GlenRose Instruments Inc. - FORM 10-Q

Attached files

file	filename
EX-31.2 - GlenRose Instruments Inc.	v222014_ex31-2.htm
EX-31.1 - GlenRose Instruments Inc.	v222014_ex31-1.htm
EX-32.1 - GlenRose Instruments Inc.	v222014_ex32-1.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 27, 2011

or

¨		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission file number 000-51645

GLENROSE INSTRUMENTS INC.

(Exact name of Registrant as specified in its charter)

Delaware	20-3521719
(State of incorporation or organization)	(IRS Employer Identification No.)

45 First Avenue
Waltham, Massachusetts	02451
(Address of Principal Executive Offices)	(Zip Code)

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

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every

Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes ¨ No ¨

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

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

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

Yes ¨ No x

Title of each class		Outstanding at March 27, 2011
Common Stock, $0.01 par value		3,117,647

GLENROSE INSTRUMENTS INC.

QUARTERLY REPORT ON FORM 10-Q

FOR THE PERIOD ENDING MARCH 27, 2011

TABLE OF CONTENTS

PART I – FINANCIAL INFORMATION

Item 1:	Financial Statements (unaudited)	3

	Condensed Consolidated Balance Sheets – March 27, 2011 and December 26, 2010	3

	Condensed Consolidated Statement of Operations – Three Months Ended March 27, 2011 and March 28, 2010	5

	Condensed Consolidated Statement of Cash Flows – Three Months Ended March 27, 2011 and March 28, 2010	6

	Notes to Condensed Consolidated Financial Statements	8

Item 2:	Management’s Discussion and Analysis of Financial Condition and Results of Operations	14

Item 3:	Quantitative and Qualitative Disclosures about Market Risk	17

Item 4T:	Controls and Procedures	17

PART II - OTHER INFORMATION

Item 1A:	Risk Factors	18

Item 6:	Exhibits	18

Signatures		19

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

PART I – FINANCIAL INFORMATION

Item 1 – Financial Statements

GLENROSE INSTRUMENTS INC.

CONSOLIDATED BALANCE SHEETS

As of March 27, 2011 and December 26, 2010

(Unaudited)

	March 27,		December 26,
	2011		2010

ASSETS
Current Assets
Cash and cash equivalents	$	1,524,543	$	1,669,868
Short-term investments		12,305		12,305
Accounts receivable (net of allowances of $26,120 for 2011 and 2010, respectively)		4,194,774		4,376,929
Unbilled contract receivables		300,616		370,887
Due from related party		42,858		42,858
Supply inventory		58,771		60,271
Prepaid expenses		214,707		150,515
Other receivables		60,771		58,464
Income tax receivable		161,356		161,356
Deferred tax asset		477,290		474,235
Assets held for sale		1,045,367		1,045,367
Total current assets		8,093,358		8,423,055

Property, plant and equipment, net		1,590,394		1,557,088

Other assets
Restricted cash		450,000		450,000
Deferred financing costs		83,254		104,499
Goodwill		2,740,913		2,740,913
Total other assets		3,274,167		3,295,412

TOTAL ASSETS	$	12,957,919	$	13,275,555

The accompanying notes are integral part of these consolidated financial statements

GLENROSE INSTRUMENTS INC.

CONSOLIDATED BALANCE SHEETS (CONTINUED)

As of March 27, 2011 and December 26, 2010

(Unaudited)

	March 27,			December 26,
	2011			2010

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable	$	510,665		$	653,130
Accrued expenses		198,093			223,327
Accrued employee-related costs		1,881,500			1,972,581
Accrued interest, related party		36,790			48,750
Deferred revenue		-			140,000
Notes payable, current portion		14,206			13,978
Due to related party		-			8,002
Capital lease obligations		11,031			10,752
Income taxes payable		287,869			18,130
Total current liabilities		2,940,154			3,088,650

Long-term liabilities
Convertible debentures due to related parties		4,300,000			4,875,000
Capital lease obligations, net of current portion		35,663			38,527
Notes payable, net of current portion		9,996			13,634
Deferred tax liability		416,332			427,198
Other long-term liabilities		140,091			134,552
Total liabilities		7,842,236			8,577,561

Stockholders' equity
Common stock ($0.01 par value; 10,000,000 shares authorized;
3,117,647 shares issued and outstanding at
March 27, 2011 and December 26, 2010)		31,176			31,176
Additional paid-in-capital		7,983,252			7,972,098
Accumulated deficit		(2,898,745	)		(3,305,280	)
Total stockholders' equity		5,115,683			4,697,994

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY	$	12,957,919		$	13,275,555

The accompanying notes are integral part of these consolidated financial statements

GLENROSE INSTRUMENTS INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

For the Three Months Ended March 27, 2011 and March 28, 2010

(Unaudited)

	Three Months Ended
	March 27,			March 28,
	2011			2010

Revenues	$	10,856,322		$	9,909,869

Cost of sales		9,551,585			8,983,767

Gross profit from operations		1,304,737			926,102

General and administrative expenses		573,828			526,755

Operating income		730,909			399,347

Other income (expense)
Interest and other income		876			4,713
Interest expense		(69,433	)		(179,364	)
Total other expense		(68,557	)		(174,651	)

Income from operations, before income taxes		662,352			224,696

Provision for income taxes		(255,817	)		-

Net income	$	406,535		$	224,696

Net income per share - basic and diluted	$	0.13		$	0.07

Weighted average shares outstanding - basic and diluted		3,102,647			3,102,647

The accompanying notes are integral part of these consolidated financial statements

GLENROSE INSTRUMENTS INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

For the Three Months Ended March 27, 2011 and March 28, 2010

(Unaudited)

	March 27,			March 28,
	2011			2010

CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	406,535		$	224,696
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Depreciation and amortization		122,441			100,836
Provision for deferred income taxes		(13,921	)		-
Amortization of deferred financing costs		21,245			30,000
Stock-based compensation		11,154			21,394
Gain on maturities of short-term investments		-			(3,542	)
Change in fair value of certificates of deposit		-			(949	)

Changes in operating assets and liabilities
(Increase) decrease in:
Accounts receivable		182,155			(898,058	)
Other receivables		(2,307	)		(2,152	)
Unbilled contract receivables		70,271			60,775
Prepaid expenses		(64,192	)		(34,222	)
Inventory		1,500			14,461
Increase (decrease) in:
Accounts payable		(142,465	)		(57,604	)
Notes payable		(3,410	)		-
Accrued interest, related party		(11,960	)		(113,971	)
Due to related party		(8,002	)		9,422
Other long-term liabilities		5,539			16,555
Other accrued liabilities		13,424			123,562
Net cash provided by (used in) operating activities		588,007			(508,797	)

CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment		(155,747	)		(32,007	)
Proceeds from the sale of short-term investments		-			704,142
Purchases of short-term investments		-			(504,364	)
Net cash (used in) provided by investing activities		(155,747	)		167,771

CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on capital lease obligations		(2,585	)		(3,504	)
Redemption of convertible debentures		(575,000	)		-
Net cash used in financing activities		(577,585	)		(3,504	)

Net increase (decrease) in cash and cash equivalents		(145,325	)		(344,530	)
Cash and cash equivalents, beginning of the period		1,669,868			1,012,250
Cash and cash equivalents, ending of the period	$	1,524,543		$	667,720

The accompanying notes are integral part of these consolidated financial statements

GLENROSE INSTRUMENTS INC.

Notes to Interim Financial Statements (Unaudited) for the period ending March 27, 2011

Note 1 – Organization and Significant Accounting Policies:

Organization

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

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

In March 2011 the company retained the services of Raymond James & Associates, Inc. to act as its sole, external investment banking advisor in helping the company evaluate strategic alternatives, including the possible sale of all or a material portion of the assets or securities of the company to, or merger of the company with, various third parties.

As of March 27, 2011, the company has three segments – the Environmental Services segment, the Analytical Laboratories segment and the Instruments segment. The Environmental Services operating segment provides radiological and waste management services primarily to the federal government in connection with the clean-up of the former and present atomic weapons and energy sites operated by the federal government. The Analytical Laboratories operating segment provides analytical radiological services and involves the operation of a radiochemistry laboratory network and a radioactive check source manufacturing facility. The Instruments segment was formed in 2006 with the intent to acquire instrument companies, which have well-established and proven technology. This segment also includes the research and development of a new line of instruments that the company expects to begin marketing efforts in the second half of 2011. As of the date of this report the company has not made any commitments, nor has it acquired any instrument businesses. Acquisition of instrument businesses is no longer a focus in the company’s strategy.

Principles of Consolidation and Basis of Presentation

The accompanying consolidated financial statements include the company and its subsidiaries. All significant intercompany transactions have been eliminated. In the opinion of management, the unaudited financial statements contain all adjustments (all of which were considered normal and recurring) necessary to present fairly the company's financial position at March 27, 2011, and the results of operations and cash flows for the three months ended March 27, 2011 and March 28, 2010. The unaudited financial statements included herein should be read in conjunction with the audited financial statements and notes thereto included in the company’s Form 10-K for the year ended December 26, 2010.

Fiscal Year

The company’s fiscal year-end is the last Sunday of each calendar year. Each quarter is comprised of two four-week and one five-week period to ensure consistency in prior-year comparative analysis. The company changed the fiscal year-end to the current format in 2006. The previous fiscal year-end was December 26, 2010.

Use of Estimates in Preparation of Statements

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

GLENROSE INSTRUMENTS INC.

Concentration of Credit Risk

Financial instruments, which potentially subject the company to concentrations of credit risk, consist of highly liquid cash equivalents and trade receivables. The company’s cash equivalents are placed with certain financial institutions and issuers. At March 27, 2011, the company had a balance of $1,736,848 in cash and cash equivalents, short-term investments and restricted cash that exceeded the Federal Deposit Insurance Corporation limit of $250,000.

The company performs periodic credit evaluations of its customers’ financial condition and generally does not require collateral. The company provides for an allowance for doubtful accounts on receivable balances based upon the expected collectability of such receivables. Federal and state governments collectively account for more than 90% of all revenues for the three month periods ended March 27, 2011 and March 28, 2010. Two of the company’s customers account for more than 10% of revenue and trade accounts receivable. One customer represented approximately 81% and 72% of revenue and 58% and 39% of trade accounts receivable for the three months ended March 27, 2011 and March 28, 2010, respectively. The other customer represented approximately 0% and 12% of revenue and 4% and 24% of trade accounts receivable for the three months ended March 27, 2011 and March 28, 2010, respectively.

Revenue Recognition

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

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

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

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

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

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

GLENROSE INSTRUMENTS INC.

Goodwill

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

At March 27, 2011, the company’s entire $2,740,913 goodwill balance was related to the Environmental Services segment which includes Eberline Services, ESHI and Benchmark Environmental Corp. The Analytical Laboratories goodwill was written off in prior years. No goodwill impairment was identified during the years ended December 26, 2010 and December 27, 2009. No events occurred or circumstances changed that required the company to further test goodwill for impairment during the three month period ended March 27, 2011.

Income Taxes

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

Earnings per Common Share

The company computes basic earnings per share by dividing net income for the period by the weighted average number of shares of common stock outstanding during the period. The company computes its diluted earnings per common share using the treasury stock method. For purposes of calculating diluted earnings per share, the company considers its shares issuable in connection with convertible debentures and stock options to be dilutive common stock equivalents when the exercise price is less than the average market price of the company’s common stock for the period. There are no dilutive common shares during the three month period ended March 27, 2011 and March 28, 2010. See “Note 5 – Earnings per Share.”

Stock Based Compensation

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

Fair Value of Financial Instruments

The company’s financial instruments are cash and cash equivalents, short-term investments, accounts receivable, accounts payable, convertible debentures and capital lease obligations. The recorded values of cash and cash equivalents, accounts receivable and accounts payable approximate their fair values based on their short-term nature. Short-term investments are recorded at fair value. The fair value of capital lease obligations is estimated at its carrying value based on current rates. The current value of the convertible debentures on the balance sheet at March 27, 2011, approximates fair value as the terms approximate those currently available for similar instruments. See “Note 6 – Fair Value Measurements.”

GLENROSE INSTRUMENTS INC.

Recovery of Long-Lived Assets

Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the remaining estimated useful life of such assets might warrant revision or that the balances may not be recoverable. If undiscounted cash flows are insufficient to recover the net book value of long-term assets further analysis is performed in order to determine the amount of the impairment. In such circumstances an impairment loss would be recorded equal to the amount by which the net book value of the assets exceeds fair value. Fair value is usually determined based on the present value of estimated expected future cash flows using a discount rate commensurate with the risks involved. No events occurred or circumstances changed at March 27, 2011, that would indicate that the remaining net book value of the company’s long-lived assets are not recoverable.

Assets Held for Sale

The company owns property in Albuquerque, New Mexico. In 2009, the company entered into an agreement, subject to closing conditions, with a buyer to sell the property for approximately $1.9 million. At March 27, 2011, $507,700 in land, $2,265,764 in buildings and improvements less $1,916,926 in accumulated depreciation is classified as “Assets held for sale” on the company’s balance sheet. The assets held for sale balance of $1,045,367 also includes selling costs incurred to date of $37,477 and an accrual of $151,352 towards decommissioning of the site. The company expects to complete the sale in 2011. In 2010, the company submitted a detailed site assessment of the facility to the New Mexico Environmental Department, or NMED, as part of the closure process. The company characterized and classified all radiological waste associated with the facility and all waste was crated and packaged for disposal in 2010. In January 2011, the company applied for a shipment permit to transfer the remaining waste to an appropriate facility and is currently communicating with NMED on the report in preparation for the demolition of the building. The company believes that it has adequately accrued for decommissioning of the site; however, it is possible that additional funds up to $100,000 may be needed.

Note 2 – Debt:

On July 25, 2008, the company entered into subscription agreements with four investors for the sale of convertible debentures in the aggregate principal amount of $14,875,000. The primary investor was Blum Strategic Partners IV, L.P., who subscribed for $12,000,000 of the debentures. Additional investors included John N. Hatsopoulos, the company’s Chairman of the board, Arvin H. Smith, the company’s President and Chief Executive Officer, and Philip Frost M.D., a holder of more than 10% of the outstanding equity securities of the company immediately prior to the sale of the debentures, who subscribed for $2,875,000 of debentures by exchanging existing promissory notes of the company for the debentures. The debentures bear interest at 4%, payable quarterly in cash, and mature on July 25, 2013. The debentures will be convertible at the option of the holder at any time into shares of common stock at a conversion price equal to $7.00 per share. In connection with the transaction, the company appointed John H. Park to the company’s board of directors. Ladenburg Thalman & Co., Inc., a registered broker-dealer, acted as placement agent on a best efforts basis for the sale of the company’s debentures. In connection with the transaction, the company paid the placement agent a cash fee of $600,000.

On July 23, 2010, the holders of the outstanding principal amount of the company’s 4% convertible debentures due 2013, agreed to amend the debenture agreements to eliminate subsections (i) and (ii) of Section 6(a) of the debentures. With this amendment the holders gave the company the option to redeem any portion of the debentures by written notice to the holders; provided that a redemption notice is delivered by the company and be received by the holder of the debentures at least ten (10) trading days but not more than thirty (30) trading days prior to the date of the redemption. In connection with the amendment described above, the company redeemed $10,000,000 on August 9, 2010 and $575,000 on January 13, 2011. At March 27, 2011, the company had $4,300,000 principal amount of convertible debentures outstanding.

GLENROSE INSTRUMENTS INC.

Note 3 – Commitments and Contingencies:

The company and its subsidiaries lease facilities and equipment under various operating leases. Future minimum rental commitments for long-term, non-cancelable operating leases at March 27, 2011 are as follows:

Summary of Lease Obligations:

	2012		2013		2014		2015		Totals

Facilities	$	224,541	$	139,655	$	49,128	$	12,282	$	425,606
Equipment		10,145		10,145		10,145		4,227		34,662
	$	234,686	$	149,800	$	59,273	$	16,509	$	460,268

Rent expense was $88,155 and $100,529 for the three month period ending March 27, 2011 and March 28, 2010, respectively.

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

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

Note 4 – Stockholders’ Equity:

Stock-based compensation expense was $11,154 and $21,394 as of March 27, 2011 and March 28, 2010, respectively. At March 27, 2011, there were 10,000 shares of unvested restricted stock outstanding and 68,800 of unvested stock options outstanding.

Note 5 – Earnings per Share:

Basic and diluted earnings per share are computed by dividing earnings available to common stockholders by the weighted average number of common shares outstanding during the period to common stock. There are no dilutive securities as of March 27, 2011 and March 28, 2010. The following reconciles amounts reported in the financial statements:

	Three Months
	March 27,		March 28,
	2011		2010
Earnings per share
Earnings available to stockholders	$	406,535	$	224,696

Weighted average shares outstanding - basic		3,102,647		3,102,647
Net earnings per share - basic	$	0.13	$	0.07

Assumed exercise of dilutive stock options and warrants		-		-
Weighted average shares outstanding - diluted		3,102,647		3,102,647
Net earnings per share - diluted	$	0.13	$	0.07

Anti-dilutive restricted stock outstanding		10,000		15,000
Anti-dilutive shares underlying stock options outstanding		172,000		181,500
Anti-dilutive convertible debentures		614,286		2,125,000

GLENROSE INSTRUMENTS INC.

Note 6 – Fair Value Measurements:

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

Level 1 — Unadjusted quoted prices in active markets for identical assets or liabilities. The company currently does not have any Level 1 financial assets or liabilities.

Level 2 — Observable inputs other than quoted prices included in Level 1. Level 2 inputs include quoted prices for identical assets or liabilities in non-active markets, quoted prices for similar assets or liabilities in active markets and inputs other than quoted prices that are observable for substantially the full term of the asset or liability.

Level 3 — Unobservable inputs reflecting management’s own assumptions about the input used in pricing the asset or liability. The company currently does not have any Level 3 financial assets or liabilities.

At March 27, 2011, the company had $12,305 in short-term investments that are comprised of certificates of deposits which are categorized as Level 2. The company determines the fair value of certificates of deposits using information provided by the issuing bank which includes discounted expected cash flow estimates using current market rates offered for deposits with similar remaining maturities.

Note 7 - Segment Data:

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

The company currently operates three business segments: Environmental Services, Analytical Laboratories and Instruments. The Environmental Services operating segment provides radiological and waste management services primarily to the federal government in connection with the clean-up of the former and present atomic weapons and energy sites operated by the federal government. The Analytical Laboratories operating segment provides analytical radiological services and involves the operation of a radiochemistry laboratory network and a radioactive check source manufacturing facility. The Instruments segment was formed in 2006 with the intent to acquire instrument companies, which have well-established and proven technology. This segment also includes the research and development of a new line of instruments that the company expects to begin marketing efforts in the second half of 2011. As of the date of this report the company has not made any commitments, nor has it acquired any instrument businesses. Acquisition of instrument businesses is no longer a focus in our strategy. Intercompany costs and sales are eliminated in the consolidated financial statements.

GLENROSE INSTRUMENTS INC.

Segment data for the periods ending March 27, 2011 and March 28, 2010 are included below:

	Three Months Ended
	March 27,			March 28,
	2011			2010

Revenues
Environmental Services	$	7,958,195		$	7,365,394
Analytical Laboratories		2,898,127			2,544,475
Instruments		-			-
		10,856,322			9,909,869
Cost of Sales
Environmental Services		7,102,332			6,832,391
Analytical Laboratories		2,449,253			2,151,376
Instruments		-			-
		9,551,585			8,983,767
Gross Profit (Loss)
Environmental Services		855,863			533,003
Analytical Laboratories		448,874			393,099
Instruments		-			-
		1,304,737			926,102
General and administrative expenses
Environmental Services		381,848			340,120
Analytical Laboratories		120,414			100,854
Instruments		71,566			85,781
		573,828			526,755
Operating profit (Loss)
Environmental Services		474,015			192,883
Analytical Laboratories		328,460			292,245
Instruments		(71,566	)		(85,781	)
		730,909			399,347
Supplemental Disclosure
Depreciation Expense
Environmental Services		23,505			12,640
Analytical Laboratories		98,936			88,196
Instruments		-			-
		122,441			100,836
Capital Expenditures
Environmental Services		52,462			-
Analytical Laboratories		103,285			32,007
Instruments		-			-
		155,747			32,007
Total Assets
Environmental Services		8,326,477			7,119,186
Analytical Laboratories		4,489,599			4,078,444
Instruments		141,843			10,371,777
	$	12,957,919		$	21,569,407

Note 8 – Subsequent Events:

On March 31, 2011, the company redeemed an additional $500,000 principal amount of the outstanding convertible debentures on a pro-rata basis.

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

GLENROSE INSTRUMENTS INC.

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

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

First quarter 2011 Compared to First quarter 2010

Revenues

Revenues in the first quarter of 2011 were $10,856,322 compared to $9,909,869 for the same period in 2010, an increase of $946,453 or 9.6%. The increase in revenues was due to an increase in both our Environmental Services revenues, and Analytical Laboratory revenues. The increase in our Environmental Services revenues was due to increased work at Hanford and increased work at Argonne National Laboratory. The increase in revenue in our Analytical Laboratory revenues was due to increased sample volume at all three labs and increased demand on quick-turn analyses which carry a higher price and margin per sample.

Revenues from our Environmental Services in the first quarter of 2011 were $7,958,195 compared to $7,365,394 for the same period in 2010, an increase of $592,801 or 8.0%. Our Environmental Services contributed 73.3% to total revenues in the first quarter of 2011 compared to 74.3% for the same period in 2010. The increase in our Environmental Services revenue was due to increased work at Hanford and new work at Argonne National Laboratory. At Hanford our efforts are centered on all three contracts, however, the largest increase was with the River Corridor contract where we reached our highest level of effort as that contract is at its peak this year. Work continued on our CHPRC contract at Hanford and we added additional contract work in radiological mapping for CHPRC. At Los Alamos our work changed from a long-term support contract to a contract which includes an on-site screening facility and remediation support. We also performed work at the Argonne National Laboratory this quarter in support of a decontamination and demolition project.

Revenues from our Analytical Laboratories in the first quarter of 2011 were $2,898,127 compared to $2,544,475 for the same period in 2010, an increase of $353,652 or 13.9%. Our Analytical Labs contributed 26.7% to total revenues in the first quarter of 2011 compared to 25.7% for the same period in 2010. The increase in revenues was the result of increased sample loads. In addition to the number of samples there was also an increased emphasis on performing quick-turn analyses as customers required faster results. Faster analyses carry a premium price which helped increase revenues. The largest increase was at the Lionville laboratory.

Cost of Sales

The cost of sales in the first quarter of 2011 was $9,551,585 compared to $8,983,767 for the same period in 2010, an increase of $567,818 or 6.3%. The increase in cost of sales was primarily due to increased variable costs associated with the sales increases experienced in both the Service and Laboratory segments. We increased the number of employees, subcontracts and direct materials.

The cost of sales from our Environmental Services in the first quarter of 2011 was $7,102,332 compared to $6,832,391 for the same period in 2010, an increase of $269,941 or 4.0% primarily due to salaries of new employees and an increase in subcontracts.

The cost of sales from our Analytical Laboratories in the first quarter of 2011 was $2,449,253 compared to $2,151,376 for the same period in 2010, an increase of $297,877 or 13.8%, primarily due to increased direct labor and direct materials associated with the increased sales during the period. Our direct labor was affected by increased overtime required to meet response times. At our Oak Ridge and Lionville laboratories we did not have to add additional staff to meet the increased work. At the Richmond laboratory we increased the staff to meet the increased demand and shorten response times. During the quarter we utilized our capacity more efficiently and established better cost controls.

Gross Profit

Gross profit in the first quarter of 2011 was $1,304,737 compared to $926,102 for the same period in 2010, an increase of $378,635 or 40.9%. The gross profit margin increased to 12.0% in the first quarter of 2011 from 9.3% for the same period in 2010. The increase in the quarterly gross profit was primarily due to increased revenue at our Analytical Laboratories and Environmental Services segments.

GLENROSE INSTRUMENTS INC.

The gross profit from our Environmental Services in the first quarter of 2011 was $855,863 compared to $533,003 for the same period in 2010, an increase of $322,860 or 60.6%. The gross profit from our Analytical Laboratories in the first quarter of 2011 was $448,874 compared to $393,099 for the same period in 2010, an increase of $55,775. The increase in gross profit was greater in the Environmental Services segment due to increase in the number of personnel employed and due to the on-site screening facility which carried a higher profit margin than labor dominated contracts. Gross margins increased proportionately primarily at the Lionville and Oak Ridge laboratories and at a lesser extent at the Richmond laboratory as it prepared for a larger sample load.

Operating Expenses

General and administrative expenses in the first quarter of 2011 were $573,828 compared to $526,755 for the same period in 2010, an increase of $47,073 or 8.9%. The general and administrative expenses increased to meet the demands of increased work and to accommodate increased business development efforts.

Operating Income (Loss)

The operating income in the first quarter of 2011 was $730,909 compared to $399,347 for the same period in 2010. The operating income consisted of $474,015 at the Environmental Services and $328,460 at the Analytical Laboratories, offset by corporate general and administrative expenses of $71,566. The increase in operating income was due to the increased revenue in both operating segments. During the quarter we added direct personnel and were able to better utilize existing personnel in more direct roles on large contracts. Our overhead was also reduced by decreases in other indirect costs, including depreciation. The increase in our Analytical Laboratory revenues allowed for better utilization of existing infrastructure, staff and capacity, as the cost structure of the laboratories is generally fixed in the short-term. Increases in revenue at the laboratories require a lower incremental increase in direct costs, resulting in higher margins and subsequently a greater operating income.

Other Income (Expense)

Other expenses in the first quarter of 2011 were $68,557 compared to $174,651 for the same period in 2010, a decrease of $106,094. Interest and other miscellaneous income in the first quarter of 2011 was $876 compared to $4,713 for the same period in 2010. The decrease was primarily due to a lower return on invested cash balances. Interest expense in the first quarter of 2011 was $69,433 compared to $179,364 for the same period in 2010 due a smaller principal amount of our related party convertible debentures outstanding and amortization of the associated financing expenses associated with those convertible debentures.

Provision for Income Taxes

The company recorded a tax provision of $255,817 in the first quarter of 2011 as the company had fully utilized the majority of its available net loss carryforwards in prior periods. The company recorded no tax provision in the first quarter of 2010 as the company had sufficient net loss carryforwards to offset any tax liability.

Net Income/Loss

Net income in the first quarter of 2011 was $406,535 compared to $224,696 for the same period in 2010.

Liquidity and Capital Resources

Consolidated working capital at March 27, 2011 was $5,153,204, compared to $5,334,405 at December 26, 2010. Included in working capital were cash, cash equivalents and short-term investments of $1,505,843 as of March 27, 2011, compared to $1,682,173 at December 26, 2010. The decrease in working capital was primarily due to the redemption of $575,000 of convertible debentures including accrued interest.

Cash provided by operating activities was $588,007 in the first quarter of 2011, compared to cash used in operating activities of $508,797 for the same period in 2010. Our net receivables balance decreased to $4,194,774 in the first quarter of 2011 compared to $4,376,929 at December 26, 2010, resulting in an increase in cash of $182,155 primarily due to timing of invoicing related to our Hanford contracts. Our unbilled contract receivables decreased to $300,616 in the first quarter of 2011 compared to $370,887 at December 26, 2010, resulting in an increase in cash of $70,271 due to higher billings on our major cost-type contracts. Our prepaid expenses increased to $214,707 in the first quarter of 2011, compared to $150,515 at December 26, 2010, resulting in a decrease in cash of $64,192 due to the timing of annual insurance premium renewals. Other receivables increased to $60,771 in the first quarter of 2011, compared to $58,464 at December 26, 2010, resulting in a decrease in cash of $2,307.

GLENROSE INSTRUMENTS INC.

Accounts payable decreased to $510,665 in the first quarter of 2011, compared to $653,130 at December 26, 2010 resulting in a decrease in cash of $142,465 due to timing and quicker liquidation of payables. Other accrued liabilities, including accrued expenses, accrued employee-related costs, deferred revenue and income taxes payable, increased to $2,367,462 in the first quarter of 2011, compared to $2,354,038 at December 26, 2010, resulting in an increase in cash of $13,424. Our accrued interest balance associated with the previously issued subordinated notes decreased to $36,790 in the first quarter of 2011, compared to $48,750 at December 26, 2010, resulting in a decrease in cash of $11,960 due to interest payments.

The primary investing activities of the company’s operations included the purchase of equipment. The company continues to manage its capital expenditures very selectively and in the first quarter of 2011 used $155,747 for purchases of equipment. The company’s financing activities used $577,585 of cash in the first quarter of 2011, primarily due to redemption of convertible debentures and payments on capital lease obligations.

The company believes that its existing resources, including cash and cash equivalents and future cash flow from operations, are sufficient to meet the working capital requirements of its existing business for the foreseeable future, including the next 12 months. We believe that our cash and cash equivalents and our ability to control certain costs, including those related to general and administrative expenses will enable us to meet our anticipated cash expenditures for the next 12 months. The company’s long-term liabilities primarily include convertible debentures that bear interest at 4%, payable quarterly in cash and mature on July 25, 2013. At March 27, 2011, the company had $4,300,000 of convertible debentures outstanding.

The company believes that its existing resources, including cash and cash equivalents, future cash flow from operations, and potential future property sales in Albuquerque, New Mexico and Richmond California will be sufficient to meet those obligations. Our ability to continue to access capital, however, could be impacted by various factors including general market conditions and the continuing slowdown in the economy, interest rates, the perception of our potential future earnings and cash distributions, any unwillingness on the part of lenders to make loans to us and any deterioration in the financial position of lenders that might make them unable to meet their obligations to us.

GLENROSE INSTRUMENTS INC.

Item 3: Quantitative and Qualitative Disclosures about Market Risk

Not applicable.

Item 4T: Controls and Procedures

Management’s evaluation of disclosure controls and procedures:

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

Changes in Internal Controls over Financial Reporting:

In connection with the evaluation referred to in the foregoing paragraph, we have identified no change in our internal control over financial reporting that occurred during the period ending March 27, 2011 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

GLENROSE INSTRUMENTS INC.

PART II – OTHER INFORMATION

Item 1A: Risk Factors

In addition to the other information set forth in this report, you should carefully consider the factors discussed under “Risk Factors” in our Annual Report on Form 10-K for our fiscal year ended December 26, 2010. The risks discussed in our Annual Report on Form 10-K could materially affect our business, financial condition and future results. The risks described in our Annual Report on Form 10-K are not the only risks facing us. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially and adversely affect our business, financial condition or operating results.

Item 6: Exhibits

Exhibit Number		Description of Exhibit

31.1*	–	Rule 13a-14(a) Certification of Chief Executive Officer

31.2*	–	Rule 13a-14(a) Certification of Chief Financial Officer

32.1*	–	Section 1350 Certifications of Chief Executive Officer and Chief Financial Officer

* Filed herewith.

GLENROSE INSTRUMENTS INC.

SIGNATURES

Pursuant to the requirements of Section 12 of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on May 11, 2011.

GLENROSE INSTRUMENTS INC.
(Registrant)

By:	/s/ ARVIN H. SMITH
	Chief Executive Officer
	(Principal Executive Officer)

By:	/s/ ANTHONY S. LOUMIDIS
	Chief Financial Officer
	(Principal Financial Officer)

GlenRose Instruments Inc. - FORM 10-Q - May 11, 2011

Attached files

GlenRose Instruments Inc. Reports