ATRM (ATRM) 10-Q 2011 Q3 Quarterly report

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, 2011

Commission File No. 000-22166

AETRIUM INCORPORATED

(Exact name of registrant as specified in its charter)

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

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

(651) 770-2000

(Registrant's telephone number including area code)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes RNo ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes ¨No ¨

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

Large accelerated filer ¨ Accelerated filer ¨ Non-accelerated filer ¨ Smaller reporting company R

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

Number of shares of Common Stock, $.001 par value, outstanding on October 27, 2011 10,781,451

AETRIUM INCORPORATED

INDEX

			Page
PART I.  FINANCIAL INFORMATION
	Item 1.	Financial Statements
		Condensed Consolidated Balance Sheets (unaudited) as of September 30, 2011 and December 31, 2010	3
		Condensed Consolidated Statements of Operations (unaudited) for the three and nine months ended September 30, 2011 and 2010	4
		Condensed Consolidated Statements of Cash Flows (unaudited) for the nine months ended September 30, 2011 and 2010	5
		Notes to unaudited condensed consolidated financial statements	6 - 10
	Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	11 - 15
	Item 4.	Controls and Procedures	15
PART II.  OTHER INFORMATION
	Item 1.	Legal Proceedings	16
	Item 1A.	Risk Factors	16
	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	16
	Item 3.	Defaults Upon Senior Securities	16
	Item 4.	Reserved	16
	Item 5.	Other Information	16
	Item 6.	Exhibits	16
SIGNATURES			17

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PART 1. FINANCIAL INFORMATION

Item 1.  Financial Statements

AETRIUM INCORPORATED

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

(in thousands, except share data)

	September 30,			December 31,
	2011			2010
ASSETS
Current assets:
Cash and cash equivalents	$	6,264		$	10,033
Accounts receivable, net		592			862
Inventories		7,632			7,382
Other current assets		65			67
Total current assets		14,553			18,344
Property and equipment, net		121			98
Other asset		33			41
Total assets	$	14,707		$	18,483
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Trade accounts payable	$	520		$	502
Accrued compensation		232			361
Other accrued liabilities		805			353
Total current liabilities		1,557			1,216
Noncurrent accrued liabilities		161			377
Commitments and contingencies
Shareholders' equity:
Common stock, $.001 par value; 30,000,000 shares authorized; 10,781,451 shares issued and outstanding		11			11
Additional paid-in capital		65,330			65,085
Accumulated deficit		(52,352	)		(48,206	)
Total shareholders' equity		12,989			16,890
Total liabilities and shareholders' equity	$	14,707		$	18,483

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

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AETRIUM INCORPORATED

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

(in thousands, except per share data)

	Three months ended  September 30,					Nine months ended  September 30,
	2011			2010		2011			2010
Net sales	$	1,459		$	4,957	$	6,638		$	14,591
Cost of goods sold		2,125			2,679		5,054			7,922
Gross profit (loss)		(666	)		2,278		1,584			6,669
Operating expenses:
Selling, general and administrative		1,245			1,433		3,617			4,110
Research and development		913			841		2,142			2,350
Total operating expenses		2,158			2,274		5,759			6,460
Income (loss) from operations		(2,824	)		4		(4,175	)		209
Interest income		7			21		29			55
Income (loss) before income taxes		(2,817	)		25		(4,146	)		264
Income tax benefit		—			—		—			57
Net income (loss)	$	(2,817	)	$	25	$	(4,146	)	$	321
Income (loss) per share:
Basic	$	(0.26	)	$	0.00	$	(0.38	)	$	0.03
Diluted	$	(0.26	)	$	0.00	$	(0.38	)	$	0.03
Weighted average common shares outstanding:
Basic		10,781			10,764		10,781			10,690
Diluted		10,781			10,844		10,781			10,849

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

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AETRIUM INCORPORATED

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(in thousands)

	Nine months ended  September 30,
	2011			2010
Cash flows from operating activities:
Net income (loss)	$	(4,146	)	$	321
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Depreciation and amortization expense		51			43
Share-based compensation expense		245			385
Provision for excess and obsolete inventories		1,116			—
Changes in assets and liabilities:
Accounts receivable		270			(1,289	)
Inventories		(1,366	)		(85	)
Other current assets		(24	)		21
Other asset		8			(44	)
Trade accounts payable		18			876
Accrued compensation		(129	)		(26	)
Other accrued liabilities		236			30
Net cash provided by (used in) operating activities		(3,721	)		232
Cash flows from investing activities:
Purchase of property and equipment		(74	)		(43	)
Collection of note receivable		26			83
Net cash provided by (used in) investing activities		(48	)		40
Cash flows from financing activities:
Proceeds from exercise of stock options		—			273
Net cash provided by financing activities		—			273
Net increase (decrease) in cash and cash equivalents		(3,769	)		545
Cash and cash equivalents at beginning of period		10,033			9,476
Cash and cash equivalents at end of period	$	6,264		$	10,021

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

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AETRIUM INCORPORATED

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1. BASIS OF PRESENTATION

The condensed consolidated balance sheet at December 31, 2010 has been derived from our audited financial statements. In the opinion of management, the unaudited interim condensed consolidated financial statements include all adjustments (consisting only of normal, recurring adjustments) necessary to present fairly the financial position, results of operations and cash flows for the interim periods presented. The results of operations for the three and nine months ended September 30, 2011 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, 2010.

2. INCOME (LOSS) PER COMMON SHARE

Basic income (loss) per common share is computed by dividing net income (loss) by the weighted-average number of common shares outstanding during each period. Diluted income per share is computed by dividing net income by the weighted-average number of common shares and common equivalent shares outstanding during each period. Common equivalent shares includes dilutive stock options computed using the treasury stock method. For loss periods, the computation of diluted loss per share excludes the impact of stock options because they would be antidilutive and diluted loss per share is therefore the same as basic loss per share.

For the three and nine month periods ended September 30, 2011, all stock options were excluded from the diluted computations because they would be antidilutive. For the three and nine month periods ended September 30, 2010, 225,000 and 129,000 options, respectively, were excluded from the diluted computations because their exercise prices exceeded the average market value of our common stock for the periods and they would therefore be antidilutive to income per share. As of September 30, 2011, there were 1,416,470 stock options outstanding that could have potentially impacted diluted income per share.

3. RECENT ACCOUNTING PRONOUNCEMENTS

In June 2011, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update No. 2011-05, Comprehensive Income (Topic 220)—Presentation of Comprehensive Income (ASU 2011-05), which requires an entity to 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. ASU 2011-05 eliminates the option to present the components of other comprehensive income as part of the statement of changes in shareholders’ equity. ASU 2011-05 is effective for Aetrium in the first quarter of fiscal year 2012 and should be applied retrospectively. The implementation of this guidance is not expected to have an impact on our consolidated financial position or results of operations.

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In January 2010, the FASB issued authoritative guidance for fair value measurements that requires additional disclosures and clarifications to existing disclosures. This authoritative guidance requires a reporting entity to disclose separately the amounts of significant transfers in and out of Level 1and Level 2 investments and describe the reasons for these transfers. This authoritative guidance also requires enhanced disclosure of activity in Level 3 investments. The new disclosures and clarifications of existing disclosures for Level 1 and Level 2 investments became effective for Aetrium in the first quarter of fiscal year 2010 and the disclosure requirements regarding activity in Level 3 investments became effective for Aetrium in the first quarter of fiscal year 2011. The implementation of this authoritative guidance had no impact on our consolidated financial position, results of operations or cash flows.

In October 2009, the FASB issued authoritative guidance for revenue recognition with multiple deliverables. This authoritative guidance impacts the determination of when the individual deliverables included in a multiple-element arrangement may be treated as separate units of accounting. Additionally, this guidance modifies the manner in which the transaction consideration is allocated to separately identified deliverables by no longer permitting the residual method of allocating arrangement consideration. This guidance became effective for Aetrium in the first quarter of fiscal year 2011 and its implementation did not have a material impact on our consolidated financial position or results of operations.

In October 2009, the FASB issued new accounting guidance for the accounting for certain revenue arrangements that include software elements. The new guidance amends the scope of pre-existing software revenue guidance by removing from the guidance non-software components of tangible products and certain software components of tangible products. This guidance became effective for Aetrium in the first quarter of fiscal year 2011 and its implementation did not have a material impact on our consolidated financial position or results of operations.

4. INVENTORIES

Inventories are comprised of the following (in thousands):

	September 30,		December 31,
	2011		2010
Purchased parts and completed subassemblies	$	3,770	$	4,004
Work-in-process		961		2,190
Finished goods, including saleable demonstration equipment		2,754		1,164
Equipment shipped, subject to revenue deferral		147		24
Total inventories	$	7,632	$	7,382

In the third quarter of 2011, due to general economic uncertainties and weakening business conditions in the semiconductor industry that we believed would continue into early 2012, we reviewed the potential impact of an industry slowdown on our sales forecasts and on our ability to fully realize our inventories. We determined that the potential to realize the full value of our inventories for certain of our older gravity test handler products had been reduced. Accordingly, we wrote down the value of these inventories to their estimated net realizable values by increasing our reserve for excess and obsolete inventories by $1.1 million. We recorded a charge for this amount in cost of goods sold in the quarter ended September 30, 2011.

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5. OTHER ACCRUED LIABILITIES

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

	September 30,		December 31,
	2011		2010
Accrued commissions	$	6	$	12
Customer deposit		110		—
Accrued severance and related costs		260		—
Accrued retirement benefits – current portion		264		207
Accrued warranty		49		64
Accrued taxes, other than income		37		22
Other		79		48
Total other accrued liabilities	$	805	$	353

The accrued severance and related costs of $260,000 at September 30, 2011 are related to a workforce reduction we implemented in late September 2011.  Due to weakening semiconductor industry conditions that we expect will continue into fiscal year 2012, we reduced our expense structure to be better aligned with expected sales levels. We terminated ten employees in manufacturing, sales, and engineering. The accrued severance and related costs are scheduled to be substantially paid by March 31, 2012.

In November 2010, the Compensation Committee of our Board of Directors approved arrangements to provide retirement benefits for our then chief executive officer and our current chief administrative officer. Accrued retirement benefits amounted to approximately $425,000 ($264,000 current, $161,000 noncurrent) at September 30, 2011 and $584,000 ($207,000 current, $377,000 noncurrent) at December 31, 2010.  The current portion of accrued retirement benefits is included in “Other accrued liabilities” and the noncurrent portion is included in “Noncurrent accrued liabilities” in our consolidated balance sheet.

Changes in accrued warranty are summarized below (in thousands):

	Three months ended September 30,						Nine months ended  September 30,
	2011			2010			2011			2010
Accrual balance, beginning of period	$	55		$	87		$	64		$	82
Accruals for warranties - included in selling, general and administrative expenses		—			7			50			79
Settlements made		(6	)		(14	)		(65	)		(81	)
Accrual balance, end of period	$	49		$	80		$	49		$	80

6. LEGAL SETTLEMENT

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

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7. 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, 2011:

	Number of Shares			Weighted Average Exercise Price		Weighted Average Remaining Contract Term	Aggregate Intrinsic Value (in thousands)
Outstanding, January 1, 2011		1,895,437		$	2.38
Options forfeited		(61,199	)		2.33
Options expired		(417,768	)		2.52
Outstanding, September 30, 2011		1,416,470		$	2.34	2.1 years	$	5
Exercisable, September 30, 2011		965,592		$	2.33	1.4 years	$	3

All stock options outstanding at September 30, 2011 are nonqualified options that become exercisable over four years from the grant date and expire five years after the grant date. The aggregate intrinsic value in the table above represents the total pretax intrinsic value (the difference between Aetrium’s closing stock price on September 30, 2011 and the option exercise price) of all in-the-money stock options that would have been received by the option holders had they exercised their options on September 30, 2011.

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. Share-based compensation expense included in our consolidated statements of operations was as follows (in thousands):

	Three months ended September 30,				Nine months ended  September 30,
	2011		2010		2011		2010
Cost of goods sold	$	9	$	14	$	36	$	54
Selling, general and administrative		35		66		150		257
Research and development		16		22		59		74
Total share-based compensation expense	$	60	$	102	$	245	$	385

As of September 30, 2011, we had approximately $0.4 million of unrecognized pretax share-based compensation expense, which is expected to be recognized over a weighted average period of 2.4 years.

8. INCOME TAXES

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

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We recorded an income tax benefit of $57,000 in the nine months ended September 30, 2010 related to a carryback claim filed in 2010 for a refund of federal alternative minimum taxes paid in prior years.

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AETRIUM INCORPORATED

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

Overview

Aetrium designs, manufactures and markets a variety of electromechanical equipment used in the handling and testing of integrated circuits, or ICs, which constitute the highest revenue component of the semiconductor industry. Our primary focus is on high volume ICs and on the latest IC package designs. Our test handler products are purchased primarily by semiconductor manufacturers and their assembly and test subcontractors and are used in the test, assembly and packaging, or TAP, segment of semiconductor manufacturing. Our reliability test products are used to validate IC designs and monitor semiconductor wafer fabrication processes. Our products automate critical functions to improve manufacturing yield, raise quality levels, increase product reliability and reduce manufacturing costs.

As an equipment supplier to the semiconductor industry, Aetrium’s results are driven primarily by worldwide demand for ICs, which in turn depends on end-user demand for electronic products. The demand for our products can fluctuate significantly from period to period due to the direct or indirect impact of numerous factors, including but not limited to changes in the supply and demand for ICs, changes in IC manufacturing capacity, advancements in industry technologies, changes in U.S. and worldwide economic conditions and competitive factors.

The worldwide financial crisis and ensuing economic recession during fiscal years 2008 and 2009 led to a significant decrease in the sales of electronic products and one of the most severe downturns ever in our industry. In mid-2009, general economic conditions began to improve and the semiconductor industry began to recover as the demand for ICs increased.

General economic and semiconductor industry business conditions continued to improve in 2010 and IC manufacturers expanded their production capacity. Aetrium’s results generally followed the improving trend of our industry segment. Our net sales increased from $2.7 million in the fourth quarter of 2009 to $4.6 million, $5.0 million and $5.0 million in the first, second and third quarters of 2010, respectively. However, our net sales decreased significantly in the fourth quarter of 2010 due in part to a general slowdown in the semiconductor industry and also due to significantly lower sales to one of our largest customers. This customer, in addition to being impacted by the industry slowdown, was transitioning from four-site testing to eight-site testing, and we believe its extended eight-site test handler evaluations in the fourth quarter of 2010 resulted in delayed orders from that customer. As a result of these factors, our net sales decreased to $1.7 million in the fourth quarter of 2010.

In the first nine months of 2011, we continued to be impacted by the industry slowdown and reduced sales to the customer discussed above. Although this customer had not yet completed its evaluation of eight-site test handlers, it did purchase some initial units of our new VMAX eight-site test handler and related equipment in the first half of 2011. Accordingly, our net sales increased sequentially to $1.9 million and $3.3 million in the first and second quarters of 2011, respectively. In the third quarter of 2011, economic uncertainties contributed to softening demand for semiconductors that led to reduced revenue forecasts for most IC manufacturers. We observed slowing business activity within our customer base and our net sales decreased sequentially to $1.5 million in the third quarter of 2011. Net sales for the nine months ended September 30, 2011 were $6.6 million compared with $14.6 million for the same period in 2010, a decrease of 55%. The customer discussed above has not yet selected its test handler suppliers for its eight-site test applications.

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Industry analysts are generally predicting that currently weak business conditions will continue into early 2012. A worsening or prolonged continuation of the slowdown in our industry would likely adversely impact the demand for and prices of our products and adversely affect our future operating results and cash flows.

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, 2010. There were no changes in such policies during the nine months ended September 30, 2011.

Results of Operations

Net Sales. Net sales for the nine months ended September 30, 2011 were $6.6 million compared with $14.6 million for the same period in 2010, a 55% decrease. Net sales for the three months ended September 30, 2011 were $1.5 million compared with $5.0 million for the same period in 2010, a 71% decrease. The decrease in net sales in 2011 was attributable primarily to a significant decrease in sales of test handlers as a result of the semiconductor industry slowdown that began in late 2010 and to lower sales to one of our largest customers. This customer has been transitioning from four-site to eight-site testing during 2010 and 2011 and, we believe, reduced and/or delayed purchases of equipment while it continued its evaluations of eight-site test handlers. Sales of test handlers were $2.3 million in the nine months ended September 30, 2011 compared with $9.7 million for the same period in 2010, a decrease of 77%. Sales of reliability test equipment products were $2.0 million in the nine months ended September 30, 2011 compared with $2.5 million for the same period in 2010, a decrease of 20%. Sales of change kits and spare parts were $2.4 million in the nine months ended September 30, 2011 compared with $2.3 million for the same period in 2010, an increase of 2%. We believe sales of change kits and spare parts were less impacted by the industry slowdown because some customers have continued to purchase these items to optimize the utilization of existing equipment rather than purchase new equipment or have purchased additional change kits with new equipment orders.

Gross Profit. Aetrium’s gross profit as a percentage of net sales can fluctuate based on a number of factors, including but not limited to the mix of products sold, distribution channel mix, price discounting, product maturity, inventory writedowns, and the utilization of our manufacturing capacity based upon varying production levels. Gross profit was 23.9% of net sales in the nine months ended September 30, 2011 compared with 45.7% for the same period in 2010. Cost of goods sold in 2011 included a $1.1 million charge for excess and obsolete inventories recorded in the third quarter of 2011. In September 2011, due to general economic uncertainties and weakening business conditions in the semiconductor industry that we believed would continue into early 2012, we reviewed the potential impact of an industry slowdown on our sales forecasts and on our ability to fully realize our inventories. We determined that the potential to realize the full value of our inventories for certain of our older gravity test handler products had been reduced. Accordingly, we wrote down the value of these inventories to their estimated net realizable values by increasing our reserve for excess and obsolete inventories by $1.1 million. Other factors adversely affecting gross profit margin in 2011 included inefficiencies associated with significantly lower production and net sales levels and a slightly less favorable distribution mix. These adverse factors were partially offset by a more favorable product mix. Test handlers, which are generally lower margin sales than reliability test equipment and spare parts/change kits, represented 34% of total net sales in the first nine months of 2011 compared with 67% for the same period in 2010. Reliability test equipment sales represented 30% of total net sales in the first nine months of 2011 compared with 17% for the same period in 2010 and spares/change kit sales represented 36% of total net sales in the first nine months of 2011 compared with 16% for the same period in 2010. Gross profit (loss) was (45.6%) of net sales in the three months ended September 30, 2011 compared with 46.0% for the same period in 2010. Gross margin decreased in 2011 primarily due to the charge for excess and obsolete inventories discussed above and inefficiencies associated with lower production and net sales levels, partially offset by a more favorable product mix.

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Selling, General and Administrative. Selling, general and administrative (S, G and A) expenses for the nine months ended September 30, 2011 were $3.6 million compared with $4.1 million for the comparable period in 2010, a decrease of 12%. S, G and A expenses for the nine months ended September 30, 2010 included a credit of $0.2 million related to the settlement of a legal dispute with a subtenant of our former leased facility in Poway, California. Excluding the credit in 2010, the $0.7 million decrease in S, G and A expenses was primarily attributable to a $0.6 million decrease in commissions expense on lower net sales and a $0.3 million decrease in employee compensation expense. These expense decreases were partially offset by a $0.1 million increase in demonstration costs related to evaluations of our newer equipment products at existing and potential customer sites and a $0.1 million restructuring charge we recorded related to a workforce reduction implemented in September 2011. S, G and A expenses for the three months ended September 30, 2011 were $1.2 million compared with $1.4 million for the comparable period in 2010, a decrease of 13%. The decrease was primarily attributed to a $0.2 million decrease in commissions expense on lower net sales.

Research and Development. Research and development expenses for the nine months ended September 30, 2011 were $2.1 million compared with $2.4 million for the comparable period in 2010, a 9% decrease. A $0.5 million decrease in contract service costs was partially offset by a $0.2 million increase in employee compensation and a $0.1 million charge related to a workforce reduction implemented in September 2011. Research and development expenses for the three months ended September 30, 2011 were $0.9 million compared with $0.8 million for the comparable period in 2010, a 9% increase. The increase was primarily attributed to a $0.1 million increase in employee compensation and a $0.1 million charge related to a workforce reduction implemented in late September 2011, offset by a $0.2 million decrease in engineering contract services. Research and development expenses represented 32.3% of total net sales for the nine month period ended September 30, 2011 compared with 16.1% of total net sales for the comparable period in 2010. New product development is an essential part of our strategy to gain market share. Over time, we expect to invest approximately 12% to 15% of our revenues in research and development, although we may exceed this range in periods of relatively low revenues.

Interest Income. Interest income amounted to $29,000 and $55,000 for the nine months ended September 30, 2011 and 2010, respectively, and amounted to $7,000 and $21,000 for the three months ended September 30, 2011 and 2010, respectively. The decrease in interest income in 2011 reflects generally lower interest rates and lower average invested cash balances.

Income Taxes. We recorded no income tax benefit or expense for the three and nine month periods ended September 30, 2011. 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. We recorded an income tax benefit of $57,000 in the nine months ended September 30, 2010 related to a carryback claim filed in 2010 for a refund of federal alternative minimum taxes paid in prior years.

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Financial Condition, Liquidity and Capital Resources

Cash and cash equivalents decreased by approximately $3.8 million in the nine months ended September 30, 2011. We used $3.7 million of cash to fund operating activities during this period, including our net loss of $4.1 million and $1.0 million in working capital changes, partially offset by $1.4 million in non-cash expenses. Non-cash expenses included a $1.1 million charge for excess and obsolete inventories, depreciation expense of $0.1 million and share-based compensation expense of $0.2 million. Working capital changes using cash consisted primarily of a $1.4 million increase in inventories, partially offset by a $0.3 million decrease in accounts receivable. The increase in inventories resulted from an increase in inventories related to our new VMAX eight-site test handler to meet anticipated sales demand and demo/evaluation unit requirements for potential new accounts. Accounts receivable decreased due to a decrease in net sales in the third quarter of 2011 compared with the fourth quarter of 2010 and the timing of collections. Net cash flows from investing and financing activities in the nine months ended September 30, 2011 were not significant.

Cash and cash equivalents increased by approximately $0.5 million in the nine months ended September 30, 2010. We generated $0.2 million of cash from operating activities during this period. Cash generated from net income of $0.3 million and $0.4 million in non-cash depreciation and share-based compensation expense was partially offset by $0.5 million in working capital changes. Working capital changes using cash consisted primarily of a $1.3 million increase in accounts receivable and a $0.1 million increase in inventories, partially offset by a $0.9 million increase in accounts payable. Accounts receivable increased due to a significant increase in net sales in the third quarter of 2010 compared with the fourth quarter of 2009. Inventories increased primarily to support customer evaluations and initial shipments anticipated for our new VMAX eight site test handler. Accounts payable increased primarily due to higher levels of inventory purchases in the third quarter of 2010 compared with the fourth quarter of 2009. Net cash flows from investing activities for the nine months ended September 30, 2010 were not significant. Net cash provided by financing activities for the nine months ended September 30, 2010 consisted of $0.3 million in net proceeds from employee stock option exercises.

Historically we have supported our capital expenditure and working capital needs with cash generated from operations and our existing cash and cash equivalents.  We believe our cash balance of $6.3 million at September 30, 2011 will be sufficient to meet capital expenditure and working capital requirements for at least the next twelve months. In addition, we have a revolving credit line agreement with a bank that provides for borrowings up to $2.0 million. Advances under the agreement are at the sole discretion of the bank. The agreement expires in December 2011. There can be no assurance that the agreement will be renewed with terms favorable to us or at all or that funds will be available to us under the existing or any subsequent agreement. As discussed above, business conditions in the semiconductor industry weakened in the third quarter of 2011 and some industry analysts and many semiconductor manufacturers are forecasting declining revenues as the end of fiscal year 2011 approaches. We believe that industry conditions are likely to continue to be weak into early 2012. A worsening or prolonged continuation of the current slowdown in our industry would likely adversely impact the demand for and prices of our products and adversely affect our future operating results and cash flows. Also, as we continue to monitor the industry and customer needs, we may acquire other companies, product lines or technologies that are complementary to our business, and our working capital needs may change as a result of such acquisitions.

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Recent Accounting Pronouncements

In June 2011, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update No. 2011-05, Comprehensive Income (Topic 220)—Presentation of Comprehensive Income (ASU 2011-05), which requires an entity to 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. ASU 2011-05 eliminates the option to present the components of other comprehensive income as part of the statement of changes in shareholders’ equity. ASU 2011-05 is effective for Aetrium in the first quarter of fiscal year 2012 and should be applied retrospectively. The implementation of this guidance is not expected to have an impact on our consolidated financial position or results of operations.

In January 2010, the FASB issued authoritative guidance for fair value measurements that requires additional disclosures and clarifications to existing disclosures. This authoritative guidance requires a reporting entity to disclose separately the amounts of significant transfers in and out of Level 1 and Level 2 investments and describe the reasons for these transfers. This authoritative guidance also requires enhanced disclosure of activity in Level 3 investments. The new disclosures and clarifications of existing disclosures for Level 1 and Level 2 investments became effective for Aetrium in the first quarter of fiscal year 2010 and the disclosure requirements regarding activity in Level 3 investments became effective for Aetrium in the first quarter of fiscal year 2011. The implementation of this authoritative guidance had no impact on our consolidated financial position, results of operations or cash flows.

In October 2009, the FASB issued authoritative guidance for revenue recognition with multiple deliverables. This authoritative guidance impacts the determination of when the individual deliverables included in a multiple-element arrangement may be treated as separate units of accounting. Additionally, this guidance modifies the manner in which the transaction consideration is allocated to separately identified deliverables by no longer permitting the residual method of allocating arrangement consideration. This guidance became effective for Aetrium in the first quarter of fiscal year 2011 and its implementation did not have a material impact on our consolidated financial position or results of operations.

In October 2009, the FASB issued new accounting guidance for the accounting for certain revenue arrangements that include software elements. The new guidance amends the scope of pre-existing software revenue guidance by removing from the guidance non-software components of tangible products and certain software components of tangible products. This guidance became effective for Aetrium in the first quarter of fiscal year 2011 and its implementation did not have a material impact on our consolidated financial position or results of operations.

Item 4. Controls and Procedures

Our chief executive officer, our chief administrative officer and our treasurer conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Securities Exchange Act Rules 13a-15(e) and 15d-15(e)). Based on their evaluation, they concluded that our disclosure controls and procedures were effective as of September 30, 2011, the end of the period covered by this quarterly report. There were no changes in our internal control over financial reporting that occurred during the third quarter of 2011 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.

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AETRIUM INCORPORATED

PART II.  OTHER INFORMATION

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

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AETRIUM INCORPORATED

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

AETRIUM INCORPORATED

(Registrant)

Date: November 3, 2011	By:	/s/ John J. Pollock
		John J. Pollock
		President and Chief Executive Officer
Date: November 3, 2011	By:	/s/ Paul H. Askegaard
		Paul H. Askegaard
		Treasurer (principal financial and accounting officer)

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