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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 October 1, 2011

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  x    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 November 3, 2011, the issuer had 4,566,135 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 – October 1, 2011 and March 31, 2011			3
		Consolidated Statements of Operations – Thirteen Weeks Ended October 1, 2011 and September 25, 2010			4
		Consolidated Statements of Operations – Twenty-Six Weeks Ended October 1, 2011 and September 25, 2010			5
		Consolidated Statement of Shareholders’ Equity – Twenty-Six Weeks Ended October 1, 2011			6
		Consolidated Statements of Cash Flows – Twenty-Six Weeks Ended October 1, 2011 and September 25, 2010			7
		Notes to Consolidated Financial Statements			8
Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations			17
Item 3.		Quantitative and Qualitative Disclosures About Market Risk			22
Item 4.		Controls and Procedures			22
Part II.		Other Information
Item 1.		Legal Proceedings			23
Item 1A		Risk Factors			23
Item 6.		Exhibits			24

 

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PART I. FINANCIAL INFORMATION

 

Item 1.

Financial Statements

MICRONETICS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Unaudited)

 

		October 1, 2011				March 31, 2011
ASSETS
Current assets:
Cash and cash equivalents		$	534,642			$	745,116
Accounts receivable, net of allowance for doubtful accounts of $546,802 and $511,532 at October 1, 2011 and March 31, 2011, respectively			6,410,782				5,706,837
Inventories, net			15,171,972				13,998,539
Deferred tax asset			1,553,887				1,553,887
Prepaid income taxes			—				406,072
Prepaid expenses and other current assets			299,686				218,984
Total current assets			23,970,969				22,629,435
Property, plant and equipment, net			4,674,163				4,617,989
Other assets:
Security deposits			97,079				97,079
Other long term assets			6,182				10,304
Intangible assets, net			918,872				1,075,895
Goodwill			1,117,197				1,117,197
Total other assets			2,139,330				2,300,475
TOTAL ASSETS		$	30,784,462			$	29,547,899
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Current portion of long-term debt		$	1,046,805			$	1,468,733
Line of credit			6,631,364				6,714,319
Accounts payable			1,364,941				2,088,784
Accrued expenses and other current liabilities			3,038,869				2,718,329
Income tax payable			71,258				—
Deferred revenue			642,507				30,860
Total current liabilities			12,795,744				13,021,025
Long-term debt, net of current portion			—				325,000
Deferred tax liability			1,267,681				1,267,681
Total liabilities			14,063,425				14,613,706
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; 5,403,717 issued, 4,566,135 outstanding at October 1, 2011 and 5,393,717 issued, 4,556,135 outstanding at March 31, 2011			54,037				53,937
Additional paid-in capital			12,420,338				12,280,641
Retained earnings			7,227,175				5,580,128
			19,701,550				17,914,706
Treasury stock at cost, 837,582 shares at October 1, 2011 and March 31, 2011			(2,980,513	)			(2,980,513	)
Total shareholders’ equity			16,721,037				14,934,193
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY		$	30,784,462			$	29,547,899

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
		October 1, 2011				September 25, 2010
Net sales		$	11,626,692			$	8,984,145
Cost of sales			7,388,154				5,907,894
Gross margin			4,238,538				3,076,251
Operating expenses:
Research and development			375,186				343,927
Selling, general and administrative			1,855,087				1,740,321
Loss on disposal of asset			—				13,560
Amortization of intangible assets			78,512				87,024
Total operating expenses			2,308,785				2,184,832
Income from operations			1,929,753				891,419
Other income (expense):
Interest income			65				264
Interest expense			(72,961	)			(107,691	)
Change in fair value of interest rate swap			88				23,869
Miscellaneous income			1,674				9,299
Total other expense			(71,134	)			(74,259	)
Income before provision for income taxes			1,858,619				817,160
Provision for income taxes			775,944				344,443
Net income		$	1,082,675			$	472,717
Earnings per common share
Basic		$	0.24			$	0.10
Diluted		$	0.24			$	0.10
Weighted average common shares outstanding
Basic			4,562,371				4,553,635
Diluted			4,585,381				4,565,349

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)

 

		Twenty-Six Weeks Ended
		October 1, 2011				September 25, 2010
Net sales		$	21,665,985			$	18,350,839
Cost of sales			14,247,218				11,875,267
Gross margin			7,418,767				6,475,572
Operating expenses:
Research and development			788,881				830,938
Selling, general and administrative			3,612,083				3,625,477
Loss on disposal of asset			—				13,560
Amortization of intangible assets			157,023				174,048
Total operating expenses			4,557,987				4,644,023
Income from operations			2,860,780				1,831,549
Other income (expense):
Interest income			1,445				293
Interest expense			(154,571	)			(213,227	)
Change in fair value of interest rate swap			34,685				55,409
Miscellaneous income			4,823				12,818
Total other expense			(113,618	)			(144,707	)
Income before provision for income taxes			2,747,162				1,686,842
Provision for income taxes			1,100,115				714,275
Net income		$	1,647,047			$	972,567
Earnings per common share
Basic		$	0.36			$	0.21
Diluted		$	0.36			$	0.21
Weighted average common shares outstanding
Basic			4,560,388				4,553,635
Diluted			4,574,938				4,563,643

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, 2011			4,556,135			$	53,937			$	12,280,641			$	5,580,128			$	(2,980,513	)		$	14,934,193
Stock-based compensation			—				—				109,947				—				—				109,947
Exercise of stock options			10,000				100				29,750				—				—				29,850
Net income			—				—				—				1,647,047				—				1,647,047
Balance at October 1, 2011			4,566,135			$	54,037			$	12,420,338			$	7,227,175			$	(2,980,513	)		$	16,721,037

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)

 

		Twenty-Six Weeks Ended
		October 1, 2011				September 25, 2010
Cash flow from operating activities:
Net income		$	1,647,047			$	972,567
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization			764,583				806,472
Stock-based compensation			109,947				102,470
Change in fair value of interest rate swap			(34,685	)			(55,409	)
Loss on disposal of assets			—				13,560
Provision for doubtful accounts			35,270				31,449
Provision for inventory obsolescence and losses			138,498				140,558
Deferred taxes related to non-qualified stock options			—				(91,016	)
Changes in operating assets and liabilities:
Accounts receivable			(739,215	)			(108,721	)
Unbilled revenue			—				(18,502	)
Inventories			(1,311,931	)			(1,178,751	)
Other long term assets			4,122				4,122
Prepaid income taxes			406,072				76,175
Prepaid expenses, other current assets, and other assets			(80,702	)			(917	)
Accounts payable			(723,843	)			(83,285	)
Accrued expenses			355,225				51,870
Income tax payable			71,258				—
Deferred revenue			611,647				(200,000	)
Net cash provided by operating activities			1,253,293				462,642
Cash flows from investing activities:
Capital expenditures			(663,734	)			(628,496	)
Net cash used in investing activities			(663,734	)			(628,496	)
Cash flows from financing activities:
Net (payments) proceeds from line of credit			(82,955	)			1,253,401
Repayments on term loan			(650,000	)			(650,000	)
Repayments of capital leases			(96,928	)			(117,743	)
Proceeds from exercise of stock options			29,850				—
Additional paid-in capital charge related to cancellation of non-qualified stock options			—				91,016
Net cash (used in) provided by financing activities			(800,033	)			576,674
Net change in cash and cash equivalents			(210,474	)			410,820
Cash and cash equivalents at beginning of period			745,116				482,442
Cash and cash equivalents at end of period		$	534,642			$	893,262
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest		$	161,556			$	206,340
Income taxes		$	623,000			$	638,100
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 financial statements be read in conjunction with the Company’s Annual Report on Form 10-K for its fiscal year ended March 31, 2011. 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 October 1, 2011 and the results of operations for the thirteen and twenty-six weeks ended October 1, 2011 and September 25, 2010.

The Company reports its fiscal quarters for the 13-week period ending on the Saturday nearest June 30, September 30 and December 31. As a result, the first and fourth quarter may be more or less than 13 weeks, by 1 to 6 days, which can affect comparability between periods. The second quarter of Fiscal 2012 and Fiscal 2011 reflect 91 days. The Company’s current fiscal year end is March 31, 2012.

The Company evaluated its October 1, 2011 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 twenty-six weeks ended October 1, 2011 are not necessarily indicative of the results to be expected for the full year ending March 31, 2012.

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 activity has 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, intangibles, accrued liabilities, and deferred income taxes. 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 to a lesser extent integrated assemblies which includes microwave hardware and embedded software, that are delivered to original equipment manufacturers (OEMs) of telecommunication and networking products who are considered to be end users.

The Company occasionally enters into contracts for production of customized microwave and radio frequency components and integrated sub-assemblies for 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. We currently have no such contracts in process that require the percentage of completion method for revenue recognition.

 

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Deferred revenue represents billings in excess of revenue recognized.

The Company sells its products using a direct sales force and sales representatives. The Company’s standard terms of sale 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.

Recently enacted 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 became effective for us for revenue arrangements entered into or materially modified on or after April 1, 2011. Adoption of this guidance did not have a material impact 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 became effective for us for revenue arrangements entered into or materially modified on or after April 1, 2011. Adoption of this guidance did not have a material impact on our consolidated financial statements. Both ASU No. 2009-13 and ASU No. 2009-14 were adopted in the same period and use the same transition disclosures.

Recently issued accounting pronouncements— In May 2011, the FASB issued ASU No. 2011-04, “Fair Value Measurement (ASC Topic 820) - Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs.” ASU No. 2011-04 amends current fair value measurement and disclosure guidance to include increased transparency around valuation inputs and investment categorization. The changes to the ASC as a result of this update are effective prospectively for interim and annual periods beginning after December 15, 2011. We are currently evaluating the impact of this ASU on our consolidated financial statements.

In June 2011, the FASB issued ASU No. 2011-05, “Comprehensive Income.” This ASU intends to enhance comparability and transparency of other comprehensive income components. The guidance provides an option to present total comprehensive income, the components of net income and the components of other comprehensive income in a single continuous statement or two separate but consecutive statements. This ASU eliminates the option to present other comprehensive income components as part of the statement of changes in shareowners’ equity. The provisions of this ASU will be applied retrospectively for interim and annual periods beginning after December 15, 2011. Early application is permitted. We are currently evaluating the impact of this new ASU on our consolidated financial statements.

In September 2011, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update No. 2011-08, Intangibles—Goodwill and Other (Topic 350)—Testing Goodwill for Impairment (ASU 2011-08), to allow entities to use a qualitative approach to test goodwill for impairment. Under the new guidance, an entity has the option to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying value. If it is concluded that this is the case, it is necessary to perform the currently prescribed two-step goodwill impairment test. Otherwise, the two-step goodwill impairment test is not required. This guidance is applicable for annual and interim goodwill impairment tests for fiscal years beginning after December 15, 2011. We are currently evaluating this effect of this guidance on our consolidated financial statements.

 

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3. INVENTORIES

At October 1, 2011 and March 31, 2011, inventories consisted of the following:

 

		October 1, 2011				March 31, 2011
Raw materials		$	8,570,720			$	7,730,924
Work in process			6,673,735				6,319,860
Finished goods			1,564,201				1,445,941
			16,808,656				15,496,725
Less: allowance for obsolescence			(1,636,684	)			(1,498,186	)
		$	15,171,972			$	13,998,539

4. PROPERTY, PLANT AND EQUIPMENT

At October 1, 2011 and March 31, 2011, property, plant and equipment consisted of the following:

 

		October 1, 2011				March 31, 2011
Land		$	162,000			$	162,000
Buildings and leasehold improvements			2,096,161				2,072,655
Machinery and equipment			12,482,404				11,865,186
Furniture, fixtures and other			236,521				213,511
			14,977,086				14,313,352
Less: accumulated depreciation			(10,302,923	)			(9,695,363	)
		$	4,674,163			$	4,617,989

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. No triggering events requiring an interim impairment test occurred in the thirteen week period ended October 1, 2011.

The following table presents details of the Company’s finite-lived intangible assets as of October 1, 2011 and March 31, 2011 (in thousands):

 

		Useful Life (years)				October 1, 2011												March 31, 2011
Intangible Assets						Gross Value				Accumulated Amortization				Net Value				Gross Value				Accumulated Amortization				Net Value
Customer relationships (non-contractual)			3-10			$	2,956			$	2,235			$	721			$	2,956			$	2,134			$	822
Trade name			10				260				112				148				260				99				161
Developed technology-drawings			3-5				513				463				50				513				420				93
						$	3,729			$	2,810			$	919			$	3,729			$	2,653			$	1,076

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)
2012 (remainder of year)			157
2013			163
2014			144
2015			144
2016			144
Thereafter			167
Total		$	919

 

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6. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES

At October 1, 2011 and March 31, 2011, accrued expenses and other current liabilities consisted of the following:

 

		October 1, 2011				March 31, 2011
Unbilled payables		$	1,029,016			$	1,105,306
Payroll, benefits and related taxes			1,228,465				1,142,503
Warranty			210,906				255,538
Commissions			107,712				115,659
Customer deposits			408,250				9,215
Fair value of interest rate swap			24,280				58,965
Miscellaneous			30,240				31,143
		$	3,038,869			$	2,718,329

Included in accrued payroll are bonuses of $534,000 and $500,000 at October 1, 2011 and March 31, 2011, respectively.

7. DEBT

At October 1, 2011 and March 31, 2011 long-term debt consisted of the following:

 

		October 1, 2011				March 31, 2011
Term loan			975,000				1,625,000
Capital leases			71,805				168,733
			1,046,805				1,793,733
Less current portion			(1,046,805	)			(1,468,733	)
Long-term debt, net of current portion		$	—			$	325,000

Term Loan and Revolver

In March 2007, the Company entered into a credit facility which consisted of a $6.5 million five year secured term loan and a $5.0 million three year revolving line of credit. In fiscal 2009, the revolving line of credit was extended by two years. On August 13, 2010, the revolving line of credit was increased to $7.5 million and was extended until March 31, 2013.

On September 19, 2011, the Company entered into an amendment to the term loan and revolving line of credit agreement under which the revolving line of credit was increased to $10 million and extended until September 30, 2015. The term loan and revolving line of credit are guaranteed by the Company and its subsidiaries and are 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 October 1, 2011, the interest rate was 8.2%. 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 October 1, 2011, the interest rate was 2.99%. The Company had approximately $3.4 million available under the line of credit at October 1, 2011.

In April 2007, the Company entered into an interest rate swap agreement with an initial notional amount of $6.5 million 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 $975,000 at October 1, 2011.

The Company was in compliance with its bank covenants at October 1, 2011. 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 and a minimum current ratio of 1.25:1.

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 $71,805 for capital lease obligations. The remaining interest associated with the Company’s capital lease obligations amounts to approximately $1,220 over the lease terms.

 

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8. STOCK OPTION PLANS AND STOCK-BASED COMPENSATION

During fiscal 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 stock options to purchase up to 1,000,000 shares of common stock. As of October 1, 2011 there were 520,000 options available for grant 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 Company’s 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.

The following table sets forth the Company’s stock option activity during the twenty-six weeks ended October 1, 2011:

 

		Shares Underlying options				Weighted Average Exercise price				Weighted Average Remaining Contractual life (in years)				Aggregate Intrinsic Value
Outstanding at March 31, 2011			293,000			$	5.43							$	84,025
Granted			195,000				6.84								—
Exercised			(10,000	)			2.99								—
Expired			—				—								—
Forfeited			(10,500	)			4.13								—
Outstanding at October 1, 2011			467,500			$	6.10				8.26			$	410,910
Exercisable at October 1, 2011			152,750			$	6.68				6.30			$	112,305

The following table sets forth the status of the Company’s non-vested stock options as of October 1, 2011:

 

		Number of Options				Weighted-  Average Grant-Date Fair Value
Non-vested as of March 31, 2011			153,875			$	2.70
Granted			195,000				4.26
Forfeited			(9,750	)			2.64
Vested			(24,375	)			2.75
Non-vested as of October 1, 2011			314,750			$	3.67

The following table summarizes the effects of stock-based compensation for the thirteen weeks ended October 1, 2011 and September 25, 2010:

 

		Thirteen Weeks Ended
		October 1, 2011				September 25, 2010
Cost of sales		$	16,116			$	9,364
Selling, general and administrative			50,421				37,261
Stock-based compensation effect on income before taxes		$	66,537			$	46,625

 

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The following table summarizes the effects of stock-based compensation for the twenty-six weeks ended October 1, 2011 and September 25, 2010:

 

		Twenty-Six Weeks Ended
		October 1, 2011				September 25, 2010
Cost of sales		$	25,984			$	21,832
Selling, general and administrative			83,963				80,638
Stock-based compensation effect on income before taxes		$	109,947			$	102,470

Unrecognized stock-based compensation expense related to the unvested options is approximately $1 million, and will be recorded over the remaining vesting period of 4 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.

There were 195,000 options granted during the twenty-six weeks ended October 1, 2011 and no options granted during the twenty-six weeks ended September 25, 2010. The fair value of options issued was estimated at the date of grant using the following weighted-average assumptions for the twenty-six weeks ended October 1, 2011 were as follows:

 

Risk free interest rate			1.40	%
Expected life			6.25 years
Expected volatility			68.39	%
Forfeiture rate			2.92	%
Expected dividend yield			0	%

The per share fair value of stock options granted for the twenty-six weeks ended October 1, 2011 was $4.27.

9. INCOME TAXES

The Company’s effective tax rate was 41.7% for the thirteen weeks ended October 1, 2011 and 42.1% for the thirteen weeks ended September 25, 2010. The Company’s effective tax rate was 40% for the twenty-six weeks ended October 1, 2011 and 42.3% for the twenty-six weeks ended September 25, 2010. The decrease for both periods is primarily due to additional benefits expected for domestic production activities and R&D tax credits offset slightly by an increase for stock compensation for options granted during the thirteen weeks ended October 1, 2011.

As of April 1, 2010, the Company is subject to tax in the U.S. Federal and various state jurisdictions. The Company is open to examination for tax years March 31, 2008 through 2011.

As of October 1, 2011, there are no uncertain tax benefits recognized. The Company’s policy is to recognize interest and penalties accrued on any uncertain tax position as a component of income tax expense, if any.

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 October 1, 2011 and September 25, 2010 are:

 

		Thirteen Weeks Ended
		October 1, 2011				September 25, 2010
Net income		$	1,082,675			$	472,717
Weighted average shares outstanding			4,562,371				4,553,635
Basic earnings per share		$	0.24			$	0.10
Common stock equivalents			23,010				11,714
Weighted average common and common equivalent shares outstanding			4,585,381				4,565,349
Diluted earnings per share		$	0.24			$	0.10

 

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The computations of basic and diluted EPS for the twenty-six weeks ended October 1, 2011 and September 25, 2010 are:

 

		Twenty-Six Weeks Ended
		October 1, 2011				September 25, 2010
Net income		$	1,647,047			$	972,567
Weighted average shares outstanding			4,560,388				4,553,635
Basic earnings per share		$	0.36			$	0.21
Common stock equivalents			14,550				10,008
Weighted average common and common equivalent shares outstanding			4,574,938				4,563,643
Diluted earnings per share		$	0.36			$	0.21

At October 1, 2011 and September 25, 2010, 301,000 and 149,000 stock options, respectively, were excluded from the diluted earnings per share calculation because the effect 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.

 

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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 October 1, 2011 and March 31, 2011.

 

			$000,000				$000,000				$000,000				$000,000
		Fair Value Measurements at October 1, 2011 Using
		Quoted Prices in Active Markets (Level 1)				Significant Other Observable Inputs (Level 2)				Significant Unobservable Inputs (Level 3)				Total Fair Value as of October 1, 2011
Assets:
Money market fund (included in cash and cash equivalents)			—			$	530,000				—			$	530,000
Total assets at fair value			—			$	530,000				—			$	530,000
Liabilities:
Interest rate swap (included in accrued expenses and other current liabilities)			—			$	24,000				—			$	24,000
Total liabilities at fair value			—			$	24,000				—			$	24,000

 

			$000,000				$000,000				$000,000				$000,000
		Fair Value Measurements at March 31, 2011 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, 2011
Assets:
Money market fund (included in cash and cash equivalents)			—			$	740,000				—			$	740,000
Total assets at fair value			—			$	740,000				—			$	740,000
Liabilities:
Interest rate swap (included in accrued expenses and other current liabilities)			—			$	59,000				—			$	59,000
Total liabilities at fair value			—			$	59,000				—			$	59,000

The following provides a summary of the change in fair value for the interest rate swap for the twenty-six weeks ended October 1, 2011:

 

Balance at March 31, 2011		$	59,000
Change in fair value			(35,000	)
Balance at October 1, 2011		$	24,000

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 this asset as level 2. 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 Company estimates the fair value of the term loan at $999,280 as of October 1, 2011.

 

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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 CUSTOMER

The Company sells primarily to original equipment manufacturers of communications equipment in either the commercial or the defense electronics 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 33% of the Company’s consolidated sales for the twenty-six weeks ended October 1, 2011 and 30% for the twenty-six weeks ended September 25, 2010. This same customer accounted for 33% of the Company’s accounts receivable at October 1, 2011 and 35% of the Company’s accounts receivable at March 31, 2011.

 

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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, 2011, 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, 2011, 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 that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and 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 long lived assets, accrued liabilities, and deferred income taxes. 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, 2011.

Recent Accounting Pronouncements

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

 

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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. Our microwave devices are used on subassemblies and integrated systems in addition to being sold on a component basis.

We sell our products primarily to original equipment manufacturers of communications equipment in either the commercial or the defense electronics 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.

Results of Operations

Thirteen Weeks Ended October 1, 2011 compared to September 25, 2010

Net sales

Net sales for the thirteen weeks ended October 1, 2011 (“Q2 FY 12”) were $11,626,692, an increase of $2,642,547, or 29% as compared to $8,984,145 for the thirteen weeks ended September 25, 2010 (“Q2 FY 11”). Sales of both component and integrated component sub-systems increased in response to customer schedule requirements.

Gross margin

Gross margin for Q2 FY 12 was approximately 36% as compared to 34% for Q2 FY 11. The increase in gross margin was primarily a result of favorable product mix.

Research and development

Research and development expense for Q2 FY 12 was $375,186 as compared to $343,927 for Q2 FY 11, an increase of $31,259 or 9%. There were no material activities associated with this increase. 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 Q2 FY 12 was $1,855,087 as compared to $1,740,321 for Q2 FY 11, representing an increase of $114,766 or 7%. The increase was due primarily to the non-recurrence of a bad debt recovery which occurred in the second quarter of FY 2011.

Amortization of intangible assets

Amortization expense attributable to our intangible assets related to previous acquisitions was $78,512 in Q2 FY 12 as compared to $87,024 in Q2 FY 11. The decrease of $8,512 was due to completing amortization of certain intangible assets.

Interest expense

Interest expense for Q2 FY 12 was $72,961 as compared to $107,691 for Q2 FY 11, a decrease of $34,730 or 32%. The decrease was primarily due to lower average interest rates and to a lesser degree by lower average debt in Q2 FY 12 as compared to Q2 FY 11.

 

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Interest rate swap

A positive change in fair value of $88 was recorded for Q2 FY 12 as compared to positive change in fair value of $23,869 recorded in Q2 FY 11 on 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 for Q2 FY 12 was 41.7% as compared to 42.3% for Q2 FY 11. The decrease in the effective tax rate relates primarily to additional benefits for domestic production activities tax deduction and R&D tax credits, offset slightly by stock compensation for options granted during Q2 FY12.

Twenty-six Weeks Ended October 1, 2011 compared to September 25, 2010

Net sales

Net sales for the twenty-six weeks ended October 1, 2011 were $21,665,985, an increase of $3,315,146, or 18% as compared to $18,350,839 for the twenty-six weeks ended September 25, 2010. Sales of both component and integrated component sub-systems increased in response to customer schedule requirements.

Gross margin

Gross margin for the twenty-six weeks ended October 1, 2011 was approximately 34% as compared to 35% for the twenty-six weeks ended September 25, 2010. The decrease in gross margin was a result of increases in our manufacturing cost base to support converting our current backlog into sales combined with start-up costs incurred during Q1 FY12 associated with new contract shipments.

Research and development

Research and development expense for the twenty-six weeks ended October 1, 2011 was $788,881 as compared to $830,938 for the twenty-six weeks ended September 25, 2010, a decrease of $42,057 or 5%. There were no material activities associated with this increase. 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 twenty-six weeks ended October 1, 2011 was $3,612,083 as compared to $3,625,477 for the twenty-six weeks ended September 25, 2010, representing a decrease of $13,394 or less than 1%. There were no material items associated with this change.

Amortization of intangible assets

Amortization expense attributable to our intangible assets related to previous acquisitions was $157,023 in the twenty-six weeks ended October 1, 2011 as compared to $174,048 in the twenty-six weeks ended September 25, 2010. The decrease of $17,025 was due to completing amortization of certain intangible assets.

Interest expense

Interest expense for the twenty-six weeks ended October 1, 2011 was $154,571 as compared to $213,227 for the twenty-six weeks ended September 25, 2010, a decrease of $58,656 or 28%. The decrease was primarily due to lower average interest rates in the first half of FY 12 as compared to the first half of FY 11.

Interest rate swap

A positive change in fair value of $34,685 was recorded for the twenty-six weeks ended October 1, 2011 as compared to positive change in fair value of $55,409 recorded in the twenty-six weeks ended September 25, 2010 on 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 for the twenty-six weeks ended October 1, 2011 was 40% as compared to 42.3% for the twenty-six weeks ended September 25, 2010. The decrease in the effective tax rate relates primarily to additional benefits for domestic production activities tax deduction and R&D tax credits offset slightly for stock compensation related to options granted during Q2 FY12.

 

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Backlog

Our backlog was approximately $29 million as of October 1, 2011 and September 25, 2010.

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 $534,642 and $745,116, respectively, at October 1, 2011 and March 31, 2011. Working capital defined as accounts receivable, unbilled revenue, inventory, prepaid expenses, other current assets net of accounts payable, accrued expenses and deferred revenue was $16,836,123 and $15,086,387 at October 1, 2011 and March 31, 2011, respectively. Borrowings under our revolving line of credit were $6,631,364 and $6,714,319 at October 1, 2011 and March 31, 2011, respectively.

Our current ratio was approximately 1.87 at October 1, 2011 and 1.74 at March 31, 2011, respectively.

In the twenty-six weeks ended October 1, 2011 net cash provided by operating activities was $1,253,293 as compared to $462,642 for the twenty-six weeks ended September 25, 2010.

In the twenty-six weeks ended October 1, 2011, cash provided by net income after adjusting for non-cash items including depreciation, amortization, stock-based compensation, changes in working capital reserves and a change in the fair value of an interest rate swap was approximately $2.7 million. Approximately $1.4 million was used for working capital needs. Of this amount, approximately $1.3 million was used to fund inventory requirements as a result of increased sales levels, approximately $0.1 million was used for receivables and unbilled/deferred revenue and approximately $0.4 million was used for accounts payable and accrued expenses. In addition $0.4 million was provided by a reduction in prepaid tax assets.

In the twenty-six weeks ended September 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 a change in the fair value of an interest rate swap was approximately $2.0 million. Approximately $1.4 million was used for working capital needs. Of this amount, approximately $1.2 million was used to fund inventory requirements as a result of increased sales levels, approximately $0.3 million was used for receivables and unbilled/deferred revenue and approximately $0.1 million was provided by prepaid tax asset utilization. In addition the use of $0.1 million 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.

Net cash used in investing activities was $663,734 during the twenty-six weeks ended October 1, 2011 as compared to $628,496 in the twenty-six weeks ended September 25, 2010. In the twenty-six weeks ended October 1, 2011 and September 25, 2010, investing activities was solely comprised of capital expenditures.

Net cash used for financing activities was $800,033 during the twenty-six weeks ended October 1, 2011 as compared to cash provided by financing activities of $576,674 during the twenty-six weeks ended September 25, 2010.

In the twenty-six weeks ended October 1, 2011, we repaid approximately $0.1 million towards our line of credit, repaid term debt of approximately $0.6 million and paid approximately $0.1 million for capital lease obligations.

In the twenty-six weeks ended September 25, 2010, we borrowed approximately $1.2 million from our line of credit, repaid term debt of approximately $0.6 million and paid approximately $0.1 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.

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.

 

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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 the third quarter of fiscal 2009 we extended the term of the revolving line of credit for two years. On August 13, 2010, the revolving line of credit was increased to $7.5 million and was extended until March 31, 2013.

On September 19, 2011 we entered into an amendment to the term loan and revolving line of credit agreement pursuant to the revolving line of credit was increased to $10 million and extended until September 30, 2015.

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.

At October 1, 2011 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 and a minimum current ratio of 1.25:1.

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. 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 October 1, 2011, we had approximately $3.4 million available under the line of credit.

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. Included in the current portion of long-term debt is $71,805 for capital lease obligations. The remaining interest associated with our capital lease obligations amounts to approximately $1,220 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 currently 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 October 1, 2011, 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 October 1, 2011 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 second quarter of fiscal 2012 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, 2011, 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, 2011.

 

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Item 6.

Exhibits.

 

10.1		Employment Agreement, dated as of July 22, 2011, between Micronetics, Inc. and David Robbins (incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K filed by the Company on July 28, 2011)
10.2		Severance Agreement, dated as of August 29, 2011, between Micronetics, Inc. and Carl Lueders (incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K filed by the Company on August 31, 2011)
10.3		Amendment to Commercial Loan Agreement and Loan Documents, by and between, Micronetics, Inc., Microwave & Video Systems, Inc., Microwave Concepts, Inc., Stealth Microwave, Inc., MICA Microwave Corporation and RBS Citizens National Association (successor by merger to Citizens Bank New Hampshire), dated September 19, 2011 (incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K filed by the Company on September 22, 2011)
10.4		Amended and Restated Revolving Credit Note, dated September 19, 2011 issued by Micronetics, Inc. to RBS Citizens National Association (successor by merger to Citizens Bank New Hampshire) (incorporated by reference to Exhibit 10.2 to the Current Report on Form 8-K filed by the Company on September 22, 2011)
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.
101.INS		XBRL Instance Document
101.SCH		XBRL Taxonomy Extension Schema Document
101.CAL		XBRL Taxonomy Calculation Linkbase Document
101.DEF		XBRL Taxonomy Extension Definition Linkbase Document
101.LAB		XBRL Taxonomy Label Linkbase Document
101.PRE		XBRL Taxonomy Presentation Linkbase Document

 

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Table of Contents

SIGNATURES

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: November 4, 2011		By:		/S/    DAVID ROBBINS
				David Robbins
				Chief Executive Officer and Treasurer (Principal Executive Officer)
Dated: November 4, 2011		By:		/S/    CARL LUEDERS
				Carl Lueders
				Chief Financial Officer (Principal Financial and Accounting Officer)

 

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