(3,099,842
)
Accumulated other comprehensive income from foreign currency translation
67,721
 
 
42,502
 
Retained earnings                                                                                      
9,649,201
 
 
9,790,304
 
Total shareholders’ equity                                                                                   
17,346,790
 
 
17,425,439
 
Total liabilities and shareholders’ equity                                                                                   
$
19,284,783
 
 
$
20,329,496
 
 
The accompanying notes are an integral part of the consolidated financial statements.
 

1

 

ARRHYTHMIA RESEARCH TECHNOLOGY, INC. AND SUBSIDIARIES
 
Consolidated Statements of Income
 
(Unaudited)
 
 
Three months ended March 31,
 
2011
 
2010
Revenue
$
6,183,065
 
 
$
5,585,360
 
Cost of sales
4,804,779
 
 
4,601,212
 
Gross profit
1,378,286
 
 
984,148
 
Selling and marketing
360,013
 
 
157,989
 
General and administrative
878,370
 
 
603,997
 
Research and development
81,208
 
 
55,673
 
Total expense
1,319,591
 
 
817,659
 
Income from operations
58,695
 
 
166,489
 
Other income (expense), net
(10,562
)
 
122
 
Income before income taxes
48,133
 
 
166,611
 
Income tax provision
21,000
 
 
64,000
 
Net income
$
27,133
 
 
$
102,611
 
Net income per share – basic
$
0.01
 
 
$
0.04
 
Net income per share – diluted
$
0.01
 
 
$
0.04
 
Weighted average common shares
   Outstanding – basic
2,790,514
 
 
2,675,481
 
Weighted average common shares
   Outstanding – diluted
2,829,518
 
 
2,707,864
 
 
 
The accompanying notes are an integral part of the consolidated financial statements.
 
 

2

 

 
ARRHYTHMIA RESEARCH TECHNOLOGIES, INC. AND SUBSIDIARIES
 
 
Consolidated Statements of Changes in Shareholders' Equity and Comprehensive Income
 
(Unaudited)
 
 
 
Common Stock
 
Additional paid-in capital
 
 Treasury stock
 
Accumulated other comprehensive income
 
Retained earnings
 
 
Comprehensive income
 
 
Shares
 
Amount
 
 
 
Total
December 31, 2010
 
3,926,491
 
 
$
39,265
 
 
$
10,653,210
 
$
(3,099,842
)
 
$
42,502
 
 
$
9,790,304
 
 
$
17,425,439
 
 
Foreign currency translation adjustments
 
 
 
 
 
 
 
 
 
25,219
 
 
 
 
25,219
 
$
25,219
 
Share based compensation
 
 
 
 
 
37,235
 
 
 
 
 
 
 
 
 
 
37,235
 
 
Cash dividends
 
 
 
 
 
 
 
 
 
 
 
(168,236
)
 
(168,236
)
 
Net income
 
 
 
 
 
 
 
 
 
 
 
27,133
 
 
27,133
 
27,133
 
Comprehensive Income
 
 
 
 
 
 
 
 
 
 
 
 
 
 
$
52,352
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
March 31, 2011
 
3,926,491
 
 
$
39,265
 
 
$
10,690,445
 
$
(3,099,842
)
 
$
67,721
 
 
$
9,649,201
 
 
$
17,346,790
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
See accompanying notes to consolidated financial statements.

3

 

 
 
ARRHYTHMIA RESEARCH TECHNOLOGY, INC. AND SUBSIDIARIES
 
Consolidated Statements of Cash Flows
 
(Unaudited)
 
 
Three months ended March 31,
 
2011
 
2010
Cash flows from operating activities:
 
 
 
Net income
$
27,133
 
 
$
102,611
 
Adjustments to reconcile net income to net cash provided by
    operating activities:
 
 
 
 
 
Depreciation and amortization
382,309
 
 
345,529
 
Share based compensation
37,235
 
 
36,896
 
Provision for doubtful accounts
5,000
 
 
15,000
 
Deferred tax expense
(96,500
)
 
(10,500
)
Changes in operating assets and liabilities:
 
 
 
 
 
Trade and other accounts receivable
(493,071
)
 
(419,006
)
Inventories
(57,503
)
 
(421,378
)
Deposits, prepaid expenses and other assets
95,607
 
 
(21,036
)
Accounts payable and accrued expenses
(869,564
)
 
465,840
 
Net cash (used in) or provided by operating activities
(969,354
)
 
93,956
 
 
 
 
 
Cash flows from investing activities:
 
 
 
 
 
Capital expenditures, net of disposals
(402,647
)
 
(452,519
)
Net cash used in investing activities
(402,647
)
 
(452,519
)
 
 
 
 
Cash flows from financing activities:
 
 
 
 
 
Cash dividend paid
(168,236
)
 
(161,328
)
Net cash used in financing activities
(168,236
)
 
(161,328
)
 
 
 
 
Effect of currency translation on cash and cash equivalents
25,219
 
 
 
Net decrease in cash and cash equivalents
(1,515,018
)
 
(519,891
)
 
 
 
 
Cash and cash equivalents at beginning of period
3,962,454
 
 
3,674,179
 
Cash and cash equivalents at end of period
$
2,447,436
 
 
$
3,154,288
 
 
 
The accompanying notes are an integral part of the consolidated financial statements.
 

4

 

Notes to 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 subsidiaries (the “Company”) Annual Report on Form 10-K for the year ended December 31, 2010 filed March 23, 2011.
 
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:
 
Inventories consist of the following as of:
March 31,
2011
 
December 31,
2010
Raw materials
$
1,309,950
 
 
$
911,440
 
Work-in-process 
444,758
 
 
169,063
 
Finished goods
1,371,972
 
 
1,988,674
 
Total
$
3,126,680
 
 
$
3,069,177
 
 
The value of silver in inventory at March 31, 2011 as a part of finished goods as plated sensors, work in process, or raw material is $924,547. Inventories are stated net of a reserve for slow moving or obsolete inventory.
 
3. Share-Based Compensation:
 
The Company accounts for non-cash share based compensation under ASC 718 “Stock Compensation”, which establishes accounting for equity instruments exchanged for employee services.  Under the provisions of ASC 718, 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 Company recognized share-based compensation expense of $37,235 and $36,896 in general and administrative expense for the three months ended March 31, 2011 and 2010, respectively.  No grants were made in the first three months of 2011. A grant totaling 75,500 options to 16 persons, including directors and management, was made during the three months ended March 31, 2010.  

5

 

The following assumptions were used to estimate the fair market value of options granted using the Black Scholes valuation method:
 
 
Three Months Ended March 31, 2010
Dividend Yield
—%
Expected Volatility
31.18%
Risk Free Interest Rate
1.36%
Expected Option Terms (in years)
4.5
 
Share-based Incentive Plan
 
At March 31, 2011, 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 500,000 shares.  The options granted have six-year contractual terms and either vest immediately or vest annually over a five-year term.
 
The following table presents the average price and contractual life information about options outstanding and exercisable at March 31, 2011:
 
Exercise Price
 
Number of Outstanding Shares
 
Weighted Average Remaining Contractual Life (years)
 
Options Currently
Exercisable
 
Average Fair Value
at Grant Date
$
3.41
 
 
75,500
 
4.76
 
15,100
 
$
0.96
 
4.76
 
 
60,000
 
4.21
 
15,000
 
1.77
 
7.15
 
 
96,000
 
2.76
 
57,600
 
2.74
 
9.86
 
 
63,000
 
0.72
 
63,000
 
4.22
 
12.42
 
 
10,000
 
1.35
 
8,000
 
5.38
 
23.10
 
 
10,000
 
1.93
 
8,000
 
10.77
 
 
The aggregated intrinsic value of options outstanding and vested at March 31, 2011 was $202,195 and $42,659, respectively.  The Company expects 115,639 of the 147,800 options to vest over their remaining life.
 
The following table summarizes the status of Company’s non-vested options since December 31, 2010:
 
 
Non-Vested Options
 
Number of Shares
 
Weighted
Average Fair
Value
Non-vested at December 31, 2010
184,100
 
 
$
1.98
 
Granted
 
 
 
Vested
(36,300
)
 
2.44
 
Forfeited
 
 
 
Non-vested at March 31, 2011
147,800
 
 
$
1.86
 
 
At March 31, 2011, there was $157,562 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 3.32 years.

6

 

 
 
4. Income Taxes:
 
The Company accounts for income taxes in accordance with ASC 740 “Income Taxes,” which requires recognition of deferred tax liabilities and assets for the expected future tax consequences of events that have been included in the financial statements or tax returns.  Under this method, deferred tax liabilities and assets are determined based on the difference between the financial statement and tax bases of assets and liabilities using tax rates in effect for the year in which the differences are expected to reverse.
 
The Company files income tax returns in the U.S. Federal jurisdiction and various state jurisdictions.  The periods from 2007 to 2010 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 were any interest expenses recognized during the three months ended March 31, 2011.
 
5. Earnings per share:
 
In accordance with ASC 260, the basic earnings per share is computed by dividing net income available to common stockholders by the weighted average number of common shares outstanding.  Diluted earnings per share is computed similar to basic earnings per share except that the denominator is increased to include the number of additional shares that would have been outstanding if the potential shares had been issued and if the additional shares were dilutive.  At March 31, 2011, some of the stock options were anti-dilutive and excluded in the earnings per share computation.
 
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; our ability to increase sales of higher margin products and services; variations in the mix of products and services sold; variability of customer delivery requirements; ability to license our software, provide timely customization and updates; a stable interest rate market and/or a stable currency rate environment in the world, and specifically the countries where we are doing business; 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; adverse regulatory developments in the U.S. or any other country the Company plans to do business in; entrance of competitive products and services in the Company's markets; the ability of management to execute plans and motivate personnel in the execution of those plans; no adverse publicity related to the Company and/or its products; adverse claims relating to the Company's intellectual property; adoption of new, or changes in, accounting principles; passage of new, or changes in, regulations; legal proceedings; ability to maintain compliance with the NYSE Amex requirements for continued listing of our common stock; the costs inherent with complying with statutes and regulations applicable to public reporting companies, such as the Sarbanes-Oxley Act of  2002; our ability to efficiently integrate 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, 2010.
 

7

 

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.  This primary source of revenue relates to the manufacturing of components, devices and equipment primarily for the medical and defense industries.  The single largest category of revenue relates to Micron’s production and sale of silver/silver chloride coated and conductive resin sensors used as component parts in the manufacture of integrated disposable electrophysiological sensors.  These disposable medical devices are used worldwide in the monitoring of electrical signals in various medical applications.   In an effort to leverage these skills, the Company has expanded into custom thermoplastic injection molded products with a full array of design, engineering and production services and management. With the addition of a medical machining cell, the Company began production of patient specific metal and plastic orthopedic devices.  ART and its wholly-owned subsidiary, RMDDxUSA Corp. together with its subsidiary RMDDx Corporation (collectively, "WirelessDx") provide medical software and services, respectively, to the medical industry. While not currently adding significant revenue to the results, management believes these businesses have significant potential for future growth of the Company. Management continues to identify complementary and/or synergistic products, technologies and lines of business in an effort to broaden the Company’s offerings.
 
Results of Operations
 
Revenue for the three months ended March 31, 2011 was $6,183,065 versus $5,585,360 for the three months ended March 31, 2010, an increase of $597,705 or 11%.   Micron’s medical sensors and snaps with silver surcharge revenue increased by $1,226,000 and high volume precision molded products and other miscellaneous sales increased by $61,000.  The change in revenues from sensors and snaps is due to higher silver surcharge and per sensor revenue.  Revenue from the Micron Integrated Technology’s (MIT) product life cycle management programs decreased $653,000 due to decreased volume with our defense industry customers and the planned completion of a significant program.  The MIT division’s revenue is derived from the custom molding, precision metal machining and mold making activities. The first three months of 2010 included $50,000 in ART's software revenues, while in the same period of 2011 no revenues were recognized. This decrease was partially offset by WirelessDx's medical service revenues.
 
Revenue from domestic and foreign sales for the three months is as follows:
 
 
Three Months Ending March 31,
 
2011
 
     %
 
2010
 
   %
United States
$
2,666,295
 
 
43
 
 
$
3,108,220
 
 
55
 
Canada
1,903,889
 
 
31
 
 
1,340,010
 
 
24
 
Europe
643,260
 
 
11
 
 
489,162
 
 
9
 
Pacific Rim
509,972
 
 
8
 
 
391,296
 
 
7
 
Other
459,649
 
 
7
 
 
256,672
 
 
5
 
Total
$
6,183,065
 
 
100
 
 
$
5,585,360
 
 
100
 
 
The increase of sales in Canada, Europe and the Pacific Rim is due to increasing sensor revenue. The decrease of sales in United States is related to a reduction in defense industry products.
 
Cost of sales was $4,804,779 for the three months ended March 31, 2011 as compared to $4,601,212 for the same period in 2010.  The cost of sales was 78% of revenue for the three months ended March 31, 2011 as compared to 82% for the same period in 2010.  The stabilization and reduction of costs remains a priority of management.  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.  As silver increases in price, the additional cost is passed to customers in the form of a silver surcharge, resulting in a decreased gross margin as a percentage of sales. The improvement in margin this period is despite the aforementioned escalating cost of silver. The improvements from automation and in process controls continue to positively contribute to gross profit. Management continues to investigate ways to improve the overall gross margin by focusing marketing efforts on higher margin products and investing in new technologies.
 

8

 

Selling and marketing expense was $360,013 for the three months ended March 31, 2011 as compared to $157,989 for the same period in 2010.  The selling and marketing expense was 5.8% of sales in the three months ended March 31, 2011 and 2.8% for the same period in 2010.  The increase includes $107,000 and $45,000 in personnel and travel expenses related to the WirelessDx medical services and ART software new sales and marketing costs, respectively. The remainder of the increase in expense was on travel expenses associated with the Micron's sensor business and MIT's additional personnel. When compared to the same period in 2010, the company added four additional employees targeting the service and software markets, and one additional person in the custom manufacturing business. The previous addition of three manufacturer's representatives have begun to gain traction in their respective target markets. Selling expenses for WirelessDx is expected to continue to increase as the operations are scaled according to the Company's plans. As a percentage of sales, selling expenses will increase as there will be a timing lag between the additional expense and the expected revenue increases through the remainder of 2011.
 
General and administrative expense was $878,370 for the three months ended March 31, 2011 as compared to $603,997 for the same period in 2010.  The general and administrative expense was 14% of sales in the three months ended March 31, 2011 and 11% for the same period in 2010.  The increase includes $233,000 associated with operational infrastructure for WirelessDx operations, travel and other administrative expenses associated with this new entity. The remainder of the increase includes personnel cost increases as well as increased legal and travel expenses from merger and acquisition activities. The expense is expected to continue to grow as personnel will be added as the Company grows. It is expected that as of the June 30, 2011 measurement date, the Company will not be an accelerated filer; therefore, the expense related to auditor attestation for Section 404b of the Sarbanes-Oxley Act of 2002 will not be incurred in 2011.
 
Research and development expense was $81,208 for the three months ended March 31, 2011 as compared to $55,673 for the same period in 2010.  The research and development expense was 1.3% of sales in the three months ended March 31, 2011 as compared to 1.0% in the same period in 2010.  In 2011 and 2010, approximately 50% of the expense was related to ART’s SAECG software, Predictor®.  Product testing and development costs continue in support of a National Institutes of Health research project utilizing ART’s proprietary Signal Averaged ECG products.  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 2011. Both areas of research and development have resulted in the filing of provisional patent applications.
 
Other income (expense), net was $(10,562) versus income of $122 for the three months ended March 31, 2011 and 2010, respectively.  Interest income in the three months ended March 31, 2011 was offset by a loss in currency exchange of $14,339 associated with WirelessDx's Canadian operations. Interest income in the three months ended March 31, 2010 was offset by the disposal of assets of $2,939.
 
Income taxes as a percent of income before income taxes were 44% for the three months ended March 31, 2011 as compared to 38% for the same period in 2010.  This difference is due to rate differences associated with offsetting losses and profits occurring in different jurisdictions. Management will continue to seek to implement any tax planning opportunities that could effectively reduce the Company’s income tax obligations in the future.
 
 
 

Liquidity and Capital Resources
 
Working capital was $8,693,667 at March 31, 2011 compared to $8,902,507 at December 31, 2010, a decrease of $208,840.  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.
 
Net capital expenditures were $402,647 for the first three months of 2011 as compared to $452,519 for the same period in 2010.  The largest portion of the capital expenditures in the first three months of 2011 resulted from increased investment in medical devices used by the medical services business with the remainder being deployed for the routine replacement of production equipment and tooling on the sensor product line.  Capital expenditures for the three months ended March 31, 2011 were made with cash on hand.
 
The Company has an unsecured $2,000,000 credit line with a large multinational bank.  The agreement provides for borrowings up to 80% of eligible accounts receivable plus 50% of raw material and finished goods inventories.  This facility has no borrowing base charge.  The agreement contains covenants that apply upon drawing on the line. The covenants relate to various matters including notice prior to executing further borrowings and security interests, merger or consolidation, acquisitions, guarantees, sales of assets other than in the normal course of business, leasing, changes in ownership and payment of dividends.  No funds have been drawn down on this line during the quarter ended March 31, 2011.
 

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The Company's subsidiary, RMDDx, had $520,696 in cash which is restricted as it collateralizes a guarantee on a stand-by letter of credit related to a Canadian Federal contracting economic incentive program involving an unrelated third party. The Company has secured a $1,000,000 letter of credit to replace the guarantee by the Province of Prince Edward Island and the restrictions were removed during the second quarter of 2011.
 
During the first period, payment terms with the silver material vendor were modified resulting in a negative impact of approximately $650,000 to cash flow from operations. This decrease in accounts payable from the shorter payment terms with our silver supplier was to offset a possible increase in material cost. The savings in cost of materials was greater than the cost of capital to the Company.
 
The Company expects to meet cash demands for its operations at current levels with current operating cash flows for the foreseeable future.
 
During the period ended March 31, 2011, the Board of Directors declared and paid a cash dividend of $0.06 per share for a total of $168,236. In the comparable period ended March 31, 2010, the Board of Directors declared and paid a cash dividend of $0.06 per share for a total of $161,328.
 
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.  To date an aggregate of 36,199 shares were purchased under the program to date for an aggregate of $87,163.  No purchases were made in the first three months of 2011 or 2010.
 
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
 
The Company recognizes revenue upon product shipment or customer acceptance of completion of service provided, with persuasive evidence of an arrangement, the fee is fixed or determinable, and collectability of the related receivable is reasonably assured. The acceptance of the service by RMDDx is the prearranged transmission of medical records into the customer owned database. The Company recognizes software license revenue upon completion of performance obligations by the Company and evidence of licenses transmitted from the control of the Company.
 

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Products are shipped to the customer with the warranty that the product meets the mutually agreed specifications as detailed on the purchase order. Upon agreement within 90 days of shipment between the Company and customer that the product did not conform to the agreed upon specifications, a return is authorized, credited and product returned is replaced.
 
Based on management’s on-going analysis of accounts receivable balances, and after the initial recognition of the revenue, as to any event that adversely affects the ultimate ability to collect the related receivable, management will record an allowance for bad debts.  Bad debts have not had a significant impact on the Company’s financial position, results of operations and cash flows.
 
Stock-Based Compensation
 
The Company accounts for share based compensation under ASC 718, “Stock Compensation” (“ASC 718”). ASC 718 requires that companies recognize and measure compensation expense for all share-based payments at the grant date based on the fair market value of the award.  This share-based compensation expense must be included in the Company’s statement of operations over the requisite service period.
 
The Company uses the Black-Scholes option pricing model which requires extensive use of financial estimates and accounting judgment, including the expected volatility of the Company’s common stock over the estimated term, and estimates on the expected time period that employees will retain their vested options prior to exercising them.  The use of alternative assumptions could produce significantly different estimates of the fair value of the stock-based compensation and as a result, provide significantly different amounts recognized in the Company’s statement of income.
 
Inventory and Inventory Reserves
 
The Company values its inventory at the lower of average 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.
 
The Company maintains some reserve for excess, slow moving, and obsolete inventory.  A review of inventory on hand is made at least annually and some obsolete inventory is scrapped and/or recycled.  The review is based on several factors including a current assessment of future product demand, historical experience, and product expiration.
 
Deferred Tax Assets
 
The Company assesses its deferred tax assets based upon a more likely than not to be realized criteria.  The Company considers future taxable income and ongoing prudent and feasible tax planning strategies in assessing the need for the valuation allowance.  In accordance with ASC 740 we recognize the benefits of a tax position if that position is more likely than not to be sustained on audit, based on the technical merit of the position.
 
Asset Impairment – Goodwill
 
The Company reviews the valuation of goodwill and intangible assets to assess potential impairments.  Management reassesses the useful lives of other intangible assets with identifiable useful lives in accordance with the guidelines set forth in ASC 350, “Intangible Assets”.  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 previously acquired or others likely to be acquired in the future.  If the actual sale of product and market acceptance differs significantly from the estimates, management may be required to record an impairment charge to write down the asset to its realizable value.  To test for impairment, a present value of an estimate of future cash flows related to goodwill or intangible assets with indefinite lives are calculated and compared to the value of the intangible asset during the first quarter annually.  When impairment exists it could have a material adverse effect on the Company’s business, financial condition and results of operations.  After the annual testing was completed as of March 31, 2011, no impairment of goodwill was required.
 
Asset Impairment – Long Lived Assets
 
The Company assesses the impairment of long-lived assets and intangible assets with finite lives whenever events or changes in circumstances indicate that the carrying value may not be fully recoverable.  When the Company’s management determines that the carrying value of such assets may not be recoverable, management generally measures any impairment on a projected discounted cash flow method using a discount rate determined by management to be commensurate with the risk inherent

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in its current business model.
 
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”). 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.
 

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PART II - OTHER INFORMATION
 
Item 7.  Exhibits
 
(a)
Exhibits
3.0
Articles of Incorporation (a)
3.1
Amended and Restated By-laws(b)
10.43*
Employment agreement between James E. Rouse and the company dated December 26th, 2006. (c)
10.44*
Employment agreement between David A. Garrison and the Company dated January 1st, 2007. (d)
31.1
Certification of the CEO pursuant to Rule 13a-14(a) or Rule 15(d)-14(a) on page X-1
31.2
Certification of the CFO pursuant to Rule 13a-14(a) or Rule 15(d)-14(a) on page X-2.
32.1
Certification pursuant to 18 U.S.C. §1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 on page X-3.
32.2
Certification pursuant to 18 U.S.C. §1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 on page X-4.
__________________________
 
* Indicates a management contract or compensatory plan required to be filed as an exhibit.
(a)
Incorporated by reference from the Company’s Registration Statement on Form S-18 as filed with the Commission in April 1988, Registration Statement No. 33-20945-FW.
(b)
Incorporated by reference from the Company’s Form 8-K as filed with the Commission May 8, 2009.
(c)
Incorporated by reference from the Company’s Form 8-K as filed with the Commission on December 8, 2006.
(d)
Incorporated by reference from the Company’s Form 10-KSB for period ended December 31, 2006 as filed with the Commission in March of 2007.
 
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.
 
 
ARRHYTHMIA RESEARCH TECHNOLOGY, INC.
 
May 12, 2011
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)
 

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Index to Exhibits
 
Number
Exhibit
Page
31.1
Certification of the CEO pursuant to Rule 13a-14(a) or Rule 15(d)-14(a)
X-1
31.2
Certification of the CFO pursuant to Rule 13a-14(a) or Rule 15(d)-14(a) 
X-2
32.1
Certification pursuant to 18 U.S.C. §1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
X-3
32.2
Certification pursuant to 18 U.S.C. §1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002                                           
X-4
 

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