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EX-31.1 - EXHIBIT 31.1 - ATRM Holdings, Inc.v359218_ex31-1.htm
EX-31.2 - EXHIBIT 31.2 - ATRM Holdings, Inc.v359218_ex31-2.htm
EX-32.1 - EXHIBIT 32.1 - ATRM Holdings, Inc.v359218_ex32-1.htm

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 
FORM 10-Q
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended September 30, 2013
 
Commission File No. 000-22166
 
AETRIUM INCORPORATED
(Exact name of registrant as specified in its charter)
 
Minnesota
(State or other jurisdiction of incorporation or organization)
41-1439182
(I.R.S. Employer Identification No.)
 
2350 Helen Street, North St. Paul, Minnesota
( Address of principal executive offices)
55109
(Zip Code)
 
(651) 770-2000
(Registrant's telephone number including area code)
 
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ    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 during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ  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 þ
 
Indicate by a checkmark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨  No þ
 
Number of shares of Common Stock, $.001 par value, outstanding on November 1, 2013
1,078,176
 
 
 
 
AETRIUM INCORPORATED
 
INDEX
 
 
Page
PART I.  FINANCIAL INFORMATION
 
 
 
 
Item 1.
Financial Statements
 
 
 
 
 
 
 
Condensed Consolidated Balance Sheets (unaudited) as of September 30, 2013 and December 31, 2012
3
 
 
 
 
 
 
Condensed Consolidated Statements of Operations (unaudited) for the three and nine months ended September 30, 2013 and 2012
4
 
 
 
 
 
 
Condensed Consolidated Statements of Cash Flows (unaudited) for the nine months ended September 30, 2013 and 2012
5
 
 
 
 
 
 
Notes to unaudited condensed consolidated financial statements
6 - 10
 
 
 
 
 
Item 2.
Management's Discussion and Analysis of Financial Condition and Results of Operations
11 - 13
 
 
 
 
 
Item 4.
Controls and Procedures
14
 
 
 
 
PART II.  OTHER INFORMATION
 
 
 
 
 
 
Item 1.
Legal Proceedings
15
 
 
 
 
 
Item 1A.
Risk Factors
15
 
 
 
 
 
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
15
 
 
 
 
 
Item 3.
Defaults Upon Senior Securities
15
 
 
 
 
 
Item 4.
Mine Safety Disclosures
15
 
 
 
 
 
Item 5.
Other Information
15
 
 
 
 
 
Item 6.
Exhibits
15
 
 
 
 
SIGNATURES
16
  
 
2

 
PART 1. FINANCIAL INFORMATION
 
Item 1. Financial Statements
 
AETRIUM INCORPORATED
 
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(in thousands, except share data)
 
 
 
September 30,
 
December 31,
 
 
 
2013
 
2012
 
 
 
 
 
 
 
 
 
ASSETS
 
 
 
 
 
 
 
Current assets:
 
 
 
 
 
 
 
Cash and cash equivalents
 
$
2,036
 
$
3,013
 
Accounts receivable, net of allowance for doubtful accounts
    of $0 at September 30, 2013 and $25 at December 31, 2012
 
 
367
 
 
243
 
Inventories, current
 
 
1,644
 
 
1,577
 
Other current assets
 
 
377
 
 
143
 
Current assets – discontinued operations
 
 
 
 
993
 
Total current assets
 
 
4,424
 
 
5,969
 
 
 
 
 
 
 
 
 
Property and equipment, net
 
 
97
 
 
143
 
Property and equipment, net – discontinued operations
 
 
 
 
19
 
 
 
 
 
 
 
 
 
Inventories, noncurrent
 
 
302
 
 
1,810
 
Other assets
 
 
250
 
 
58
 
 
 
 
 
 
 
 
 
Total assets
 
$
5,073
 
$
7,999
 
 
 
 
 
 
 
 
 
LIABILITIES AND SHAREHOLDERS' EQUITY
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Current liabilities:
 
 
 
 
 
 
 
Capitalized lease obligation, current portion
 
$
31
 
$
29
 
Trade accounts payable
 
 
740
 
 
501
 
Accrued compensation
 
 
118
 
 
256
 
Other accrued liabilities
 
 
188
 
 
310
 
Current liabilities – discontinued operations
 
 
 
 
192
 
Total current liabilities
 
 
1,077
 
 
1,288
 
 
 
 
 
 
 
 
 
Capitalized lease obligation, less current portion
 
 
11
 
 
35
 
Noncurrent accrued expenses
 
 
22
 
 
96
 
 
 
 
 
 
 
 
 
Commitments and contingencies
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Shareholders' equity:
 
 
 
 
 
 
 
Common stock, $.001 par value; 3,000,000 shares
    authorized; 1,078,176 issued and outstanding
 
 
1
 
 
1
 
Additional paid-in capital
 
 
65,816
 
 
65,644
 
Accumulated deficit
 
 
(61,854)
 
 
(59,065)
 
Total shareholders' equity
 
 
3,963
 
 
6,580
 
 
 
 
 
 
 
 
 
Total liabilities and shareholders' equity
 
$
5,073
 
$
7,999
 
 
The accompanying notes are an integral part of the condensed consolidated financial statements.
 
 
3

 
AETRIUM INCORPORATED
 
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(in thousands, except per share data)
 
 
 
Three months ended
September 30,
 
Nine months ended
September 30,
 
 
 
2013
 
2012
 
2013
 
2012
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net sales
 
$
715
 
$
409
 
$
1,927
 
$
2,091
 
Cost of goods sold
 
 
765
 
 
3,194
 
 
2,305
 
 
4,456
 
Gross loss
 
 
(50)
 
 
(2,785)
 
 
(378)
 
 
(2,365)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Operating expenses:
 
 
 
 
 
 
 
 
 
 
 
 
 
Selling, general and administrative
 
 
771
 
 
1,007
 
 
2,838
 
 
2,687
 
Research and development
 
 
103
 
 
233
 
 
368
 
 
795
 
Total operating expenses
 
 
874
 
 
1,240
 
 
3,206
 
 
3,482
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Loss from operations
 
 
(924)
 
 
(4,025)
 
 
(3,584)
 
 
(5,847)
 
Interest income
 
 
 
 
2
 
 
1
 
 
7
 
Interest expense
 
 
 
 
(1)
 
 
(3)
 
 
(4)
 
Loss from continuing operations before income taxes
 
 
(924)
 
 
(4,024)
 
 
(3,586)
 
 
(5,844)
 
Income tax benefit (expense)
 
 
279
 
 
(41)
 
 
279
 
 
209
 
Loss from continuing operations
 
 
(645)
 
 
(4,065)
 
 
(3,307)
 
 
(5,635)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Discontinued operations (see Note 2):
 
 
 
 
 
 
 
 
 
 
 
 
 
Income (loss) from operations
 
 
(121)
 
 
(116)
 
 
(224)
 
 
598
 
Gain on sale of discontinued operations
 
 
1,021
 
 
 
 
1,021
 
 
 
Income (loss) before income taxes
 
 
900
 
 
(116)
 
 
797
 
 
598
 
Income tax benefit (expense)
 
 
(279)
 
 
41
 
 
(279)
 
 
(209)
 
Income (loss) from discontinued operations
 
 
621
 
 
(75)
 
 
518
 
 
389
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net loss
 
$
(24)
 
$
(4,140)
 
$
(2,789)
 
$
(5,246)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Income (loss) per share – basic and diluted:
 
 
 
 
 
 
 
 
 
 
 
 
 
Continuing operations
 
$
(0.60)
 
$
(3.77)
 
$
(3.07)
 
$
(5.23)
 
Discontinued operations
 
 
0.58
 
 
(0.07)
 
 
0.48
 
 
0.36
 
Net loss
 
$
(0.02)
 
$
(3.84)
 
$
(2.59)
 
$
(4.87)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Weighted average common shares outstanding
    – basic and diluted
 
 
1,078
 
 
1,078
 
 
1,078
 
 
1,078
 
 
The accompanying notes are an integral part of the condensed consolidated financial statements.
 
 
4

 
AETRIUM INCORPORATED
 
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
 
 
 
Nine months ended
September 30,
 
 
 
2013
 
2012
 
Cash flows from operating activities:
 
 
 
 
 
 
 
Net loss
 
$
(2,789)
 
$
(5,246)
 
Gain on sale of discontinued operations
 
 
(1,021)
 
 
 
Adjustments to reconcile net loss to net cash used in operating activities:
 
 
 
 
 
 
 
Depreciation and amortization
 
 
52
 
 
59
 
Share-based compensation expense
 
 
172
 
 
183
 
Credit to allowance for bad debts
 
 
(25)
 
 
 
Provision for excess and obsolete inventories
 
 
1,177
 
 
2,766
 
Changes in assets and liabilities:
 
 
 
 
 
 
 
Accounts receivable
 
 
(216)
 
 
804
 
Inventories
 
 
200
 
 
550
 
Other current assets
 
 
65
 
 
(18)
 
Other assets
 
 
8
 
 
9
 
Trade accounts payable
 
 
193
 
 
135
 
Accrued compensation
 
 
(216)
 
 
(82)
 
Other accrued liabilities
 
 
(202)
 
 
(429)
 
Net cash used in operating activities
 
 
(2,602)
 
 
(1,269)
 
 
 
 
 
 
 
 
 
Cash flows from investing activities:
 
 
 
 
 
 
 
Proceeds from sale of discontinued operations, net of transaction costs
 
 
1,651
 
 
 
Purchase of property and equipment
 
 
(5)
 
 
(45)
 
Net cash provided by (used in) investing activities
 
 
1,646
 
 
(45)
 
 
 
 
 
 
 
 
 
Cash flows from financing activities:
 
 
 
 
 
 
 
Principal payments on capital lease
 
 
(21)
 
 
(17)
 
Net cash used by financing activities
 
 
(21)
 
 
(17)
 
 
 
 
 
 
 
 
 
Net decrease in cash and cash equivalents
 
 
(977)
 
 
(1,331)
 
 
 
 
 
 
 
 
 
Cash and cash equivalents at beginning of period
 
 
3,013
 
 
5,008
 
 
 
 
 
 
 
 
 
Cash and cash equivalents at end of period
 
$
2,036
 
$
3,677
 
 
 
 
 
 
 
 
 
Supplemental cash flow information:
 
 
 
 
 
 
 
Cash paid for interest expense
 
$
 
$
3
 
Equipment acquired by capital lease
 
$
 
$
89
 
 
The accompanying notes are an integral part of the condensed consolidated financial statements.
 
 
5

 
AETRIUM INCORPORATED
 
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
1.       BASIS OF PRESENTATION
 
The condensed consolidated balance sheet at December 31, 2012 has been derived from our audited financial statements. In the opinion of management, the unaudited interim condensed consolidated financial statements include all adjustments (consisting only of normal, recurring adjustments) necessary to present fairly the financial position, results of operations and cash flows for the interim periods presented. The results of operations for the nine months ended September 30, 2013 are not necessarily indicative of the operating results to be expected for the full year or any future period.
 
The accompanying unaudited condensed financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures, normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America, have been condensed or omitted, pursuant to such rules and regulations. Therefore, these financial statements should be read in conjunction with the consolidated financial statements and accompanying footnotes included in our Annual Report on Form 10-K for the year ended December 31, 2012.
 
On October 11, 2013 Aetrium effected a one-for-ten reverse split of its common stock. The reverse split reduced the number of outstanding shares of our common stock from 10,781,451 shares to 1,078,176 shares. The reverse stock split had no impact on the rights or preferences of the holders of the outstanding shares of our common stock. A proportional adjustment was also made to all outstanding stock options to reflect the reverse split. All share and per share amounts in our consolidated financial statements and accompanying footnotes have been retroactively adjusted to reflect the reverse stock split.
 
In the nine months ended September 30, 2013, we incurred a loss from continuing operations of $3.3 million and we used $2.6 million of cash to fund our operations. Our losses and negative cash flows in recent periods were largely attributable to reduced net sales resulting from relatively weak business conditions and excess production capacity in the semiconductor industry. In addition, beginning in the third quarter of 2012, we incurred significant legal expenses related to litigation. We have taken aggressive actions to reduce our expenses and preserve cash, including salary reductions for executive officers, pay freezes and reductions in workforce. Effective July 31, 2013, as described in Note 2, we sold the assets related to our Reliability Test Products (RTP) business and received proceeds of approximately $1.7 million net of transaction expenses. We believe our cash balance of $2.0 million at September 30, 2013 will be sufficient to meet our working capital and capital expenditure requirements through at least the end of our current fiscal year. Industry forecasters predict that semiconductor industry conditions will improve in the fourth quarter of 2013 and in fiscal year 2014 as integrated circuit (IC) production volumes increase. Aetrium experienced an increase in sales order activity early in the fourth quarter of 2013. In addition, the lawsuit brought against us in  federal court by UTHE Technology Corporation (UTHE), for which we have incurred substantial legal costs since mid-2012, was dismissed by the court in September 2013. Although UTHE has filed an appeal, we believe our future legal expenses related to this action will be substantially lower than incurred in recent periods. However, we believe business conditions will continue to be challenging for us until the excess production capacity in the industry we serve is reduced. If semiconductor industry business conditions do not improve as predicted and/or we incur higher than anticipated legal expenses, our operating results and cash flows would be further adversely affected. Given these circumstances, there can be no assurance that our existing cash reserves will be sufficient to avoid liquidity issues and/or fund operations beyond this fiscal year. 
 
 
6

 
2.       SALE OF PRODUCT LINE - DISCONTINUED OPERATIONS
 
On July 31, 2013 and pursuant to a letter of intent that was executed on June 14, 2013, we sold the assets related to our Reliability Test Products (RTP) line of products. The RTP product line includes test equipment that provides semiconductor manufacturers with structural performance data to aid in the evaluation and improvement of IC designs and manufacturing processes to increase IC yield and reliability. The sale of our RTP product line resulted in an increase in our cash reserves, which have been significantly diminished in recent quarters due to operating losses and high legal costs related primarily to litigation.
 
The RTP product line was sold to Cascade Microtech, Inc. (Cascade), a U.S. public company headquartered in Beaverton, OR. Cascade manufactures products and provides services for precision contact, electrical measurement and test of integrated circuits, optical devices and other small structures. The sale transaction included the following terms:
 
·
Purchase price of approximately $3,400,000 including the following:
 
o
$1,750,000 payable at closing, subject to working capital adjustment. (Cascade paid $1,910,000, including a $160,000 estimated working capital adjustment, to Aetrium at the closing of the transaction).
o
$1,000,000 contingent earn-out payment. If RTP net revenues for the nine months ended April 30, 2014 are in the range of $2,250,000 to $3,750,000 or more, a pro rata earn-out payment will be payable to Aetrium on May 31, 2014.
o
$500,000 holdback amount to secure Aetrium’s obligations related to representations, warranties and covenants. $300,000 of the holdback amount is payable on July 31, 2014 and $200,000 is payable on January 15, 2015, subject to indemnity claims by Cascade.
  
·
Aetrium transferred receivables, inventories, equipment, intellectual property, and other assets associated with the RTP product line to Cascade.
 
·
Cascade assumed certain liabilities related to the RTP product line, including accounts payable, accrued expenses and product support and warranty obligations.
 
·
Cascade and Aetrium executed a sublease and transition services agreement providing for Cascade to continue to conduct RTP operations in approximately 9,000 square feet within Aetrium’s facility in North St. Paul, MN and for Aetrium to provide certain administrative services to Cascade. The sublease provides for monthly rent payments of $14,500 and an initial term of August 1, 2013 through April 30, 2014, after which Cascade may continue to sublease the space on a month-to-month basis.
 
·
Eleven Aetrium employees were hired by Cascade in connection with the transaction.
 
We recorded a pre-tax gain of approximately $1.0 million on the sale of the RTP product line as follows (in thousands):
 
Proceeds:
 
 
 
 
- Cash received
 
$
1,914
 
- Due from Cascade, payable July 31, 2014
 
 
300
 
- Due from Cascade, payable January 31, 2015
 
 
200
 
Total proceeds
 
 
2,414
 
 
 
 
 
 
Fair value of net assets transferred to Cascade:
 
 
 
 
- Accounts receivable
 
 
340
 
- Inventories
 
 
834
 
- Prepaid expenses
 
 
1
 
- Equipment
 
 
17
 
- Accounts payable
 
 
(50)
 
- Accrued liabilities
 
 
(12)
 
Total net assets transferred
 
 
1,130
 
 
 
 
 
 
Gain on sale, before transaction costs
 
 
1,284
 
Transaction costs
 
 
(263)
 
Gain on sale
 
$
1,021
 
   
The holdback amounts due from Cascade are included in our consolidated balance sheet at September 30, 2013 as follows: $300,000 is included in “Other current assets” and $200,000 is included in “Other assets.”
 
 
7

 
In accordance with ASC 205-20, “Discontinued Operations,” assets and liabilities included in our consolidated balance sheet and the results of operations included in our consolidated statements of operations related to the RTP product line have been reclassified and presented as discontinued operations for all periods reported.
 
Assets and liabilities related to the RTP product line presented as discontinued operations in our consolidated balance sheet at December 31, 2012 are summarized below (in thousands):
 
 
 
December 31,
 
 
 
2012
 
Accounts receivable
 
$
223
 
Inventories
 
 
770
 
Current assets – discontinued operations
 
$
993
 
 
 
 
 
 
Property and equipment
 
$
213
 
Less, accumulated depreciation
 
 
(194)
 
Property and equipment, net – discontinued operations
 
$
19
 
 
 
 
 
 
Accounts payable
 
$
96
 
Accrued compensation
 
 
78
 
Accrued warranty
 
 
12
 
Other accrue liabilities
 
 
6
 
Current liabilities – discontinued operations
 
$
192
 
 
Condensed results from discontinued operations included in our consolidated statements of operations are summarized below (in thousands).
 
 
 
Three months ended
September 30,
 
Nine months ended
September 30,
 
 
 
2013
 
2012
 
2013
 
2012
 
Net sales
 
$
36
 
$
387
 
$
1,215
 
$
2,607
 
Cost of goods sold
 
 
67
 
 
139
 
 
534
 
 
865
 
Gross profit (loss)
 
 
(31)
 
 
248
 
 
681
 
 
1,742
 
Operating expenses
 
 
90
 
 
364
 
 
905
 
 
1,144
 
Income (loss) from operations
 
 
(121)
 
 
(116)
 
 
(224)
 
 
598
 
Gain on sale of discontinued operations
 
 
1,021
 
 
 
 
1,021
 
 
 
Income (loss) before income taxes
 
 
900
 
 
(116)
 
 
797
 
 
598
 
Income tax benefit (expense)
 
 
(279)
 
 
41
 
 
(279)
 
 
(209)
 
Income (loss) from discontinued operations
 
$
621
 
$
(75)
 
$
518
 
$
389
 
 
Operating results from discontinued operations exclude building rent, property taxes, and other facility-related and administrative costs that continue to be incurred following the disposition of the product line.

3.        LOSS PER COMMON SHARE
 
Basic and diluted loss per common share is computed by dividing net loss by the weighted-average number of common shares outstanding during each period. The computation of diluted loss per share excludes the impact of stock options because they would be antidilutive. The weighted average number of common shares used to calculate loss per share in our condensed consolidated statements of operations has been adjusted to reflect the one-for-ten reverse stock split for all periods presented.
 
 
8

 
4.       INVENTORIES
 
Inventories are comprised of the following (in thousands):
 
 
 
September 30,
 
December 31,
 
 
 
2013
 
2012
 
Purchased parts and completed subassemblies
 
$
405
 
$
918
 
Work-in-process
 
 
430
 
 
459
 
Finished goods, including saleable demonstration
    equipment
 
 
1,111
 
 
2,010
 
Total inventories
 
 
1,946
 
 
3,387
 
Noncurrent portion
 
 
(302)
 
 
(1,810)
 
Current portion
 
$
1,644
 
$
1,577
 
 
Inventories not expected to be realized within the following twelve months amounted to $0.3 million at September 30, 2013 and $1.8 million at December 31, 2012 and is included in the caption “Inventories, noncurrent” in our consolidated balance sheet. We evaluated the inventories for certain of our older products and, based on updated sales forecasts, concluded we had excess inventories as of September 30, 2013. Accordingly, we reduced the carrying value of these inventories to their estimated net realizable values and recorded a corresponding charge of $0.3 million in cost of goods sold in the quarter ended September 30, 2013. The write-down related primarily to change kits for IC package types for which sales potential has declined. In the quarter ended June 30, 2013 we recorded a charge of $0.8 million in cost of goods sold to write-down certain inventories. The write-down related primarily to our Model V16 test handler for which sales prospects for eight-site testing applications have diminished in favor of our newer Model VMAX test handler. Charges for excess and obsolete inventories amounted to $1.2 million and $2.8 million for the nine-month periods ended September 30, 2013 and 2012, respectively.

5.       CURRENT LIABILITIES
 
In November 2011, Joseph C. Levesque, the chairman of our board of directors, was appointed to serve as president and chief executive officer pending the appointment of a permanent replacement for these positions. At that time, we entered into an employment agreement with Mr. Levesque that provided for the payment of a majority of his 2011 and 2012 base salary to be deferred until 2013. Deferred payments under this agreement amounted to approximately $30,000 and $131,000 at September 30, 2013 and December 31, 2012, respectively, which amounts are included in “Accrued Compensation” in our condensed consolidated balance sheet.
 
Other current accrued liabilities are comprised of the following (in thousands):
 
 
September 30,
 
December 31,
 
 
 
2013
 
2012
 
Accrued retirement benefits, current portion
 
$
108
 
$
147
 
Accrued commissions
 
 
 
 
9
 
Accrued warranty
 
 
14
 
 
12
 
Accrued obligation related to litigation settlement
 
 
 
 
85
 
Other
 
 
66
 
 
57
 
Total other current accrued liabilities
 
$
188
 
$
310
 
 
In 2010, we recorded accrued retirement benefits awarded to our chief executive officer and our then current chief administrative officer. Accrued retirement benefits amounted to $130,000 ($108,000 current, $22,000 noncurrent) at September 30, 2013 and $243,000 ($147,000 current, $96,000 noncurrent) at December 31, 2012. The current portion of accrued retirement benefits is included in “Other accrued liabilities” and the noncurrent portion is included in “Noncurrent accrued expenses” in our condensed consolidated balance sheet.
   
Effective January 31, 2013, we entered into a settlement agreement with an activist shareholder group resolving these shareholders’ claims and our counterclaims related to litigation initiated in November 2012. We agreed to pay $85,000 to the shareholder group as part of the settlement. The settlement payment was covered under our directors and officers insurance policy and was paid directly to the shareholder group by our insurance carrier.
   
Changes in accrued warranty are summarized below (in thousands):
 
 
Nine months ended September 30,
 
 
 
2013
 
2012
 
Accrual balance, beginning of period
 
$
12
 
$
30
 
Accruals for warranties
 
 
17
 
 
10
 
Settlements made
 
 
(15)
 
 
(28)
 
Accrual balance, end of period
 
$
14
 
$
12
 
 
 
9

 
6.       STOCK INCENTIVE PLAN AND SHARE-BASED COMPENSATION
 
The following table summarizes stock option activity under our stock incentive plan for the nine months ended September 30, 2013 (share and per share amounts have been retroactively adjusted to reflect a one-for-ten reverse stock split implemented on October 11, 2013 – see Note 1):
 
 
 
Number
of Shares
 
Weighted 
Average 
Exercise 
Price
 
Weighted 
Average 
Remaining 
Contract Term
 
Aggregate 
Intrinsic Value 
(in thousands)
 
Outstanding, December 31, 2012
 
191,778
 
$
12.30
 
 
 
 
 
 
Options forfeited
 
(22,536)
 
 
9.64
 
 
 
 
 
 
Options expired
 
(46,425)
 
 
17.85
 
 
 
 
 
 
Outstanding, September 30, 2013
 
122,817
 
$
10.74
 
3.29 years
 
$
0
 
 
 
 
 
 
 
 
 
 
 
 
 
Exercisable, September 30, 2013
 
103,715
 
$
11.08
 
3.26 years
 
$
0
 
 
All stock options outstanding at September 30, 2013 are nonqualified options that expire five years after the grant date. The aggregate intrinsic values in the table above are zero because the option exercise prices for all outstanding options exceeded Aetrium’s closing stock price on September 30, 2013.
 
Aetrium uses the fair value method to measure and recognize share-based compensation. We determine the fair value of share-based awards on the grant date using the Black-Scholes option valuation model and recognize the compensation expense on a straight-line basis over the vesting period of the applicable awards. Effective March 13, 2013, we entered into an agreement with an activist shareholder group pursuant to which our board of directors was reconstituted to include three incumbent directors and three members of the shareholder group. As a result of this change of control, a total of 25,771 unvested stock options held by certain of our executive officers became immediately and fully exercisable pursuant to the terms of change of control agreements with such officers. Share-based compensation of approximately $77,000 was recorded in the nine months ended September 30, 2013 as a result of the accelerated vesting of such options.
 
Share-based compensation expense included in our condensed consolidated statements of operations was as follows (in thousands):
 
 
Three months ended 
September 30,
 
Nine months ended 
September 30,
 
 
 
2013
 
2012
 
2013
 
2012
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cost of goods sold
 
$
1
 
$
 
$
5
 
$
4
 
Selling, general and administrative
 
 
6
 
 
45
 
 
137
 
 
129
 
Research and development
 
 
4
 
 
9
 
 
12
 
 
26
 
Income (loss) from discontinued
   operations
 
 
2
 
 
9
 
 
18
 
 
24
 
Total share-based compensation
   expense
 
$
13
 
$
63
 
$
172
 
$
183
 
 
As of September 30, 2013, we had approximately $56,000 of unrecognized pretax share-based compensation expense, which is expected to be recognized over a weighted average period of 2.0 years.

7.       INCOME TAXES
 
We record the benefit we will derive in future accounting periods from tax losses and credits and deductible temporary differences as “deferred tax assets.” In accordance with ASC 740, “Income Taxes,” we record a valuation allowance to reduce the carrying value of our deferred tax assets if, based on all available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized. Since 2009, we have maintained a valuation allowance to fully reserve our deferred tax assets. We recorded a full valuation allowance in 2009 because we determined there was not sufficient positive evidence regarding our potential for future profits to outweigh the negative evidence of our three year cumulative loss position at that time under the guidance provided in ASC 740. We expect to continue to maintain a full valuation allowance until we determine that we can sustain a level of profitability that demonstrates our ability to realize these assets. To the extent we determine that the realization of some or all of these benefits is more likely than not based upon expected future taxable income, a portion or all of the valuation allowance will be reversed. Such a reversal would be recorded as an income tax benefit and, for some portion related to deductions for stock option exercises, an increase in shareholders' equity.
 
 
10

 
AETRIUM INCORPORATED
 
Item 2.     Management's Discussion and Analysis of Financial Condition and Results of Operations
 
On July 31, 2013, as discussed in Note 2 to our Condensed Consolidated Financial Statements, we sold the assets related to our Reliability Test Products (RTP) line of products. Operating results related to the RTP product line have been reclassified and presented as discontinued operations for all periods presented and, unless otherwise indicated, the following management discussion and analysis refers to continuing operations only.
 
Overview
 
Aetrium designs, manufactures and markets test handler products that are used in the handling and testing of integrated circuits, or ICs, which constitute the highest revenue component of the semiconductor industry. Our test handlers are purchased primarily by semiconductor manufacturers and their assembly and test subcontractors and are used in the test, assembly and packaging, or TAP, segment of semiconductor manufacturing. 
 
Demand for Aetrium’s test handler products is driven primarily by worldwide demand for ICs, which in turn depends on end-user demand for electronic products. The demand for our products can fluctuate significantly from period to period due to the direct or indirect impact of numerous factors, including but not limited to changes in the supply and demand for ICs, changes in IC manufacturing capacity, advancements in industry technologies, changes in U.S. and worldwide economic conditions and competitive factors. 
 
Following a period of strong expansion and increasing IC sales in the semiconductor industry in 2010, IC unit sales were virtually flat in 2011 and 2012 and grew only modestly in the first half of 2013 over the same period in 2012. As a result, with sufficient production capacity in place, demand for additional production equipment has been generally suppressed since 2010. 
 
In fiscal year 2012, an industry rebound had been predicted for the second half of 2012 but did not materialize. In the third quarter of 2012, many IC manufacturers, including some of our customers, reported weakening business conditions and responded by reducing IC production and delaying equipment purchases. Our net sales were relatively flat in the first half of the year, amounting to $1.7 million, and then decreased to $0.9 million in the second half of the year as industry conditions weakened further.
 
Weak industry conditions persisted in early 2013 and continued to impact our net sales, which amounted to $0.6 million, $0.7 million, and $0.7 million in the first, second and third quarters of fiscal year 2013, respectively. Many of our customers continue to have excess production capacity and are limiting purchases to equipment required for newer products and special applications. In addition, we have incurred significant legal expenses in 2013 to defend ourselves in an action brought against us in federal court by UTHE Technology Corporation (UTHE). In September 2013, the case was dismissed by the court. Although UTHE subsequently filed an appeal, we expect our future legal expenses related to this matter will be substantially lower than we incurred in recent periods. Some industry forecasters are predicting that semiconductor industry conditions will improve in the fourth quarter of 2013 and in fiscal year 2014 as IC production volumes are expected to increase. If semiconductor industry business conditions do not improve sufficiently to drive meaningful improvement in demand for production-based equipment and/or we incur higher than anticipated legal expenses, our operating results and cash flows would be further adversely affected.
 
 
11

 
Critical Accounting Policies
 
Aetrium’s critical accounting policies are disclosed in our most recent Annual Report on Form 10-K for the year ended December 31, 2012. There were no changes in such policies during the three months ended September 30, 2013.
   
Results of Operations
 
Net Sales. Net sales for the nine months ended September 30, 2013 were $1.9 million compared with $2.1 million for the same period in 2012, an 8% decrease. Sales of our test handlers were impacted by semiconductor industry conditions characterized by relatively weak IC demand and excess production capacity that existed throughout fiscal year 2012 and continued into 2013. Sales of test handlers were $0.3 million in the nine months ended September 30, 2013 compared with $1.1 million for the same period in 2012, a decrease of 70%. Sales of change kits and spare parts were $1.6 million in the nine months ended September 30, 2013 compared with $1.0 million for the same period in 2012, an increase of 57%. Sales of change kits and spare parts increased primarily as a result of increased purchases by two customers that have large installed bases of our test handlers, one of which purchased significant spare parts for an expanded equipment preventative maintenance program. Net sales for the three months ended September 30, 2013 were $0.7 million compared with $0.4 million for the same period in 2012, a 75% increase. The increase was primarily attributable to an increase in sales of test handlers which amounted to $0.2 million in the third quarter of 2013 compared with zero for the same period in 2012.
 
Gross Loss. Aetrium’s gross profit (loss) as a percentage of net sales can fluctuate based on a number of factors, including but not limited to the mix of products sold, distribution channel mix, price discounting, product maturity, inventory write-downs, and the utilization of our manufacturing capacity based upon varying production levels. Gross loss was (19.6%) of net sales in the nine months ended September 30, 2013 compared with (113.1%) of net sales for the same period in 2012. Cost of goods sold included charges for excess and obsolete inventories of $1.2 million and $2.8 million in the nine-month periods ended September 30, 2013 and 2012, respectively, and charges of $0.1 million for severance costs related to workforce reductions in the nine-month period ended September 30, 2012. Excluding these charges, our gross margin for the nine months ended September 30, 2013 would have been 41.5% compared with 23.6% for the same period in 2012. Gross margin excluding these charges improved in 2013 due to significant reductions in our workforce and a more favorable product mix. Test handlers, which are generally lower margin sales than spare parts/change kits, represented 17% of total net sales in the first nine months of 2013 compared with 51% for the same period in 2012. Spares/change kit sales represented 83% of total net sales in the first nine months of 2013 compared with 49% for the same period in 2012. Gross loss was (7.0%) of net sales in the three months ended September 30, 2013 compared with (680.9%) for the same period in 2012. Excluding charges for inventory write-downs and workforce reductions, gross margin would have been 41.0% and 6.4% in the quarters ended September 30, 2013 and 2012, respectively.   Gross margin excluding these charges improved in the 2013 period due to the higher sales volume and cost savings from reductions in our workforce. 
 
Selling, General and Administrative. Selling, general and administrative (S,G&A) expenses for the nine months ended September 30, 2013 were $2.8 million compared with $2.7 million for the comparable period in 2012, an increase of 6%. The increase in S,G&A expenses from the prior year was primarily attributable to a $0.6 million increase in legal expenses, partially offset by a $0.2 million decrease in employee compensation resulting from reductions in personnel and also to reductions in product demonstration and investor relations expenses. S,G &A expenses for the three months ended September 30, 2013 were $0.8 million compared with $1.0 million for the comparable period in 2012, a decrease of 23%. The decrease was primarily attributable to a decrease in employee compensation and product demonstration expenses. Legal expenses incurred in 2013 were primarily related to defending an action brought against us in federal court by UTHE Technology Corporation (UTHE). The case was dismissed by the court in September 2013. Although UTHE subsequently filed an appeal in the case, we believe our future legal expenses related to this matter will be lower than incurred in recent periods.
 
Research and Development. Research and development expenses for the nine months ended September 30, 2013 were $0.4 million compared with $0.8 million for the comparable period in 2012, a 54% decrease. The decrease from the prior year was primarily attributable to a $0.4 million decrease in employee compensation due to staff reductions. Research and development expenses for the three months ended September 30, 2013 were $0.1 million compared with $0.2 million for the comparable period in 2012, a 56% decrease. The decrease was primarily attributable to a decrease in employee compensation.
 
 
12

 
Interest Income. Interest income amounted to $1,000 and $7,000 for the nine months ended September 30, 2013 and 2012, respectively. The decrease in interest income in 2013 primarily reflects lower average invested cash balances. 
 
Interest expense. Interest expense amounted to $3,000 and $4,000 for the nine months ended September 30, 2013 and 2012, respectively and was related to a capital lease agreement we executed in February 2012 for the acquisition of certain data processing equipment. 
 
Income Taxes. Since 2009, we have maintained a valuation allowance to fully reserve our deferred tax assets. We expect to continue to maintain a full valuation allowance until we determine that we can sustain a level of profitability that demonstrates our ability to realize these assets. To the extent we determine that the realization of some or all of these benefits is more likely than not based upon expected future taxable income, a portion or all of the valuation allowance will be reversed. Such a reversal would be recorded as an income tax benefit and, for some portion related to deductions for stock option exercises, an increase in shareholders' equity. For the three and nine-month periods ended September 30, 2013 and 2012 the income tax benefit or expense recorded for continuing operations offsets the income tax benefit or expense recorded in discontinued operations. 
 
Discontinued Operations. On July 31, 2013, as discussed in Note 2 to our Condensed Consolidated Financial Statements, we sold the assets related to our Reliability Test Products (RTP) line of products. In accordance with ASC 205-20, “Discontinued Operations,” results related to RTP operations have been reclassified and presented as discontinued operations for all periods reported.  Condensed results of discontinued operations are summarized below (in thousands): 
 
 
 
Three months ended 
September 30,
 
Nine months ended 
September 30,
 
 
 
2013
 
2012
 
2013
 
2012
 
Net sales
 
$
36
 
$
387
 
$
1,215
 
$
2,607
 
Cost of goods sold
 
 
67
 
 
139
 
 
534
 
 
865
 
Gross profit (loss)
 
 
(31)
 
 
248
 
 
681
 
 
1,742
 
Operating expenses
 
 
90
 
 
364
 
 
905
 
 
1,144
 
Income (loss) from operations
 
 
(121)
 
 
(116)
 
 
(224)
 
 
598
 
Gain on sale of discontinued operations
 
 
1,021
 
 
 
 
1,021
 
 
 
Income (loss) before income taxes
 
 
900
 
 
(116)
 
 
797
 
 
598
 
Income tax benefit (expense)
 
 
(279)
 
 
41
 
 
(279)
 
 
(209)
 
Income (loss) from discontinued operations
 
$
621
 
$
(75)
 
$
518
 
$
389
 
 
Operating results from discontinued operations exclude building rent, property taxes, and other facility-related and administrative costs that continue to be incurred following the disposition of the product line.
 
Financial Condition, Liquidity and Capital Resources
 
Cash and cash equivalents decreased by approximately $1.0 million in the nine months ended September 30, 2013. We used $2.6 million of cash to fund operating activities during this period, which included our net loss of $3.8 million (excluding a $1.0 million pre-tax gain on the sale of our RTP product line) and $0.2 million in working capital changes, partially offset by $1.4 million in non-cash expenses. Non-cash expenses included charges for excess and obsolete inventories of $1.2 million and share-based compensation expense of $0.2 million. Working capital changes using cash included a $0.2 million increase in accounts receivable, a $0.2 million decrease in accrued compensation, and a $0.2 million decrease in other accrued liabilities, partially offset by a $0.2 million decrease in inventories and a $0.2 million increase in accounts payable. Cash received from investing activities amounted to $1.6 million in the nine months ended September 30, 2013, consisting primarily of the net proceeds from the sale of our RTP product line in July 2013. Net cash flows used in financing activities in the nine months ended September 30, 2013 were not significant.   

Cash and cash equivalents decreased by approximately $1.3 million in the nine months ended September 30, 2012. We used $1.3 million of cash to fund operating activities during this period, including our net loss of $5.2 million, partially offset by $3.0 million in non-cash expenses and $1.0 million in working capital changes. Non-cash expenses included a $2.8 million charge for excess and obsolete inventories, depreciation and amortization expense of $0.1 million and share-based compensation expense of $0.2 million. Working capital changes generating cash consisted primarily of a $0.8 million decrease in accounts receivable and a $0.6 million decrease in inventories, partially offset by a decrease of $0.2 million in accrued severance costs. Accounts receivable decreased primarily due to a decrease in net sales in the third quarter of 2012 compared with the fourth quarter of 2011. The decrease in inventories resulted primarily from management efforts to reduce our inventories of test handler-related products in 2012. Net cash flows used in investing and financing activities in the nine months ended September 30, 2012 were not significant.
 
Historically we have supported our capital expenditure and working capital needs with cash generated from operations and our existing cash and cash equivalents. In addition, on July 31, 2013, we sold the assets related to our Reliability Test Products (RTP) product line and received net proceeds of approximately $1.6 million. We believe our cash balance of $2.0 million at September 30, 2013 will be sufficient to meet our working capital and capital expenditure requirements through at least the end of our current fiscal year. As discussed above, our sales have been adversely impacted by excess production capacity that has persisted in the semiconductor industry since 2010. We have aggressively taken steps to reduce our expense structure, including salary reductions for our executive officers, pay freezes and reductions in our workforce. We implemented these actions in order to preserve cash during these difficult business conditions while maintaining the resources we believe we will need to respond to an industry recovery when it occurs. In recent periods, we have incurred significant legal costs to defend the company in a legal action brought in federal court by UTHE Technology Corporation. As discussed above, this case was dismissed by the court in September 2013 and UTHE subsequently filed an appeal. We will continue to incur legal expenses to defend ourselves in this action, although we believe at significantly lower expense levels than we incurred in recent periods. Industry forecasters predict that semiconductor industry conditions will improve in the fourth quarter of 2013 and fiscal year 2014 as IC production volumes are forecasted to increase. If semiconductor industry business conditions do not improve sufficiently to drive meaningful improvement in demand for production-based equipment and/or we incur higher than anticipated legal expenses, our operating results and cash flows would be further adversely affected. There can be no assurance that our existing cash reserves or funds generated from operations will be sufficient to avoid liquidity issues or, if needed, that we would be able to obtain working capital and/or equipment financing with terms favorable to us or at all.
 
13

 
Item 4.       Controls and Procedures
 
Evaluation of Disclosure Controls and Procedures
 
As of the end of the period covered by this report, our chief executive officer and our treasurer conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Securities Exchange Act Rules 13a-15(e) and 15d-15(e)). Based on their evaluation, they concluded that our disclosure controls and procedures were not effective as of September 30, 2013 due to a material weakness in internal control over financial reporting related to non-routine transactions. The material weakness was identified during the preparation of our Form 10-Q for the quarter ended June 30, 2013 and related to the reporting of discontinued operations in connection with the sale of our RTP product line.
  
To remediate the material weakness described above, we implemented remedial measures including an expansion of our documented controls to provide that non-routine transactions that have the potential to materially impact our financial reporting, such as acquisitions and divestitures, are reviewed with our Audit Committee and that we consider utilizing independent experts to evaluate non-routine situations if deemed appropriate. Despite the measures that have been implemented, the material weakness cannot be considered remediated until the applicable remedial controls operate for a sufficient period of time and management has concluded that the controls are operating effectively. 
 
Changes in Internal Controls
 
Other than the material weakness noted above, there were no changes in our internal control over financial reporting that occurred during the third quarter of 2013 that have materially affected, or are reasonably likely to materially affect, Aetrium’s internal control over financial reporting.
 
It should be noted that any system of controls, however well designed and operated, can provide only reasonable, and not absolute, assurance that the objectives of the system will be met. In designing and operating a control system, one must consider the potential benefits of controls relative to their costs and the reality of limited resources available to allocate to control activities, particularly in smaller companies. In addition, the design of any control system is based in part upon certain assumptions about the likelihood of future events and there can be no assurance that any control will meet its objectives under all potential future conditions. Because of such inherent limitations in any control system, there can be no absolute assurance that control issues, misstatements, and/or fraud will be prevented or detected.
 
 
14

 
AETRIUM INCORPORATED
 
PART II. OTHER INFORMATION
 
 
Item 1.
Legal Proceedings
 
 
 
 
 
 
 
As reported in our Form 10-K for the year ended December 31, 2012, we are subject to litigation captioned UTHE Technology Corporation vs. Aetrium Incorporated et al. in the United States District Court for the Northern District of California.  On September 13, 2013 the court entered final judgment dismissing all remaining claims UTHE asserted against Aetrium in the litigation. On September 23, 2013, UTHE Technology Corporation appealed the district court judgment to the United States Court of Appeal for the Ninth Circuit. The appeal is currently pending.
 
 
 
 
 
 
Item 1A.
Risk Factors
 
 
 
 
 
 
 
Except as described in our Current Report on Form 8-K dated October 29, 2013, there have not been any material changes to the risk factors disclosed in our Form 10-K for the year ended December 31, 2012.
 
 
 
 
 
 
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
 
 
 
 
 
 
 
None.
 
 
 
 
 
 
Item 3.
Defaults on Senior Securities
 
 
 
 
 
 
 
None.
 
 
 
 
 
 
Item 4.
Mine Safety Disclosures
 
 
 
 
 
 
 
Not applicable.
 
 
 
 
 
 
Item 5.
Other Information
 
 
 
 
 
 
 
None.
 
 
 
 
 
 
Item 6.
Exhibits
 
 
 
 
31.1
Certification by Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
 
 
31.2
Certification by Treasurer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
 
 
32.1
Certifications pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
 
 
101.INS *
XBRL Instance Document
 
 
 
101.SCH *
XBRL Taxonomy Extension Schema
 
 
 
101.CAL *
XBRL Taxonomy Extension Calculation Linkbase
 
 
 
101.DEF *
XBRL Taxonomy Extension Definition Linkbase
 
 
 
101.LAB *
XBRL Taxonomy Extension Label Linkbase
 
 
 
101.PRE *
XBRL Taxonomy Extension Presentation Linkbase
 
 
* Pursuant to Rule 406T of Regulation S-T, the XBRL related information in Exhibit 101 to this Quarterly Report on Form 10-Q shall not be deemed to be “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to the liability of that section, and shall not be deemed part of a registration statement, prospectus or other document filed under Sections 11 or 12 of the Securities Act of 1933, as amended, or otherwise subject to the liability of those sections, except as shall be expressly set forth by specific reference in such filings.
 
 
15

 
AETRIUM INCORPORATED
 
SIGNATURES
 
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. 
 
 
AETRIUM INCORPORATED
 
(Registrant)
   
Date: November 14, 2013
By:
/s/ Joseph C. Levesque
 
 
 
Joseph C. Levesque
 
 
 
President and Chief Executive Officer
 
 
 
 
 
Date: November 14, 2013
By:
/s/ Paul H. Askegaard
 
 
 
Paul H. Askegaard
 
 
 
Treasurer (principal financial and accounting officer)
 
 
 
16