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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549

 

FORM 10-Q

 

R   QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
     
    For the quarterly period ended March 25, 2012
     
    or
     
¨   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

Commission file number 000-51645

 

GLENROSE INSTRUMENTS INC.

(Exact name of Registrant as specified in its charter)

 

Delaware 20-3521719
(State of incorporation or organization) (IRS Employer Identification No.)
   
45 First Avenue  
Waltham, Massachusetts 02451
(Address of Principal Executive Offices) (Zip Code)

 

Registrant’s Telephone Number, Including Area Code: (781) 622-1120

 


 

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 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 x        No ¨

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check One):

 

Large accelerated filer ¨ Accelerated filer ¨
   
Non –accelerated filer ¨ Smaller reporting company x
   
(Do not check if a smaller reporting company)  

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes ¨ No x

 

  Title of each class   Outstanding at March 25, 2012  
  Common Stock, $0.01 par value   3,112,647  
         
         

 

 
 

 

GLENROSE INSTRUMENTS INC.

 

QUARTERLY REPORT ON FORM 10-Q

FOR THE PERIOD ENDING MARCH 25, 2012

 

TABLE OF CONTENTS

 

PART I – FINANCIAL INFORMATION
     
Item 1: Financial Statements 3
     
  Condensed Consolidated Balance Sheets –  
  March 25, 2012 (unaudited) and December 25, 2011 3
     
  Condensed Consolidated Statement of Income –  
  Three Months Ended March 25, 2012 and March 27, 2011 (unaudited) 5
     
  Condensed Consolidated Statement of Cash Flows –  
  Three Months Ended March 25, 2012 and March 27, 2011 (unaudited) 6
     
  Notes to Condensed Consolidated Financial Statements 7
     
Item 2: Management’s Discussion and Analysis of Financial Condition and Results of Operations 15
     
Item 3: Quantitative and Qualitative Disclosures about Market Risk 18
     
Item 4T: Controls and Procedures 18
     
PART II - OTHER INFORMATION
     
Item 1A: Risk Factors 19
     
Item 6: Exhibits 19
     
Signatures   20

 

References in this Form 10-Q to “we”, “us”, “our”, the “Company” “GlenRose Instruments” and “GlenRose” refers to GlenRose Instruments Inc. and its consolidated subsidiaries, unless otherwise noted.

 

2
 

 

PART I – FINANCIAL INFORMATION

 

Item 1 – Financial Statements

 

GLENROSE INSTRUMENTS INC.

CONSOLIDATED BALANCE SHEETS

As of March 25, 2012 and December 25, 2011

 

   March 25,   December 25, 
   2012   2011 
   (unaudited)     
ASSETS          
Current Assets          
Cash and cash equivalents  $2,553   $831,516 
Short-term investments   12,305    12,305 
Accounts receivable (net of allowances of $24,320 for 2012 and 2011, respectively)   5,106,774    3,932,918 
Unbilled contract receivables   810,959    1,110,193 
Due from related party   42,858    42,858 
Supply inventory   63,482    61,758 
Prepaid expenses   235,368    163,559 
Other receivables   23,246    6,561 
Deferred tax asset, current portion   292,060    290,281 
Assets held for sale   1,185,941    1,178,306 
Total current assets   7,775,546    7,630,255 
           
Property, plant and equipment, net   1,394,416    1,527,206 
           
Other assets          
Restricted assets   451,381    451,406 
Deposits   53,065    53,065 
Deferred tax asset, net of current portion   207,926    207,926 
Deferred financing costs   79,253    83,451 
Goodwill   2,740,913    2,740,913 
Total other assets   3,532,538    3,536,761 
           
TOTAL ASSETS  $12,702,500   $12,694,222 

 

The accompanying notes are integral part of these consolidated financial statements

 

3
 

 

GLENROSE INSTRUMENTS INC.

CONSOLIDATED BALANCE SHEETS (CONTINUED)

As of March 25, 2012 and December 25, 2011

 

   March 25,   December 25, 
   2012   2011 
   (unaudited)     
LIABILITIES AND STOCKHOLDERS' EQUITY          
Current liabilities          
Accounts payable  $1,705,759   $2,228,321 
Deferred revenue   172,697    172,697 
Accrued expenses   418,540    342,736 
Accrued employee-related costs   1,785,375    2,000,903 
Line of credit payable   558,964    - 
Term note payable, current portion   142,857    142,857 
Notes payable, current portion   49,064    52,116 
Due to related party   52,988    22,078 
Capital lease obligations, current portion   12,225    11,915 
Income taxes payable   197,722    283,635 
Total current liabilities   5,096,191    5,257,258 
           
Long-term liabilities          
Term note payable, net of current portion   785,714    821,429 
Note payable, net of current portion   14,629    24,619 
Capital lease obligations, net of current portion   23,438    26,613 
Deferred tax liability   551,500    524,269 
Other long-term liabilities   21,048    24,037 
Total liabilities   6,492,520    6,678,225 
           
Stockholders' equity          
Common stock ($0.01 par value; 10,000,000 shares authorized; 3,112,647 shares issued and outstanding at March 25, 2012 and December 25, 2011, respectively)   31,126    31,126 
Additional paid-in-capital   8,009,275    8,004,229 
Accumulated deficit   (1,830,421)   (2,019,358)
Total stockholders' equity   6,209,980    6,015,997 
           
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY  $12,702,500   $12,694,222 

 

The accompanying notes are integral part of these consolidated financial statements

 

4
 

 

GLENROSE INSTRUMENTS INC.

CONSOLIDATED STATEMENT OF INCOME

For the Three Months Ended March 25, 2012 and March 27, 2011

 

   Three Months Ended 
   March 25,   March 27, 
   2012   2011 
   (unaudited)   (unaudited) 
         
Revenues  $10,158,534   $10,856,322 
           
Cost of sales   9,337,232    9,551,585 
           
Gross profit from operations   821,302    1,304,737 
           
General and administrative expenses   475,780    573,828 
           
Operating income   345,522    730,909 
           
Other income (expense)          
Interest and other income   670    876 
Interest expense   (43,716)   (69,433)
Total other expense   (43,046)   (68,557)
           
Income from operations, before income taxes   302,476    662,352 
           
Provision for income taxes   (113,539)   (255,817)
           
Net income  $188,937   $406,535 
           
Net income per share - basic and diluted  $0.06   $0.13 
           
Weighted average shares outstanding - basic and diluted   3,102,647    3,102,647 

 

The accompanying notes are integral part of these consolidated financial statements

 

5
 

 

GLENROSE INSTRUMENTS INC.

CONSOLIDATED STATEMENT OF CASH FLOWS

For the Three Months Ended March 25, 2012 and March 27, 2011

 

   March 25,   March 27, 
   2012   2011 
   (unaudited)   (unaudited) 
         
CASH FLOWS FROM OPERATING ACTIVITIES:          
Net income  $188,937   $406,535 
Adjustments to reconcile net income to net cash provided by operating activities:          
Depreciation and amortization   143,298    122,441 
Provision for deferred income taxes   25,452    (13,921)
Amortization of deferred financing costs   4,198    21,245 
Stock-based compensation   5,046    11,154 
Changes in operating assets and liabilities          
(Increase) decrease in:          
Accounts receivable   (1,173,856)   182,155 
Unbilled contract receivables   299,234    70,271 
Supply inventory   (1,724)   1,500 
Prepaid expenses   (71,809)   (64,192)
Other receivables   (16,685)   (2,307)
Assets held for sale   (7,635)   - 
Restricted assets   25    - 
Increase (decrease) in:          
Accounts payable   (522,562)   (142,465)
Accrued interest, related party   -    (11,960)
Due to related party   30,910    (8,002)
Other long-term liabilities   (2,989)   5,539 
Other accrued liabilities   (225,637)   13,424 
Net cash (used in) provided by operating activities   (1,325,797)   591,417 
           
CASH FLOWS FROM INVESTING ACTIVITIES:          
Purchase of property and equipment   (10,508)   (155,747)
Net cash used in investing activities   (10,508)   (155,747)
           
CASH FLOWS FROM FINANCING ACTIVITIES:          
Redemption of convertible debentures   -    (575,000)
Advances on line of credit   5,509,590    - 
Payments on line of credit   (4,950,626)   - 
Payments on term note payable   (35,715)   - 
Payments on notes payable   (13,042)   (3,410)
Principal payments on capital lease obligations   (2,865)   (2,585)
Net cash provided by (used in) financing activities   507,342    (580,995)
           
Net decrease in cash and cash equivalents   (828,963)   (145,325)
Cash and cash equivalents, beginning of the period   831,516    1,669,868 
Cash and cash equivalents, end of the period  $2,553   $1,524,543 

 

The accompanying notes are integral part of these consolidated financial statements

 

6
 

 

GLENROSE INSTRUMENTS INC.

 

Notes to Interim Financial Statements (Unaudited) for the period ending March 25, 2012

 

Note 1 – Organization and Significant Accounting Policies:

 

Organization

 

GlenRose Instruments Inc., a Delaware corporation, or the Company, was incorporated in September 2005 by the GlenRose Partnership L.P., or the GlenRose Partnership, a private-equity partnership with its headquarters in Waltham, Massachusetts. The Company was organized to serve as a holding company through which the GlenRose Partnership’s partners would hold the shares of Eberline Services, Inc. or Eberline Services or ESI (all of which had previously been held by the GlenRose Partnership). In order to effect such change in structure, the GlenRose Partnership entered into a stock exchange agreement with the Company in September 2005 pursuant to which all outstanding shares of Eberline Services owned by the GlenRose Partnership were exchanged for 3,000,000 shares of common stock of GlenRose Instruments. As a result of this exchange, the GlenRose Partnership owned all of the outstanding stock of the Company, and the Company owned all of the outstanding stock of its subsidiary, ESI.

 

GlenRose Instruments, through Eberline Services and its subsidiaries, provides radiological services and operates a radiochemistry laboratory network, as well as provides radiological characterization and analysis, hazardous, radioactive and mixed waste management, and facility, environmental, safety and health management. The subsidiaries of Eberline Services are Eberline Services Hanford, Inc. or ESHI, Eberline Analytical Corporation, Benchmark Environmental Corp., or Benchmark, and Lionville Laboratory Inc., or Lionville.

 

As of March 25, 2012, the Company has three segments – the Environmental Services segment, the Analytical Laboratories segment and the Instruments segment. The Environmental Services operating segment provides radiological and waste management services primarily to the federal government in connection with the clean-up of the former and present atomic weapons and energy sites operated by the federal government. The Analytical Laboratories operating segment provides analytical radiological services and involves the operation of a radiochemistry laboratory network and a radioactive check source manufacturing facility. The Instruments segment was formed in 2006 with the intent to acquire instrument companies, which have well-established and proven technology. This segment also includes the research and development of a new line of instruments that the Company expects to begin manufacturing later this year. As of the date of this report the Company has not made any commitments, nor has it acquired any instrument businesses.

 

Principles of Consolidation and Basis of Presentation

 

The accompanying consolidated financial statements include the Company and its subsidiaries. All significant intercompany transactions have been eliminated. In the opinion of management, the unaudited financial statements contain all adjustments (all of which were considered normal and recurring) necessary to present fairly the Company's financial position at March 25, 2012, and the results of operations and cash flows for the three months ended March 25, 2012 and March 27, 2011. The unaudited financial statements included herein should be read in conjunction with the audited financial statements and notes thereto included in the Company’s Form 10-K for the year ended December 25, 2011.

 

Reclassifications

 

Certain prior period balances have been reclassified to conform with current period presentation.

 

Fiscal Year

 

The Company’s fiscal year-end is the last Sunday of each calendar year. Each quarter is comprised of two four-week and one five-week period to ensure consistency in prior-year comparative analysis. The Company changed the fiscal year-end to the current format in 2006. The previous fiscal year-end was December 25, 2011.

 

Use of Estimates in Preparation of Statements

 

The preparation of financial statements in conformity with generally accepted accounting principles, or GAAP, requires management to make estimates and underlying assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.

 

7
 

 

GLENROSE INSTRUMENTS INC.

 

Concentration of Credit Risk

 

Financial instruments, which potentially subject the Company to concentrations of credit risk, consist of highly liquid cash equivalents and trade receivables. The Company’s cash equivalents are placed with certain financial institutions and issuers. At March 25, 2012, the Company had $201,381 of restricted cash that exceeded the Federal Deposit Insurance Corporation limit of $250,000.

 

The Company performs periodic credit evaluations of its customers’ financial condition and generally does not require collateral. The Company provides for an allowance for doubtful accounts on receivable balances based upon the expected collectability of such receivables. Federal and state governments collectively account for more than 90% of all revenues for the three month periods ended March 25, 2012 and March 27, 2011. Two of the Company’s customers account for more than 10% of revenue and trade accounts receivable. One customer represented approximately 71% and 81% of revenue and 27% and 58% of trade accounts receivable for the three months ended March 25, 2012 and March 27, 2011, respectively. The other customer represented approximately 8% and 0% of revenue and 32% and 4% of trade accounts receivable for the three months ended March 25, 2012 and March 27, 2011, respectively.

 

Revenue Recognition

 

Revenue for laboratory services is recognized upon completion of the services and the shipment of the related data packages to the Company’s customers. Revenue for government service contracts is recognized as the services are performed. Revenues are recognized based upon actual costs incurred plus specified fees or actual time and materials as required. The Company performs certain contracts that are audited by either the Defense Contract Audit Agency, or the DCAA, or Los Alamos National Laboratories Internal Audit. Such contracts may be subject to adjustment dependent upon such factors as provisional billing rates or other contract terminology. The Company records as revenue what it considers to be allowable costs under government service contracts. Calculations of allowable overhead and profit may also change after audits by the DCAA for cost reimbursable type contracts. Contracts are normally settled during the audit year the contract terminates performance and is submitted for closure. The Company is currently audited and settled through December 2005 for all contracts subject to review by DCAA and audited through December 2002 for contracts subject to review by the Los Alamos Internal Audit. Contracts performed after 2005 for DCAA purposes, or after 2002 for the Los Alamos Internal Audit, and are either active or have not been submitted for closure may be subject to adjustment during subsequent audits during the year they are closed and audited.

 

The Company is engaged principally in three types of service contracts with the federal government and its contractors:

 

Cost Reimbursable Contracts. Revenue from “cost-plus-fixed-fee” contracts is recognized on the basis of reimbursable contract costs incurred during the period plus an earned fee. Costs incurred for services which have been authorized and performed, but may not have been billed, are allocated with operational fringe, overhead, general and administrative expenses and fees, and are presented as Unbilled Contract Receivables on the accompanying consolidated balance sheets contained herein.

 

Time-and-Materials Contracts. Revenue from “time and material” contracts is recognized on the basis of man-hours utilized plus other reimbursable contract costs incurred during the period.

 

Fixed-Price Contracts. Revenue from “fixed-price” contracts is recognized on the percentage-of-completion method.  For fixed-price contracts, the amount of revenues recognized is that portion of the total contract amount that the actual cost expended bears to the anticipated final total cost based on current estimates of cost to complete the project (cost-to-cost method).  However, when it becomes known that the anticipated final total cost will exceed the contract amount, the excess of cost over the contract amount is immediately recognized as a loss on the contract. Recognition of profit commences on an individual project only when cost to complete the project can reasonably be estimated and after there has been some meaningful performance achieved on the project (greater than 10% complete). Changes in job performance, job conditions, and estimated profitability, including those arising from contract penalty provisions (when applicable) and final contract settlements, may result in revisions to costs and income and are recognized in the period in which the revisions are determined. Claims and change orders are not recorded and recognized until such time as they have been accepted.

 

Direct costs of contracts include direct labor, subcontractors and consultants, materials and travel. The treatment of direct costs is outlined in the Federal Acquisition Regulations. The balance of costs, including facilities costs, insurance, administrative costs, overhead labor and fringe costs, are classified as either indirect costs or general and administrative expense and are allocated to jobs as a percentage of each division’s total cost base consistent with the Company’s approved cost structure. Direct materials, direct travel, other direct costs, and minor subcontract costs are passed through to the customer at cost, with or without fee depending on contract type and/or direct cost element and are burdened with general and administrative expenses. Major subcontracts are passed through at cost, without fee and are burdened with a material handling fee. The Company is exempt from federal cost accounting standards coverage based on its size standard, but otherwise complies with applicable regulations.

 

8
 

 

GLENROSE INSTRUMENTS INC.

 

Goodwill

 

Goodwill is the excess of the purchase price over the fair value of identifiable net assets acquired in business combinations. Goodwill is subject to an impairment test annually. Goodwill is also reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. The Company performs impairment testing at the reporting unit level. An impairment loss is recognized when the fair value of the discounted cash flows of the reporting unit including its tangible assets is less than the carrying value. Model assumptions are based on the Company’s projections and best estimates using appropriate and customary market participant assumptions. Changes in forecasted cash flows or the discount rate would affect the estimated fair value of the reporting unity and could result in a goodwill impairment charge in a future period.

 

At March 25, 2012, the Company’s entire $2,740,913 goodwill balance was related to the Environmental Services segment which includes Eberline Services, ESHI and Benchmark. The Analytical Laboratories goodwill was written off in prior years. No goodwill impairment was identified during the year ended December 25, 2011. No events occurred or circumstances changed that required the Company to further test goodwill for impairment during the three month period ended March 25, 2012.

 

Income Taxes

 

The Company uses the liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are determined based on the differences between the financial statement and tax basis of assets and liabilities using enacted tax rates in effect in the years in which the differences are expected to reverse. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. The amount of such provisions is based on various factors, such as the amount of taxable income in the current and prior periods, and the likelihood of continued taxable income. Additionally, management is responsible for estimating the probability that certain tax assets or liabilities can and will be utilized in future periods. The Company believes it records and/or discloses such potential tax liabilities as appropriate and has reasonably estimated its income tax liabilities and recoverable tax assets. The Company recorded a tax provision of $113,539 and $255,817 during the three month periods ended March 25, 2012 and March 27, 2011, respectively.

 

Earnings per Common Share

 

The Company computes basic net income per share by dividing net income for the period by the weighted average number of shares of common stock outstanding during the period. The Company computes diluted net income per common share using the treasury stock method. For purposes of calculating diluted net income per share, the Company considers shares issuable in connection with stock options and unvested restricted stock to be dilutive common stock equivalents when the exercise price is less than the average market price of the common stock for the period. There were no dilutive common shares during the three month period ended March 25, 2012. See “Note 5 – Earnings per Share.”

 

Stock Based Compensation

 

Stock based compensation cost is measured at the grant date based on the estimated fair value of the award and is recognized as an expense in the statement of income over the requisite service period. The fair value of stock options granted is estimated using the Black-Scholes option pricing valuation model. The Company recognizes compensation on a straight-line basis for each separately vesting portion of the option award. Use of a valuation model requires management to make certain assumptions with respect to selected model inputs. Expected volatility is calculated based on the average volatility of 20 companies in the same industry as the Company. The average expected life is estimated using the simplified method for “plain vanilla” options. The simplified method determines the expected life in years based on the vesting period and contractual terms as set forth when the award is made. The Company uses the simplified method for awards of stock-based compensation since it does not have the necessary historical exercise and forfeiture data to determine an expected life for stock options. The risk-free interest rate is based on U.S. Treasury zero-coupon issues with a remaining term which approximates the expected life assumed at the date of grant. When options are exercised the Company normally issues new shares.

 

Recovery of Long-Lived Assets

 

Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the remaining estimated useful life of such assets might warrant revision or that the balances may not be recoverable. If undiscounted cash flows are insufficient to recover the net book value of long-term assets further analysis is performed in order to determine the amount of the impairment. In such circumstances an impairment loss would be recorded equal to the amount by which the net book value of the assets exceeds fair value. Fair value is usually determined based on the present value of estimated expected future cash flows using a discount rate commensurate with the risks involved. No events occurred or circumstances changed at March 25, 2012, that would indicate that the remaining net book value of the Company’s long-lived assets is not recoverable.

 

9
 

 

GLENROSE INSTRUMENTS INC.

 

Assets Held for Sale

 

The Company owns property in Albuquerque, New Mexico. In 2009, the Company entered into an agreement, subject to closing conditions, with a buyer to sell the property for approximately $1.9 million. At March 25, 2012, $507,700 in land, $2,265,764 in buildings and improvements less $1,916,926 in accumulated depreciation is classified as “Assets held for sale” on the Company’s balance sheet. The assets held for sale balance of $1,185,941 also includes selling costs incurred to date of $37,477 and an accrual of $291,926 towards decommissioning of the site. In 2010, the Company submitted a detailed site assessment of the facility to the New Mexico Environmental Department, or NMED, as part of the closure process which was approved in June 2011. The Company characterized and classified all radiological waste associated with the facility and all waste was crated and packaged for disposal in 2010. In January 2011, the Company applied for a shipment permit to transfer the remaining waste to an appropriate facility. The Company is currently communicating with NMED on the report in preparation for the demolition of the building. The Company believes that it has adequately accrued for decommissioning of the site; however, it is possible that additional funds up to $100,000 may be needed. The Company expects to complete the sale in 2012.

 

 New Accounting Pronouncements

 

In September 2011, the Financial Accounting Standards Board, or FASB, issued an amendment to the accounting guidance for goodwill in order to simplify how companies test goodwill for impairment. The amendment permits an entity to first assess the qualitative factors to determine whether it is more likely than not that the fair value of the reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test. The more-likely-than-not threshold is defined as having a likelihood of more than 50 percent. If, after assessing the totality of events or circumstances, an entity determines it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, then performing the two-step impairment test is unnecessary. The amendment is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. The adoption of this accounting pronouncement did not have a material impact on the Company’s financial statements and the Company does not expect it to have a material impact on the Company’s annual goodwill impairment assessment in the fourth quarter of 2012.

 

In June 2011, the FASB issued an amendment to the accounting guidance for presentation of comprehensive income. Under the amended guidance, an entity may present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. In either case, an entity is required to present each component of net income along with total net income, each component of other comprehensive income along with a total for other comprehensive income, and a total amount for comprehensive income. For public companies, the amendment is effective for fiscal years, and interim periods within those years, beginning after December 15, 2011, and shall be applied retrospectively. The implementation of this accounting pronouncement did not have a material impact on the Company’s financial statements.

 

In May 2011, the FASB issued an amendment to the accounting guidance for fair value measurement and disclosure. Among other things, the guidance expands the disclosure requirements around fair value measurements categorized in Level 3 of the fair value hierarchy and requires disclosure of the level in the fair value hierarchy of items that are not measured at fair value in the statement of financial position but whose fair value must be disclosed. It also clarifies and expands upon existing requirements for measurement of the fair value of financial assets and liabilities as well as instruments classified in shareholders’ equity. The guidance is effective for interim and annual periods beginning after December 15, 2011. The adoption of this accounting pronouncement did not have a material impact on the Company’s financial statements.

 

Note 2 – Debt:

 

On August 31, 2011, the Company entered into a line of credit agreement with Wells Fargo Bank for a $5,000,000 credit facility. The facility included a $1,000,000 term real-estate note, or Term Note, with a 7 year straight line amortization, at Libor plus 3.5%, and up to $4,000,000 in a revolving line of credit, or Line of Credit, for 5 years, at Libor plus 3.5%, based on a borrowing base of the Company’s trade receivables subject to certain adjustments. The Term Note and Line of Credit are payable by Eberline Services, ESHI, Eberline Analytical Corporation and Lionville, subsidiaries of the Company. 

 

On August 31, 2011, the Company borrowed $1,000,000 against the Term Note and at March 25, 2012, the outstanding balance on the Term Note was $928,571. The Term Note is secured by the Company’s real estate assets which are included in fixed assets which at March 25, 2012, had a net book value of $1,394,416.

 

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GLENROSE INSTRUMENTS INC.

 

At March 25, 2012, the outstanding balance on the Line of Credit was $558,964 and the undrawn portion was $3,441,036. The Line of Credit is secured by the Company’s trade receivables. The loan is also subject to various financial statement covenants.

 

In December 2010, the Company entered into a finance agreement with Ford Motor Credit. At March 25, 2012, the outstanding balance with Ford Motor Credit was $63,693 and it is classified on the Company’s balance sheet as Notes payable current and Notes payable long-term.

 

Annual principal payments on long-term debt at March 25, 2012 were as follows:

 

Periods Ending March 25,  Amount 
     
2012  $155,266 
2013   180,682 
2014   152,135 
2015   146,986 
2016   142,858 
2017 and thereafter   250,000 
Total  $1,027,927 

 

Note 3 – Commitments and Contingencies:

 

The Company and its subsidiaries lease facilities and equipment under various operating leases. Future minimum rental commitments for long-term, non-cancelable operating leases at March 25, 2012, are as follows:

 

Summary of Lease Obligations:

 

   2012   2013   2014   2015   Totals 
Facilities  $77,376   $139,655   $49,128   $12,282   $278,441 
Equipment   3,804    15,217    10,144    4,227    33,392 
   $81,180   $154,872   $59,272   $16,509   $311,833 

 

For the three month period ending March 25, 2012, rent expense was $91,225 and $88,155, respectively.

 

The Company performs services under numerous subcontract agreements on cost-reimbursable contracts with the federal government. During the period from 1998 to 2003, the Company was party to a subcontract agreement with Johnson Control Northern New Mexico, or JCNNM, to provide services to Los Alamos on a cost-reimbursable basis. On May 14, 2007, the Company received notification from IAP-Northern New Mexico, or IAPNNM, the successor corporation to JCNNM, that the results of a Los Alamos audit for the period ending in 2003 determined that certain costs previously claimed and billed by the Company were subsequently deemed unallowable or otherwise not reimbursable. IAPNNM requested that the Company reimburse the amount of $321,836 that was paid to the Company during the subject time period. In January 2009, the Company protested the Los Alamos audit results claiming they were inaccurate and requested to resubmit a claim for the subject contract. The Los Alamos audit team agreed to review the audit results and adjust the claim as needed. Management believes that the Company will prevail in this decision and has therefore not provided a specific reserve for this claim. In the event it is determined that the Company has to reimburse such amount in full, the resultant cost could materially affect its results of operations.

 

The Company is not currently a party to any material litigation and is not aware of any pending or threatened litigation against it that could have a material adverse effect on its business, operating results or financial condition.

 

Note 4 – Stockholders’ Equity:

 

Stock-based compensation expense was $5,046 and $11,154 as of March 25, 2012 and March 27, 2011, respectively. At March 25, 2012, there were 10,000 shares of unvested restricted stock outstanding and 33,400 of unvested stock options outstanding.

 

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GLENROSE INSTRUMENTS INC.

 

Note 5 – Earnings per Share:

 

Basic and diluted earnings per share for the three month periods ended March 25, 2012 and March 27, 2011 was as follows:

 

   Three Months 
   March 25,   March 27, 
   2012   2011 
Earnings per share          
Earnings available to stockholders  $188,937   $406,535 
           
Weighted average shares outstanding - basic   3,102,647    3,102,647 
Net earnings per share - basic  $0.06   $0.13 
           
Assumed exercise of dilutive stock options and warrants   -    - 
Weighted average shares outstanding - diluted   3,102,647    3,102,647 
Net earnings per share - diluted  $0.06   $0.13 
           
Anti-dilutive restricted stock outstanding   10,000    10,000 
Anti-dilutive shares underlying stock options outstanding   167,000    172,000 
Anti-dilutive convertible debentures   -    614,286 

 

Note 6 – Fair Value Measurements:

 

The fair value topic of FASB’s Accounting Standards Codification defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The accounting guidance also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs, where available, and minimize the use of unobservable inputs when measuring fair value. There are three levels of inputs that may be used to measure fair value:

 

Level 1 — Quoted prices in active markets for identical assets or liabilities that the entity has the ability to access at the measurement date.

 

Level 2 — Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

 

Level 3 — Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

 

At March 25, 2012, the Company had no financial instruments that are required to be recorded at fair value on a recurring basis. The Company’s financial instruments include cash and cash equivalents, short-term investments, accounts receivable, accounts payable, capital lease obligations, line of credit payable, term note payable and notes payable.

 

The recorded values of cash and cash equivalents, short-term investments, accounts receivable and accounts payable approximate fair value based on their short-term nature. The fair value of capital lease obligations and notes payable is estimated at its carrying value based on current market rates for instruments with similar maturities adjusted for applicable credit risk, which are Level 2 inputs. The carrying value of the Company’s line of credit and term loan approximates its fair value due to their variable interest rates, which are Level 2 inputs.

 

Note 7 - Segment Data:

 

The Company’s executive officers include Arvin Smith, Dr. Richard Chapman and Dr. Shelton Clark. Collectively, they are the Chief Operating Decision Maker, or CODM, as defined by Disclosures about Segments of an Enterprise and Related Information. The office of the CODM is responsible for assessing the performance of each segment, as well as the allocation of Company resources.

 

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GLENROSE INSTRUMENTS INC.

 

The Company currently operates three business segments: Environmental Services, Analytical Laboratories and Instruments. The Environmental Services operating segment provides radiological and waste management services primarily to the federal government in connection with the clean-up of the former and present atomic weapons and energy sites operated by the federal government. The Analytical Laboratories operating segment provides analytical radiological services and involves the operation of a radiochemistry laboratory network and a radioactive check source manufacturing facility. The Instruments segment was formed in 2006 with the intent to acquire instrument companies, which have well-established and proven technology. This segment also includes the research and development of a new line of instruments that the Company expects to begin manufacturing later this year. As of the date of this report the Company has not made any commitments, nor has it acquired any instrument businesses. Acquisition of instrument businesses is no longer a focus in our strategy. Intercompany costs and sales are eliminated in the consolidated financial statements.

 

Segment data for the periods ending March 25, 2012 and March 27, 2011 are included below: 

 

   Three Months Ended 
   March 25,   March 27, 
   2012   2011 
   (unaudited)   (unaudited) 
Revenues          
Environmental Services  $8,491,148   $7,958,195 
Analytical Laboratories   1,667,386    2,898,127 
Instruments   -    - 
    10,158,534    10,856,322 
Cost of Sales          
Environmental Services   7,702,385    7,102,332 
Analytical Laboratories   1,634,847    2,449,253 
Instruments   -    - 
    9,337,232    9,551,585 
Gross Profit          
Environmental Services   788,763    855,863 
Analytical Laboratories   32,539    448,874 
Instruments   -    - 
    821,302    1,304,737 
General and administrative expenses          
Environmental Services   327,133    381,848 
Analytical Laboratories   83,539    120,414 
Instruments   65,108    71,566 
    475,780    573,828 
Operating profit (Loss)          
Environmental Services   461,630    474,015 
Analytical Laboratories   (51,000)   328,460 
Instruments   (65,108)   (71,566)
    345,522    730,909 
Supplemental Disclosure          
Depreciation Expense          
Environmental Services   38,264    23,505 
Analytical Laboratories   105,034    98,936 
Instruments   -    - 
    143,298    122,441 
Capital Expenditures          
Environmental Services   8,925    52,462 
Analytical Laboratories   1,583    103,285 
Instruments   -    - 
   $10,508   $155,747 

 

   March 25,   December 25, 
   2012   2011 
   (unaudited)     
Total Assets          
Environmental Services  $9,236,189   $9,414,532 
Analytical Laboratories   2,869,507    3,132,814 
Instruments   596,804    146,876 
   $12,702,500   $12,694,222 

 

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GLENROSE INSTRUMENTS INC.

 

Note 8 – Subsequent Events:

 

The Company has evaluated subsequent events through the filing date of this Form 10-Q and determined that no additional subsequent events occurred that would require recognition in the consolidated financial statements or disclosure in the notes thereto.

 

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GLENROSE INSTRUMENTS INC.

 

Item 2: Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

Forward-looking statements are made throughout this Management's Discussion and Analysis of Financial Condition and Results of Operations. Any statements contained herein that are not statements of historical fact may be deemed to be forward-looking statements. Without limiting the foregoing, the words “believes,” “anticipates,” “plans,” “expects,” “seeks,” “estimates” and similar expressions are intended to identify forward-looking statements. While the Company may elect to update forward-looking statements in the future, it specifically disclaims any obligation to do so, even if the Company's estimates change and readers should not rely on those forward-looking statements as representing the Company's views as of any date subsequent to the date of the filing of this Quarterly Report on Form 10-Q. There are a number of important factors that could cause the actual results of the Company to differ materially from those indicated by such forward-looking statements, including those detailed under the heading “Risk Factors” in this Quarterly Report on Form 10-Q.

 

First Quarter 2012 Compared to First Quarter 2011

 

Revenues

 

Revenues in the first quarter of 2012 were $10,158,534 compared to $10,856,322 for the same period in 2011, a decrease of $697,788 or 6.4%. The decrease in revenues was primarily due to a decrease in our Analytical Laboratory revenues due to lower sample loads, offset by an increase in our Environmental Services revenues due to additional work at Hanford and Argonne National Laboratory.

 

Revenues from our Environmental Services in the first quarter of 2012 were $8,491,148 compared to $7,958,195 for the same period in 2011, an increase of $532,953 or 6.7%. Our Environmental Services contributed 83.6% to total revenues in the first quarter of 2012 compared to 73.3% for the same period in 2011. The increase in our Environmental Services revenue was due to increased work at Hanford and at Argonne National Laboratory. Our Los Alamos work continued in environmental well drilling and sampling but was at a lower level than the previous period in support of a restoration project. The work at the Argonne National Laboratory this quarter was in support of a characterization and survey project of a discontinued facility.

 

Revenues from our Analytical Laboratories in the first quarter of 2012 were $1,667,386 compared to $2,898,127 for the same period in 2011, a decrease of $1,230,741 or 42.5%. Our Analytical Laboratories contributed 16.4% to total revenues in the first quarter of 2012 compared to 26.7% for the same period in 2011. The decrease in revenues was the result of decreased sample loads from the Hanford site at both our Richmond and Lionville laboratories.

 

Cost of Sales

 

The cost of sales in the first quarter of 2012 was $9,337,232 compared to $9,551,585 for the same period in 2011, a decrease of $214,353 or 2.2%. While the cost of sales increased at our Environmental Services, the overall decrease in cost of sales was primarily due to decreased revenue at our Richmond and Lionville laboratories and their associated costs.

 

The cost of sales from our Environmental Services in the first quarter of 2012 was $7,702,385 compared to $7,102,332 for the same period in 2011, an increase of $600,053 or 8.4% primarily due to salaries of new employees and an increase in subcontracts. The increased subcontracts were at Los Alamos in support of the drilling project.

 

The cost of sales from our Analytical Laboratories in the first quarter of 2012 was $1,634,847 compared to $2,449,253 for the same period in 2011, a decrease of $814,406 or 33.3%, primarily due to cost reductions in staffing during the period. Early in the quarter we made significant cost reduction efforts by reducing staffing across the laboratory segment by 10 full time employees and reducing time for other employees. In addition, the lower sample volume resulted in lower variable material costs associated with the completion of samples.

 

Gross Profit

 

Gross profit in the first quarter of 2012 was $821,302 compared to $1,304,737 for the same period in 2011, a decrease of $483,435 or 37.1%. The gross profit margin decreased to 8.1% in the first quarter of 2012 from 12.0% for the same period in 2011. The gross profit from our Environmental Services in the first quarter of 2012 was $788,763 compared to $855,863 for the same period in 2011, a decrease of $67,100 or 7.8%. The gross profit from our Analytical Laboratories in the first quarter of 2012 was $32,539 compared to $448,874 for the same period in 2011, a decrease of $416,335. Our laboratories have certain fixed costs that need to be absorbed and the lower sample volume at the laboratories made it hard to cover those costs.

 

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GLENROSE INSTRUMENTS INC.

 

Operating Expenses

 

General and administrative expenses in the first quarter of 2012 were $475,780 compared to $573,828 for the same period in 2011, a decrease of $98,048 or 17.1%. The general and administrative expenses decreased due to the reduction of two employees in the beginning of the year.

 

Operating Income

 

The operating income in the first quarter of 2012 was $345,522 compared to $730,909 for the same period in 2011. The operating income consisted of $461,630 at the Environmental Services and was decreased by a loss of $51,000 at the Analytical Laboratories and by corporate general and administrative expenses of $65,108. The decrease in operating income compared to the previous period was due to the decrease in operating income at our Analytical Laboratories and general and administrative costs related to increased business development efforts.

 

Other Income (Expense)

 

Other expenses in the first quarter of 2012 were $43,046 compared to $68,557 for the same period in 2011, a decrease of $25,511. Interest and other miscellaneous income in the first quarter of 2012 was $670 compared to $876 for the same period in 2011. The decrease was primarily due to a lower return on invested cash balances. Interest expense in the first quarter of 2012 was $43,716 compared to $69,433 for the same period in 2011 due a smaller principal amount outstanding on our loan balances and line of credit and due to the change in interest rates.

 

Provision for Income Taxes

 

The company recorded a tax provision of $113,539 in the first quarter of 2012 compared to $255,817 for the same period in 2011 at a 37.5% and 38.6% effective tax rate, respectively.

 

Net Income/Loss

 

Net income in the first quarter of 2012 was $188,937 compared to $406,535 for the same period in 2011.

 

Liquidity and Capital Resources

 

Consolidated working capital at March 25, 2012, was $2,679,355 compared to $2,372,997 at December 25, 2011. Included in working capital were cash, cash equivalents and short-term investments of $14,858 as of March 25, 2012, compared to $843,821 at December 25, 2011. The increase in working capital was primarily due to cash used by our accounts receivable and cash provided by the Line of Credit.

 

Cash used by operating activities was $1,325,797 in the first three months of 2012, compared to cash provided by operating activities of $591,417 for the same period in 2011. Our net receivables balance increased to $5,106,774 in the first three months of 2012, compared to $3,932,918 at December 25, 2011, resulting in a decrease in cash of $1,173,856 primarily due to timing of invoicing related to a new contract at Los Alamos. Our unbilled contract receivables decreased to $810,959 in the first three months of 2012 compared to $1,110,193 at December 25, 2011, resulting in an increase in cash of $299,234 due to timing of billings on our major cost-type contracts and the new fixed price contracts at Los Alamos. Our prepaid expenses increased to $235,368 in the first three months of 2012, compared to $163,559 at December 25, 2011, resulting in a decrease in cash of $71,809 primarily due to the payment and timing of normal operating expenses. Our other receivables increased to $23,246 in the first three months of 2012, compared to $6,561 at December 25, 2011, resulting in a decrease in cash of $16,685.

 

Accounts payable decreased to $1,705,759 in the first three months of 2012, compared to $2,228,321 at December 25, 2011 resulting in a decrease in cash of $522,562 due to normal accounts payable events such as liquidation of liabilities. Other accrued liabilities, including accrued expenses, accrued employee-related costs and income taxes payable, decreased to $2,401,637 in the first three months of 2012, compared to $2,627,274 at December 25, 2011, resulting in a decrease in cash of $225,637. Our due to related party increased to $52,988 in the first three months of 2012, compared to $22,078 at December 25, 2011, resulting in an increase in cash of $30,910.

 

The primary investing activities of the company’s operations included the purchase of equipment. The company continues to manage its capital expenditures very selectively and in the first three months of 2012, used $10,508 for purchases of equipment. The company’s financing activities provided $507,342 of cash in the first three months of 2012, primarily due to an advance by the Line of Credit.

 

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GLENROSE INSTRUMENTS INC.

 

The company owns property in Albuquerque, New Mexico. In 2009, the company entered into an agreement, subject to closing conditions, with a buyer to sell the property for approximately $1.9 million. At March 25, 2012, $507,700 in land, $2,265,764 in buildings and improvements less $1,916,926 in accumulated depreciation is classified as “Assets held for sale” on the company’s balance sheet. The assets held for sale balance of $1,185,941 also includes selling costs incurred to date of $37,477 and an accrual of $291,926 towards decommissioning of the site. In 2010, the company submitted a detailed site assessment of the facility to the New Mexico Environmental Department, or NMED, as part of the closure process which was approved in June 2011. The company characterized and classified all radiological waste associated with the facility and all waste was crated and packaged for disposal in 2010. In January 2011, the company applied for a shipment permit to transfer the remaining waste to an appropriate facility. The company is currently communicating with NMED on the report in preparation for the demolition of the building. The company believes that it has adequately accrued for decommissioning of the site; however, it is possible that additional funds up to $100,000 may be needed. The company expects to complete the sale in 2012.

 

On August 31, 2011, the company entered into a credit agreement with Wells Fargo Bank for a $5,000,000 credit facility. The facility included a $1,000,000 term real-estate note with a 7 year straight line amortization, at Libor plus 3.5%, and up to $4,000,000 in a revolving line of credit for 5 years, at Libor plus 3.5%. As of March 25, 2012, the balance outstanding on the Term Note was $928,571 and the balance outstanding on the revolving line of credit was $558,964.

 

The company believes that its existing resources, including cash and cash equivalents, future cash flow from operations, available borrowings under the Line of Credit and potential future property sales in Albuquerque, New Mexico and Richmond California will enable it to meet the working capital requirements of its existing business for the foreseeable future, including the next 12 months.

 

The company’s ability to continue to access capital, however, could be impacted by various factors including general market conditions and the continuing slowdown in the economy, interest rates, the perception of the Company’s potential future earnings and cash distributions, any unwillingness on the part of lenders to make loans to the Company and any deterioration in the financial position of lenders that might make them unable to meet their obligations to the Company.

 

Significant Accounting Policies and Critical Estimates

 

The Company’s significant accounting policies are discussed in the Notes to the Consolidated Financial Statements above and are those that are incorporated in the Company’s Annual Report on Form 10-K filed with the SEC. The accounting policies and estimates that can have a significant impact upon the operating results, financial position and footnote disclosures of the Company are described in the above notes and the Financial Review in the Company’s Annual Report on Form 10-K filed with the SEC.

 

Off-Balance Sheet Arrangements

 

We do not have any off-balance sheet arrangements, including any outstanding derivative financial statements, off-balance sheet guarantees, interest rate swap transactions or foreign currency contracts. We do not engage in trading activities involving non-exchange traded contracts.

 

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GLENROSE INSTRUMENTS INC.

 

Item 3: Quantitative and Qualitative Disclosures about Market Risk

 

Not applicable.

 

Item 4T: Controls and Procedures

 

Management’s evaluation of disclosure controls and procedures:

 

Our chief executive officer and our chief financial officer, after evaluating the effectiveness of our “disclosure controls and procedures” (as defined in the Securities Exchange Act of 1934, as amended (the “Exchange Act”) Rules 13a−15(e) and 15d−15(e); collectively, “Disclosure Controls”) as of the end of the period covered by this report (the “Evaluation Date”) has concluded that as of the Evaluation Date, our Disclosure Controls were effective to provide reasonable assurance that information required to be disclosed in our reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified by the Securities and Exchange Commission, and that material information relating to our Company and any consolidated subsidiaries is made known to management, including the chief executive officer and chief financial officer, particularly during the period when our periodic reports are being prepared to allow timely decisions regarding required disclosure.

Changes in Internal Controls over Financial Reporting:

 

In connection with the evaluation referred to in the foregoing paragraph, we have identified no change in our internal control over financial reporting that occurred during the period ending March 25, 2012, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

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GLENROSE INSTRUMENTS INC.

 

PART II – OTHER INFORMATION

 

Item 1A: Risk Factors

 

In addition to the other information set forth in this report, you should carefully consider the factors discussed under “Risk Factors” in our Annual Report on Form 10-K for our fiscal year ended December 25, 2011. The risks discussed in our Annual Report on Form 10-K could materially affect our business, financial condition and future results. The risks described in our Annual Report on Form 10-K are not the only risks facing us. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially and adversely affect our business, financial condition or operating results.

 

Item 6:  Exhibits

 

Exhibit
Number
  Description of Exhibit
     
31.1* Rule 13a-14(a) Certification of Chief Executive Officer
     
31.2* Rule 13a-14(a) Certification of Chief Financial Officer
     
  32.1** Section 1350 Certifications of Chief Executive Officer and Chief Financial Officer

  

 

 

* Filed herewith

** Furnished herewith

 

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GLENROSE INSTRUMENTS INC.

 

SIGNATURES

 

Pursuant to the requirements of Section 12 of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on March 9, 2012.

 

  GLENROSE INSTRUMENTS INC.
  (Registrant)
   
  By: /s/ ARVIN H. SMITH
    Chief Executive Officer
    (Principal Executive Officer)
   
   
  By: /s/ ANTHONY S. LOUMIDIS
    Chief Financial Officer
    (Principal Financial Officer)

 

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