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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

 

 

FORM 10-Q

 

 

 

x	QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended December 25, 2010

OR

 

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

For the transition period from              to             .

Commission file number 0-17966

 

 

MICRONETICS, INC.

(Exact name of registrant as specified in its charter)

 

 

 

Delaware		22-2063614
(State or other jurisdiction of incorporation or organization)		(IRS Employer Identification No.)
26 Hampshire Drive, Hudson NH		03051
(Address of principal executive offices)		(Zip Code)

(603) 883-2900

(Issuer’s telephone number)

 

(Former name, former address and former fiscal year, if changed since last report)

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act 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 definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

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

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

As of January 28, 2011, the issuer had 4,556,135 shares of common stock, par value $.01 per share, outstanding.

 

 

 

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MICRONETICS, INC.

INDEX

 

				Page No.
Part I. Financial Information:
Item 1.		Financial Statements (unaudited)
		Consolidated Balance Sheets – December 25, 2010 and March 31, 2010			3
		Consolidated Statements of Operations – Thirteen Weeks Ended December 25, 2010 and December 26, 2009			4
		Consolidated Statements of Operations – Thirty-nine Weeks Ended December 25, 2010 and December 26, 2009			5
		Consolidated Statement of Shareholders’ Equity – Thirty-nine Weeks Ended December 25, 2010			6
		Consolidated Statements of Cash Flows – Thirty-nine Weeks Ended December 25, 2010 and December 26, 2009			7
		Notes to Consolidated Financial Statements			8
Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations			16
Item 3.		Quantitative and Qualitative Disclosures About Market Risk			21
Item 4.		Controls and Procedures			21
Part II. Other Information:
Item 1.		Legal Proceedings			22
Item 1A		Risk Factors			22
Item 6.		Exhibits			22

 

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PART I. FINANCIAL INFORMATION

 

Item 1.

Financial Statements

MICRONETICS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Unaudited)

 

		December 25, 2010				March 31, 2010
ASSETS
Current assets:
Cash and cash equivalents		$	1,058,885			$	482,442
Accounts receivable, net of allowance for doubtful accounts of $590,392 and $570,782 at December 25, 2010 and March 31, 2010, respectively			4,133,313				5,691,334
Inventories, net			12,680,997				10,943,968
Unbilled revenue			—				219,958
Deferred tax asset			1,464,733				1,557,093
Prepaid income taxes			622,140				434,379
Prepaid expenses and other current assets			280,546				218,554
Total current assets			20,240,614				19,547,728
Property, plant and equipment, net			4,644,338				4,787,880
Other assets:
Security deposits			97,079				97,079
Other long term assets			12,365				18,547
Intangible assets, net			1,149,221				1,396,595
Goodwill			1,117,197				1,117,197
Total other assets			2,375,862				2,629,418
TOTAL ASSETS		$	27,260,814			$	26,965,026
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Current portion of long-term debt		$	1,514,715			$	1,457,267
Line of credit			5,671,405				4,234,435
Accounts payable			957,977				2,179,422
Accrued expenses and other current liabilities			2,723,344				2,732,429
Deferred revenue			29,418				200,000
Total current liabilities			10,896,859				10,803,553
Long-term debt, net of current portion			678,776				1,786,378
Other long-term liability			—				1,740
Deferred tax liability			1,237,668				1,033,531
Total liabilities			12,813,303				13,625,202
Shareholders’ equity:
Preferred stock, $0.10 par value; 100,000 shares authorized; no shares issued or outstanding			—				—
Common stock, $0.01 par value; 10,000,000 shares authorized; 5,393,717 issued, 4,556,135 outstanding at December 25, 2010 and 5,391,217 issued, 4,553,635 outstanding at March 31, 2010			53,937				53,912
Additional paid-in capital			12,238,096				12,204,124
Retained earnings			5,135,991				4,062,301
			17,428,024				16,320,337
Treasury stock at cost, 837,582 shares at December 25, 2010 and March 31, 2010			(2,980,513	)			(2,980,513	)
Total shareholders’ equity			14,447,511				13,339,824
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY		$	27,260,814			$	26,965,026

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

 

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MICRONETICS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

 

		Thirteen Weeks Ended
		December 25, 2010				December 26, 2009
Net sales		$	7,601,372			$	9,009,161
Cost of sales			5,265,794				5,702,003
Gross margin			2,335,578				3,307,158
Operating expenses:
Research and development			447,197				411,059
Selling, general and administrative			1,755,689				1,877,494
Gain on sale of asset			(10,000	)			—
Amortization of intangible assets			73,326				87,023
Total operating expenses			2,266,212				2,375,576
Income from operations			69,366				931,582
Other income (expense):
Interest income			258				67
Interest expense			(84,222	)			(131,820	)
Change in fair value of interest rate swap			27,084				32,204
Miscellaneous income			2,797				3,162
Total other expense			(54,083	)			(96,387	)
Income before provision for income taxes			15,283				835,195
(Benefit) provision for income taxes			(85,840	)			331,052
Net income		$	101,123			$	504,143
Income per common share
Basic		$	0.02			$	0.11
Diluted		$	0.02			$	0.11
Weighted average common shares outstanding
Basic			4,555,119				4,553,635
Diluted			4,568,344				4,553,753

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

 

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MICRONETICS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

 

		Thirty-Nine Weeks Ended
		December 25, 2010				December 26, 2009
Net sales		$	25,952,211			$	25,742,328
Cost of sales			17,141,061				17,077,056
Gross margin			8,811,150				8,665,272
Operating expenses:
Research and development			1,278,135				1,257,121
Selling, general and administrative			5,381,166				5,714,058
Net loss on disposal of assets			3,560				—
Amortization of intangible assets			247,374				261,069
Total operating expenses			6,910,235				7,232,248
Income from operations			1,900,915				1,433,024
Other income (expense):
Interest income			551				135
Interest expense			(297,449	)			(400,263	)
Change in fair value of interest rate swap			82,493				86,814
Miscellaneous income			15,615				17,904
Total other expense			(198,790	)			(295,410	)
Income before provision for income taxes			1,702,125				1,137,614
Provision for income taxes			628,435				459,213
Net income		$	1,073,690			$	678,401
Income per common share
Basic		$	0.24			$	0.15
Diluted		$	0.24			$	0.15
Weighted average common shares outstanding
Basic			4,554,137				4,553,635
Diluted			4,565,041				4,553,890

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

 

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MICRONETICS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY

(Unaudited)

 

		Common Stock								Additional Paid-In Capital				Retained Earnings				Treasury Stock				Total
		Shares Outstanding				Par Value
Balance at March 31, 2010			4,553,635			$	53,912			$	12,204,124			$	4,062,301			$	(2,980,513	)		$	13,339,824
Stock-based compensation			—				—				145,032				—				—				145,032
Reduction of deferred tax asset related to cancellation of non-qualified stock options			—				—				(116,660	)			—				—				(116,660	)
Exercise of stock option			2,500				25				5,600				—				—				5,625
Net income			—				—				—				1,073,690				—				1,073,690
Balance at December 25, 2010			4,556,135			$	53,937			$	12,238,096			$	5,135,991			$	(2,980,513	)		$	14,447,511

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

 

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MICRONETICS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

		Thirty-Nine Weeks Ended,
		December 25, 2010				December 26, 2009
Cash flow from operating activities:
Net income		$	1,073,690			$	678,401
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization			1,191,941				1,156,353
Stock-based compensation			145,032				198,368
Change in fair value of interest rate swap			(82,493	)			(86,814	)
Deferred taxes			179,837				22,893
Net loss on disposal of assets			3,560				—
Provision for allowances on accounts receivable			19,610				176,722
Provision for inventory obsolescence and losses			207,952				193,949
Deferred taxes related to non-qualified stock options			(116,660	)			—
Changes in operating assets and liabilities:
Accounts receivable			1,538,411				(165,358	)
Unbilled revenue			219,958				(518,626	)
Inventories			(1,944,981	)			(1,261,705	)
Other long term assets			6,183				6,183
Prepaid income taxes			(189,502	)			880,374
Prepaid expenses, other current assets, and other assets			(61,993	)			21,992
Accounts payable			(1,221,444	)			656,633
Accrued expenses			73,408				76,785
Deferred revenue			(170,582	)			200,000
Net cash provided by operating activities			871,927				2,236,150
Cash flows from investing activities:
Capital expenditures			(690,067	)			(973,774	)
Proceeds from sale of assets			10,000				—
Net cash used in investing activities			(680,067	)			(973,774	)
Cash flows from financing activities:
Net proceeds (payments) from line of credit			1,436,970				(7,239	)
Repayments on term loan			(975,000	)			(975,000	)
Repayments of capital leases			(199,672	)			(233,261	)
Proceeds from exercise of stock options			5,625				—
Additional paid in capital charge related to cancellation of non-qualified stock options			116,660				—
Net cash provided by (used in) financing activities			384,583				(1,215,500	)
Net change in cash and cash equivalents			576,443				46,876
Cash and cash equivalents at beginning of period			482,442				620,259
Cash and cash equivalents at end of period		$	1,058,885			$	667,135
Supplemental disclosure of cash flow information:
Cash paid (received) during the period for:
Interest		$	303,100			$	356,248
Income taxes		$	638,100			$	(444,054	)
Supplemental disclosure of non-cash financing activities:
Equipment acquired under capital leases		$	124,518			$	—

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

 

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MICRONETICS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

1. BASIS OF PRESENTATION

The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“US GAAP”) for interim financial information and the rules of the Securities and Exchange Commission for quarterly reports on Form 10-Q. It is suggested that these consolidated condensed financial statements be read in conjunction with the Company’s Annual Report on Form 10-K for its fiscal year ended March 31, 2010. In the opinion of management, the statements contain all adjustments, including normal recurring adjustments necessary in order to present fairly the financial position as of December 25, 2010 and the results of operations for the thirteen and thirty-nine weeks ended December 25, 2010 and December 26, 2009.

The Company evaluated its December 25, 2010 financial statements for subsequent events through the date the financial statements were issued. The Company is not aware of any subsequent events which would require recognition or disclosure in its financial statements.

The results of operations for the thirteen and thirty-nine weeks ended December 25, 2010 are not necessarily indicative of the results to be expected for the full year ended March 31, 2011.

2. PRINCIPAL BUSINESS ACTIVITY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Summary of operations and basis of consolidation—Micronetics, Inc. and subsidiaries (collectively the “Company” or “Micronetics”) are engaged in the design, development, manufacturing and marketing of a broad range of high performance wireless components, test equipment and integrated multifunction subassemblies used in cellular, microwave, satellite, radar and communication systems around the world.

The consolidated financial statements include the accounts of Micronetics and its wholly-owned subsidiaries, Microwave & Video Systems, Inc. (“MVS”), Microwave Concepts, Inc. (“MicroCon”), Stealth Microwave, Inc. (“Stealth”) and MICA Microwave Corporation (“MICA”). All intercompany balances and activity have been eliminated in consolidation.

Use of estimates—The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“US GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Estimates and judgments include revenue recognition, assumptions used in stock option and goodwill valuations, reserves for accounts receivable and inventories, useful lives of property, plant and equipment, intangible assets, accrued liabilities, and deferred income taxes and various other assumptions that it believes are reasonable under the circumstances. Actual results could differ from those estimates.

Revenue recognition—The Company generates revenue from the sale of products, technology development, and licensing. Revenue is recognized when persuasive evidence of an arrangement exists, delivery of product has occurred or services have been rendered, the price to the customer is fixed or determinable, collection is reasonably assured, and no future services are required. The Company’s products are primarily hardware components and integrated sub-assemblies, which includes microwave hardware and embedded software, that are delivered to original equipment manufacturers (OEMs) of telecommunication and networking products and defense contractors who are considered to be end users.

The Company occasionally enters into contracts for production of highly customized microwave and radio frequency components and integrated sub-assemblies which it records revenue based on the percentage of completion method (assuming all other requirements for revenue recognition have been satisfied) typically using labor hours to measure progress toward completion of the contract as the Company has determined this methodology best reflects the fundamentals of the contract. If estimates to complete the contract change materially from one period to the next, profit levels could significantly vary. Unbilled revenue represents revenue recognized in excess of billings.

The Company sells its products using a direct sales force and sales representatives. Contracts with customers do not include product return rights or price protection. The estimated cost of product warranties are accrued based on historical experience at the time the revenue is recognized. Unless customers purchase an extended warranty, Micronetics typically offers a one-year warranty.

 

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Recently issued accounting pronouncements—In October 2009, the FASB issued ASU No. 2009-13, “Revenue Recognition (Topic 605): Multiple-Deliverable Revenue Arrangements (a consensus of the FASB Emerging Issues Task Force),” which amends ASC 605-25, “Revenue Recognition: Multiple-Element Arrangements.” ASU No. 2009-13 addresses how to determine whether an arrangement involving multiple deliverables contains more than one unit of accounting and how to allocate consideration to each unit of accounting in the arrangement. This ASU replaces all references to fair value as the measurement criteria with the term selling price and establishes a hierarchy for determining the selling price of a deliverable. ASU No. 2009-13 also eliminates the use of the residual value method for determining the allocation of arrangement consideration. Additionally, ASU No. 2009-13 requires expanded disclosures. This ASU will become effective for us for revenue arrangements entered into or materially modified on or after April 1, 2011. Earlier application is permitted with required transition disclosures based on the period of adoption. We are currently evaluating the impact of this ASU on our consolidated financial statements.

In October 2009, the FASB issued ASU No. 2009-14, “Software (Topic 985): Certain Revenue Arrangements That Include Software Elements (a consensus of the FASB Emerging Issues Task Force).” ASU No. 2009-14 amends ASC 985-605, “Software: Revenue Recognition,” such that tangible products, containing both software and non-software components that function together to deliver the tangible product’s essential functionality, are no longer within the scope of ASC 985-605. It also amends the determination of how arrangement consideration should be allocated to deliverables in a multiple-deliverable revenue arrangement. This ASU will become effective for us for revenue arrangements entered into or materially modified on or after April 1, 2011. Earlier application is permitted with required transition disclosures based on the period of adoption. We are currently evaluating the impact of this ASU on our consolidated financial statements. Both ASU No. 2009-13 and ASU No. 2009-14 must be adopted in the same period and must use the same transition disclosures.

3. INVENTORIES, NET

At December 25, 2010 and March 31, 2010, inventories consisted of the following:

 

		December 25, 2010				March 31, 2010
Raw materials		$	7,384,465			$	7,170,056
Work in process			5,375,884				3,941,829
Finished goods			1,328,268				1,368,591
			14,088,617				12,480,476
Less: allowance for obsolescence and excess inventory			(1,407,620	)			(1,536,508	)
		$	12,680,997			$	10,943,968

4. PROPERTY, PLANT AND EQUIPMENT, NET

At December 25, 2010 and March 31, 2010, property, plant and equipment, net consisted of the following:

 

		December 25, 2010				March 31, 2010
Land		$	162,000			$	162,000
Buildings and leasehold improvements			2,016,532				2,170,278
Machinery and equipment			11,643,834				10,833,486
Furniture, fixtures and other			213,511				244,171
			14,035,877				13,409,935
Less: accumulated depreciation			(9,391,539	)			(8,622,055	)
		$	4,644,338			$	4,787,880

5. INTANGIBLE ASSETS AND GOODWILL

The Company tests goodwill for impairment annually and when an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying value.

 

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The following table presents gross intangible assets and the related accumulated amortization of the Company’s finite-lived intangible assets as of December 25, 2010 and March 31, 2010 (in thousands):

 

		Useful Life (years)				December 25, 2010												March 31, 2010
Intangible Assets						Gross Value				Accumulated Amortization				Net Value				Gross Value				Accumulated Amortization				Net Value
Customer relationships (non-contractual)			3-10			$	2,956			$	2,088			$	868			$	2,956			$	1,931			$	1,025
Trade name			10				260				93				167				260				73				187
Developed technology-drawings			3-5				513				399				114				513				328				185
						$	3,729			$	2,580			$	1,149			$	3,729			$	2,332			$	1,397

The Company amortizes intangible assets with finite lives over the estimated useful lives of the respective assets. The following is a summary of estimated aggregate amortization expense for each of the five succeeding fiscal years and thereafter:

 

		(in thousands)
2011			73
2012			314
2013			163
2014			144
2015			144
Thereafter			311
Total		$	1,149

6. ACCRUED EXPENSES

At December 25, 2010 and March 31, 2010 accrued expenses consisted of the following:

 

		December 25, 2010				March 31, 2010
Unbilled payables		$	970,870			$	837,603
Professional fees			—				15,750
Payroll, benefits and related taxes			1,183,001				1,142,532
Warranty			264,146				211,240
Fair value of interest rate swap			82,557				165,050
Commissions			150,713				185,967
Customer deposits			9,215				71,348
Miscellaneous			62,842				102,939
		$	2,723,344			$	2,732,429

Included in accrued payroll are bonuses of $539,186 and $600,000 at December 25, 2010 and March 31, 2010, respectively.

7. LONG-TERM DEBT

At December 25, 2010 and March 31, 2010 long-term debt consisted of the following:

 

		December 25, 2010				March 31, 2010
Term loan			1,950,000				2,925,000
Capital leases			243,491				318,645
			2,193,491				3,243,645
Less current portion			(1,514,715	)			(1,457,267	)
Long-term debt, net of current portion		$	678,776			$	1,786,378

 

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Term Loan and Revolver

In March 2007, the Company entered into a credit facility which consists of a $6.5 million five year secured term loan and a $5.0 million three year revolving line of credit. In the third quarter of fiscal 2009, the revolving line of credit was extended by two years. On August 13, 2010 the Company entered into an amended term loan and revolving line of credit agreement under which the revolving line of credit was increased to $7.5 million and extended by one additional year and now expires on March 31, 2013. The term loan is guaranteed by the Company and its subsidiaries and secured by substantially all of the Company’s assets. The term loan is payable in quarterly principal installments of $325,000 plus accrued interest at the rate of 5.2% plus the applicable margin. At December 25, 2010, the interest rate was 7.95%. The final payment for the term loan is due in April 2012. The revolving line of credit bears interest at LIBOR plus the applicable margin. At December 25, 2010, the interest rate was 3.01%. The Company had approximately $1.8 million available under the line of credit at December 25, 2010.

In April 2007, the Company entered into an interest rate swap agreement with a notional amount of $6.5 million in April 2007 to mitigate the effect of interest rate fluctuations on the term loan. The interest rate swap was not designated as a hedging instrument at the initiation of the swap, and therefore the Company has not applied hedge accounting. As a result, at the end of each reporting period, the change in fair value of the interest rate swap is recorded on the consolidated balance sheet, with any related gains or losses included in earnings. The notional amount of this swap agreement was $1,950,000 at December 25, 2010.

At December 25, 2010 the Company was in compliance with its bank covenants. Under the terms of the amended term loan and the revolving line of credit agreement, the Company is required to maintain certain financial covenants on a quarterly and annual basis, including total funded debt to EBITDA not exceeding 2.5:1, minimum debt service coverage of 1.25:1, a minimum current ratio of 1.25:1 and minimum tangible net worth of $9.2 million. For the fiscal year ended March 31, 2011, the debt service coverage covenant is required to be at least 1.10:1 except that for the third quarter of fiscal 2011 the minimum ratio is 0.85:1.

Capital Leases

Commercial capital leases payable are reflected at their present value based upon interest of approximately 6.8% per annum, and are secured by the underlying assets. The assets are depreciated over their estimated useful lives. Included in the current portion of long-term debt is $214,715 for capital lease obligations. Included in long-term debt net of current portion is $28,776 for capital lease obligations. The remaining interest associated with the Company’s capital lease obligations amounts to approximately $9,300 over the lease terms.

8. STOCK OPTION PLANS AND STOCK-BASED COMPENSATION

At December 25, 2010, the Company had one stock option plan under which grants were outstanding. The stock options outstanding are for grants issued under the Company’s 2006 Equity Incentive Plan.

The 2003 Stock Incentive Plan

During the fiscal year ended March 31, 2004, the Company adopted a stock option plan entitled “The 2003 Stock Incentive Plan” (the “2003 Plan”) under which the Company may grant options to purchase up to 900,000 shares of common stock plus any shares of common stock remaining available for issuance as of July 22, 2003 under the 1996 Stock Option Plan. In July 2006, the Board of Directors determined that it would not issue any new option awards under the 2003 Plan. During the third quarter of fiscal 2011, all remaining outstanding options under the 2003 Stock Option Plan expired.

The 2006 Equity Incentive Plan

During the fiscal year ended March 31, 2007, the Company adopted a stock option plan entitled “The 2006 Equity Incentive Plan” (the “2006 Plan”) under which the Company may grant shares of restricted stock or options to purchase up to 1,000,000 shares of common stock. As of December 25, 2010 there were 261,000 options outstanding under the 2006 Plan.

The 2006 Plan is administered by the Board of Directors or a Committee of the Board of Directors which has the authority to determine the persons to whom the options may be granted, the number of shares of common stock to be covered by each option grant, and the terms and provisions of each option grant. Options granted under the 2006 Plan may be incentive stock options or non-qualified options, and may be issued to employees, consultants, advisors and directors of the Company and its subsidiaries. The exercise price of options granted under the 2006 Plan may not be less than the fair market value of the shares of common stock on the date of grant, and may not be granted more than ten years from the date of adoption of the plan or exercised more than ten years from the date of grant.

 

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The following table sets forth the Company’s stock option activity during the thirty-nine weeks ended December 25, 2010:

 

		Shares Underlying options				Weighted Average Exercise price				Weighted Average Remaining Contractual life				Aggregate Intrinsic Value
Outstanding at March 31, 2010			511,100			$	6.79							$	—
Granted			—				—								—
Exercised			(2,500	)			2.25								—
Expired			(236,600	)			8.12								—
Forfeited			(11,000	)			7.68								—
Outstanding at December 25, 2010			261,000			$	5.59				7.65			$	239,715
Exercisable at December 25, 2010			128,375			$	7.10				6.75			$	27,261

The following table sets forth the status of the Company’s non-vested stock options as of December 25, 2010:

 

		Number of Options				Weighted-Average Grant-Date Fair Value
Non-vested as of March 31, 2010			191,750			$	2.95
Granted			—				—
Forfeited			(6,250	)			4.19
Vested			(52,875	)			3.54
Non-vested as of December 25, 2010			132,625			$	2.66

The following table summarizes the effects of stock-based compensation for the thirteen weeks ended December 25, 2010 and December 26, 2009:

 

		Thirteen Weeks Ended
		December 25, 2010				December 26, 2009
Cost of sales		$	8,537			$	10,590
Selling, general and administrative			34,025				34,352
Stock-based compensation effect on income before taxes		$	42,562			$	44,942

The following table summarizes the effects of stock-based compensation for the thirty-nine weeks ended December 25, 2010 and December 26, 2009:

 

		Thirty-Nine Weeks Ended
		December 25, 2010				December 26, 2009
Cost of sales		$	30,369			$	31,290
Selling, general and administrative			114,663				167,078
Stock-based compensation effect on income before taxes		$	145,032			$	198,368

Unrecognized stock-based compensation expense related to the unvested options is approximately $0.3 million, and will be recorded over the remaining vesting periods of 2.54 years. This estimate is based on the number of unvested options currently outstanding and could change based on the number of options granted or forfeited in the future.

 

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There were no options granted during the thirteen weeks ended December 25, 2010 and 10,000 options granted during the thirteen weeks ended December 26, 2009. The fair value of options issued was estimated at the date of grant using the following weighted-average assumptions for the thirteen weeks ended December 26, 2009 were as follows:

 

Risk free interest rate			2.49	%
Expected life			6.25 years
Expected volatility			70.18	%
Forfeiture rate			2.92	%
Expected dividend yield			0	%

The per share fair value of stock options granted for the thirteen weeks ended December 26, 2009 was $2.04.

9. INCOME TAXES

Before discrete items, the Company’s effective tax rate was 39.5% for the thirteen weeks ended December 25, 2010 and 42% for the thirteen weeks ended December 26, 2009.

In the thirteen weeks ended December 25, 2010, the Company recorded true-up adjustment credits totaling approximately $42,000 primarily related to the filing of our fiscal 2010 tax returns. In addition, the Company recognized uncertain tax benefits of $1,762 due to the statute of limitations expiration.

In the thirteen weeks ended December 26, 2009, the Company recorded true-up adjustment credits totaling approximately $21,000 primarily related to the filing of our fiscal 2009 tax return.

As of April 1, 2010, the Company is subject to tax in the U.S. Federal and various state jurisdictions. The Internal Revenue Service (IRS) recently finalized the review of our March 31, 2008 tax return and recommended no changes to the return. The Company is open to examination for tax years March 31, 2007 through 2010.

10. EARNINGS PER SHARE

Basic earnings per share, or EPS, is computed based on the net income for each period divided by the weighted average actual shares outstanding during the period. Diluted earnings per share is computed based on the net income or loss per period divided by the weighted average number of common shares and common equivalent shares outstanding during each period unless the effect would be anti-dilutive. Common stock equivalents represent the dilutive effect of the assumed exercise of certain outstanding stock options using the treasury stock method. The computations of basic and diluted EPS for the thirteen weeks ended December 25, 2010 and December 26, 2009 are:

 

		Thirteen Weeks Ended
		December 25, 2010				December 26, 2009
Net income		$	101,123			$	504,143
Weighted average shares outstanding			4,555,119				4,553,635
Basic earnings per share		$	0.02			$	0.11
Common stock equivalents			13,225				118
Weighted average common and common equivalent shares outstanding			4,568,344				4,553,753
Diluted earnings per share		$	0.02			$	0.11

The computations of basic and diluted EPS for the thirty-nine weeks ended December 25, 2010 and December 26, 2009 are:

 

		Thirty-Nine Weeks Ended
		December 25, 2010				December 26, 2009
Net income		$	1,073,690			$	678,401
Weighted average shares outstanding			4,554,137				4,553,635
Basic earnings per share		$	0.24			$	0.15
Common stock equivalents			10,904				255
Weighted average common and common equivalent shares outstanding			4,565,041				4,553,890
Diluted earnings per share		$	0.24			$	0.15

 

 

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At December 25, 2010 and December 26, 2009, 129,000 and 376,600 stock options, respectively, were excluded from the diluted earnings per share calculation because they would have been anti-dilutive.

11. FAIR VALUE MEASUREMENTS

The Company assesses fair value as an exit price representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability. As a basis for considering such assumptions, this standard establishes a three-tier value hierarchy, which prioritizes, in descending order, the inputs used in measuring fair value as follows:

Level 1 — Inputs used to measure fair value are unadjusted quoted prices that are available in active markets for the identical assets or liabilities as of the reporting date.

Level 2 — Inputs used to measure fair value, other than quoted prices included in Level 1, are either directly or indirectly observable as of the reporting date through correlation with market data, including quoted prices for similar assets and liabilities in active markets and quoted prices in markets that are not active. Level 2 also includes assets and liabilities that are valued using models or other pricing methodologies that do not require significant judgment since the input assumptions used in the models, such as interest rates and volatility factors, are corroborated by readily observable data from actively quoted markets for substantially the full term of the financial instrument.

Level 3 — Inputs used to measure fair value are unobservable inputs that are supported by little or no market activity and reflect the use of significant management judgment. These values are generally determined using pricing models for which the assumptions utilize management’s estimates of market participant assumptions.

This hierarchy requires the Company to use observable market data, when available, and to minimize the use of unobservable inputs when determining fair value. Assets and liabilities measured at fair value on a recurring basis, include the following as of December 25, 2010 and March 31, 2010.

 

		Fair Value Measurements at December 25, 2010 Using
		Quoted Prices in Active Markets (Level 1)				Significant Other Observable Inputs (Level 2)				Significant Unobservable Inputs (Level 3)				Total Fair Value as of December 25, 2010
Assets:
Money market fund (included in cash and cash equivalents)			—			$	1,015,000				—			$	1,015,000
Total assets at fair value			—			$	1,015,000				—			$	1,015,000
Liabilities:
Interest rate swap (included in accrued expenses and other current liabilities)			—			$	83,000				—			$	83,000
Total liabilities at fair value			—			$	83,000				—			$	83,000
		Fair Value Measurements at March 31, 2010 Using
		Quoted Prices in Active Markets (Level 1)				Significant Other Observable Inputs (Level 2)				Significant Unobservable Inputs (Level 3)				Total Fair Value as of March 31, 2010
Assets:
Money market fund (included in cash and cash equivalents)			—			$	419,000				—			$	419,000
Total assets at fair value			—			$	419,000				—			$	419,000
Liabilities:
Interest rate swap (included in accrued expenses and other current liabilities)			—			$	165,000				—			$	165,000
Total liabilities at fair value			—			$	165,000				—			$	165,000

 

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The following provides a summary of the change in fair value for the interest rate swap for the thirty-nine weeks ended December 25, 2010:

 

Balance at March 31, 2010		$	165,000
Unrealized gain			(82,000	)
Balance at December 25, 2010		$	83,000

The fair value of the money market fund was determined based on pricing provided by a large investment bank. Since the valuation was not observable, the Company has classified these as level 2 securities. There has been no change in the fair value of the money market fund since December 25, 2010. The fair value of the interest rate swap was determined by using a market driven valuation model using the LIBOR rate forecast applied to common intervals for the remaining term of the interest rate swap.

The carrying amounts reported in the consolidated balance sheet for cash, trade receivables, accounts payable, and accrued expenses and amounts borrowed under the revolving line of credit and capital leases approximate fair value because of the relatively short maturity of these instruments. The carrying amount of our term debt approximates fair value primarily because it is based on a variable interest rate.

12. RELATED PARTY TRANSACTION

On September 4, 2008, Micronetics, Inc. entered into a lease with SBJ Development, LLC (the “Landlord”) for a new headquarters for Stealth Microwave, Inc, its subsidiary. The property is located in the Township of Ewing, New Jersey. The lease has an initial term of five years and contains three options to extend the lease, each for a term of five years. The annual rent for the initial term of the lease is $225,600.

Kevin Beals, President of Micronetics, is a member of the Landlord. Mr. Beals owns sixteen percent of the outstanding units of membership interest of the Landlord.

The Audit Committee of the Board of Directors of Micronetics reviewed and approved the terms of the lease prior to its execution.

13. MAJOR CUSTOMERS

The Company sells primarily to original equipment manufacturers of communications equipment in either the commercial or the defense electronic marketplace. Many of those customers are prime contractors for defense work or Fortune 500 companies with world-wide operations. One customer, ITT Electronic Warfare Systems, accounted for 24% of the Company’s consolidated sales for the thirty-nine weeks ended December 25, 2010 and 25% for the thirty-nine weeks ended December 26, 2009. This same customer accounted for 14% of the Company’s accounts receivable at December 25, 2010 and 37% of the Company’s accounts receivable at March 31, 2010.

 

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Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Forward Looking Statements

Certain statements in this report contain words such as “could,” “expects,” “may,” “anticipates,” “believes,” “intends,” “estimates,” “plans,” “envisions,” and other similar language and are considered forward-looking statements. These statements are based on our expectations, estimates, forecasts and projections about the operating environment, economies and markets in which we operate and are merely our current predictions of future events. In addition, other written or oral statements which are considered forward-looking may be made by us or others on our behalf. These statements are subject to important risks, uncertainties and assumptions, which are difficult to predict and the actual outcome may be materially different. Some of the factors which could cause results or events to differ from current expectations include, but are not limited to, the factors described here, in our Annual Report on Form 10-K for the fiscal year ended March 31, 2010, and in the other documents that we file with the Securities and Exchange Commission. We assume no obligation to update our forward-looking statements to reflect new information or developments.

An investment in our common stock involves a high degree of risk. We urge readers to review carefully the risk factors described herein, in our Annual Report on Form 10-K for the fiscal year ended March 31, 2010, and in the other documents that we file with the Securities and Exchange Commission. You can read these documents at www.sec.gov. If any of these risks, or other risks not presently known to us or that we currently believe are not significant, develops into an actual event, then our business, financial condition and results of operations could be adversely affected. If that happens, the market price of our common stock could decline.

Critical Accounting Policies and Estimates

The discussion and analysis of our financial condition and the results of operations are based on our consolidated financial statements and the data used to prepare them. Our consolidated financial statements have been prepared based on accounting principles generally accepted in the United States of America. On an on-going basis, we evaluate our judgments and estimates including those related to revenue recognition, allowances for doubtful accounts, inventory valuation and obsolescence, long-lived assets, goodwill impairment, stock-based compensation, warranty obligations, and the valuation of our deferred tax asset. These estimates and judgments are based on historical experience and various other assumptions that are believed to be reasonable under current business conditions and circumstances. Actual results may differ from these estimates under different assumptions or conditions.

There have been no changes to our critical accounting policies from those described in our Annual Report on Form 10-K for the fiscal year ended March 31, 2010.

Recent Accounting Pronouncements

We discuss recently issued accounting standards in Item 1. Notes to Consolidated Financial Statements – Note 2.

Overview

Micronetics designs and manufactures high performance microwave and radio frequency (RF) components and integrated multifunction subassemblies used in a variety of commercial wireless, defense and aerospace products, including satellite communications, electronic warfare and electronic counter-measures. We also manufacture and design test equipment, subassemblies and components used to test the strength, durability and integrity of signals in communications equipment. Our products are embedded in a variety of radars, electronic warfare systems, guidance systems, wireless telecommunications and satellite equipment.

We sell our products primarily to original equipment manufacturers of communications equipment in either the commercial or the defense electronic marketplace. Many of our customers are prime contractors for defense applications and/or Fortune 500 companies with world-wide operations.

A key driver of demand for our products is the pervasive transformation of information from the analog domain to the digital domain. Because digital technologies require greater degrees of precision and rely more on miniature circuits than analog technologies, testing is critical for the rapid commercialization of reliable products necessitated by broadband and wireless communication technologies. As the speed to market challenges increase, larger companies are relying increasingly on other companies to manufacture a module or an integrated subassembly. This module or subassembly is then integrated by the larger company into a piece of equipment and sold to a customer. Micronetics has been seeking to capitalize on this trend by increasing its capability to manufacture integrated subassemblies. Our goal is to leverage our high power and noise technology to continue to be a highly reliable supplier of integrated microwave subsystems.

 

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Results of Operations

Thirteen Weeks Ended December 25, 2010 compared to December 26, 2009

Net sales

Net sales for the thirteen weeks ended December 25, 2010 (“Q3 FY 11”) were $7,601,372, a decrease of $1,407,789, or 16% as compared to $9,009,161 for the thirteen weeks ended December 26, 2009 (“Q3 FY 10”). The decrease was due to a delay in shipments of integrated component sub-systems for defense jamming and electronic system modernization applications for a customer while we upgraded procedures in response to that customer’s request. We expect to ship the delayed product over the next two to three quarters.

Gross margin

Gross margin for Q3 FY 11 was approximately 31% as compared to 37% for Q3 FY 10. The gross margin decrease is due to lower sales of integrated component sub-systems due to shipping delays, without a corresponding decrease in costs.

Research and development

Research and development expense for Q3 FY 11 was $447,197 as compared to $411,059 for Q3 FY 10, an increase of $36,138 or 9%. Our research and development expense varies to a certain degree based upon emerging technologies, shifts in product requirements and our assessment of future business opportunities.

Selling, general and administrative

Selling, general and administrative expense for Q3 FY 11 was $1,755,689 as compared to $1,877,494 for Q3 FY 10, representing a decrease of $121,805 or 6%. Approximately $125,000 of the decrease was due to lower bad debt expense resulting from improved collections activity.

Amortization of intangible assets

Amortization expense attributable to our intangible assets related to previous acquisitions was $73,326 in Q3 FY 11 as compared to $87,023 in Q3 FY 10. The decrease of $13,697 was due to completing amortization of certain intangible assets.

Interest expense

Interest expense for Q3 FY 11 was $84,222 as compared to $131,820 for Q3 FY 10, a decrease of $47,598 or 4%. The decrease was primarily due to lower average interest rates.

Interest rate swap

An unrealized gain of $27,084 was recorded for Q3 FY 11 as compared to an unrealized gain of $32,204 recorded in Q3 FY 10 to reflect the change in fair value of the interest rate swap agreement entered into in April 2007 to mitigate interest rate fluctuations on our term loan.

(Benefit) provision for income taxes

Before considering the effect of discrete items, our effective tax rate for Q3 FY 11 was 39.5% as compared to 42% for Q3 FY 10. In the thirteen weeks ended December 25, 2010, we recorded true-up adjustment credits totaling approximately $42,000 primarily related to the filing of our fiscal 2010 tax return and $1,762 of uncertain tax benefits recognized due to the statute of limitations expiration. In the thirteen weeks ended December 26, 2009, we recorded true-up adjustment credits totaling approximately $21,000 primarily related to the filing of our fiscal 2009 tax return.

Thirty-nine Weeks Ended December 25, 2010 compared to December 26, 2009

Net sales

Net sales for the thirty-nine weeks ended December 25, 2010 were $25,952,211, an increase of $209,883, or 1% as compared to $25,742,328 for the thirty-nine weeks ended December 26, 2009. Sales of integrated component sub-systems for defense jamming and electronic system modernization applications increased by approximately $0.6 million and component sales increased by approximately $1.4 million. These increases were offset by a decrease of approximately $0.7 million related to the beta test portion of a purchase agreement for a radio frequency identification system product line (“RFID”) application and a decrease of approximately $1.1 million related to a space based components application which were recorded in the first half of fiscal 2010.

 

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Gross margin

Gross margin for the thirty-nine weeks ended December 25, 2010 was 34% as compared to 34% at December 26, 2009. Gross margins associated with integrated component sub-systems decreased and were offset by an increase in gross margins associated with component products.

Research and development

Research and development expense for the thirty-nine weeks ended December 25, 2010 was $1,278,135 as compared to $1,257,121 for the thirty-nine weeks ended December 26, 2009, a slight increase of $21,014 or 2%. Spending on a high power digital pre-distortion amplifier product line decreased and was offset by an increase in spending on new applications for commercial components. Our research and development expense varies to a certain degree based upon emerging technologies, shifts in product requirements and our assessment of future business opportunities.

Selling, general and administrative

Selling, general and administrative expense for the thirty-nine weeks ended December 25, 2010 was $5,381,166 as compared to $5,714,058 for the thirty-nine weeks ended December 26, 2009, representing a decrease of $332,892 or 6%. Approximately $240,000 of the decrease was due to lower bad debt expense resulting from the partial recovery of a previously reserved receivable and strong collections. Approximately $50,000 of the decrease was due to lower stock compensation expense, due to fewer stock options being granted and some outstanding options being fully expensed. All other net spending decreased by approximately $43,000.

Amortization of intangible assets

Amortization expense attributable to our intangible assets related to previous acquisitions decreased slightly to $247,374 for the thirty-nine weeks ended December 25, 2010 as compared to $261,069 for the thirty-nine weeks ended December 26, 2009. The decrease of $13,695 was due to completing amortization of certain intangible assets.

Interest expense

Interest expense for the thirty-nine weeks ended December 25, 2010 was $297,449 as compared to $400,263 for the thirty-nine weeks ended December 26, 2009, a decrease of $102,814 or 3%. The decrease was primarily due to lower average interest rates in fiscal 2011 as compared to fiscal 2010.

Interest rate swap

An unrealized gain of $82,493 was recorded for the thirty-nine weeks ended December 25, 2010 as compared to an unrealized gain of $86,814 recorded for the thirty-nine weeks ended December 26, 2009 to reflect the change in fair value of the interest rate swap agreement entered into in April 2007 to mitigate interest rate fluctuations on our term loan.

Provision for income taxes

Our effective tax rate was 39.5% for the thirty-nine weeks ended December 25, 2010 as compared to 42% for the thirty-nine weeks ended December 26, 2009. The decrease is primarily related an increase in our expected research and development credit of approximately 1% and a reduction in our effective state income tax rate of 1%.

Backlog

Our backlog is approximately $27 million as of December 25, 2010 as compared to approximately $32 million as of December 26, 2009. The decrease is due primarily to shipments against our components backlog.

Financial Condition, Liquidity and Capital Resources

We finance our operating and investment requirements primarily through operating cash flows and borrowings. Cash and cash equivalents were $1,058,885 and $482,442, respectively, at December 25, 2010 and March 31, 2010. Working capital defined as accounts receivable, unbilled revenue, inventory, prepaid expenses, other current assets net of accounts payable, accrued expenses and deferred revenue was $13,384,117 and $11,961,963 at December 25, 2010 and March 31, 2010, respectively. Borrowings under our revolving line of credit were $5,671,405 and $4,234,435 at December 25, 2010 and March 31, 2010, respectively.

Our current ratio was approximately 1.86 at December 25, 2010 as compared to 1.81 at March 31, 2010.

 

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In the thirty-nine weeks ended December 25, 2010 net cash provided by operating activities was $871,927 as compared to $2,236,150 for the thirty-nine weeks ended December 26, 2009.

In the thirty-nine weeks ended December 25, 2010, cash provided by net income after adjusting for non-cash items including depreciation, amortization, stock-based compensation, changes in working capital reserves and an unrealized gain on interest rate swap was approximately $2.4 million. Approximately $1.7 million was used for working capital needs. Of this amount, approximately $1.6 million was provided by receivables and unbilled/deferred revenue, approximately $2.0 million was used to fund inventory requirements, approximately $1.1 million was used to fund accounts payable and accrued expenses, approximately $0.1 million was used to fund prepaid expenses and approximately $0.2 million was used for prepaid tax assets. In addition an approximate $0.1 million use was the result of a non-cash charge related to a deferred tax asset associated with the expiration of non-qualified stock options. There is an offset to this amount in additional paid in capital. The increase in inventory was due in part to the delay in shipments in Q3 FY 2011 of integrated component sub-systems for defense jamming and electronic system modernization applications. We expect to ship this product over the next two to three quarters. The increase in inventory was also due in part to support product shipment requirements associated with our existing backlog.

In the thirty-nine weeks ended December 26, 2009, cash provided by net income after adjusting for non-cash items including depreciation, amortization, stock-based compensation, changes in working capital reserves and an unrealized gain on interest rate swap was approximately $2.3 million. Approximately $0.1 million was used to fund working capital needs. Of this amount, approximately $0.7 million was used to fund receivables and unbilled revenue as a result of higher sales and approximately $1.3 million was used to fund inventory requirements primarily related to specific contracts. A tax refund net of tax payments provided approximately $0.9 million, increases in accounts payable and accrued expenses provided approximately $0.8 million and cash received and recorded as deferred revenue provided approximately $0.2 million.

Net cash used in investing activities was $680,067 during the thirty-nine weeks ended December 25, 2010 as compared to $973,774 in the thirty-nine weeks ended December 26, 2009. In the thirty-nine weeks ended December 25, 2010 and December 26, 2009, investing activities was solely comprised of capital expenditures.

Net cash provided by financing activities was $384,583 during the thirty-nine weeks ended December 25, 2010 as compared to net cash used for financing activities of $1,215,500 during the thirty-nine weeks ended December 26, 2009.

In the thirty-nine weeks ended December 25, 2010, we borrowed approximately $1.4 million from our line of credit, repaid term debt of approximately $1.0 million and paid approximately $0.2 million for capital lease obligations. In addition, approximately $0.1 million of a deferred tax asset related to the cancellation of non-qualified stock options was charged to additional paid in capital.

In the thirty-nine weeks ended December 26, 2009, we repaid term debt of approximately $1.0 million and repaid $0.2 million of capital lease obligations.

We believe that cash and cash equivalents on hand, anticipated future cash receipts, and borrowings available under our line of credit will be sufficient to meet our obligations as they become due for the next twelve months. However, a decrease in our sales or demand for our products would likely adversely affect our working capital amounts. As part of our business strategy, we occasionally evaluate potential acquisitions of businesses, products and technologies. Accordingly, a portion of our available cash may be used at any time for the acquisition of complementary products or businesses. These potential transactions may require substantial capital resources, which, in turn, may require us to seek additional debt or equity financing. There are no assurances that we will be able to consummate any such transaction. There are no current plans to raise additional debt or equity capital, nor is there a projected need to raise any such capital.

Term Loan and Revolver

In March 2007, we entered into a credit facility consisting of a $6.5 million five year secured term loan and a $5.0 million three year revolving line of credit, which replaced the then existing $6.0 million term loan entered into in June 2005. In December 2008 we extended the term of the revolving line of credit for two years.

We entered into an interest rate swap agreement in April 2007 to mitigate interest rate fluctuations on the term loan. At the end of each reporting period we record the current fair value of the interest rate swap on the balance sheet. Any unrealized gain or loss on the swap is included in earnings.

 

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On August 13, 2010 we entered into an amended term loan and revolving line of credit agreement. Under the terms of the amended revolving line of credit agreement, the revolving line of credit was increased from $5.0 million to $7.5 million and extended by one year. The revolving line of credit now expires on March 31, 2013. At December 25, 2010 we were in compliance with our bank covenants. Under the terms of the amended term loan and revolving line of credit agreement we are required to maintain certain financial covenants on a quarterly and annual basis, including total funded debt to EBITDA not exceeding 2.5:1, minimum debt service coverage of 1.25:1, a minimum current ratio of 1.25:1 and minimum tangible net worth of $9.2 million. For the fiscal year ending March 31, 2011, the debt service coverage covenant is required to be at least 1.10:1 except that for the third quarter of fiscal 2011 the minimum ratio is 0.85:1.

The term loan and revolving line of credit are guaranteed by the Company and its subsidiaries and secured by substantially all of our assets. The term loan is payable in quarterly principal installments of $325,000 plus accrued interest at the rate of 5.2% plus the applicable margin. At December 25, 2010, $1,950,000 was outstanding under the term loan and our interest rate was 7.95%. The final payment for the term loan is in April 2012.

The revolving line of credit bears interest at LIBOR plus the applicable margin. At December 25, 2010, $5,671,405 was outstanding under our revolving line of credit and our interest rate was 3.01%. We had approximately $1.8 million available under the line of credit at December 25, 2010.

Capital Leases

Commercial capital leases payable are reflected at their present value based upon interest rates of approximately 6.8% per annum, and are secured by the underlying assets. The assets are depreciated over their estimated useful lives. Included in the current portion of long-term debt is $214,715 for capital lease obligations. Included in long-term debt net of current portion is $28,776 for capital lease obligations. The remaining interest associated with our capital lease obligations amounts to approximately $9,300 over the lease terms.

Off-Balance Sheet Arrangements

We did not have any off-balance sheet arrangements, other than operating leases that have or are, in the opinion of management, likely to have a current or future material effect on our financial statements.

 

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Item 3.

Quantitative and Qualitative Disclosures about Market Risk

We are exposed to a variety of market risks, including changes in interest rates primarily as a result of our borrowing and investing activities.

We are subject to interest rate exposure on our revolving line of credit. Our revolving line of credit interest rate is tied to LIBOR. We have entered into an interest rate swap agreement to minimize our exposure to interest rate fluctuations on our term debt. Our interest rate swap has not been designated as a hedging instrument, therefore changes in fair value are recognized in earnings.

We conduct our transactions with foreign customers in U.S. dollars. Although we are not subject to the risks of foreign currency fluctuations directly, demand from foreign customers may be affected by the relative change in value of the customer’s currency to the value of the U.S. dollar. Changes in the relative value of the U.S. dollar may also change our prices relative to the prices of our foreign competitors.

 

Item 4.

Controls and Procedures

Evaluation of disclosure controls and procedures—As of December 25, 2010, the Company carried out an evaluation, under the supervision and with the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rules 13a- 15(e) and 15d- 15(e) of the Securities Exchange Act of 1934 (the “Exchange Act”)). Based upon that evaluation, the Chief Executive Officer and the Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective as of December 25, 2010 to provide reasonable assurance that material information relating to the Company required to be disclosed by the Company in reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms and that such information is accumulated and communicated to management, including the Company’s Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

Changes in internal control—There were no changes in the Company’s internal controls over financial reporting that occurred during the third quarter of fiscal 2011 that materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

Important considerations—The effectiveness of our disclosure controls and procedures is subject to various inherent limitations, including cost limitations, judgments used in decision making, assumptions about the likelihood of future events, the soundness of our systems, the possibility of human error, and the risk of fraud. Because of these limitations, there can be no assurance that any system of disclosure controls and procedures will be successful in preventing all errors or fraud or in making all material information known in a timely manner to the appropriate levels of management.

 

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PART II. OTHER INFORMATION

 

Item 1.

Legal Proceedings.

The Company is not a party to any material pending legal proceedings.

 

Item 1A.

Risk Factors.

This report contains forward-looking statements that involve risks and uncertainties, such as statements of our objectives, expectations and intentions. You should consider carefully all of the material risks described herein, in our Annual Report on Form 10-K for the fiscal year ended March 31, 2010, and in our other documents filed with the Securities and Exchange Commission, as well as the cautionary statements made elsewhere in the Annual Report and in this report, before making a decision to invest in our securities. Such cautionary statements are applicable to all forward-looking statements wherever they appear in this report. If any of the events described therein occur, our business, financial conditions and results of operations may be materially adversely affected. In that event, the trading price of our securities could decline, and you could lose all or part of your investment.

There have been no material changes to the risk factors previously disclosed in the Company’s Annual Report on Form 10-K for the fiscal year ended March 31, 2010.

 

Item 6.

Exhibits.

 

31.1		Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2		Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1		Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of Sarbanes-Oxley Act of 2002.
32.2		Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of Sarbanes-Oxley Act of 2002.

 

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Table of Contents

SIGNATURE

In accordance with 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.

 

				MICRONETICS, INC.
Dated: January 31, 2011				By:		/S/    DAVID ROBBINS
						David Robbins,
						Chief Executive Officer and Treasurer (Principal Executive Officer)
Dated: January 31, 2011				By:		/S/    CARL LUEDERS
						Carl Lueders,
						Chief Financial Officer (Principal Financial and Accounting Officer)

 

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