v2.3.0.11
Document and Entity Information
9 Months Ended
Sep. 30, 2011
Nov. 07, 2011
Entity Information    
Entity Registrant Name Arrhythmia Research Technology Inc /DE/  
Entity Central Index Key 0000819689  
Current Fiscal Year End Date --12-31  
Entity Filer Category Smaller Reporting Company  
Document Type 10-Q  
Document Period End Date Sep. 30, 2011
Document Fiscal Year Focus 2011  
Document Fiscal Period Focus Q3  
Amendment Flag false  
Entity Common Stock, Shares Outstanding   2,790,514
v2.3.0.11
Consolidated Balance Sheets (USD $)
Sep. 30, 2011
Dec. 31, 2010
Current Assets:    
Cash and cash equivalents $ 2,445,115 $ 3,962,454
Trade and other accounts receivable, net of allowance for doubtful accounts of $43,496 and $83,976 4,811,442 3,819,361
Inventories, net 2,730,818 3,069,177
Deferred income taxes, net 355,000 44,000
Prepaid tax 94,905 166,694
Deposits, prepaid expenses and other current assets 430,915 397,010
Total current assets 10,868,195 11,458,696
Property and equipment, net of accumulated depreciation of $9,989,038 and $9,101,732 7,447,154 6,691,817
Goodwill 1,564,966 1,564,966
Other intangible assets, net 136,726 96,446
Restricted cash 0 517,571
Total assets 20,017,041 20,329,496
Current liabilities:    
Accounts payable 2,016,804 2,280,992
Accrued expenses 715,479 275,197
Total current liabilities 2,732,283 2,556,189
Long term liabilities:    
Long term deferred tax liability, net 387,965 330,000
Long term portion of deferred gain on lease 14,518 17,868
Total long term liabilities 402,483 347,868
Total liabilities 3,134,766 2,904,057
Shareholders' equity    
Preferred stock, $1 par value; 2,000,000 shares authorized, non issued 0 0
Common stock, $0.01 par value; 10,000,000 shares authorized, 3,926,491 shares issued, 2,790,514 39,265 39,265
Additional paid-in-capital 10,738,595 10,653,210
Common stock held in treasury, 1,135,977 shares at cost 3,099,842 3,099,842
Accumulated other comprehensive income from foreign currency translationAccumulated other comprehensive income from foreign currency translation 51,849 42,502
Retained earnings 9,152,408 9,790,304
Total shareholders’ equity 16,882,275 17,425,439
Total liabilities and shareholders’ equity $ 20,017,041 $ 20,329,496
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Consolidated Balance Sheets Parenthetical (USD $)
Sep. 30, 2011
Dec. 31, 2010
Current Assets:    
Allowance for Doubtful Accounts Receivable, Current $ 43,496 $ 83,976
Accumulated Depreciation, Depletion and Amortization, Property, Plant, and Equipment $ 9,989,038 $ 9,101,732
Stockholders' Equity    
Common stock, par value $ 0.01 $ 0.01
Common stock, shares authorized 10,000,000 10,000,000
Common stock, shares issued 3,926,491 3,926,491
Common stock, shares outstanding 2,790,514 2,790,514
Preferred stock, par value $ 1 $ 1
Preferred stock, shares authorized 2,000,000 2,000,000
Preferred stock, shares issued 0 0
Preferred stock, shares outstanding 0 0
Treasury stock, shares 1,135,977 1,135,977
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Consolidated Statements of Operations (USD $)
3 Months Ended 9 Months Ended
Sep. 30, 2011
Sep. 30, 2010
Sep. 30, 2011
Sep. 30, 2010
Revenue $ 6,788,974 $ 5,888,277 $ 18,990,368 $ 17,255,916
Cost of sales 5,455,531 4,605,683 15,254,373 13,894,697
Gross profit 1,333,443 1,282,594 3,735,995 3,361,219
Selling and marketing 450,910 259,831 1,224,440 673,457
General and administrative 885,214 749,396 2,684,057 2,025,255
Research and development 125,573 76,189 313,437 179,000
Total expense 1,461,697 1,085,416 4,221,934 2,877,712
Income (loss) from operations (128,254) 197,178 (485,939) 483,507
Other income (expense), net 4,241 (2,450) (970) 142,319
Income (loss) before income taxes (124,013) 194,728 (486,909) 625,826
Income tax provision (benefit) (50,000) 75,200 (185,485) 185,000
Net income (loss) $ (74,013) $ 119,528 $ (301,424) $ 440,826
Net income (loss) per share – basic $ (0.03) $ 0.04 $ (0.11) $ 0.16
Net income (loss) per share – diluted $ (0.03) $ 0.04 $ (0.11) $ 0.16
Weighted average common shares Outstanding – basic 2,790,514 2,790,514 2,790,514 2,719,724
Weighted Average Number of Shares Outstanding, Diluted   2,820,834   2,769,049
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Statement of Changes in Shareholders' Equity (USD $)
Total
Common Stock
Additional Paid-in Capital
Treasury Stock
Accumulated other comprehensive income
Retained Earnings
Comprehensive income (loss)
Stockholders' Equity Attributable to Parent at Dec. 31, 2010 $ 17,425,439 $ 39,265 $ 10,653,210 $ (3,099,842) $ 42,502 $ 9,790,304  
Common Stock, Shares, Issued at Dec. 31, 2010 3,926,491 3,926,491          
Foreign currency translation adjustments 9,347       9,347   9,347
Share based compensation 85,385   85,385       0
Cash dividends (336,472)         (336,472) 0
Net loss (301,424)         (301,424) (301,424)
Comprehensive loss             (292,077)
Stockholders' Equity Attributable to Parent at Sep. 30, 2011 $ 16,882,275 $ 39,265 $ 10,738,595 $ (3,099,842) $ 51,849 $ 9,152,408  
Common Stock, Shares, Issued at Sep. 30, 2011 3,926,491 3,926,491          
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Consolidated Statements of Cash Flows (USD $)
9 Months Ended
Sep. 30, 2011
Sep. 30, 2010
Cash flows from operating activities:    
Net Income (loss) $ (301,424) $ 440,826
Adjustments to reconcile net income (loss) to net cash provided by operating activities:    
Non-cash gain from bargain purchase 0 (146,288)
Amortization of the gain on lease (3,350) 0
Depreciation and amortization 1,166,666 1,070,175
Share based compensation 85,385 79,041
Provision for doubtful accounts (40,480) 19,000
Deferred tax expense (253,035) (84,000)
Changes in operating assets and liabilities:    
Trade and other accounts receivable (951,601) (328,538)
Inventories 338,359 (190,970)
Deposits, prepaid expenses and other assets 37,884 (325,575)
Accounts payable and accrued expenses 176,096 314,084
Net cash provided by operating activities 254,500 847,755
Cash flows from investing activities:    
Capital expenditures, net of disposals (1,962,285) (1,080,418)
Cash released from restrictions 517,571 0
Acquisitions 0 16,357
Net cash used in investing activities (1,444,714) (1,064,061)
Cash flows from financing activities:    
Cash dividend paid (336,472) (336,461)
Net cash used in financing activities (336,472) (336,461)
Effect of currency translation on cash and cash equivalents 9,347 18,134
Net decrease in cash and cash equivalents (1,517,339) (534,633)
Cash and Cash Equivalents, at begining of period 3,962,454 3,674,179
Cash and Cash Equivalents, at end of period $ 2,445,115 $ 3,139,546
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Note 1 - Basis of Presentation
9 Months Ended
Sep. 30, 2011
Basis of Presentation [Abstract]  
Basis of Presentation
Basis of Presentation:
 
The unaudited interim consolidated financial statements and related notes have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (the "SEC").  Accordingly, certain information and footnote disclosures normally included in complete financial statements prepared in accordance with generally accepted accounting principles have been omitted pursuant to such rules and regulations.  The accompanying unaudited interim consolidated financial statements and related notes should be read in conjunction with the consolidated financial statements and notes thereto included in the Arrhythmia Research Technology, Inc. ("ART") and subsidiaries (the “Company”) Annual Report on Form 10-K for the year ended December 31, 2010 filed with the SEC on March 23, 2011.
 
The information presented reflects, in the opinion of the management of the Company, all adjustments necessary for a fair presentation of the financial results for the interim period presented.
 
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period.  Actual results could differ from those estimates.  Operating results for interim periods are not necessarily indicative of results that may be expected for the entire fiscal year.
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Note 2 - Inventories
9 Months Ended
Sep. 30, 2011
Inventories [Abstract]  
Inventories
Inventories:
 
Inventories consist of the following as of:
September 30,
2011
 
December 31,
2010
Raw materials
$
878,113

 
$
911,440

Work-in-process 
307,155

 
169,063

Finished goods
1,545,550

 
1,988,674

Total
$
2,730,818

 
$
3,069,177


The value of silver in inventory at September 30, 2011 and December 31, 2010 as a part of finished goods as plated sensors, work in process, or raw material was $752,149 and $617,154, respectively. Inventories are stated net of a reserve for slow moving or obsolete inventory.

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Note 3 - Share-Based Compensation
9 Months Ended
Sep. 30, 2011
Share-based Compensation [Abstract]  
Share-Based Compensation
Share-Based Compensation:
 
The Company accounts for non-cash share based compensation under Accounting Standards Codification ("ASC") 718 “Stock Compensation”, which establishes accounting for equity instruments exchanged for employee services.  Under the provisions of ASC 718, share-based compensation cost is measured at the grant date, based on the fair value of the award, and is recognized as an expense over the employee’s requisite service period (generally the vesting period of the equity grant).
 
The Company estimates the fair value of stock options using the Black-Scholes valuation model.  Key input assumptions used to estimate the fair value of stock options include the exercise price of the award, the expected option term, the expected volatility of the Company’s stock over the option’s expected term, the risk-free interest rate over the option’s expected term, and the Company’s expected annual dividend yield.  The Company believes that the valuation technique and the approach utilized to develop the underlying assumptions are appropriate in calculating the fair values of the Company’s stock options.  Estimates of fair value are not intended to predict actual future events or the value ultimately realized by persons who receive equity awards.
 
The Company recognized share-based compensation expense of $23,521 and $22,030 for the three months ended September 30, 2011 and 2010, and $85,385 and $79,041 for the nine months ended September 30, 2011 and 2010, respectively.  Two grants totaling 160,000 options to 9 persons, including directors and management, were made during the nine months ended September 30, 2011.  Grants totaling 135,500 options were made in the first nine months of 2010 of which, 60,000 non-qualified options were outside of the Company’s stock option plan in conjunction with business combination activities, of which 20,000 are currently exercisable.
The following is a weighted average of the assumptions used to estimate the fair market value of options granted using the Black Scholes valuation method:
 
 
Nine Months Ended September 30, 2011
Nine Months Ended September 30, 2010
Dividend Yield
2.1%
1.26%
Expected Volatility
31.24%
46.48%
Risk Free Interest Rate
0.98%
1.2%
Expected Option Terms (in years)
5
5

Share-based Incentive Plan

At September 30, 2011, the Company has two stock option plans that includes both incentive stock options and non-qualified stock options to be granted to certain eligible employees, non-employee directors, or consultants of the Company.  The 2001 Plan has 236,500 options outstanding; however, has been closed for new grants. The 2010 Plan has 160,000 options outstanding and the maximum number of shares reserved for issuance is 500,000 shares.  The options granted have six or ten year contractual terms and either vest immediately or vest annually over a five-year term.
 
The following table presents the average price and contractual life information about options outstanding and exercisable at September 30, 2011:
 
Exercise Price
 
Number of Outstanding Shares
 
Weighted Average Remaining Contractual Life (years)
 
Options Currently
Exercisable
 
Average Fair Value
at Grant Date
$
3.41

 
75,500
 
4.26
 
15,100
 
$
0.96

4.76

 
60,000
 
3.71
 
20,000
 
1.77

5.73

 
90,000
 
9.68
 
 
1.30

7.15

 
96,000
 
2.26
 
57,600
 
2.74

9.86

 
63,000
 
0.22
 
63,000
 
4.22

9.86

 
70,000
 
9.63
 
 
0.50

12.42

 
10,000
 
0.85
 
10,000
 
5.38

23.10

 
10,000
 
1.43
 
8,000
 
10.77

 
 
474,500
 
 
 
173,700
 
 
 
The aggregated intrinsic value of options outstanding and vested at September 30, 2011 was $0.  The Company expects 244,490 or 81.3% of the 300,800 unvested options to vest over their remaining life.
 
The following table summarizes the status of the Company’s non-vested options since December 31, 2010:
 
 
Non-Vested Options
 
Number of Shares
 
Weighted
Average Fair
Value
Non-vested at December 31, 2010
184,100

 
$
1.98

Granted
160,000

 
0.95

Vested
(43,300
)
 
2.50

Forfeited

 
 
Non-vested at September 30, 2011
300,800

 
$
1.36


At September 30, 2011, there was $259,125 of total unrecognized cost related to non-vested share-based compensation arrangements granted under the Plan.  This cost is expected to be recognized over a weighted average period of 3.92 years.

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Note 4 - Income Taxes
9 Months Ended
Sep. 30, 2011
Income Taxes [Abstract]  
Income Taxes
Income Taxes:
 
The Company accounts for income taxes in accordance with ASC 740 “Income Taxes,” which requires recognition of deferred tax liabilities and assets for the expected future tax consequences of events that have been included in the financial statements or tax returns.  Under this method, deferred tax liabilities and assets are determined based on the difference between the financial statement and tax bases of assets and liabilities using tax rates in effect for the year in which the differences are expected to reverse.
 
The Company files income tax returns in the U.S. Federal jurisdiction and various state jurisdictions.  The periods from 2008 to 2010 remain open to examination by the IRS and state jurisdictions.  The Company believes it is not subject to any significant tax risks related to uncertain tax positions.  The Company does not have any accrued interest or penalties associated with any unrecognized tax benefits, nor were any interest expenses recognized during the nine months ended September 30, 2011 and 2010.
 
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Note 5 - Earnings per share
9 Months Ended
Sep. 30, 2011
Earnings Per Share [Abstract]  
Earnings per share
Earnings per share:
 
In accordance with ASC 260, the basic earnings per share is computed by dividing net income available to common stockholders by the weighted average number of common shares outstanding.  Diluted earnings per share is computed similar to basic earnings per share except that the denominator is increased to include the number of additional shares that would have been outstanding if the potential shares had been issued and if the additional shares were dilutive.  At September 30, 2011, 173,700 stock options were anti-dilutive and are excluded from the three and nine months in the earnings per share computation.
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Note 6 - RMDDx Acquisition
9 Months Ended
Sep. 30, 2011
RMDDx Acquisition [Abstract]  
RMDDx Acquisition
RMDDx Acquisition:
On June 18, 2010, the Company, through a newly created Delaware subsidiary named RMDDxUSA Corp., purchased all of the outstanding shares of RMDDx Corporation (“RMDDx”), a Prince Edward Island corporation. The shares were exchanged for 115,033 shares of ART common stock and options to purchase 60,000 shares at $4.76. These shares and options were immediately placed in escrow and are released and vested based upon the achievement of certain performance targets. The performance targets require client contracts, service volumes and gross sales with minimum gross margins. On October 15, 2010, the first performance target was met, 28,758 shares of stock were released from escrow and 20,000 options are vested. On October 18, 2011, the second performance target was missed, and will require an adjustment to equity.
RMDDxUSA Corp. is the U.S. sales and distribution operations entity for, and parent of, RMDDx.
RMDDx is a medical device and diagnostic service company dedicated to the development and commercialization of medical devices, medical information technology, medical diagnostics and patient monitoring through wireless, internet and telecommunication technologies. Since inception, the efforts have been devoted to the development of remote wireless medical technology for heart monitors.
The fair value of the assets acquired and liabilities assumed in the acquisition on June 18, 2010 is as follows:
Assets
 
Current Assets
$
17,357

Fixed Assets
83,381

Deferred Tax Assets
165,872

Other Assets
512,483

Total Assets
$
779,093

 
 
Liabilities
 
Current Liabilities
$
82,254

Total Liabilities
$
82,254

RMDDx has a deferred tax asset related to losses prior to the close of the transaction. The deferred tax asset is for Canadian and Provincial corporate income taxes.
RMDDx had $510,833 in cash which was restricted as it collateralized a guarantee on a stand-by letter of credit related to a Canadian Federal contracting economic incentive program involving an unrelated third party. The restriction was lifted during the second quarter of 2011 when the Company secured a $1,000,000 letter of credit to replace the guarantee by the Province of Prince Edward Island. Using the judgment of management in the fair market valuation required by ASC 805 “Business Combinations”, over the next 5 years the targets of the incentive program are expected to be achieved. These calculations and the associated assumptions are the basis for not including a liability related to the guarantee on the Balance Sheet. As of September 30, 2011, management has not booked a reserve for this performance requirement. This guarantee, secured by the Company's letter of credit, is reviewed by management for impairment. The Province of Prince Edward Island, through an economic incentive program, has paid expense reimbursements exceeding $220,000 to the Company in the form of a labor and equipment rebates.
The common stock was issued from treasury, and the options were issued outside of the Company's existing stock option plan. The fair value of the options was determined by using the Black Scholes valuation methods described in Note 3. The fair value of the equity issued was determined based on the probability of the management of RMDDx meeting the performance targets required for the release and vesting of shares and options. In compliance with ASC 805-30-30-1, a fair value of the equity was determined to be $550,551 and was calculated by discounting the targets outside of a 12 month period with an estimate of the probability of attainment. The determination of probabilities was made using the same assumptions used throughout the purchase accounting.
In compliance with FASB ASC 805-30-25-2, this transaction was deemed a “bargain purchase” with the resulting gain of $146,288 booked as other income in the quarter ended June 30, 2010. This increase to other income offsets the general and administrative costs related to the transaction of approximately $80,000. As defined by ASC 805-30-25, the purchase of RMDDx was not a forced sale in which the seller acted under compulsion. The discount to fair value relates to the sellers belief in the future value of the combined entity exceeding the current value of the consideration.
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Note 7 - Recent Pronouncements
9 Months Ended
Sep. 30, 2011
Recent Pronouncements [Abstract]  
Recent Pronouncements
Recent Pronouncements
Accounting Standards Update (ASU) 2011-05, “Comprehensive Income” (“Update 2011-05”), revises the manner in which companies present comprehensive income in their financial statements. This ASU requires companies to report the components of comprehensive income in either a continuous statement of comprehensive income or in two separate but consecutive statements. In the two-statement approach, the first statement would present the components of net income, similar to the Company’s current Consolidated Statements of Operations, while the second statement would include the components of other comprehensive income (OCI), as well as a cumulative total for comprehensive income. This ASU does not change the items that must be reported in OCI. ASU 2011-05 must be applied retrospectively and is effective for the first quarter of 2012. Management is in the process of evaluating the presentation options required by this ASU.
Accounting Standards Update (ASU) 2011-07, “Health Care Entities (Topic 954): Presentation and Disclosure of Patient Service Revenue, Provision for Bad Debts and the Allowance for Doubtful Accounts for Certain Health Care Entities” (“Update 2011-07”). Update 2011-07 requires certain health care entities to change the presentation in their statement of operations by reclassifying the provision for bad debts associated with patient service revenue from an expense to a deduction from patient service revenue (net of contractual allowances and discounts). Additionally, those health care entities are required to provide enhanced disclosure about their policies for recognizing revenue and assessing bad debts. The amendments also require disclosures of patient service revenue (net of contractual allowances and discounts) as well as qualitative and quantitative information about changes in the allowance for doubtful accounts. Update 2011-07 is effective for fiscal years and interim periods within those fiscal years beginning after December 15, 2011, with early adoption permitted. Management is in the process of evaluating the effects of Update 2011-07 on the consolidated financial statements.
Accounting Standards Update (“ASU”) 2011-08, "Intangibles Goodwill and Other (Topic 350): Testing Goodwill for Impairment" ("Update 2011-08"). Update 2011-08 amends existing guidance by giving an entity the option to first assess qualitative factors to determine whether it is more likely than not (that is, a likelihood of more than 50%) that the fair value of a reporting unit is less than its carrying amount. If this is the case, companies will need to perform a more detailed two-step goodwill impairment test which is used to identify potential goodwill impairments and to measure the amount of goodwill impairment losses to be recognized, if any. ASU 2011-08 will be effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011, which for the company is the first quarter of 2012. Management does not believe the adoption of this update will have a material impact on the consolidated financial statements.