ATRM (ATRM) 10-Q 2012 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, 2012

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. YesRNo¨

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). YesRNo¨

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 companyR

Indicate by a checkmark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes¨NoR

Number of shares of Common Stock, $.001 par value, outstanding on October 31, 2012 10,781,451

AETRIUM INCORPORATED

INDEX

		Page
PART I.  FINANCIAL INFORMATION
Item 1.	Financial Statements
	Condensed Consolidated Balance Sheets (unaudited) as of September 30, 2012 and December 31, 2011	3
	Condensed Consolidated Statements of Operations (unaudited) for the three and nine months ended September 30, 2012 and 2011	4
	Condensed Consolidated Statements of Cash Flows (unaudited) for the nine months ended September 30, 2012 and 2011	5
	Notes to unaudited condensed consolidated financial statements	6 - 9
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	10 - 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

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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,
	2012			2011
ASSETS
Current assets:
Cash and cash equivalents	$	3,677		$	5,008
Accounts receivable, net of allowance for doubtful accounts of $30 at September 30, 2012 and December 31, 2011		520			1,324
Inventories, current		2,605			7,731
Other current assets		71			53
Total current assets		6,873			14,116
Property and equipment, net		184			109
Inventories, noncurrent		1,810			0
Other asset		21			30
Total assets	$	8,888		$	14,255
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Capital lease obligation – current portion	$	29		$	0
Trade accounts payable		641			506
Accrued compensation		241			323
Other accrued liabilities		416			728
Total current liabilities		1,327			1,557
Capital lease obligation – noncurrent portion		43			0
Accrued liabilities - noncurrent		139			256
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		65,568			65,385
Accumulated deficit		(58,200	)		(52,954	)
Total shareholders' equity		7,379			12,442
Total liabilities and shareholders' equity	$	8,888		$	14,255

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

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AETRIUM INCORPORATED

CONDENSEDCONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

(in thousands, except per share data)

	Three months ended September 30,						Nine months ended September 30,
	2012			2011			2012			2011
Net sales	$	796		$	1,459		$	4,698		$	6,638
Cost of goods sold		3,361			2,125			5,403			5,054
Gross profit (loss)		(2,565	)		(666	)		(705	)		1,584
Operating expenses:
Selling, general and administrative		1,205			1,245			3,383			3,617
Research and development		371			913			1,161			2,142
Total operating expenses		1,576			2,158			4,544			5,759
Loss from operations		(4,141	)		(2,824	)		(5,249	)		(4,175	)
Interest income (expense), net		1			7			3			29
Loss before income taxes		(4,140	)		(2,817	)		(5,246	)		(4,146	)
Income taxes		0			0			0			0
Net loss	$	(4,140	)	$	(2,817	)	$	(5,246	)	$	(4,146	)
Net loss per share – basic and diluted	$	(0.38	)	$	(0.26	)	$	(0.49	)	$	(0.38	)
Weighted average common shares outstanding – basic and diluted		10,781			10,781			10,781			10,781

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,
	2012			2011
Cash flows from operating activities:
Net loss	$	(5,246	)	$	(4,146	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization expense		59			51
Share-based compensation expense		183			245
Provision for excess and obsolete inventories		2,766			1,116
Changes in assets and liabilities:
Accounts receivable		804			270
Inventories		550			(1,366	)
Other current assets		(18	)		(24	)
Other asset		9			8
Trade accounts payable		135			18
Accrued compensation		(82	)		(129	)
Other accrued liabilities		(429	)		236
Net cash used in operating activities		(1,269	)		(3,721	)
Cash flows from investing activities:
Purchase of property and equipment		(45	)		(74	)
Collection of note receivable		0			26
Net cash used in investing activities		(45	)		(48	)
Cash flows from financing activities:
Payments on capital lease		(17	)		0
Net cash used by financing activities		(17	)		0
Net decrease in cash and cash equivalents		(1,331	)		(3,769	)
Cash and cash equivalents at beginning of period		5,008			10,033
Cash and cash equivalents at end of period	$	3,677		$	6,264
Supplemental cash flow information:
Equipment acquired by capital lease	$	89		$	0

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, 2011 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, 2012 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, 2011.

2. NET 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.

3. INVENTORIES

Inventories are comprised of the following (in thousands):

	September 30,			December 31,
	2012			2011
Purchased parts and completed subassemblies	$	1,405		$	3,688
Work-in-process		645			571
Finished goods, including saleable demonstration equipment		2,365			3,472
Total inventories		4,415			7,731
Noncurrent portion		(1,810	)		0
Current portion	$	2,605		$	7,731

We adjust our inventories for excess and obsolete items by reducing their carrying values to estimated net realizable value based upon assumptions about future product demand. We evaluate potential excess and obsolete inventory exposures by reviewing historical usage and anticipated demand based on current and projected market conditions, customer requirements and other factors. We also evaluate inventories for potential excess and obsolescence due to engineering design changes and the impact of new products. In the third quarter of 2012, due to general economic uncertainties and weakening business conditions in the semiconductor industry that we believed would continue into 2013, we reviewed the potential impact of an industry slowdown on our sales forecasts and on our ability to fully realize our inventories. Sales of our gravity-feed test handler products are particularly vulnerable to reduced semiconductor demand and production capacity utilization rates and we determined that the potential to realize the full value of inventories for these products under current industry conditions had been significantly reduced. Accordingly, we reduced the carrying value of certain of these inventories to their estimated net realizable values and recorded a corresponding charge of $2.8 million in cost of goods sold in the quarter ended September 30, 2012.

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Based on our assessment of potential excess and obsolete inventories at September 30, 2012, we estimated that inventories in the amount of $1.8 million may not be sold within the next year. Accordingly, this amount is included in the caption “Inventory, noncurrent” in our condensed consolidated balance sheet.

4. OTHER CURRENT ACCRUED LIABILITIES

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

	September 30,		December 31,
	2012		2011
Accrued commissions	$	58	$	132
Accrued severance and related costs		101		326
Accrued retirement benefits – current portion		147		133
Accrued warranty		24		42
Other		86		95
Total other current accrued liabilities	$	416	$	728

We implemented workforce reductions in September 2011, January 2012 and September 2012 in order to reduce our expense structure to be better aligned with expected sales levels. In September 2012, we eliminated eight employee positions in manufacturing, sales, and engineering. We recorded a charge of $68,000 for severance and related costs in the quarter ended September 30, 2012 related to this workforce reduction. Accrued severance and related costs at September 30, 2012 included this charge and also $33,000 for amounts owing under a separation agreement executed in December 2011 with our former president/chief executive officer. Of the $101,000 of accrued severance and related costs at September 30, 2012, approximately $90,000 is scheduled to be paid by December 31, 2012.

Accrued retirement benefits for our chief executive officer and chief administrative officer amounted to approximately $277,000 ($147,000 current, $130,000 noncurrent) at September 30, 2012 and $380,000 ($133,000 current, $247,000 noncurrent) at December 31, 2011. The current portion of accrued retirement benefits is included in “Other accrued liabilities” and the noncurrent portion is included in “Accrued liabilities - noncurrent” in our condensed consolidated balance sheet.

In November 2011, Joseph C. Levesque, the chairman of our board of directors, was appointed to serve as president and chief executive officer on an interim basis pending the appointment of a permanent replacement for these positions. We entered into an employment agreement with Mr. Levesque that provides for the payment of a majority of his base salary to be deferred until 2013. The current portion of amounts deferred under this agreement ($93,000 at September 30, 2012 and $0 at December 31, 2011) is included in “Accrued Compensation” and the noncurrent portion ($9,000 at September 30, 2012 and December 31, 2011) is included in “Accrued liabilities - noncurrent” in our condensed consolidated balance sheet.

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

	Nine months ended September 30,
	2012			2011
Accrual balance, beginning of period	$	42		$	64
Accruals for warranties		3			50
Settlements made		(21	)		(65	)
Accrual balance, end of period	$	24		$	49

5. CAPITAL LEASE

In February 2012, we entered into an agreement to lease certain data processing equipment. The agreement provides for monthly payments of $2,634 plus applicable sales taxes over three years. At the end of the three year term, we have the option to purchase the equipment for $200. We recorded this transaction as a capital lease in the amount of $89,000, the fair value of the related equipment. As of September 30, 2012 the capitalized lease obligation amounted to approximately $72,000 ($29,000 current, $43,000 noncurrent).

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, 2012:

	Number of Shares			Weighted Average Exercise Price		Weighted Average Remaining Contract Term		Aggregate Intrinsic Value (in thousands)
Outstanding, January 1, 2012		1,275,640		$	2.32
Options granted		1,019,319			0.78
Options forfeited		(106,983	)		1.96
Options expired		(535,489	)		2.33
Outstanding, September 30, 2012		1,652,487		$	1.39		3.45 years	$	164
Exercisable, September 30, 2012		805,310		$	1.68		2.73 years	$	53

All stock options outstanding at September 30, 2012 are nonqualified options that expire five years after the grant date and of which 496,570 become exercisable in monthly increments over one year and of which 1,155,917 become exercisable over four years from 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, 2012 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, 2012.

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.

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In March 2012, pursuant to our 2003 Stock Incentive Plan, we granted stock options to purchase 1,019,319 shares of our common stock at an exercise price of $0.775 per share, the fair market value of the common stock on the date of the grants.Each stock option agreement provides that one-half of the option shares vest in equal monthly increments over one year and that one-half of the option shares vest in equal monthly increments over four years. All options expire five years after the grant date.Using the Black-Scholes valuation model, the fair value of the options granted was determined to be $0.25 per share or approximately $254,000, which amount is being expensed over the applicable vesting periods. Assumptions used in applying the Black-Scholes option-pricing model to determine the fair value of the options granted were as follows:

Expected stock price volatility	45	%
Risk-free interest rate	0.6	%
Expected dividend level	0	%
Expected life of options (years)	3.15

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

	Three months ended September 30,				Nine months ended September 30,
	2012		2011		2012		2011
Cost of goods sold	$	4	$	9	$	14	$	36
Selling, general and administrative		47		35		135		150
Research and development		12		16		34		59
Total share-based compensation expense	$	63	$	60	$	183	$	245

As ofSeptember 30, 2012, we had approximately $0.3 million of unrecognized pretax share-based compensation expense, which is expected to be recognized over a weighted average period of 1.76 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 withASC 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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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, the latest IC package designs, and ICs using advanced geometry 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 evaluate and improve semiconductor wafer fabrication processes, and are used in advanced reliability test labs at wafer manufacturing sites. Our products automate critical functions to improve manufacturing yield, raise quality levels, increase product reliability and reduce manufacturing costs.

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. Demand for Aetrium’s reliability test products is less sensitive to fluctuations in IC demand and is driven more by technological changes in IC design and manufacturing processes. 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 economic recession that began to unfold in 2008 led to a significant decrease in the sales of electronic products and one of the most severe downturns ever in our industry. Industry conditions improved slowly and unevenly in 2009 and 2010. Many IC manufacturers expanded their production capacity during 2010. However, by the end of the year, IC demand had weakened and IC production decreased significantly late in the year.

In 2011, worldwide economic uncertainty contributed to relatively flat and inconsistent business conditions in the semiconductor industry. IC production growth resumed in the first half of 2011 but leveled off in the third quarter and then decreased significantly in the fourth quarter, having never exceeded the peak production levels of 2010. As a result, many manufacturers operated at less than full capacity throughout the year and many semiconductor equipment manufacturers experienced reduced sales in 2011 compared with 2010. Sales of our test handler products decreased significantly in 2011 as many of our customers operated with excess production capacity throughout the year and required new equipment for only their fastest growing products. During 2011, one of our largest test handler customers was conducting an evaluation of eight-site gravity-feed test handlers, including our new V_MAX test handler. During the evaluation process, this customer purchased initial units of our V_MAX test handler and related change kits in the first half of 2011 but did not purchase any test handlers from us in the second half of the year as industry conditions weakened. Sales of our reliability test equipment and change kits/spare parts increased slightly in 2011 despite the generally weak industry conditions. Our total sales declined from $16.3 million in 2010 to $9.0 million in 2011 as a result of a 75% decrease in test handler sales.

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Generally weak semiconductor industry conditions characterized by high inventories and excess production capacity continued into 2012. IC production levels increased in the second quarter of 2012, but did not reach the peak levels attained in the third quarter of 2010. 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 $1.9 million and $2.0 million in the first and second quarters, respectively, and then decreased to $0.8 million in the third quarter as industry conditions weakened.

In April 2012, the customer discussed above informed us that it had completed its test handler evaluations and had selected another supplier for its eight-site gravity-feed test handler requirements. Although we expect to continue to be a supplier to this customer, we believe future sales to this customer in the near term are likely to continue to be substantially lower than in past years.

Industry analysts and most of our customers have indicated that they now expect industry conditions to remain weak into fiscal year 2013. Some of our customers have indicated they are experiencing capacity utilization rates below 70%. This suggests that IC production levels must increase appreciably to absorb the excess capacity and lead to meaningful increases in the purchases of production-based equipment, which we believe may not transpire until mid-2013. A worsening or prolonged continuation of the slowdown in our industry would likely further adversely impact the demand for and prices of our products, in particular our test handler 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, 2011. There were no changes in such policies during the nine months ended September 30, 2012.

Results of Operations

Net Sales. Net sales for the nine months ended September 30, 2012 were $4.7 million compared with $6.6 million for the same period in 2011, a 29% decrease. Sales of our test handlers, change kits and spare parts continued to be impacted by semiconductor industry conditions characterized by relatively weak IC demand and excess production capacity that existed throughout fiscal year 2011 and continued into 2012 and by reduced sales to the customer discussed above. Sales to this customer amounted to $0.4 million in the nine months ended September 30, 2012 compared with $2.0 million for the same period in 2011. Sales of test handlers were $1.1 million in the nine months ended September 30, 2012 compared with $2.3 million for the same period in 2011, a decrease of 52%. Sales of change kits and spare parts were $1.0 million in the nine months ended September 30, 2012 compared with $2.4 million for the same period in 2011, a decrease of 57%. Sales of reliability test equipment products, which are driven more by technology factors and less by IC demand and production capacity, were $2.6 million in the nine months ended September 30, 2012 compared with $2.0 million for the same period in 2011, an increase of 29%. Net sales for the three months ended September 30, 2012 were $0.8 million compared with $1.5 million for the same period in 2011, a 45% decrease. The decrease was attributable primarily to lower sales of test handlers and change kits/spare parts resulting from weak industry conditions and lower sales to the customer discussed above.

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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 (loss) was (15.0)% of net sales in the nine months ended September 30, 2012 compared with 23.9% for the same period in 2011. Cost of goods sold included charges for excess and obsolete inventories of $2.8 million and $1.1 million in the nine months ended September 30, 2012 and 2011, respectively. In September 2012, due to general economic uncertainties and weakening business conditions in the semiconductor industry that we believed would continue into 2013, we reviewed the potential impact of a prolonged industry slowdown on our sales forecasts and on our ability to fully realize our inventories. Sales of our gravity-feed test handler products are particularly vulnerable to reduced semiconductor demand and production capacity utilization rates and we determined that the potential to realize the full value of these inventories under current conditions had been significantly reduced. Accordingly, we reduced the carrying values of certain of these inventories to their estimated net realizable values and recorded a corresponding charge of $2.8 million in cost of goods sold in the quarter ended September 30, 2012. We also recorded charges for costs related to workforce reductions of $0.1 million in each of the nine month periods ended September 30, 2012 and 2011. Excluding the charges for inventory write-downs and workforce reductions, our gross margins would have been 45.8% and 41.5% in the nine month periods ended September 30, 2012 and 2011, respectively. The margin improvement in 2012 was primarily attributable to a more favorable product mix. Test handlers, which are generally lower margin sales than reliability test equipment and spare parts/change kits, represented 23% of total net sales in the first nine months of 2012 compared with 34% for the same period in 2011. Reliability test equipment sales represented 55% of total net sales in the first nine months of 2012 compared with 30% for the same period in 2011 and spares/change kit sales represented 22% of total net sales in the first nine months of 2012 compared with 36% for the same period in 2011. Gross profit (loss) was (322.2)% of net sales in the three months ended September 30, 2012 compared with (45.6)% for the same period in 2011. Gross margin decreased in 2012 primarily due to higher charges for excess and obsolete inventories and inefficiencies associated with lower production and net sales levels, partially offset by a more favorable product mix. In fiscal year 2011 and through the first nine months of fiscal year 2012, we recorded cumulative charges for excess and obsolete inventories of $3.9 million which had a significant adverse impact on our gross margins. If actual product demand or market conditions are ultimately less favorable than those assumed in recording such write-downs, additional inventory adjustments may be required in the future, which could have a material adverse impact on our gross margins and results of operations. Conversely, if inventories that have been previously written down are ultimately sold, our gross margins and results of operations would be favorably impacted.

Selling, General and Administrative.Selling, general and administrative (S, G and A) expenses for thenine months ended September 30, 2012were $3.4 millioncompared with $3.6 million for the comparable period in 2011, a decrease of 6%.The decrease in S, G & A expenses from the prior year was primarily attributable to a $0.3 million decrease in wages and share-based compensation expense resulting from reductions in personnel and a $0.1 million decrease in travel costs, partially offset by a $0.3 million increase in legal expenses. S, G and A expenses were $1.2 million in each of thethree month periods ended September 30, 2012 and 2011 as a $0.2 million decrease in employee compensation and travel costs in the third quarter of 2012 was offset by a $0.2 million increase in legal expenses. Legal expenses incurred in 2012 were primarily related to defending an action brought against us by UTHE Technology Corporation as previously disclosed and to activities related to a dissident shareholders group that was formed in August 2012.

Research and Development. Research and developmentexpenses for thenine months ended September 30, 2012were $1.2 million compared with $2.1 million for the comparable period in 2011, a 46% decrease. The decrease from the prior year was primarily attributable to a $0.5 million decrease in employee compensation resulting from reductions in personnel and decreases of $0.2 million, $0.2 million and $0.1 million in contract services, materials and travel costs, respectively.Research and developmentexpenses for thethree months ended September 30, 2012were $0.4 million compared with $0.9 million for the comparable period in 2011, a 59% decrease. The decrease was primarily attributable to a $0.3 million decrease in employee compensation resulting from reductions in personnel and decreases of $0.1 million in each of contract services and materials costs. Research and development expenses represented 24.7% of total net sales for the nine month period ended September 30, 2012 and 32.3% of total net sales for the comparable period in 2011. 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 as was the case in the nine month periods ended September 30, 2012 and 2011.

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Interest Income (expense), net. Interest income (expense), net, amounted to $3,000 and $29,000 for the nine months ended September 30, 2012 and 2011, respectively, and amounted to $1,000 and $7,000 for the three months ended September 30, 2012 and 2011, respectively. The decrease in interest income in 2012 reflects primarily lower average invested cash balances.

Income Taxes.Werecorded no income tax benefit or expense for the three and nine month periods ended September 30, 2012 and 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.

Financial Condition, Liquidity and Capital Resources

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.

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 V_MAX 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.

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 $3.7 million at September 30, 2012 will be sufficient to meet our working capital and capital expenditure requirements for at least the next twelve months. As discussed above, semiconductor industry conditions weakened in the third quarter of 2012. It appears there will continue to be excess production capacity into fiscal year 2013 that will present challenges for us, in particular for sales of our test handler products. We have aggressively taken steps to reduce our expense structure in the past year, including salary reductions for our executive officers and reductions in our workforce, most recently in September 2012 when we eliminated eight employee positions. 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. We have incurred and expect to incur additional legal costs in the fourth quarter of 2012 related to litigation and activities associated with a dissident shareholders group. A worsening or prolonged continuation of the industry slowdown and/or higher than anticipated legal expenses would further adversely impact our future operating results and cash flows. If needed, there can be no assurance that we would be able to obtain working capital and/or equipment financing with terms favorable to us or at all.

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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, 2012, 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 2012 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
	UTHE Technology Corporation vs. Aetrium Incorporated et al., as previously reported in our Form 10-Q for the quarter ended June 30, 2012.
Item 1A.	Risk Factors
	Except as described inour Form 10-Q for the quarter ended June 30, 2012 and ourCurrent Reports on Form 8-K dated September 13, 2012 and November 2, 2012, there have not been any material changes to the risk factors disclosed in our Form 10-K for the year ended December 31, 2011.
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 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 of2002.
	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 14, 2012	By:	/s/ Joseph C. Levesque
		Joseph C. Levesque
		President and Chief Executive Officer
Date: November 14, 2012	By:	/s/ Paul H. Askegaard
		Paul H. Askegaard
		Treasurer (principal financial and accounting officer)

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