UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
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x
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QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the quarterly period ended June 27, 2009
OR
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¨
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TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the transition period from
to
.
Commission file number 0-17966
MICRONETICS, INC.
(Exact name of small business issuer as specified in its
charter)
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Delaware
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22-2063614
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(State or other jurisdiction of
incorporation or organization)
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(IRS Employer
Identification No.)
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26 Hampshire Drive, Hudson NH
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03051
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(Address of principal executive offices)
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(Zip Code)
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(603) 883-2900
(Issuer’s telephone number)
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant
(1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes
x
No
¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such
files). Yes
¨
No
¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer”
and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
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Large accelerated filer
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¨
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Accelerated filer
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¨
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Non-accelerated filer
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¨
(Do not check if a smaller reporting company)
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Smaller reporting company
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x
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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 July 31, 2009, the issuer had 4,553,635 shares of common stock, par value $.01 per share, outstanding.
MICRONETICS, INC.
INDEX
2
MICRONETICS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
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June 27, 2009
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March 31, 2009
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ASSETS
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Current assets:
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Cash
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$
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388,370
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$
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620,259
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Accounts receivable, net of allowance for doubtful accounts of $496,941 and $449,799 at June 27, 2009 and March 31, 2009,
respectively
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5,571,875
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4,980,924
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Inventories, net
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9,586,563
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9,436,210
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Deferred tax asset
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1,464,958
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1,464,958
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Prepaid income taxes
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1,077,716
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1,068,832
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Prepaid expenses and other current assets
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255,160
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276,222
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Total current assets
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18,344,642
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17,847,405
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Property, plant and equipment, net
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4,650,078
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4,703,529
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Other assets:
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Security deposits
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90,376
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86,839
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Other long term assets
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24,730
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26,791
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Intangible assets, net
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1,657,667
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1,744,691
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Goodwill
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1,117,197
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1,117,197
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Total other assets
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2,889,970
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2,975,518
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TOTAL ASSETS
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$
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25,884,690
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$
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25,526,452
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LIABILITIES AND SHAREHOLDERS’ EQUITY
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Current liabilities:
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Current portion of long-term debt
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$
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1,532,810
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$
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1,588,175
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Line of credit
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4,179,878
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3,502,620
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Accounts payable
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1,265,211
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1,070,831
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Accrued expenses and other current liabilities
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2,739,749
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3,141,424
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Deferred revenue
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200,000
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—
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Total current liabilities
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9,917,648
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9,303,050
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Long-term debt, net of current portion
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2,735,050
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3,085,290
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Other long-term liability
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6,200
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6,200
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Deferred tax liability
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901,722
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901,722
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Total liabilities
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13,560,620
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13,296,262
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Shareholders’ equity:
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Preferred stock, $0.10 par value; 100,000 shares authorized; no shares issued or outstanding
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—
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—
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Common stock, $0.01 par value; 10,000,000 shares authorized; 5,391,217 issued, 4,553,635 outstanding at June 27, 2009 and March 31,
2009
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53,912
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53,912
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Additional paid-in capital
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12,348,265
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12,242,320
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Retained earnings
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2,902,406
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2,914,471
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15,304,583
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15,210,703
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Treasury stock at cost, 837,582 shares at June 27, 2009 and March 31, 2009
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(2,980,513
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)
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(2,980,513
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)
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Total shareholders’ equity
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12,324,070
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12,230,190
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TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY
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$
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25,884,690
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$
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25,526,452
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The accompanying notes are an integral part of these consolidated financial statements.
3
MICRONETICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
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Thirteen Weeks Ended
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June 27, 2009
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June 28, 2008
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Net sales
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$
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7,912,956
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$
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7,086,657
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Cost of sales
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5,436,471
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4,108,487
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Gross profit
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2,476,485
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2,978,170
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Operating expenses:
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Research and development
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306,422
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342,093
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Selling, general and administrative
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2,023,743
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2,199,587
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Amortization of intangible assets
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87,023
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177,106
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Total operating expenses
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2,417,188
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2,718,786
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Income from operations
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59,297
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259,384
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Other income (expense):
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Interest income
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34
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13,954
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Interest expense
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(130,230
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)
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(98,867
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)
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Unrealized gain on interest rate swap
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35,683
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102,801
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Miscellaneous income
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14,585
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6,355
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Total other (expense) income
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(79,928
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)
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24,243
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(Loss) income before provision for income taxes
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(20,631
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)
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283,627
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Benefit (provision) for income taxes
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8,566
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(126,021
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)
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Net (loss) income
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$
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(12,065
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)
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$
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157,606
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(Loss) income per common share
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Basic
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$
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—
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$
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0.03
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Diluted
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$
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—
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$
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0.03
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Weighted average common shares outstanding
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Basic
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4,553,635
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5,000,270
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Diluted
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4,553,635
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5,007,914
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The accompanying notes are an integral part of these consolidated financial statements.
4
MICRONETICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY
(Unaudited)
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Common Stock
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Additional
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Retained
Earnings
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Treasury
Stock
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Total
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Shares
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Par
Value
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Paid-In
Capital
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Balance at March 31, 2009
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4,553,635
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$
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53,912
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$
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12,242,320
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$
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2,914,471
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$
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(2,980,513
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)
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$
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12,230,190
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Stock based compensation
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—
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—
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105,945
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—
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—
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105,945
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Net loss
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—
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—
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—
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(12,065
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)
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—
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(12,065
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)
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Balance at June 27, 2009
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4,553,635
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$
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53,912
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$
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12,348,265
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$
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2,902,406
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$
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(2,980,513
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)
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$
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12,324,070
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The accompanying notes are an integral part of these consolidated financial statements.
5
MICRONETICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
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Thirteen Weeks Ended,
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June 27, 2009
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June 28, 2008
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Cash flow from operating activities:
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Net (loss) income
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$
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(12,065
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)
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$
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157,606
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Adjustments to reconcile net (loss) income to net cash (used in) provided by operating activities:
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Depreciation and amortization
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378,577
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445,344
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Stock-based compensation
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105,945
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209,546
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Unrealized gain on interest rate swap
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(35,683
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)
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(102,801
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)
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Provision for allowances on accounts receivable
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47,142
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21,977
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Provision for inventory obsolescence and losses
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64,510
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33,689
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Changes in operating assets and liabilities:
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Accounts receivable
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(638,093
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)
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1,032,632
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Inventories
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(214,862
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)
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(852,868
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)
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Other long term assets
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2,061
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2,061
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Prepaid income taxes
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(8,884
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)
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|
—
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Prepaid expenses, other current assets, and other assets
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17,525
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(432,862
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)
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Accounts payable
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194,379
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(319,702
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)
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Accrued expenses
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(365,991
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)
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182,736
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Deferred revenue
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200,000
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—
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|
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Net cash (used in) provided by operating activities
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(265,439
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)
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377,358
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Cash flows from investing activities:
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|
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Proceeds from sale of investments
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—
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400,000
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Purchase of equipment
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(238,103
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)
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|
|
(170,698
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)
|
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MICA acquisition, net of cash acquired
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|
—
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|
|
|
20,522
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|
|
|
|
|
|
|
|
|
|
|
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Net cash (used in) provided by investing activities
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|
|
(238,103
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)
|
|
|
249,824
|
|
|
|
|
|
|
|
|
|
|
|
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Cash flows from financing activities:
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|
|
|
|
|
|
|
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Proceeds from line of credit
|
|
|
677,258
|
|
|
|
—
|
|
|
Repayments on term loan and mortgages
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|
|
(325,000
|
)
|
|
|
(359,514
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)
|
|
Repayments of capital leases
|
|
|
(80,605
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)
|
|
|
(881
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities
|
|
|
271,653
|
|
|
|
(360,395
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net change in cash
|
|
|
(231,889
|
)
|
|
|
266,787
|
|
|
Cash at beginning of period
|
|
|
620,259
|
|
|
|
3,163,415
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash at end of period
|
|
$
|
388,370
|
|
|
$
|
3,430,202
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow information:
|
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|
|
|
|
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|
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|
Cash paid during the period for:
|
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
108,220
|
|
|
$
|
100,647
|
|
|
|
|
|
|
|
|
|
|
|
|
Income taxes
|
|
$
|
318
|
|
|
$
|
660,000
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of non-cash financing activities:
|
|
|
|
|
|
|
|
|
|
Equipment acquired under capital leases
|
|
$
|
—
|
|
|
$
|
58,241
|
|
The accompanying notes are an integral part of these consolidated financial statements.
6
MICRONETICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1.
BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting
principles generally accepted in the United States of America (“US GAAP”) for interim financial information and the rules of the Securities and Exchange Commission for quarterly reports on Form 10-Q. It is suggested that these consolidated
condensed financial statements be read in conjunction with the Company’s Annual Report on Form 10-K for its fiscal year ended March 31, 2009. 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 June 27, 2009, the results of operations for the thirteen weeks ended June 27, 2009 and June 28, 2008.
The Company reports its fiscal quarters using 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 first quarter of Fiscal 2010 has 88 days as compared to 89 in the first quarter of Fiscal 2009. The
Company’s fiscal year end is still March 31.
The results of operations for the thirteen weeks ended June 27, 2009 are not
necessarily indicative of the results to be expected for the full year ended March 31, 2010.
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, Inc. (“Micronetics”) and its wholly-owned subsidiaries, Microwave & Video Systems, Inc. (“MVS”), Microwave Concepts, Inc. (“MicroCon”), Stealth Microwave, Inc. (“Stealth”)
and MICA Microwave Corporation (“MICA”).
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, purchase price allocation, intangibles, accrued liabilities, and deferred income taxes and various other assumptions that it believes are reasonable under the
circumstances. Actual results could differ from those estimates.
Revenue recognition
—The Company generates revenue from the
sale of products, technology development, and licensing. Revenue is recognized when persuasive evidence of an arrangement exists, delivery of product has occurred or services have been rendered, the price to the customer is fixed or determinable,
collection is reasonably assured, and no future services are required. The Company’s products are primarily hardware components, and to a lesser extent integrated assembly 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 enters into contracts for production of highly customized microwave and radio frequency components and integrated sub-assemblies which it accounts for in accordance with SOP 81-1, “Accounting for Performance of Construction-Type and
Certain Production-Type of Contracts.” For these types of contracts, the Company 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. Deferred revenue represents billings in excess of revenue recognized.
The Company sells its products
using a direct sales force and sales representatives. Contracts with customers do not include product return rights or price protection. The estimated costs of product warranties are accrued based on historical experience at the time the revenue is
recognized. Unless customers purchase an extended warranty, Micronetics offers a one-year warranty.
7
Recently adopted accounting pronouncements
—The Provisions of SFAS 157, as issued, are
effective for the fiscal years beginning after November 15, 2007. In February 2008, the FASB issued FASB Staff Position No. 157-2, “
Effective Date of FASB Statement No. 157
”, (“FSP 157-2”) that amended SFAS
157 to delay the effective date for all non-financial assets and non-financial liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis (that is, at least annually). FSP 157-2 defers
the effective date of SFAS 157 to fiscal years beginning after November 15, 2008, and interim periods within those fiscal years for items within the scope. On April 1, 2009, the Company implemented the provisions of SFAS 157. The adoption
of SFAS 157-2 did not have any effect on the Company’s consolidated financial statements.
In December 2007, the FASB issued
Statement of Financial Accounting Standards No. 141(Revised), “
Business Combinations”
(“SFAS 141R”), which replaces Statement of Financial Accounting Standards No. 141, “
Business Combinations”
(“SFAS 141”). SFAS 141R requires the assets acquired, liabilities assumed, and any non-controlling interest to be measured at their fair values as of the acquisition date. SFAS 141R also requires expensing of acquisition related
costs and restructuring costs, and re-measurement of earn out provisions at fair value. SFAS 141R is effective for any of the Company’s business combinations on or after April 1, 2009. On April 1, 2009, the Company implemented the
provisions of SFAS 141R. The adoption of SFAS 141R did not have any effect on the Company’s consolidated financial statements. Prospectively all acquisitions will conform to SFAS No. 141R.
In December 2007, the FASB issued Statement of Financial Accounting Standards No. 160, “
Noncontrolling Interests in Consolidated
Financial Statements”
(“SFAS 160”). SFAS 160 clarifies the accounting and reporting standards for the noncontrolling interest in a subsidiary, including classification as a component of equity. SFAS 160 is effective for the
Company on April 1, 2009. On April 1, 2009, the Company implemented the provisions of SFAS 160. The adoption of SFAS 160 did not have any effect on the Company’s consolidated financial statements.
In March 2008, the FASB issued Statement of Financial Accounting Standards No. 161,
“Disclosures About Derivative Instruments and Hedging
Activities, an Amendment of Statement No. 133
” (“SFAS 161”). SFAS 161 expands the disclosure requirements in Statement 133 about an entity’s derivative instruments and hedging activities. SFAS 161 is effective for fiscal
years and interim periods beginning after November 15, 2008. On April 1, 2009, the Company implemented the provisions of SFAS 161. The adoption of SFAS 161 did not have any effect on the Company’s consolidated financial statements.
In April 2008, the FASB issued Staff Position No. FAS 142-3, “
Determination of the Useful Life of Intangible Assets
”
(“FSP FAS 142-3”). FSP FAS 142-3 amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under SFAS 142, Goodwill and Other Intangible
Assets (“SFAS 142”). The intent of FSP FAS 142-3 is to improve the consistency between the useful life of a recognized intangible asset under SFAS 142 and the period of expected cash flows used to measure the fair value of the asset under
SFAS 141(R) and other applicable accounting literature. FSP FAS 142-3 is effective for fiscal years beginning after December 15, 2008. On April 1, 2009, the Company implemented the provisions of FSP FAS 142-3. The adoption of FSP FAS 142-3
did not have any effect on the Company’s consolidated financial statements.
In June 2008, the FASB issued Staff Position (FSP”)
Emerging Issue Task Force (EITF”) Issue No. 03-6-1,
Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities
” (FSP EITF 03-6-1”). FSP EITF 03-6-1 provides that unvested
share-based payment awards that contain non-forfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities and shall be included in the computation of earnings per share pursuant to the two-class
method. FSP EITF 03-6-1 is effective for fiscal years beginning after December 15, 2008. Upon adoption, a company is required to retrospectively adjust its earnings per share data, including any amounts related to interim periods, summaries of
earnings and selected financial data, to conform to the provisions of FSP EITF 03-6-1. On April 1, 2009, the Company implemented the provisions of FSP EITF 03-6-1. The adoption of FSP EITF 03-6-1 did not have any effect on the Company’s
consolidated financial statements.
In November 2008, the FASB ratified Emerging Issues Task Force Issue No. 08-7,
Accounting for
Defensive Intangible Assets
. EITF 08-7 clarifies the accounting for certain separately identifiable intangible assets which an acquirer does not intend to actively use but intends to hold to prevent its competitors from obtaining access to them.
EITF 08-7 requires an acquirer in a business combination to account for a defensive intangible asset as a separate unit of accounting which should be amortized to expense over the period the asset diminishes in value. EITF 08-7 is effective for
fiscal years beginning after December 15, 2008, with early adoption prohibited. On April 1, 2009, the Company implemented the provisions of EITF 08-7. The adoption of EITF 08-7 did not have any effect on the Company’s consolidated
financial statements.
8
In April 2009, the FASB issued FSP FAS 107-1 and Accounting Principles Board (APB) 28-1,
Interim
Disclosures about Fair Value of Financial Instruments
. The FSP amends SFAS No. 107,
Disclosures about Fair Value of Financial Instruments
to require an entity to provide disclosures about fair value of financial instruments in
interim financial information. This FSP is to be applied prospectively and is effective for interim and annual periods ending after June 15, 2009 with early adoption permitted for periods ending after March 15, 2009. On April 1, 2009
the Company adopted FSP FAS 107-1. The adoption of FSP FAS 107-1 did not have any effect on the Company’s consolidated financial statements. See Note 11, “Fair Value Measurements.”
In May 2009, the FASB issued SFAS 165, “
Subsequent Events
” (“SFAS 165”). The objective of SFAS 165 is to establish general
standards of accounting for the disclosure of events after the balance sheet date but before financial statements are issued or are available to be issued. SFAS 165 clarifies the period after the balance sheet date that the reporting entity should
evaluate events or transactions and clarifies the circumstances that may potentially require recognition or disclosure in the financial statements. Additionally, the reporting entity is required to disclosure the date through which the entity has
evaluated subsequent events and the basis for that date. SFAS 165 is effective for financial statements issued for interim and annual periods ending after June 15, 2009. The Company evaluated its June 27, 2009 financial statements for
subsequent events through August 7, 2009, the date the financial statements were available to be issued. The Company is not aware of any subsequent events which would require recognition or disclosure in the financial statements.
In June 2009, the Financial Accounting Standards Board, or FASB, issued Statement No. 168, or SFAS No.168,
The FASB Accounting Standards
Codification and the Hierarchy of Generally Accepted Accounting Principles
. SFAS No.168 will become the single source of authoritative nongovernmental U.S. generally accepted accounting principles, or GAAP, superseding existing FASB, American
Institute of Certified Public Accountants, or AICPA, Emerging Issues Task Force, or EITF, and related accounting literature. SFAS No.168 reorganizes the thousands of GAAP pronouncements into roughly 90 accounting topics and displays them using a
consistent structure. Also included is relevant Securities and Exchange Commission guidance organized using the same topical structure in separate sections. SFAS No.168 will be effective for financial statements issued for reporting periods that end
after September 15, 2009. As a result, SFAS No.168 is effective for the Company for the interim period ending September 26, 2009. The adoption of SFAS No. 168 will not have a material impact on our financial statements. However, the
adoption of SFAS No. 168 will change our references to GAAP in our consolidated financial statements.
3. INVENTORIES, NET
At June 27, 2009 and March 31, 2009, inventories consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
June 27, 2009
|
|
|
March 31, 2009
|
|
|
Raw materials
|
|
$
|
6,127,977
|
|
|
$
|
6,222,709
|
|
|
Work in process
|
|
|
3,859,344
|
|
|
|
3,588,857
|
|
|
Finished goods
|
|
|
1,163,896
|
|
|
|
1,164,901
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11,151,217
|
|
|
|
10,976,467
|
|
|
|
|
|
|
Less: allowance for obsolescence
|
|
|
(1,564,654
|
)
|
|
|
(1,540,257
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
9,586,563
|
|
|
$
|
9,436,210
|
|
|
|
|
|
|
|
|
|
|
|
4. PROPERTY, PLANT AND EQUIPMENT, NET
At June 27, 2009 and March 31, 2009, property, plant and equipment, net consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
June 27, 2009
|
|
|
March 31, 2009
|
|
|
Land
|
|
$
|
162,000
|
|
|
$
|
162,000
|
|
|
Buildings and leasehold improvements
|
|
|
1,353,632
|
|
|
|
1,317,657
|
|
|
Machinery and equipment
|
|
|
10,611,694
|
|
|
|
10,409,567
|
|
|
Furniture, fixtures and other
|
|
|
244,171
|
|
|
|
244,171
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12,371,497
|
|
|
|
12,133,395
|
|
|
Less: accumulated depreciation
|
|
|
(7,721,419
|
)
|
|
|
(7,429,866
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
4,650,078
|
|
|
$
|
4,703,529
|
|
|
|
|
|
|
|
|
|
|
|
9
5. INTANGIBLE ASSETS AND GOODWILL
In accordance with SFAS No. 142, Goodwill and Other Intangible Assets, (SFAS No. 142), 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.
The following table presents details of the
Company’s finite-lived intangible assets as of June 27, 2009 and March 31, 2009 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangible Assets
|
|
Useful
Life
(years)
|
|
June 27, 2009
|
|
March 31, 2009
|
|
|
|
Gross
Value
|
|
Accumulated
Amortization
|
|
Impairment
Charge
|
|
Net
Value
|
|
Gross
Value
|
|
Accumulated
Amortization
|
|
Impairment
Charge
|
|
Net
Value
|
|
Customer relationships (non-contractual)
|
|
3-10
|
|
$
|
4,251
|
|
$
|
1,778
|
|
$
|
1,295
|
|
$
|
1,178
|
|
$
|
4,251
|
|
$
|
1,728
|
|
$
|
1,295
|
|
$
|
1,228
|
|
Covenants not to compete
|
|
2
|
|
|
480
|
|
|
480
|
|
|
—
|
|
|
—
|
|
|
480
|
|
|
480
|
|
|
—
|
|
|
—
|
|
Order backlog
|
|
1
|
|
|
380
|
|
|
380
|
|
|
—
|
|
|
—
|
|
|
380
|
|
|
380
|
|
|
—
|
|
|
—
|
|
Trade Name
|
|
10
|
|
|
260
|
|
|
54
|
|
|
—
|
|
|
206
|
|
|
260
|
|
|
47
|
|
|
—
|
|
|
213
|
|
Developed technology- drawings
|
|
5
|
|
|
513
|
|
|
239
|
|
|
—
|
|
|
274
|
|
|
513
|
|
|
209
|
|
|
—
|
|
|
304
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total intangibles
|
|
|
|
$
|
5,884
|
|
$
|
2,931
|
|
$
|
1,295
|
|
$
|
1,658
|
|
$
|
5,884
|
|
$
|
2,844
|
|
$
|
1,295
|
|
$
|
1,745
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During the third quarter of Fiscal 2009, the Company recorded an impairment charge of $1,295,000
related to the customer relationship intangible asset of its high performance amplifier business.
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:
|
|
|
|
|
|
|
|
(in thousands)
|
|
Remainder of 2010
|
|
$
|
261
|
|
2011
|
|
|
321
|
|
2012
|
|
|
314
|
|
2013
|
|
|
163
|
|
2014
|
|
|
144
|
|
Thereafter
|
|
|
455
|
|
|
|
|
|
|
Total
|
|
$
|
1,658
|
|
|
|
|
|
Changes in the carrying amount of goodwill at June 27, 2009 and March 31, 2009 are as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
June 27, 2009
|
|
March 31, 2009
|
|
|
Balance at the beginning of the period
|
|
$
|
1,117,197
|
|
$
|
8,931,944
|
|
|
Impairment charges
|
|
|
—
|
|
|
(7,964,916
|
)
|
|
Purchase accounting adjustments
|
|
|
—
|
|
|
150,169
|
|
|
|
|
|
|
|
|
|
|
|
Balance at the end of the period
|
|
$
|
1,117,197
|
|
$
|
1,117,197
|
|
|
|
|
|
|
|
|
|
|
During the third quarter of Fiscal 2009, the Company recorded impairment charges of $7,964,916
related to the goodwill for its high performance amplifier and mixer/ferrite reporting units.
6. ACCRUED EXPENSES
At June 27, 2009 and March 31, 2009 accrued expenses consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
June 27, 2009
|
|
March 31, 2009
|
|
Unbilled payables
|
|
$
|
838,503
|
|
$
|
1,125,365
|
|
Professional fees
|
|
|
26,438
|
|
|
7,607
|
|
Payroll, benefits and related taxes
|
|
|
1,220,955
|
|
|
1,373,688
|
|
Warranty
|
|
|
114,004
|
|
|
136,763
|
|
Unrealized loss on interest rate swap
|
|
|
244,967
|
|
|
280,650
|
|
Miscellaneous
|
|
|
294,882
|
|
|
217,351
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,739,749
|
|
$
|
3,141,424
|
|
|
|
|
|
|
|
|
Included in accrued payroll are bonuses of $563,320 and $403,322 at June 27, 2009 and
March 31, 2009.
10
7. LONG-TERM DEBT
At June 27, 2009 and March 31, 2009 long-term debt consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
June 27, 2009
|
|
|
March 31, 2009
|
|
|
Term loan
|
|
|
3,900,000
|
|
|
|
4,225,000
|
|
|
Capital leases
|
|
|
367,860
|
|
|
|
448,465
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
4,267,860
|
|
|
|
4,673,465
|
|
|
Less current portion
|
|
|
(1,532,810
|
)
|
|
|
(1,588,175
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt, net of current portion
|
|
$
|
2,735,050
|
|
|
$
|
3,085,290
|
|
|
|
|
|
|
|
|
|
|
|
Term Loan and Revolver
In March 2007, the Company entered into a credit facility which consists of a $6.5 million five year secured term loan and a $5.0 million three year revolving line of credit, which expires in March 2012. The term loan
is guaranteed by the Company’s subsidiaries and secured by substantially all of the Company’s assets. The term loan is payable in quarterly principal installments of $325,000 plus accrued interest at the rate of 5.2% plus the applicable
margin. At June 27, 2009, our interest rate was 8.95%. The final payment for the term loan is in April 2012. The revolving line of credit bears interest at LIBOR plus the applicable margin. At June 27, 2009, our interest rate was 4.56%. The Company
had $820,000 available under the line at June 27, 2009.
The Company entered into an interest rate swap agreement with a notional
amount of $6.5 million in April 2007 to mitigate the effect of interest rate fluctuations on the term loan. The interest rate swap was not designated as a hedging instrument at the initiation of the swap, and therefore the Company has not applied
hedge accounting. As a result, at the end of each reporting period, the change in value of the interest rate swap is recorded on the consolidated balance sheet, with any related gains or losses charged to earnings. For the thirteen weeks ended
June 27, 2009, the Company recorded an unrealized gain of $35,683 in the statement of operations to reflect the change in estimated fair value for the interest rate swap in the consolidated statement of operations. The net unrealized loss on
the interest rate swap amounted to approximately $245,000 at June 27, 2009.
Under the terms of the term loan and the revolver, the
Company is required to maintain certain financial covenants on a quarterly and annual basis, including total funded debt to EBITDA not exceeding 2.25:1, minimum debt service coverage of 1.25:1, a minimum current ratio of 1.25:1 and minimum tangible
net worth of $7.5 million. The Company obtained an amendment to the term loan and revolver agreements to include the goodwill and intangible asset impairment charges as an add-back to the EBITDA covenants. The Company also obtained an Amendment and
Waiver Agreement to the term loan and revolver agreements to waive the EBITDA covenants for the thirteen weeks ended June 27, 2009 and to substitute modified quarterly EBITDA covenants through March 31, 2010. Under the terms of the
amendment, the interest rate will increase from a maximum of LIBOR plus 2.5% to a maximum of LIBOR plus 4.25% for the revolving line of credit and a maximum adjusted LIBOR plus 3.75% for the term loan. The rate decreases to a minimum of LIBOR plus
2.5% based upon future performance. The Company does not expect the change in rate will have a material adverse affect on its cash flows for Fiscal 2010. At June 27, 2009 the Company was in compliance with the terms of its amended bank
agreement.
Capital leases
Commercial
capital leases payable are reflected at their present value based upon interest rates that range from 6.4% to 10.6% 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 $232,810 for capital lease obligations. Included in long-term debt net of current portion is $135,050 for capital lease obligations. The remaining interest associated with the Company’s capital lease
obligations amounts to approximately $24,000 over the lease terms.
8. STOCK OPTION PLANS AND STOCK- BASED COMPENSATION
At June 27, 2009, the Company had two stock option plans under which grants were outstanding. The stock options outstanding are for grants issued
under the Company’s 2003 Stock Option Plan and the 2006 Equity Incentive Plan.
The 2003 Stock Incentive Plan
During the fiscal year ended March 31, 2004, the Company adopted a stock option plan entitled “The 2003 Stock Incentive Plan” (the
“2003 Plan”) under which the Company may grant options to purchase up to 900,000 shares of common stock plus any shares of common stock remaining available for issuance as of July 22, 2003 under the 1996 Stock Option Plan. In
July 2006, the Board of Directors determined that it would not issue any new option awards under the 2003 Plan. As of June 27, 2009, there were 396,375 options outstanding under the 2003 Plan.
11
The 2006 Equity Incentive Plan
During the fiscal year ending March 31, 2007, the Company adopted a stock option plan entitled “The 2006 Equity Incentive Plan” (the “2006 Plan”) under which the Company may grant shares of
restricted stock or options to purchase up to 1,000,000 shares of common stock. As of June 27, 2009 there were 363,000 options outstanding under the 2006 Plan.
The 2003 Plan and the 2006 Plan are 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 2003 Plan and 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 2003 Plan and the 2006 Plan may not be less than the fair market value of the shares of common stock on the date of
grant, and may not be granted more than ten years from the date of adoption of each respective 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 thirteen weeks ended June 27, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
Underlying
options
|
|
|
Weighted
Average
Exercise
price
|
|
Weighted
Average
Remaining
Contractual
life
|
|
Aggregate
Intrinsic
Value
|
|
Outstanding at March 31, 2009
|
|
699,125
|
|
|
$
|
7.78
|
|
|
|
$
|
—
|
|
Granted
|
|
69,000
|
|
|
|
2.77
|
|
|
|
|
60,900
|
|
Exercised
|
|
—
|
|
|
|
—
|
|
|
|
|
—
|
|
Canceled
|
|
(8,750
|
)
|
|
|
7.50
|
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at June 27, 2009
|
|
759,375
|
|
|
$
|
7.78
|
|
4.36
|
|
$
|
60,900
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at June 27, 2009
|
|
486,125
|
|
|
$
|
7.71
|
|
2.12
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table sets forth the status of the Company’s non-vested stock options as of
June 27, 2009:
|
|
|
|
|
|
|
|
|
|
|
Number of
Options
|
|
|
Weighted-Average
Grant-Date
Fair
Value
|
|
Non-vested as of March 31, 2009
|
|
314,500
|
|
|
$
|
4.61
|
|
Granted
|
|
69,000
|
|
|
|
1.77
|
|
Forfeited
|
|
(8,000
|
)
|
|
|
4.07
|
|
Vested
|
|
(102,250
|
)
|
|
|
4.11
|
|
|
|
|
|
|
|
|
|
Non-vested as of June 27, 2009
|
|
273,250
|
|
|
$
|
8.35
|
|
|
|
|
|
|
|
|
During the year ended March 31, 2008, the Company granted options to purchase 10,000 shares
of common stock with an exercise price of $8.40 to a former employee. In the fourth quarter of Fiscal 2008, 5,000 options vested and the remaining options vested on July 31, 2008. The options have a contractual life of 10 years. The Company
valued the options under SFAS 123(R) at the fair value on the date of grant using the Black-Scholes options-pricing model. The Company recorded $23,981 in compensation expense for the thirteen weeks ended June 28, 2008 related to the
non-employee options.
The following table summarizes the effects of stock-based compensation resulting from the application of SFAS
No. 123(R) for the thirteen weeks ended June 27, 2009 and June 28, 2008:
|
|
|
|
|
|
|
|
|
|
|
Thirteen Weeks Ended
|
|
|
|
June 27, 2009
|
|
June 28, 2008
|
|
Cost of sales
|
|
$
|
10,695
|
|
$
|
14,530
|
|
Selling, general and administrative
|
|
|
95,250
|
|
|
195,016
|
|
|
|
|
|
|
|
|
|
Stock-based compensation effect in income before taxes
|
|
$
|
105,945
|
|
$
|
209,546
|
|
|
|
|
|
|
|
|
Unrecognized stock-based compensation expense related to the unvested options is approximately
$1,031,000, and will be recorded over the remaining vesting periods of 2.98 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.
12
The Company granted 25,000 shares of restricted stock to an employee under the 2006 Equity Incentive Plan
on November 14, 2007. The shares were issued at a purchase price of $.01 per share. The fair value of the restricted stock was determined based on the fair value of the Company’s common stock on the grant date. Upon issuance of the
restricted stock 10,000 shares vested, with the remaining 15,000 shares to vest twenty percent upon the completion of each quarterly period thereafter. The stock fully vested on August 14, 2008. As a result of the issuance of the restricted
stock, the Company recognized $39,500 in compensation expense during the thirteen weeks ended June 28, 2008.
There were 69,000
options granted during the thirteen weeks ended June 27, 2009 and 15,000 options granted during the thirteen weeks ended June 28, 2008. The fair value of options issued were estimated at the date of grant with the following
weighted-average assumptions for the thirteen weeks ended June 27, 2009 and June 28, 2008.
|
|
|
|
|
|
|
|
|
|
|
June 27, 2009
|
|
|
June 28, 2008
|
|
|
Risk free interest rate
|
|
2.93
|
%
|
|
3.55
|
%
|
|
Expected life
|
|
6.25 years
|
|
|
6.13 years
|
|
|
Expected volatility
|
|
67.09 – 69.42
|
%
|
|
61
|
%
|
|
Forfeiture rate
|
|
2.92
|
%
|
|
2.92
|
%
|
|
Expected dividend yield
|
|
0
|
%
|
|
0
|
%
|
The per share weighted average fair value of stock options granted for the thirteen weeks ended
June 27, 2009 and June 28, 2008 was $1.77 and $4.15, respectively.
9. INCOME TAXES
The Company’s effective tax rate was 42% and 44% for the thirteen weeks ended June 27, 2009 and June 28, 2008.
The Company’s adoption of FIN No. 48 on April 1, 2007 resulted in the recognition of $96,443 of previously uncertain tax benefits which,
in accordance with FIN No. 48, the cumulative amount was accounted for as an adjustment to the April 1, 2007 retained earnings balance in the first quarter of Fiscal 2008.
The amount of uncertain tax benefits as of June 27, 2009 was $6,200, which, if ultimately recognized, will reduce the Company’s annual
effective tax rate. 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.
As of April 1, 2009, 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, 2006 through 2008.
10. EARNINGS PER SHARE
Basic (loss) earnings per
share, or EPS, is computed based on the net loss or income for each period divided by the weighted average actual shares outstanding during the period. Diluted (loss) earnings per share is computed based on the net loss or income 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 June 27, 2009 and June 28, 2008 are:
|
|
|
|
|
|
|
|
|
|
|
|
Thirteen Weeks Ended
|
|
|
|
June 27, 2009
|
|
|
June 28, 2008
|
|
Net (loss) income
|
|
$
|
(12,065
|
)
|
|
$
|
157,606
|
|
Weighted average shares outstanding
|
|
|
4,553,635
|
|
|
|
5,000,270
|
|
Basic (loss) earnings per share
|
|
$
|
—
|
|
|
$
|
0.03
|
|
Common stock equivalents
|
|
|
—
|
|
|
|
7,644
|
|
Weighted average common and common equivalent shares outstanding
|
|
|
4,553,635
|
|
|
|
5,007,914
|
|
Diluted (loss) earnings per share
|
|
$
|
—
|
|
|
$
|
0.03
|
13
11. FAIR VALUE MEASUREMENTS
The Company adopted the provisions of SFAS 157 for financial assets and liabilities effective April 1, 2008. SFAS 157 clarifies the definition of 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, SFAS 157 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, consistent with SFAS 157, include the following as of June 27, 2009.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at June 27, 2009 Using
|
|
|
|
|
|
Quoted Prices
in Active
Markets
(Level 1)
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
Total Fair
Value as of
June 27, 2009
|
|
Money market fund
|
|
—
|
|
$
|
332,000
|
|
—
|
|
$
|
332,000
|
|
Interest rate swap
|
|
—
|
|
$
|
245,000
|
|
—
|
|
$
|
245,000
|
The following provides a summary of the change in fair value for the interest rate swap as of
June 27, 2009:
|
|
|
|
|
|
|
Balance at April 1, 2009
|
|
$
|
280,000
|
|
|
Unrealized gain
|
|
|
(35,000
|
)
|
|
|
|
|
|
|
|
Balance at June 27, 2009
|
|
$
|
245,000
|
|
|
|
|
|
|
|
The fair value of the money market fund was determined by using available market prices for the
underlying securities. There has been no change in the fair value of the money market fund since March 31, 2009. 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.
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.
Both Stephen N. Barthelmes, Jr., a director of Micronetics and President of Micronetics’ subsidiary
Stealth Microwave, Inc., and Kevin Beals, President of Micronetics, are members of the Landlord. Mr. Barthelmes and Mr. Beals own twenty-one percent and sixteen percent, respectively, 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.
14
|
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, 2009, 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, 2009, and in the other documents that we file with the Securities and Exchange Commission. You can read these documents at www.sec.gov. If any of these
risks, or other risks not presently known to us or that we currently believe are not significant, develops into an actual event, then our business, financial condition and results of operations could be adversely affected. If that happens, the
market price of our common stock could decline.
Critical Accounting Policies and Estimates
The discussion and analysis of our financial condition and the results of operations are based on our consolidated financial statements and the data used
to prepare them. Our consolidated financial statements have been prepared based on accounting principles generally accepted in the United States of America. On an on-going basis, we evaluate our judgments and estimates including those related to
allowances for doubtful accounts and sales returns, inventory valuation and obsolescence, long-lived assets, business combination purchase price allocation and goodwill impairment, stock-based compensation, warranty obligations, and the valuation
allowance on our deferred tax asset. These estimates and judgments are based on historical experience and various other assumptions that are believed to be reasonable under current business conditions and circumstances. Actual results may differ
from these estimates under different assumptions or conditions.
There have been no changes to our critical accounting policies from those
described in our annual report on Form 10-K for the fiscal year ended March 31, 2009.
Recent Accounting Pronouncements
We discuss recently adopted and issued accounting standards in Item 1. Notes to Consolidated Financial Statements – Note 2.
Overview
Micronetics designs and manufactures
high-end 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 that are used to test the strength, durability and integrity of signals in communications equipment. Our products are embedded in a variety of radars,
electronic warfare systems, guidance systems, wireless telecommunications and satellite equipment.
We sell our products primarily to
original equipment manufacturers of communications equipment in either the commercial or the defense electronic marketplace. Many of our customers are prime contractors for defense work or Fortune 500 companies with world-wide operations.
A key driver of demand for Micronetics’ 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.
15
Results of Operations
Thirteen Weeks Ended June 27, 2009 compared to June 28, 2008
Net sales
Net sales for the thirteen weeks ended June 27, 2009 (“Q1 FY 10”) were $7,912,956, an increase of $826,299, or 12% as compared to
$7,086,657 for the thirteen weeks ended June 28, 2008 (“Q1 FY 09”). The increase in net sales is primarily attributable to an increase in sales of integrated component sub-systems.
Gross profit margin
Gross margin for Q1 FY 10 was
approximately 31% as compared to 42% for Q1 FY 09. The decrease is due primarily to weakness in our commercial components and start-up costs associated with the March 2009 acquisition of our RFID product line.
Research and development
Research and development
(“R&D”) expense for Q1 FY 10 was $306,422 as compared to $342,093 for Q1 FY 09 or a decrease of $35,671 or 1%. 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. The amount of reduction in research and development expense in Q1 FY 10 as compared to FY Q1 09 reflects normal variability in the context of our product development requirements. We
expect total year research and development expense for Fiscal 2010 to be lower than Fiscal 2009 due to lower spending requirements for in-flight, high-speed internet transceiver and commercial telecom products.
Selling, general and administrative
Selling, general
and administrative (“SG&A”) expense for Q1 FY 10 was $2,023,743 as compared to $2,199,587 for Q1 FY 09, representing a decrease of $175,844 or 8%. Approximately half of the reduction is due to cost reductions in our commercial
components business, which have experienced sales and margin erosion. The remaining other half of the reduction is primarily due to lower non-cash stock compensation expense.
Amortization of intangible assets
Amortization expense attributable to our intangible assets related
to the acquisitions of Stealth, MICA and RFID was $87,023 in Q1 FY 10 as compared to $177,106 in Q1 FY 09 or a decrease of $90,083. Approximately $110,000 of the decrease was due to an intangible asset impairment charge, which we recorded in the
third quarter of Fiscal 2009, which was offset in part by an increase of approximately $20,000 associated with the acquisition of our RFID product line.
Interest expense
Interest expense for Q1 FY 10 was $130,230 as compared to $98,867 for Q1 FY 09 or an increase of $31,363.
The increase was primarily due to higher average borrowings during Q1 FY 10 offset in part by lower average interest rates.
Interest rate swap
An unrealized gain of $35,683 was recorded for Q1 FY 10 as compared to $102,801 recorded in Q1 FY 09 to reflect the change in fair value of
the mark to market valuation for the interest rate swap agreement entered into in April 2007 to mitigate the interest rate fluctuations on our term loan.
Provision for income taxes
Our effective tax rate for Q1 FY 10 was 42% as compared to 44% for Q1 FY 09.
Backlog
Our backlog is approximately $27 million as
of June 27, 2009 as compared to approximately $23 million as of June 28, 2008. The increase in our backlog is primarily a result of orders for integrated sub-assemblies.
16
Financial Condition, Liquidity and Capital Resources
We finance our operating and investment requirements primarily through operating cash flows and borrowings. Cash equivalents and marketable securities was
$388,370 and $620,259, respectively, at June 27, 2009 and March 31, 2009. Working capital defined as accounts receivable, inventory, prepaid expenses, other current assets net of accounts payable and accrued expenses was $12,486,354 and
$11,549,933 at June 27, 2009 and March 31, 2009, respectively. Borrowings under our revolving line of credit were $4,179,878 and $3,502,620 at June 27, 2009 and March 31, 2009, respectively.
Our current ratio was approximately 1.84 at June 27, 2009 as compared to 1.92 at March 31, 2009.
Net cash used in operating activities was $265,439 in Q1 FY 10 compared to cash provided by operating activities of $377,358 during Q1 FY 09. In Q1 FY
10, cash provided by net loss 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 $548,000.
Approximately $814,000 was used to fund working capital needs, principally receivables of approximately $.6 million and inventory of approximately $.2 million.
In Q1 FY 09, 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 $765,000. Approximately $388,000 was used to fund working capital needs. Of this amount, approximately $1 million was provided by the collection of receivables offset by approximately $.9 million used to fund increases in
inventory. Approximately $0.4 million was used to fund prepaid expenses and approximately $.1 million was used to fund accounts payable and accrued expenses.
Net cash used in investing activities was $238,103 during Q1 FY 10 as compared to cash provided by investing activities of $249,824 in Q1 FY 09. Q1 FY 10 investing activities was solely comprised of purchased
equipment. In Q1 FY 09, we sold investments of $.4 million offset by purchased equipment of $.2 million.
Net cash provided by financing
activities was $271,653 during Q1 FY 10 as compared to cash used in financing activities of $360,395 during Q1 FY 09.
In Q1 FY 10, we
borrowed approximately $.7 million from our line of credit and repaid term debt and capital lease obligations of approximately $.4 million. In Q1 FY 09, we repaid mortgage and term debt obligations of approximately $.4 million.
In summary, during Q1 FY 10 we used cash of approximately $.2 million and drew on our revolving line of credit for an additional approximately $.7
million for a total use of approximately $.9 million. We generated cash of approximately $.6 million from net income after adjusting for non-cash items. We used approximately $.8 million to fund accounts receivable and inventory, approximately $.4
million to repay debt and approximately $.2 million for capital expenditures.
In Q1 FY 10, we applied for a federal tax refund associated
with our prepaid tax asset. In July, we received the refund in the amount of approximately $850,000.
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.
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 charged to earnings.
The term loan is guaranteed by our subsidiaries and
secured by substantially all of our assets. The term loan is payable in quarterly principal installments of $325,000 plus accrued interest at the rate of 5.2% plus the applicable margin. At June 27, 2009, our interest rate was 8.95%. The final
payment for the term loan is in April 2012.
The revolving line of credit bears interest at LIBOR plus the applicable margin. At June 27,
2009, our interest rate was 4.56%. We had $.8 million available under the line at June 27, 2009. The revolving line of credit expires in March 2012.
Under the terms of the term loan and the revolver, we are required to maintain certain financial covenants on a quarterly and annual basis, including total funded debt to EBITDA not exceeding 2.25:1, minimum debt
service coverage of
17
1.25:1, a minimum current ratio of 1.25:1 and minimum tangible net worth of $7.5 million. We obtained an amendment to the term loan and revolver agreements
to include the goodwill and intangible asset impairment charges as an add-back to the EBITDA covenants. We also obtained an Amendment and Waiver Agreement to the term loan and revolver agreements to waive our EBITDA covenants for the thirteen weeks
ended June 27, 2009 and to substitute modified quarterly EBITDA covenants through March 31, 2010. Under the terms of our amendment, our interest rate will increase from a maximum of LIBOR plus 2.5% to a maximum of LIBOR plus 4.25% for our
revolving line of credit and a maximum adjusted LIBOR plus 3.75% for our term loan. The rate decreases to a minimum of LIBOR plus 2.5% based upon future performance. We do not expect the change in rate will have a material adverse affect on our cash
flows for Fiscal 2010. At June 27, 2009 we were in compliance with the terms of our amended bank agreement.
Capital leases
Commercial capital leases payable are reflected at their present value based upon interest rates that range from 6.4% to 10.6% 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 $232,810 for capital lease obligations. Included in long-term debt net of current portion is
$135,050 for capital lease obligations. The remaining interest associated with our capital lease obligations amounts to approximately $24,000 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.
18
|
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 long-term debt. Our long-term borrowings are in variable rate instruments, with interest rates tied to either the Prime Rate or the LIBOR. We have entered into an interest rate swap agreement to minimize our exposure
to interest rate fluctuations on these borrowings. Our interest rate swap has not been designated as a hedging instrument, therefore changes in fair value are recognized in earnings.
We conduct our transactions with foreign customers in U.S. dollars. Although we are not subject to the risks of foreign currency fluctuations directly, demand from foreign customers may be affected by the relative
change in value of the customer’s currency to the value of the U.S. dollar. Changes in the relative value of the U.S. dollar may also change our prices relative to the prices of our foreign competitors.
|
Item 4.
|
Controls and Procedures
|
Evaluation of
disclosure controls and procedures
—As of June 27, 2009, the Company carried out an evaluation, under the supervision and with the Company’s management, including the Company’s Chief Executive Officer and Acting 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 Acting Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective as of June 27, 2009 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 Acting Chief Financial Officer, as appropriate, to allow timely decisions regarding required
disclosure.
Changes in internal control
—In the first quarter of Fiscal 2010, the Company revised its internal control over
financial reporting to remediate the material weakness identified in the fourth quarter of Fiscal 2009 described in the Company’s Annual Report on Form 10-K for the fiscal year ended March 31, 2009. The material weakness related to the
Company’s accounting for income taxes. The changes made to the Company’s internal controls included the establishment of enhanced review procedures of third party prepared work papers by Company personnel as well as the requirement that
the third party preparer also institute enhanced internal review procedures. Other than the previously described changes, there were no other significant changes in the Company’s internal controls over financial reporting that occurred during
the first quarter of Fiscal 2010 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.
19
PART II. OTHER INFORMATION
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Item 1.
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Legal Proceedings.
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The Company is not a party to
any material pending legal proceedings.
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, 2009, 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, 2009.
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Item 2.
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Unregistered Sales of Equity Securities and Use of Proceeds.
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None.
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Item 3.
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Defaults upon Senior Securities.
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None.
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Item 4.
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Submission of Matters to a Vote of Security Holders.
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None.
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Item 5.
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Other Information.
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None.
20
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10.1
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Amendment and Waiver 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 June 26, 2009 (incorporated by reference to Exhibit 10.8 to the Annual Report on Form 10-K filed by the Company on
June 29, 2009).
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10.2
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Mortgage and Security Agreement, by and between, Micronetics, Inc., and RBS Citizens National Association (successor by merger to Citizens Bank New Hampshire), dated June 26, 2009
(incorporated by reference to Exhibit 10.9 to the Annual Report on Form 10-K filed by the Company on June 29, 2009).
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31.1
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Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
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31.2
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Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
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32.1
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Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of Sarbanes-Oxley Act of 2002.
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32.2
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Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of Sarbanes-Oxley Act of 2002.
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21
SIGNATURE
In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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MICRONETICS, INC.
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Dated: August 7, 2009
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By:
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/
S
/ D
AVID
R
OBBINS
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David Robbins,
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Chief Executive Officer and Treasurer
(Principal Executive Officer)
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Dated: August 7, 2009
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By:
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/
S
/ C
ARL
L
UEDERS
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Carl Lueders,
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Acting Chief Financial Officer
(Principal Financial and Accounting Officer)
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22
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