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Table of Contents

 

 

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 31, 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 February 1, 2012, the issuer had 4,570,635 shares of common stock, par value $.01 per share, outstanding.

 

 

 


Table of Contents

MICRONETICS, INC.

INDEX

 

         Page No.  

Part I.

  Financial Information:   

Item 1.

  Financial Statements (unaudited)   
 

Consolidated Balance Sheets – December 31, 2011 and March 31, 2011

     3   
 

Consolidated Statements of Operations – Thirteen Weeks Ended December 31, 2011 and December 25, 2010

     4   
 

Consolidated Statements of Operations – Thirty-Nine Weeks Ended December 31, 2011 and December 25, 2010

     5   
 

Consolidated Statement of Shareholders’ Equity – Thirty-Nine Weeks Ended December 31, 2011

     6   
 

Consolidated Statements of Cash Flows – Thirty-Nine Weeks Ended December 31, 2011 and December 25, 2010

     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      23   

 

2


Table of Contents

PART I. FINANCIAL INFORMATION

 

Item 1. Financial Statements

MICRONETICS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

 

     December 31, 2011     March 31, 2011  
     (Unaudited)        

ASSETS

    

Current assets:

    

Cash and cash equivalents

   $ 723,446      $ 745,116   

Accounts receivable, net of allowance for doubtful accounts of $545,248 and $511,532 at December 31, 2011 and March 31, 2011, respectively

     5,925,073        5,706,837   

Inventories, net

     14,197,247        13,998,539   

Deferred tax asset

     1,553,887        1,553,887   

Prepaid income taxes

     —          406,072   

Prepaid expenses and other current assets

     326,665        218,984   
  

 

 

   

 

 

 

Total current assets

     22,726,318        22,629,435   
  

 

 

   

 

 

 

Property, plant and equipment, net

     4,750,095        4,617,989   

Other assets:

    

Security deposits

     97,079        97,079   

Other long term assets

     4,122        10,304   

Intangible assets, net

     840,360        1,075,895   

Goodwill

     1,117,197        1,117,197   
  

 

 

   

 

 

 

Total other assets

     2,058,758        2,300,475   
  

 

 

   

 

 

 

TOTAL ASSETS

   $ 29,535,171      $ 29,547,899   
  

 

 

   

 

 

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

    

Current liabilities:

    

Current portion of long-term debt

   $ 664,902      $ 1,468,733   

Line of credit

     4,241,883        6,714,319   

Accounts payable

     1,414,012        2,088,784   

Accrued expenses and other current liabilities

     3,732,546        2,718,329   

Income tax payable

     55,854        —     

Deferred revenue

     441,328        30,860   
  

 

 

   

 

 

 

Total current liabilities

     10,550,525        13,021,025   

Long-term debt, net of current portion

     —          325,000   

Deferred tax liability

     1,267,681        1,267,681   
  

 

 

   

 

 

 

Total liabilities

     11,818,206        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; 5,408,217 issued, 4,570,635 outstanding at December 31, 2011 and 5,393,717 issued, 4,556,135 outstanding at March 31, 2011

     54,082        53,937   

Additional paid-in capital

     12,513,826        12,280,641   

Retained earnings

     8,129,570        5,580,128   
  

 

 

   

 

 

 
     20,697,478        17,914,706   

Treasury stock at cost, 837,582 shares at December 31, 2011 and March 31, 2011

     (2,980,513     (2,980,513
  

 

 

   

 

 

 

Total shareholders’ equity

     17,716,965        14,934,193   
  

 

 

   

 

 

 

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY

   $ 29,535,171      $ 29,547,899   
  

 

 

   

 

 

 

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

 

3


Table of Contents

MICRONETICS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

 

     Thirteen Weeks Ended  
     December 31, 2011     December 25, 2010  

Net sales

   $ 12,045,932      $ 7,601,372   

Cost of sales

     8,336,172        5,265,794   
  

 

 

   

 

 

 

Gross margin

     3,709,760        2,335,578   
  

 

 

   

 

 

 

Operating expenses:

    

Research and development

     301,835        447,197   

Selling, general and administrative

     1,792,120        1,755,689   

Gain on sale of asset

     —          (10,000

Amortization of intangible assets

     78,512        73,326   
  

 

 

   

 

 

 

Total operating expenses

     2,172,467        2,266,212   
  

 

 

   

 

 

 

Income from operations

     1,537,293        69,366   
  

 

 

   

 

 

 

Other income (expense):

    

Interest income

     965        258   

Interest expense

     (49,145     (84,222

Change in fair value of interest rate swap

     12,617        27,084   

Miscellaneous income

     2,261        2,797   
  

 

 

   

 

 

 

Total other expense

     (33,302     (54,083
  

 

 

   

 

 

 

Income before provision for income taxes

     1,503,991        15,283   

Provision (benefit) for income taxes

     601,596        (85,840
  

 

 

   

 

 

 

Net income

   $ 902,395      $ 101,123   
  

 

 

   

 

 

 

Earnings per common share

    

Basic

   $ 0.20      $ 0.02   
  

 

 

   

 

 

 

Diluted

   $ 0.20      $ 0.02   
  

 

 

   

 

 

 

Weighted average common shares outstanding

    

Basic

     4,567,014        4,555,119   

Diluted

     4,612,500        4,568,344   

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

 

4


Table of Contents

MICRONETICS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

 

 

     Thirty-Nine Weeks Ended  
     December 31, 2011     December 25, 2010  

Net sales

   $ 33,711,917      $ 25,952,211   

Cost of sales

     22,583,390        17,141,061   
  

 

 

   

 

 

 

Gross margin

     11,128,527        8,811,150   
  

 

 

   

 

 

 

Operating expenses:

    

Research and development

     1,090,716        1,278,135   

Selling, general and administrative

     5,404,203        5,381,166   

Net loss on disposal of asset

     —          3,560   

Amortization of intangible assets

     235,535        247,374   
  

 

 

   

 

 

 

Total operating expenses

     6,730,454        6,910,235   
  

 

 

   

 

 

 

Income from operations

     4,398,073        1,900,915   
  

 

 

   

 

 

 

Other income (expense):

    

Interest income

     2,410        551   

Interest expense

     (203,716     (297,449

Change in fair value of interest rate swap

     47,302        82,493   

Miscellaneous income

     7,084        15,615   
  

 

 

   

 

 

 

Total other expense

     (146,920     (198,790
  

 

 

   

 

 

 

Income before provision for income taxes

     4,251,153        1,702,125   

Provision for income taxes

     1,701,711        628,435   
  

 

 

   

 

 

 

Net income

   $ 2,549,442      $ 1,073,690   
  

 

 

   

 

 

 

Earnings per common share

    

Basic

   $ 0.56      $ 0.24   
  

 

 

   

 

 

 

Diluted

   $ 0.56      $ 0.24   
  

 

 

   

 

 

 

Weighted average common shares outstanding

    

Basic

     4,562,522        4,554,137   

Diluted

     4,583,167        4,565,041   

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

 

5


Table of Contents

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

     —           —           193,355         —           —          193,355   

Exercise of stock options

     14,500         145         39,830         —           —          39,975   

Net income

     —           —           —           2,549,442         —          2,549,442   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Balance at December 31, 2011

     4,570,635       $ 54,082       $ 12,513,826       $ 8,129,570       $ (2,980,513   $ 17,716,965   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

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

 

6


Table of Contents

MICRONETICS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

     Thirty-Nine Weeks Ended  
     December 31, 2011     December 25, 2010  

Cash flow from operating activities:

    

Net income

   $ 2,549,442      $ 1,073,690   

Adjustments to reconcile net income to net cash provided by operating activities:

    

Depreciation and amortization

     1,145,099        1,191,941   

Stock-based compensation

     193,355        145,032   

Change in fair value of interest rate swap

     (47,302     (82,493

Deferred taxes

     —          179,837   

Loss on disposal of assets

     —          3,560   

Provision for doubtful accounts

     33,715        19,610   

Provision for inventory obsolescence and losses

     293,178        207,952   

Deferred taxes related to non-qualified stock options

     —          (116,660

Changes in operating assets and liabilities:

    

Accounts receivable

     (251,953     1,538,411   

Unbilled revenue

     —          219,958   

Inventories

     (491,886     (1,944,981

Other long term assets

     6,182        6,183   

Prepaid income taxes

     406,072        (189,502

Prepaid expenses, other current assets, and other assets

     (107,679     (61,993

Accounts payable

     (674,771     (1,221,444

Accrued expenses

     1,061,519        73,408   

Income tax payable

     55,855        —     

Deferred revenue

     410,468        (170,582
  

 

 

   

 

 

 

Net cash provided by operating activities

     4,581,294        871,927   
  

 

 

   

 

 

 

Cash flows from investing activities:

    

Capital expenditures

     (1,041,671     (690,067

Proceeds from sale of assets

     —          10,000   
  

 

 

   

 

 

 

Net cash used in investing activities

     (1,041,671     (680,067
  

 

 

   

 

 

 

Cash flows from financing activities:

    

Net (payments) proceeds from line of credit

     (2,472,436     1,436,970   

Repayments on term loan

     (975,000     (975,000

Repayments of capital leases

     (153,832     (199,672

Proceeds from exercise of stock options

     39,975        5,625   

Additional paid-in capital charge related to cancellation of non-qualified stock options

     —          116,660   
  

 

 

   

 

 

 

Net cash (used in) provided by financing activities

     (3,561,293     384,583   
  

 

 

   

 

 

 

Net change in cash and cash equivalents

     (21,670     576,443   

Cash and cash equivalents at beginning of period

     745,116        482,442   
  

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 723,446      $ 1,058,885   
  

 

 

   

 

 

 

Supplemental disclosure of cash flow information:

    

Cash paid during the period for:

    

Interest

   $ 220,565      $ 303,100   
  

 

 

   

 

 

 

Income taxes

   $ 1,240,000      $ 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.

 

7


Table of Contents

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 December 31, 2011 and the results of operations for the thirteen and thirty-nine weeks ended December 31, 2011 and December 25, 2010.

The results of operations for the thirteen and thirty-nine weeks ended December 31, 2011 are not necessarily indicative of the results to be expected for the full year ending March 31, 2012.

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 third 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 December 31, 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.

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.

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.

 

8


Table of Contents

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 the early adoption of this guidance in connection with its testing for goodwill impairment as of March 31, 2012.

3. INVENTORIES

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

 

 

     December 31, 2011     March 31, 2011  

Raw materials

   $ 8,707,977      $ 7,730,924   

Work in process

     5,674,907        6,319,860   

Finished goods

     1,605,728        1,445,941   
  

 

 

   

 

 

 
     15,988,612        15,496,725   

Less: allowance for obsolescence

     (1,791,365     (1,498,186
  

 

 

   

 

 

 
   $ 14,197,247      $ 13,998,539   
  

 

 

   

 

 

 

 

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Table of Contents

4. PROPERTY, PLANT AND EQUIPMENT

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

 

 

     December 31, 2011     March 31, 2011  

Land

   $ 162,000      $ 162,000   

Buildings and leasehold improvements

     2,096,161        2,072,655   

Machinery and equipment

     12,860,341        11,865,186   

Furniture, fixtures and other

     236,521        213,511   
  

 

 

   

 

 

 
     15,355,023        14,313,352   

Less: accumulated depreciation

     (10,604,928     (9,695,363
  

 

 

   

 

 

 
   $ 4,570,095      $ 4,617,989   
  

 

 

   

 

 

 

5. INTANGIBLE ASSETS AND GOODWILL

The Company tests goodwill for impairment annually as of year end 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 thirty-nine week period ended December 31, 2011.

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

 

     Useful
Life
(years)
     December 31, 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       $ 2,286       $ 670       $ 2,956       $ 2,134       $ 822   

Trade name

     10         260         119         141         260         99         161   

Developed technology-drawings

     3-5         513         484         29         513         420         93   
     

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
      $ 3,729       $ 2,889       $ 840       $ 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)

   $ 78   

2013

     163   

2014

     144   

2015

     144   

2016

     144   

Thereafter

     167   
  

 

 

 

Total

   $ 840   
  

 

 

 

6. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES

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

 

     December 31, 2011      March 31, 2011  

Unbilled payables

   $ 1,174,417       $ 1,105,306   

Payroll, benefits and related taxes

     1,729,636         1,142,503   

Warranty

     228,974         255,538   

Commissions

     108,971         115,659   

Customer deposits

     462,894         9,215   

Fair value of interest rate swap

     11,663         58,965   

Miscellaneous

     15,991         31,143   
  

 

 

    

 

 

 
   $ 3,732,546       $ 2,718,329   
  

 

 

    

 

 

 

Included in accrued payroll are bonuses of $717,425 and $500,000 at December 31, 2011 and March 31, 2011, respectively.

 

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7. DEBT

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

 

 

     December 31, 2011     March 31, 2011  

Term loan

   $ 650,000      $ 1,625,000   

Capital leases

     14,902        168,733   
  

 

 

   

 

 

 
     664,902        1,793,733   

Less current portion

     (664,902     (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 December 31, 2011, 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 31, 2011, the interest rate was 3.04%. The Company had approximately $5.7 million available under the line of credit at December 31, 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 $650,000 at December 31, 2011.

The Company was in compliance with its bank covenants at December 31, 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.

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 December 31, 2011 there were 511,000 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.

 

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The following table sets forth the Company’s stock option activity during the thirty-nine weeks ended December 31, 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

     204,000        6.82            —     

Exercised

     (14,500     2.76            —     

Expired

     —          —              —     

Forfeited

     (10,500     4.13            —     
  

 

 

   

 

 

    

 

 

    

 

 

 

Outstanding at December 31, 2011

     472,000      $ 6.14         8.05       $ 854,415   
  

 

 

   

 

 

    

 

 

    

 

 

 

Exercisable at December 31, 2011

     158,250      $ 6.79         6.04       $ 173,500   
  

 

 

   

 

 

    

 

 

    

 

 

 

The following table sets forth the status of the Company’s non-vested stock options as of December 31, 2011:

 

 

     Number of
Options
    Weighted- Average
Grant-Date Fair
Value
 

Non-vested as of March 31, 2011

     153,875      $ 2.70   

Granted

     204,000        4.26   

Forfeited

     (9,750     2.64   

Vested

     (34,375     3.13   
  

 

 

   

 

 

 

Non-vested as of December 31, 2011

     313,750      $ 3.66   
  

 

 

   

 

 

 

The following table summarizes the effects of stock-based compensation for the thirteen weeks ended December 31, 2011 and December 25, 2010:

 

     Thirteen Weeks Ended  
     December 31, 2011      December 25, 2010  

Cost of sales

   $ 16,049       $ 8,537   

Selling, general and administrative

     67,358         34,025   
  

 

 

    

 

 

 

Stock-based compensation effect on income before taxes

   $ 83,408       $ 42,562   
  

 

 

    

 

 

 

The following table summarizes the effects of stock-based compensation for the thirty-nine weeks ended December 31, 2011 and December 25, 2010:

 

     Thirty-Nine Weeks Ended  
     December 31, 2011      December 25, 2010  

Cost of sales

   $ 42,034       $ 30,369   

Selling, general and administrative

     151,321         114,663   
  

 

 

    

 

 

 

Stock-based compensation effect on income before taxes

   $ 193,355       $ 145,032   
  

 

 

    

 

 

 

Unrecognized stock-based compensation expense related to the unvested options is approximately $.9 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 9,000 options granted during the thirteen weeks ended December 31, 2011 and no options granted during the thirteen weeks ended December 25, 2010. The fair value of options issued was estimated at the date of grant using the following weighted-average assumptions for the thirty-nine weeks ended December 31, 2011 were as follows:

 

Risk free interest rate

     1.39

Expected life

     6.25 years   

Expected volatility

     68.41

Forfeiture rate

     2.92

Expected dividend yield

     0

The per share fair value of stock options granted for the thirteen weeks ended December 31, 2011 was $4.07.

 

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9. INCOME TAXES

The Company’s effective tax rate was 40% for the thirteen and thirty-nine weeks ended December 31, 2011. There were no significant true-up adjustments in the thirteen weeks ended December 31, 2011 related to the filing of our fiscal 2011 tax return.

Before considering the effect of discrete items, the effective tax rate for the thirteen and thirty-nine weeks ended December 25, 2010 was 39.5%. 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.

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, 2009 through 2011.

As of December 31, 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 December 31, 2011 and December 25, 2010 are:

 

     Thirteen Weeks Ended  
     December 31, 2011      December 25, 2010  

Net income

   $ 902,395       $ 101,123   

Weighted average shares outstanding

     4,567,014         4,555,119   

Basic earnings per share

   $ 0.20       $ 0.02   

Common stock equivalents

     45,486         13,225   

Weighted average common and common equivalent shares outstanding

     4,612,500         4,568,344   

Diluted earnings per share

   $ 0.20       $ 0.02   

The computations of basic and diluted EPS for the thirty-nine weeks ended December 31, 2011 and December 25, 2010 are:

 

     Thirty-Nine Weeks Ended  
     December 31, 2011      December 25, 2010  

Net income

   $ 2,549,442       $ 1,073,690   

Weighted average shares outstanding

     4,562,522         4,554,137   

Basic earnings per share

   $ 0.56       $ 0.24   

Common stock equivalents

     20,645         10,904   

Weighted average common and common equivalent shares outstanding

     4,583,167         4,565,041   

Diluted earnings per share

   $ 0.56       $ 0.24   

At December 31, 2011 and December 25, 2010, 81,000 and 129,000 stock options, respectively, were excluded from the diluted earnings per share calculation because the effect would have been anti-dilutive.

 

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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 31, 2011 and March 31, 2011.

 

 

     Fair Value Measurements at December 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
December 31, 2011
 

Assets:

           

Money market fund (included in cash and cash equivalents)

     —         $ 718,000         —         $ 718,000   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total assets at fair value

     —         $ 718,000         —         $ 718,000   
  

 

 

    

 

 

    

 

 

    

 

 

 

Liabilities:

           

Interest rate swap (included in accrued expenses and other current liabilities)

     —         $ 12,000         —         $ 12,000   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total liabilities at fair value

     —         $ 12,000         —         $ 12,000   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

 

     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   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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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 31, 2011:

 

 

Balance at March 31, 2011

   $ 59,000   

Change in fair value

     (47,000
  

 

 

 

Balance at December 31, 2011

   $ 12,000   
  

 

 

 

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 $681,663 as of December 31, 2011.

12. RELATED PARTY TRANSACTION

On December 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 Exelis, accounted for 34% of the Company’s consolidated sales for the thirty-nine weeks ended December 31, 2011 and 24% for the thirty-nine weeks ended December 25, 2010. This same customer accounted for 32% of the Company’s accounts receivable at December 31, 2011 and 35% of the Company’s accounts receivable at March 31, 2011.

 

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Table of Contents
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.

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 subsystems. 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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Table of Contents

Results of Operations

Thirteen Weeks Ended December 31, 2011 compared to December 25, 2010

Net sales

Net sales for the thirteen weeks ended December 31, 2011 (“Q3 FY 12”) were $12,045,932, an increase of $4,444,560, or 58% as compared to $7,601,372 for the thirteen weeks ended December 25, 2010 (“Q3 FY 11”). The increase in sales was due to a combination of increased integrated component subsystems sales and returning to a normal shipping level as Q3 FY 11 was lower than normal while we implemented new operating procedures.

Gross margin

Gross margin for Q3 FY 12 was approximately 31% which was unchanged from gross margin of 31% for Q3 FY 11. Q3 FY 12 gross margin percentage was adversely affected by development costs associated with a defense sub-system contract and start-up costs associated with a commercial sub-system contract. Q3 FY 11 gross margin percentage was adversely affected by a delay in shipments while we implemented new operating procedures.

Research and development

Research and development expense for Q3 FY 12 was $301,835 as compared to $447,197 for Q3 FY 11, a decrease of $145,362 or 33%. There were no material activities associated with this decrease. 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 12 was $1,792,120 as compared to $1,755,689 for Q3 FY 11, representing an increase of $36,431 or 2%. 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 $78,512 in Q3 FY 12 as compared to $73,326 in Q3 FY 11.

Interest expense

Interest expense for Q3 FY 12 was $49,145 as compared to $84,222 for Q3 FY 11, a decrease of $35,077 or 42%. The decrease was due to a combination of lower average interest rates and lower average debt in Q3 FY 12 as compared to Q3 FY 11.

Interest rate swap

A positive change in fair value of $12,617 was recorded for Q3 FY 12 as compared to positive change in fair value of $27,084 recorded in Q3 FY 11 on the interest rate swap agreement entered into in April 2007 to mitigate interest rate fluctuations on our term loan.

Provision (benefit) for income taxes

Our effective tax rate was 40% for Q3 FY 12. There were no significant true-up adjustments in Q3 FY 12 related to the filing of our fiscal 2011 tax return.

Before considering the effect of discrete items, our effective tax rate for Q3 FY 11 was 39.5%. 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.

Thirty-nine Weeks Ended December 31, 2011 compared to December 25, 2010

Net sales

Net sales for the thirty-nine weeks ended December 31, 2011 were $33,711,917, an increase of $7,759,706, or 30% as compared to $25,952,211 for the thirty-nine weeks ended December 25, 2010. The increase in sales was due to a combination of increased integrated component subsystems sales, increased component sales and returning to a normal shipping level as Q3 FY 11 was lower than normal while we implemented new operating procedures.

Gross margin

Gross margin for the thirty-nine weeks ended December 31, 2011 was approximately 33% as compared to 34% for the thirty-nine weeks ended December 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 associated with new contract shipments and development costs associated with a defense sub-system contract.

 

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Research and development

Research and development expense for the thirty-nine weeks ended December 31, 2011 was $1,090,716 as compared to $1,278,135 for the thirty-nine weeks ended December 25, 2010, a decrease of $187,419 or 15%. There were no material activities associated with this decrease. 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 31, 2011 was $5,404,203 as compared to $5,381,166 for the thirty-nine weeks ended December 25, 2010, an increase of $23,037 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 $235,535 in the thirty-nine weeks ended December 31, 2011 as compared to $247,374 in the thirty-nine weeks ended December 25, 2010. The decrease of $11,839 was due to completing amortization of certain intangible assets.

Interest expense

Interest expense for the thirty-nine weeks ended December 31, 2011 was $203,716 as compared to $297,449 for the thirty-nine weeks ended December 25, 2010, a decrease of $93,733 or 32%. The decrease was primarily due to lower average interest rates.

Interest rate swap

A positive change in fair value of $47,302 was recorded for the thirty-nine weeks ended December 31, 2011 as compared to positive change in fair value of $82,493 recorded in the thirty-nine weeks ended December 25, 2010 on the interest rate swap agreement entered into in April 2007 to mitigate interest rate fluctuations on our term loan. $11,663 remains to be amortized related to the interest rate swap. This amount will be amortized into income in the fourth quarter of FY 2012 and the term loan will be fully paid on April 1, 2012.

Provision for income taxes

Our effective tax rate for the thirty-nine weeks ended December 31, 2011 was 40% as compared to 39.5% for the thirty-nine weeks ended December 25, 2010.

Backlog

Our backlog was approximately $26 million as of December 31, 2011 and $27 million at December 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 $723,446 and $745,116, respectively, at December 31, 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 $14,861,099 and $15,086,387 at December 31, 2011 and March 31, 2011, respectively. Borrowings under our revolving line of credit were $4,241,883 and $6,714,319 at December 31, 2011 and March 31, 2011, respectively.

Our current ratio was approximately 2.15 at December 31, 2011 and 1.74 at March 31, 2011, respectively.

In the thirty-nine weeks ended December 31, 2011 net cash provided by operating activities was $4,581,294 as compared to $871,927 for the thirty-nine weeks ended December 25, 2010.

In the thirty-nine weeks ended December 31, 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 $4.2 million. Approximately $.4 million was provided by working capital needs. Of this amount, approximately $.5 million was used to fund inventory requirements, approximately $0.1 million was provided by receivables and unbilled/deferred revenue and approximately $0.4 million was provided by an increase in accounts payable and accrued expenses. In addition $0.4 million was provided by a reduction in prepaid tax assets.

 

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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. The increase in inventory was also due in part to support product shipment requirements associated with our existing backlog.

Net cash used in investing activities was $1,041,671 during the thirty-nine weeks ended December 31, 2011 as compared to $680,067 in the thirty-nine weeks ended December 25, 2010. In the thirty-nine weeks ended December 31, 2011 and December 25, 2010, investing activities was solely comprised of capital expenditures.

Net cash used for financing activities was $3,561,293 during the thirty-nine weeks ended December 31, 2011 as compared to cash provided by financing activities of $384,583 during the thirty-nine weeks ended December 25, 2010.

In the thirty-nine weeks ended December 31, 2011, we repaid approximately $2.5 million towards our line of credit, repaid term debt of approximately $1.0 million and paid approximately $0.1 million for capital lease obligations.

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.

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 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 which 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 December 31, 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 December 31, 2011, we had approximately $5.7 million available under the line of credit.

 

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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 December 31, 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 December 31, 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 third 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.

 

  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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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: February 2, 2012     By:   /s/    DAVID ROBBINS        
      David Robbins
     

Chief Executive Officer and Treasurer

(Principal Executive Officer)

 

Dated: February 2, 2012     By:   /S/    CARL LUEDERS        
      Carl Lueders
     

Chief Financial Officer

(Principal Financial and Accounting Officer)

 

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