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 September 25, 2010
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 registrant 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 November 1, 2010, the issuer had 4,553,635 shares of common stock, par value $.01 per share, outstanding.
MICRONETICS, INC.
INDEX
2
PART I. FINANCIAL INFORMATION
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Item 1.
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Financial Statements
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MICRONETICS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
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September 25, 2010
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March 31, 2010
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ASSETS
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Current assets:
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Cash and cash equivalents
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$
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893,262
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$
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482,442
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Accounts receivable, net of allowance for doubtful accounts of $602,231 and $570,782 at September 25, 2010 and
March 31, 2010, respectively
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5,768,606
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5,691,334
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Inventories, net
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11,982,161
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10,943,968
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Unbilled revenue
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238,460
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219,958
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Deferred tax asset
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1,557,093
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1,557,093
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Prepaid income taxes
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358,225
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434,379
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Prepaid expenses and other current assets
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219,471
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218,554
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Total current assets
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21,017,278
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19,547,728
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Property, plant and equipment, net
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4,894,910
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4,787,880
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Other assets:
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Security deposits
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97,079
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97,079
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Other long term assets
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14,426
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18,547
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Intangible assets, net
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1,222,547
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1,396,595
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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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2,451,249
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2,629,418
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TOTAL ASSETS
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$
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28,363,437
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$
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26,965,026
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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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1,554,087
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$
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1,457,267
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Line of credit
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5,487,836
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4,234,435
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Accounts payable
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2,096,137
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2,179,422
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Accrued expenses and other current liabilities
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2,728,890
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2,732,429
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Deferred revenue
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—
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200,000
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Total current liabilities
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11,866,950
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10,803,553
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Long-term debt, net of current portion
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1,046,333
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1,786,378
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Other long-term liability
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1,762
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1,740
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Deferred tax liability
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1,124,547
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1,033,531
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Total liabilities
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14,039,592
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13,625,202
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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, $0.01 par value; 10,000,000 shares authorized; 5,391,217 issued, 4,553,635 outstanding at September 25, 2010
and March 31, 2010
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53,912
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53,912
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Additional paid-in capital
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12,215,578
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12,204,124
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Retained earnings
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5,034,868
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4,062,301
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17,304,358
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16,320,337
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Treasury stock at cost, 837,582 shares at September 25, 2010 and March 31, 2010
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(2,980,513
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)
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(2,980,513
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)
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Total shareholders’ equity
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14,323,845
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13,339,824
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TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY
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$
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28,363,437
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$
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25,965,026
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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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September 25, 2010
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September 26, 2009
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Net sales
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$
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8,984,145
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$
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8,820,211
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Cost of sales
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5,907,894
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5,938,582
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Gross margin
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3,076,251
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2,881,629
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Operating expenses:
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Research and development
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343,927
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539,640
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Selling, general and administrative
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1,740,321
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1,812,821
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Loss on disposal of asset
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13,560
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—
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Amortization of intangible assets
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87,024
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87,023
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Total operating expenses
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2,184,832
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2,439,484
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Income from operations
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891,419
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442,145
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Other income (expense):
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Interest income
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264
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34
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Interest expense
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(107,691
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)
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(138,213
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)
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Change in fair value of interest rate swap
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23,869
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18,927
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Miscellaneous income
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9,299
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157
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Total other expense
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(74,259
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)
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(119,095
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)
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Income before provision for income taxes
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817,160
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323,050
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Provision for income taxes
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344,443
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136,727
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Net income
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$
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472,717
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$
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186,323
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Income per common share
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Basic
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$
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0.10
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$
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0.04
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Diluted
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$
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0.10
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$
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0.04
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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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4,553,635
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Diluted
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4,565,349
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4,553,956
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The accompanying notes
are an integral part of these consolidated financial statements.
4
MICRONETICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
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Twenty-Six Weeks Ended
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September 25, 2010
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September 26, 2009
|
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Net sales
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$
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18,350,839
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$
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16,733,167
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Cost of sales
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11,875,267
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11,375,053
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Gross margin
|
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6,475,572
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5,358,114
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Operating expenses:
|
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Research and development
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830,938
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|
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846,062
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Selling, general and administrative
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3,625,477
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3,836,564
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Loss on disposal of asset
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13,560
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—
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Amortization of intangible assets
|
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174,048
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174,046
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|
|
|
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Total operating expenses
|
|
|
4,644,023
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|
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4,856,672
|
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Income from operations
|
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1,831,549
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501,442
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|
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Other income (expense):
|
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|
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Interest income
|
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|
293
|
|
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|
68
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|
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Interest expense
|
|
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(213,227
|
)
|
|
|
(268,443
|
)
|
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Change in fair value of interest rate swap
|
|
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55,409
|
|
|
|
54,610
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Miscellaneous income
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|
12,818
|
|
|
|
14,742
|
|
|
|
|
|
|
|
|
|
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Total other expense
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(144,707
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)
|
|
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(199,023
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)
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|
|
|
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Income before provision for income taxes
|
|
|
1,686,842
|
|
|
|
302,419
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|
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Provision for income taxes
|
|
|
714,275
|
|
|
|
128,161
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Net income
|
|
$
|
972,567
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|
|
$
|
174,258
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Income per common share
|
|
|
|
|
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Basic
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$
|
0.21
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|
$
|
0.04
|
|
|
|
|
|
|
|
|
|
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Diluted
|
|
$
|
0.21
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|
$
|
0.04
|
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|
|
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|
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Weighted average common shares outstanding
|
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|
|
|
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Basic
|
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4,553,635
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|
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4,553,635
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Diluted
|
|
|
4,563,643
|
|
|
|
4,553,981
|
|
The accompanying notes
are an integral part of these consolidated financial statements.
5
MICRONETICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY
(Unaudited)
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|
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|
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|
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|
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|
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Common Stock
|
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Additional
|
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Shares
|
|
|
Par
Value
|
|
|
Paid-In
Capital
|
|
|
Retained
Earnings
|
|
|
Treasury
Stock
|
|
|
Total
|
|
|
Balance at March 31, 2010
|
|
|
4,553,635
|
|
|
$
|
53,912
|
|
|
$
|
12,204,124
|
|
|
$
|
4,062,301
|
|
|
$
|
(2,980,513
|
)
|
|
$
|
13,339,824
|
|
|
Stock-based compensation
|
|
|
—
|
|
|
|
—
|
|
|
|
102,470
|
|
|
|
—
|
|
|
|
—
|
|
|
|
102,470
|
|
|
Reduction of deferred tax asset related to cancellation of non-qualified stock options
|
|
|
—
|
|
|
|
—
|
|
|
|
(91,016
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
(91,016
|
)
|
|
Net income
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
972,567
|
|
|
|
—
|
|
|
|
972,567
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at September 25, 2010
|
|
|
4,553,635
|
|
|
$
|
53,912
|
|
|
$
|
12,215,578
|
|
|
$
|
5,034,868
|
|
|
$
|
(2,980,513
|
)
|
|
$
|
14,323,845
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
6
MICRONETICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
Twenty-Six Weeks Ended,
|
|
|
|
|
September 25, 2010
|
|
|
September 26, 2009
|
|
|
Cash flow from operating activities:
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
972,567
|
|
|
$
|
174,258
|
|
|
Adjustments to reconcile net income to net cash provided by operating activities:
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
806,472
|
|
|
|
760,151
|
|
|
Stock-based compensation
|
|
|
102,470
|
|
|
|
153,426
|
|
|
Change in fair value of interest rate swap
|
|
|
(55,409
|
)
|
|
|
(54,610
|
)
|
|
Loss on disposal of assets
|
|
|
13,560
|
|
|
|
—
|
|
|
Provision for allowances on accounts receivable
|
|
|
31,449
|
|
|
|
61,965
|
|
|
Provision for inventory obsolescence and losses
|
|
|
140,558
|
|
|
|
136,299
|
|
|
Deferred taxes related to non-qualified stock options
|
|
|
(91,016
|
)
|
|
|
—
|
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(108,721
|
)
|
|
|
(1,001,981
|
)
|
|
Unbilled revenue
|
|
|
(18,502
|
)
|
|
|
(414,973
|
)
|
|
Inventories
|
|
|
(1,178,751
|
)
|
|
|
(422,343
|
)
|
|
Other long term assets
|
|
|
4,122
|
|
|
|
4,122
|
|
|
Prepaid income taxes
|
|
|
76,175
|
|
|
|
606,215
|
|
|
Prepaid expenses, other current assets, and other assets
|
|
|
(917
|
)
|
|
|
(6,848
|
)
|
|
Accounts payable
|
|
|
(83,285
|
)
|
|
|
519,521
|
|
|
Accrued expenses
|
|
|
51,870
|
|
|
|
36,481
|
|
|
Deferred revenue
|
|
|
(200,000
|
)
|
|
|
200,000
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
462,642
|
|
|
|
751,683
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
|
(628,496
|
)
|
|
|
(735,382
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(628,496
|
)
|
|
|
(735,382
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
|
Net proceeds from line of credit
|
|
|
1,253,401
|
|
|
|
728,858
|
|
|
Repayments on term loan
|
|
|
(650,000
|
)
|
|
|
(650,000
|
)
|
|
Repayments of capital leases
|
|
|
(117,743
|
)
|
|
|
(172,657
|
)
|
|
Additional paid in capital charge related to cancellation of non-qualified stock options
|
|
|
91,016
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities
|
|
|
576,674
|
|
|
|
(93,799
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net change in cash and cash equivalents
|
|
|
410,820
|
|
|
|
(77,498
|
)
|
|
Cash and cash equivalents at beginning of period
|
|
|
482,442
|
|
|
|
620,259
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period
|
|
$
|
893,262
|
|
|
$
|
542,761
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow information:
|
|
|
|
|
|
|
|
|
|
Cash paid (received) during the period for:
|
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
206,340
|
|
|
$
|
226,697
|
|
|
|
|
|
|
|
|
|
|
|
|
Income taxes
|
|
$
|
638,100
|
|
|
$
|
(478,054
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of non-cash financing activities:
|
|
|
|
|
|
|
|
|
|
Equipment acquired under capital leases
|
|
$
|
124,518
|
|
|
$
|
—
|
|
The accompanying notes
are an integral part of these consolidated financial statements.
7
MICRONETICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial
statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“US GAAP”) for interim financial information and the rules of the Securities and Exchange Commission for quarterly
reports on Form 10-Q. It is suggested that these consolidated condensed financial statements be read in conjunction with the Company’s Annual Report on Form 10-K for its fiscal year ended March 31, 2010. In the opinion of management, the
statements contain all adjustments, including normal recurring adjustments necessary in order to present fairly the financial position as of September 25, 2010 and the results of operations for the thirteen and twenty-six weeks ended
September 25, 2010 and September 26, 2009.
The Company evaluated its September 25, 2010 financial statements
for subsequent events through the date the financial statements were issued. The Company is not aware of any subsequent events which would require recognition or disclosure in its financial statements.
The results of operations for the thirteen and twenty-six weeks ended September 25, 2010 are not necessarily indicative of the
results to be expected for the full year ended March 31, 2011.
2. PRINCIPAL BUSINESS ACTIVITY AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
Summary of operations and basis of consolidation
—Micronetics, Inc. and subsidiaries (collectively the
“Company” or “Micronetics”) are engaged in the design, development, manufacturing and marketing of a broad range of high performance wireless components, test equipment and integrated multifunction subassemblies used in cellular,
microwave, satellite, radar and communication systems around the world.
The consolidated financial statements include the
accounts of Micronetics, 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”). 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, intangible assets, accrued liabilities, and deferred income taxes and
various other assumptions that it believes are reasonable under the circumstances. Actual results could differ from those estimates.
Revenue recognition
—The Company generates revenue from the sale of products, technology development, and licensing. Revenue is recognized when persuasive evidence of an arrangement exists,
delivery of product has occurred or services have been rendered, the price to the customer is fixed or determinable, collection is reasonably assured, and no future services are required. The Company’s products are primarily hardware
components, integrated sub-assemblies which includes microwave hardware and embedded software, that are delivered to original equipment manufacturers (OEMs) of telecommunication and networking products or defense contractors who are considered to be
end users.
The Company occasionally enters into contracts for production of highly customized microwave and radio frequency
components and integrated sub-assemblies which it records revenue based on the percentage of completion method (assuming all other requirements for revenue recognition have been satisfied) typically using labor hours to measure progress toward
completion of the contract as the Company has determined this methodology best reflects the fundamentals of the contract. If estimates to complete the contract change materially from one period to the next, profit levels could significantly vary.
Unbilled revenue represents revenue recognized in excess of billings.
The Company sells its products using a direct sales
force and sales representatives. Contracts with customers do not include product return rights or price protection. The estimated cost of product warranties are accrued based on historical experience at the time the revenue is recognized. Unless
customers purchase an extended warranty, Micronetics typically offers a one-year warranty.
8
MICRONETICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)—(Continued)
Recently
issued accounting pronouncements
—In October 2009, the FASB issued ASU No. 2009-13, “Revenue Recognition (Topic 605): Multiple-Deliverable Revenue Arrangements (a consensus of the FASB Emerging Issues Task Force),” which
amends ASC 605-25, “Revenue Recognition: Multiple-Element Arrangements.” ASU No. 2009-13 addresses how to determine whether an arrangement involving multiple deliverables contains more than one unit of accounting and how to allocate
consideration to each unit of accounting in the arrangement. This ASU replaces all references to fair value as the measurement criteria with the term selling price and establishes a hierarchy for determining the selling price of a deliverable. ASU
No. 2009-13 also eliminates the use of the residual value method for determining the allocation of arrangement consideration. Additionally, ASU No. 2009-13 requires expanded disclosures. This ASU will become effective for us for revenue
arrangements entered into or materially modified on or after April 1, 2011. Earlier application is permitted with required transition disclosures based on the period of adoption. We are currently evaluating the impact of this standard on our
consolidated financial statements.
In October 2009, the FASB issued ASU No. 2009-14, “Software (Topic 985):
Certain Revenue Arrangements That Include Software Elements (a consensus of the FASB Emerging Issues Task Force).” ASU No. 2009-14 amends ASC 985-605, “Software: Revenue Recognition,” such that tangible products, containing both
software and non-software components that function together to deliver the tangible product’s essential functionality, are no longer within the scope of ASC 985-605. It also amends the determination of how arrangement consideration should be
allocated to deliverables in a multiple-deliverable revenue arrangement. This ASU will become effective for us for revenue arrangements entered into or materially modified on or after April 1, 2011. Earlier application is permitted with
required transition disclosures based on the period of adoption. We are currently evaluating the impact of this standard on our consolidated financial statements. Both ASU No. 2009-13 and ASU No. 2009-14 must be adopted in the same period
and must use the same transition disclosures.
3. INVENTORIES, NET
At September 25, 2010 and March 31, 2010, inventories consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
September 25, 2010
|
|
|
March 31, 2010
|
|
|
Raw materials
|
|
$
|
7,493,019
|
|
|
$
|
7,170,056
|
|
|
Work in process
|
|
|
4,524,097
|
|
|
|
3,941,829
|
|
|
Finished goods
|
|
|
1,305,271
|
|
|
|
1,368,591
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13,322,387
|
|
|
|
12,480,476
|
|
|
Less: allowance for obsolescence and excess inventory
|
|
|
(1,340,226
|
)
|
|
|
(1,536,508
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
11,982,161
|
|
|
$
|
10,943,968
|
|
|
|
|
|
|
|
|
|
|
|
4. PROPERTY, PLANT AND EQUIPMENT, NET
At September 25, 2010 and March 31, 2010, property, plant and equipment, net consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
September 25, 2010
|
|
|
March 31, 2010
|
|
|
Land
|
|
$
|
162,000
|
|
|
$
|
162,000
|
|
|
Buildings and leasehold improvements
|
|
|
2,012,295
|
|
|
|
2,170,278
|
|
|
Machinery and equipment
|
|
|
11,586,500
|
|
|
|
10,833,486
|
|
|
Furniture, fixtures and other
|
|
|
244,171
|
|
|
|
244,171
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14,004,966
|
|
|
|
13,409,935
|
|
|
Less: accumulated depreciation
|
|
|
(9,110,056
|
)
|
|
|
(8,622,055
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
4,894,910
|
|
|
$
|
4,787,880
|
|
|
|
|
|
|
|
|
|
|
|
5. INTANGIBLE ASSETS AND GOODWILL
The Company tests goodwill for impairment annually and when an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying value.
9
MICRONETICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)—(Continued)
The following
table presents details of the Company’s finite-lived intangible assets as of September 25, 2010 and March 31, 2010 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Useful
|
|
|
September 25, 2010
|
|
|
March 31, 2010
|
|
|
Intangible Assets
|
|
Life
(years)
|
|
|
Gross
Value
|
|
|
Accumulated
Amortization
|
|
|
Net
Value
|
|
|
Gross
Value
|
|
|
Accumulated
Amortization
|
|
|
Net
Value
|
|
|
Customer relationships (non-contractual)
|
|
|
3-10
|
|
|
$
|
2,956
|
|
|
$
|
2,043
|
|
|
$
|
913
|
|
|
$
|
2,956
|
|
|
$
|
1,931
|
|
|
$
|
1,025
|
|
|
Trade name
|
|
|
10
|
|
|
|
260
|
|
|
|
86
|
|
|
|
174
|
|
|
|
260
|
|
|
|
73
|
|
|
|
187
|
|
|
Developed technology-drawings
|
|
|
3-5
|
|
|
|
513
|
|
|
|
377
|
|
|
|
136
|
|
|
|
513
|
|
|
|
328
|
|
|
|
185
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
3,729
|
|
|
$
|
2,506
|
|
|
$
|
1,223
|
|
|
$
|
3,729
|
|
|
$
|
2,332
|
|
|
$
|
1,397
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company amortizes intangible assets with finite lives over the estimated useful lives of the respective
assets. The following is a summary of estimated aggregate amortization expense for each of the five succeeding fiscal years and thereafter:
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
|
2011
|
|
|
147
|
|
|
2012
|
|
|
314
|
|
|
2013
|
|
|
163
|
|
|
2014
|
|
|
144
|
|
|
2015
|
|
|
144
|
|
|
Thereafter
|
|
|
311
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,223
|
|
|
|
|
|
|
|
6. ACCRUED EXPENSES
At September 25, 2010 and March 31, 2010 accrued expenses consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
September 25, 2010
|
|
|
March 31, 2010
|
|
|
Unbilled payables
|
|
$
|
683,752
|
|
|
$
|
837,603
|
|
|
Professional fees
|
|
|
—
|
|
|
|
15,750
|
|
|
Payroll, benefits and related taxes
|
|
|
1,355,017
|
|
|
|
1,142,532
|
|
|
Warranty
|
|
|
306,320
|
|
|
|
211,240
|
|
|
Fair value of interest rate swap
|
|
|
109,641
|
|
|
|
165,050
|
|
|
Commissions
|
|
|
183,133
|
|
|
|
185,967
|
|
|
Customer deposits
|
|
|
9,215
|
|
|
|
71,348
|
|
|
Miscellaneous
|
|
|
81,812
|
|
|
|
102,939
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,728,890
|
|
|
$
|
2,732,429
|
|
|
|
|
|
|
|
|
|
|
|
Included in accrued payroll are bonuses of $480,583 and $600,000 at September 25, 2010 and
March 31, 2010, respectively.
7. LONG-TERM DEBT
At September 25, 2010 and March 31, 2010 long-term debt consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
September 25, 2010
|
|
|
March 31, 2010
|
|
|
Term loan
|
|
|
2,275,000
|
|
|
|
2,925,000
|
|
|
Capital leases
|
|
|
325,420
|
|
|
|
318,645
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,600,420
|
|
|
|
3,243,645
|
|
|
Less current portion
|
|
|
(1,554,087
|
)
|
|
|
(1,457,267
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt, net of current portion
|
|
$
|
1,046,333
|
|
|
$
|
1,786,378
|
|
|
|
|
|
|
|
|
|
|
|
10
MICRONETICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)—(Continued)
Term Loan
and Revolver
In March 2007, the Company entered into a credit facility which consists of a $6.5 million five year
secured term loan and a $5.0 million three year revolving line of credit. In the third quarter of Fiscal 2009, the revolving line of credit was extended by two years. On August 13, 2010 the Company entered into an amended term loan and
revolving line of credit agreement under which the revolving line of credit was increased to $7.5 million and extended by one additional year and now expires on March 31, 2013. The term loan is guaranteed by the Company and its subsidiaries and
secured by substantially all of the Company’s assets. The term loan is payable in quarterly principal installments of $325,000 plus accrued interest at the rate of 5.2% plus the applicable margin. At September 25, 2010, the interest rate
was 7.95%. The final payment for the term loan is due in April 2012. The revolving line of credit bears interest at LIBOR plus the applicable margin. At September 25, 2010, the interest rate was 3.01%. The Company had approximately $2.0 million
available under the line of credit at September 25, 2010.
The Company entered into an interest rate swap agreement with
a notional amount of $6.5 million in April 2007 to mitigate the effect of interest rate fluctuations on the term loan. The interest rate swap was not designated as a hedging instrument at the initiation of the swap, and therefore the Company has not
applied hedge accounting. As a result, at the end of each reporting period, the change in fair value of the interest rate swap is recorded on the consolidated balance sheet, with any related gains or losses included in earnings.
At September 25, 2010 the Company was in compliance with its bank covenants. Under the terms of the amended term loan and the
revolving line of credit agreement, the Company is required to maintain certain financial covenants on a quarterly and annual basis, including total funded debt to EBITDA not exceeding 2.5:1, minimum debt service coverage of 1.25:1, a minimum
current ratio of 1.25:1 and minimum tangible net worth of $9.2 million. For the fiscal year ended March 31, 2011, the debt service coverage covenant is required to be at least 1.10:1 except that for the third quarter of Fiscal 2011 the minimum
ratio is 0.85:1.
For the twenty-six weeks ended September 26, 2009, 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 trailing twelve months EBITDA covenants. The Company also obtained an Amendment and Waiver Agreement to the term loan and revolver
agreements to waive the EBITDA covenants and to substitute modified quarterly EBITDA covenants through March 31, 2010. Under the terms of the amendment, the interest rate increased 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. On March 31, 2010 the waiver for the Company’s EBITDA covenants expired and the Company returned to the original terms of the agreement which
were modified on August 13, 2010 as described above.
Capital leases
Commercial capital leases payable are reflected at their present value based upon interest of approximately 6.8% per annum, and are
secured by the underlying assets. The assets are depreciated over their estimated useful lives. Included in the current portion of long-term debt is $254,087 for capital lease obligations. Included in long-term debt net of current portion is $71,333
for capital lease obligations. The remaining interest associated with the Company’s capital lease obligations amounts to approximately $14,600 over the lease terms.
8. STOCK OPTION PLANS AND STOCK-BASED COMPENSATION
At September 25,
2010, 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 September 25, 2010, there were 20,000 options outstanding under the 2003 Plan.
11
MICRONETICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)—(Continued)
The 2006
Equity Incentive Plan
During the fiscal year ended March 31, 2007, the Company adopted a stock option plan
entitled “The 2006 Equity Incentive Plan” (the “2006 Plan”) under which the Company may grant shares of restricted stock or options to purchase up to 1,000,000 shares of common stock. As of September 25, 2010 there were
263,500 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 twenty-six weeks ended September 25, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
Underlying
options
|
|
|
Weighted
Average
Exercise
price
|
|
|
Weighted
Average
Remaining
Contractual
life
|
|
|
Aggregate
Intrinsic
Value
|
|
|
Outstanding at March 31, 2010
|
|
|
511,100
|
|
|
$
|
6.79
|
|
|
|
|
|
|
$
|
—
|
|
|
Granted
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
—
|
|
|
Exercised
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
—
|
|
|
Expired
|
|
|
(216,600
|
)
|
|
|
8.04
|
|
|
|
|
|
|
|
—
|
|
|
Forfeited
|
|
|
(11,000
|
)
|
|
|
7.68
|
|
|
|
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at September 25, 2010
|
|
|
283,500
|
|
|
$
|
5.79
|
|
|
|
7.35
|
|
|
$
|
239,715
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at September 25, 2010
|
|
|
126,375
|
|
|
$
|
7.23
|
|
|
|
5.99
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
There is no intrinsic value for fully vested, exercisable options at September 25, 2010 based on the
Company’s closing stock price of $5.12.
The following table sets forth the status of the Company’s non-vested stock
options as of September 25, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
Options
|
|
|
Weighted-Average
Grant-Date
Fair Value
|
|
|
Non-vested as of March 31, 2010
|
|
|
191,750
|
|
|
$
|
2.95
|
|
|
Granted
|
|
|
—
|
|
|
|
—
|
|
|
Forfeited
|
|
|
(6,250
|
)
|
|
|
4.19
|
|
|
Vested
|
|
|
(25,875
|
)
|
|
|
2.79
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-vested as of September 25, 2010
|
|
|
159,625
|
|
|
$
|
2.93
|
|
|
|
|
|
|
|
|
|
|
|
The following table summarizes the effects of stock-based compensation for the thirteen weeks ended
September 25, 2010 and September 26, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirteen Weeks Ended
|
|
|
|
|
September 25, 2010
|
|
|
September 26, 2009
|
|
|
Cost of sales
|
|
$
|
9,364
|
|
|
$
|
10,005
|
|
|
Selling, general and administrative
|
|
|
37,261
|
|
|
|
37,476
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation effect on income before taxes
|
|
$
|
46,625
|
|
|
$
|
47,481
|
|
|
|
|
|
|
|
|
|
|
|
12
MICRONETICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)—(Continued)
The following
table summarizes the effects of stock-based compensation for the twenty-six weeks ended September 25, 2010 and September 26, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
Twenty-Six Weeks Ended
|
|
|
|
|
September 25, 2010
|
|
|
September 26, 2009
|
|
|
Cost of sales
|
|
$
|
21,832
|
|
|
$
|
20,700
|
|
|
Selling, general and administrative
|
|
|
80,638
|
|
|
|
132,726
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation effect on income before taxes
|
|
$
|
102,470
|
|
|
$
|
153,426
|
|
|
|
|
|
|
|
|
|
|
|
Unrecognized stock-based compensation expense related to the unvested options is approximately $0.3 million,
and will be recorded over the remaining vesting periods of 3.08 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 no options granted during the thirteen weeks ended September 25, 2010 and 3,000 options granted during the thirteen weeks
ended September 26, 2009. The fair value of options issued was estimated at the date of grant using the following weighted-average assumptions for the thirteen weeks ended September 26, 2009 were as follows:
|
|
|
|
|
|
|
Risk free interest rate
|
|
|
2.81
|
%
|
|
Expected life
|
|
|
6.25 years
|
|
|
Expected volatility
|
|
|
70.04
|
%
|
|
Forfeiture rate
|
|
|
2.92
|
%
|
|
Expected dividend yield
|
|
|
0
|
%
|
The per share fair value
of stock options granted for the thirteen weeks ended September 26, 2009 was $2.41.
9. INCOME TAXES
The Company’s effective tax rate was 42% for the thirteen weeks ended September 25, 2010 and September 26, 2009.
The amount of uncertain tax benefits as of September 25, 2010 was $1,762, 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, 2010, the Company is subject to tax in the U.S. Federal and various state jurisdictions. The Internal Revenue Service
(IRS) recently finalized the review of its March 31, 2008 tax return and recommended no changes to the return. The Company is open to examination for tax years March 31, 2007 through 2010.
10. EARNINGS PER SHARE
Basic earnings per share, or EPS, is computed based on the net income or loss 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 September 25, 2010 and September 26, 2009 are:
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirteen Weeks Ended
|
|
|
|
|
September 25, 2010
|
|
|
September 26, 2009
|
|
|
Net income
|
|
$
|
472,717
|
|
|
$
|
186,323
|
|
|
Weighted average shares outstanding
|
|
|
4,553,635
|
|
|
|
4,553,635
|
|
|
Basic earnings per share
|
|
$
|
0.10
|
|
|
$
|
0.04
|
|
|
Common stock equivalents
|
|
|
11,714
|
|
|
|
321
|
|
|
Weighted average common and common equivalent shares outstanding
|
|
|
4,565,349
|
|
|
|
4,553,956
|
|
|
Diluted earnings per share
|
|
$
|
0.10
|
|
|
$
|
0.04
|
|
13
MICRONETICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)—(Continued)
The computations
of basic and diluted EPS for the twenty-six weeks ended September 25, 2010 and September 26, 2009 are:
|
|
|
|
|
|
|
|
|
|
|
|
|
Twenty-Six Weeks Ended
|
|
|
|
|
September 25, 2010
|
|
|
September 26, 2009
|
|
|
Net income
|
|
$
|
972,567
|
|
|
$
|
174,258
|
|
|
Weighted average shares outstanding
|
|
|
4,553,635
|
|
|
|
4,553,635
|
|
|
Basic earnings per share
|
|
$
|
0.21
|
|
|
$
|
0.04
|
|
|
Common stock equivalents
|
|
|
10,008
|
|
|
|
346
|
|
|
Weighted average common and common equivalent shares outstanding
|
|
|
4,563,643
|
|
|
|
4,553,981
|
|
|
Diluted earnings per share
|
|
$
|
0.21
|
|
|
$
|
0.04
|
|
At September 25,
2010 and September 26, 2009, 149,000 and 522,800 stock options, respectively, were excluded from the diluted earnings per share calculation because they would have been anti-dilutive.
11. FAIR VALUE MEASUREMENTS
The Company assesses fair value as an exit
price representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that should be determined based on
assumptions that market participants would use in pricing an asset or liability. As a basis for considering such assumptions, this standard establishes a three-tier value hierarchy, which prioritizes, in descending order, the inputs used in
measuring fair value as follows:
Level 1 — Inputs used to measure fair value are unadjusted quoted prices that are
available in active markets for the identical assets or liabilities as of the reporting date.
Level 2 — Inputs used to
measure fair value, other than quoted prices included in Level 1, are either directly or indirectly observable as of the reporting date through correlation with market data, including quoted prices for similar assets and liabilities in active
markets and quoted prices in markets that are not active. Level 2 also includes assets and liabilities that are valued using models or other pricing methodologies that do not require significant judgment since the input assumptions used in the
models, such as interest rates and volatility factors, are corroborated by readily observable data from actively quoted markets for substantially the full term of the financial instrument.
Level 3 — Inputs used to measure fair value are unobservable inputs that are supported by little or no market activity and reflect
the use of significant management judgment. These values are generally determined using pricing models for which the assumptions utilize management’s estimates of market participant assumptions.
This hierarchy requires the Company to use observable market data, when available, and to minimize the use of unobservable inputs when
determining fair value. Assets and liabilities measured at fair value on a recurring basis, include the following as of September 25, 2010 and March 31, 2010.
14
MICRONETICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)—(Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at September 25, 2010
Using
|
|
|
|
|
|
|
|
Quoted Prices
in
Active
Markets
(Level 1)
|
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
|
Total Fair
Value as
of
September 25, 2010
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market fund (included in cash and cash equivalents)
|
|
|
—
|
|
|
$
|
855,000
|
|
|
|
—
|
|
|
$
|
855,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets at fair value
|
|
|
—
|
|
|
$
|
855,000
|
|
|
|
—
|
|
|
$
|
855,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swap (included in accrued expenses and other current liabilities)
|
|
|
—
|
|
|
$
|
(110,000
|
)
|
|
|
—
|
|
|
$
|
(110,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities at fair value
|
|
|
—
|
|
|
$
|
(110,000
|
)
|
|
|
—
|
|
|
$
|
(110,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at March 31, 2010
Using
|
|
|
|
|
|
|
|
Quoted Prices
in
Active
Markets
(Level 1)
|
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
|
Total Fair
Value as
of
March 31, 2010
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market fund (included in cash and cash equivalents)
|
|
|
—
|
|
|
$
|
419,000
|
|
|
|
—
|
|
|
$
|
419,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets at fair value
|
|
|
—
|
|
|
$
|
419,000
|
|
|
|
—
|
|
|
$
|
419,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swap (included in accrued expenses and other current liabilities)
|
|
|
—
|
|
|
$
|
(165,000
|
)
|
|
|
—
|
|
|
$
|
(165,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities at fair value
|
|
|
—
|
|
|
$
|
(165,000
|
)
|
|
|
—
|
|
|
$
|
(165,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following provides a summary of the change in fair value for the interest rate swap for the twenty-six
weeks ended September 25, 2010:
|
|
|
|
|
|
|
Balance at March 31, 2010
|
|
$
|
(165,000
|
)
|
|
Unrealized gain
|
|
|
55,000
|
|
|
|
|
|
|
|
|
Balance at September 25, 2010
|
|
$
|
(110,000
|
)
|
|
|
|
|
|
|
The fair value of the money market fund was determined based on pricing provided by a large investment bank.
Since the valuation was not observable, the Company has classified these as level 2 securities. There has been no change in the fair value of the money market fund since September 25, 2010. The fair value of the interest rate swap was
determined by using a market driven valuation model using the LIBOR rate forecast applied to common intervals for the remaining term of the interest rate swap.
The carrying amounts reported in the consolidated balance sheet for cash, trade receivables, accounts payable, and accrued expenses and amounts borrowed under the revolving line of credit and capital
leases approximate fair value because of the relatively short maturity of these instruments. The carrying amount of our term debt approximates fair value because it is based on a variable interest rate.
15
MICRONETICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)—(Continued)
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., the former 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.
13. MAJOR CUSTOMERS
The Company sells primarily to original equipment manufacturers of communications equipment in either the commercial or the defense
electronic marketplace. Many of those customers are prime contractors for defense work or Fortune 500 companies with world-wide operations. One customer, ITT Electronic Warfare Systems, accounted for 30% of the Company’s consolidated sales for
the twenty-six weeks ended September 25, 2010 and 23% for the twenty-six weeks ended September 26, 2009. This same customer accounted for 30% of the Company’s accounts receivable at September 25, 2010 and 37% of the
Company’s accounts receivable at March 31, 2010.
16
|
Item 2.
|
Management’s Discussion and Analysis of Financial Condition and Results of Operations.
|
Forward Looking Statements
Certain statements in this report contain words such as “could,” “expects,” “may,” “anticipates,” “believes,” “intends,” “estimates,”
“plans,” “envisions,” and other similar language and are considered forward-looking statements. These statements are based on our expectations, estimates, forecasts and projections about the operating environment, economies and
markets in which we operate and are merely our current predictions of future events. In addition, other written or oral statements which are considered forward-looking may be made by us or others on our behalf. These statements are subject to
important risks, uncertainties and assumptions, which are difficult to predict and the actual outcome may be materially different. Some of the factors which could cause results or events to differ from current expectations include, but are not
limited to, the factors described here, in our Annual Report on Form 10-K for the fiscal year ended March 31, 2010, and in the other documents that we file with the Securities and Exchange Commission. We assume no obligation to update our
forward-looking statements to reflect new information or developments.
An investment in our common stock involves a high
degree of risk. We urge readers to review carefully the risk factors described herein, in our Annual Report on Form 10-K for the fiscal year ended March 31, 2010, and in the other documents that we file with the Securities and Exchange
Commission. You can read these documents at www.sec.gov. If any of these risks, or other risks not presently known to us or that we currently believe are not significant, develops into an actual event, then our business, financial condition and
results of operations could be adversely affected. If that happens, the market price of our common stock could decline.
Critical Accounting Policies and Estimates
The discussion and analysis of our financial condition and the results of operations are based on our consolidated financial statements and the data used to prepare them. Our consolidated financial
statements have been prepared based on accounting principles generally accepted in the United States of America. On an on-going basis, we evaluate our judgments and estimates including those related to revenue recognition, allowances for doubtful
accounts, inventory valuation and obsolescence, long-lived assets, goodwill impairment, stock-based compensation, warranty obligations, and the valuation of our deferred tax asset. These estimates and judgments are based on historical experience and
various other assumptions that are believed to be reasonable under current business conditions and circumstances. Actual results may differ from these estimates under different assumptions or conditions.
There have been no changes to our critical accounting policies from those described in our Annual Report on Form 10-K for the fiscal year
ended March 31, 2010.
Recent Accounting Pronouncements
We discuss recently issued accounting standards in Item 1. Notes to Consolidated Financial Statements – Note 2.
Overview
Micronetics designs and manufactures high performance microwave and radio frequency (RF) components and integrated multifunction subassemblies used in a variety of commercial wireless, defense and
aerospace products, including satellite communications, electronic warfare and electronic counter-measures. We also manufacture and design test equipment, subassemblies and components used to test the strength, durability and integrity of signals in
communications equipment. Our products are embedded in a variety of radars, electronic warfare systems, guidance systems, wireless telecommunications and satellite equipment.
We sell our products primarily to original equipment manufacturers of communications equipment in either the commercial or the defense electronic marketplace. Many of our customers are prime contractors
for defense applications and/or Fortune 500 companies with world-wide operations.
A key driver of demand for our products is
the pervasive transformation of information from the analog domain to the digital domain. Because digital technologies require greater degrees of precision and rely more on miniature circuits than analog technologies, testing is critical for the
rapid commercialization of reliable products necessitated by broadband and wireless communication technologies. As the speed to market challenges increase, larger companies are relying increasingly on other companies to manufacture a module or an
integrated subassembly. This module or subassembly is then integrated by the larger company into a piece of equipment and sold to a customer. Micronetics has been seeking to capitalize on this trend by increasing its capability to manufacture
integrated subassemblies. Our goal is to leverage our high power and noise technology to continue to be a highly reliable supplier of integrated microwave subsystems.
17
Results of
Operations
Thirteen Weeks Ended September 25, 2010 compared to September 26, 2009
Net sales
Net sales for the thirteen weeks ended September 25, 2010 (“Q2 FY 11”) were $8,984,145, an increase of $163,934, or 2% as compared to $8,820,211 for the thirteen weeks ended
September 26, 2009 (“Q2 FY 10”). Sales of integrated component sub-systems for defense jamming and electronic system modernization applications increased by approximately $0.9 million and component sales increased by approximately
$0.5 million. These increases were offset by a decrease of approximately $0.7 million related to the beta test portion of a purchase agreement for an RFID application and a decrease of approximately $0.5 million in revenue related to a space based
components application which were recorded in Q2 FY 10.
Gross margin
Gross margin for Q2 FY 11 was approximately 34% as compared to 33% for Q2 FY 10. The gross margin increased due to improved margins in
components.
Research and development
Research and development expense for Q2 FY 11 was $343,927 as compared to $539,640 for Q2 FY 10, a decrease of $195,713 or 36%. The decrease was primarily due to a decrease in spending on a high power
digital pre-distortion amplifier product line. Our research and development expense varies to a certain degree based upon emerging technologies, shifts in product requirements and our assessment of future business opportunities.
Selling, general and administrative
Selling, general and administrative expense for Q2 FY 11 was $1,740,321 as compared to $1,812,821 for Q2 FY 10, representing a decrease of $72,500 or 4%. Approximately $111,000 of the decrease was due to
lower bad debt expense resulting from the partial recovery of a previously reserved receivable. Legal, audit and other professional fees decreased by approximately $45,000. This was offset by a net increase of approximately $84,000 for payroll and
spending in other areas.
Amortization of intangible assets
Amortization expense attributable to our intangible assets related to the acquisitions of Stealth, MICA and RFID was $87,024 in Q2 FY 11
as compared to $87,023 in Q2 FY 10.
Interest expense
Interest expense for Q2 FY 11 was $107,691 as compared to $138,213 for Q2 FY 10 a decrease of $30,522. The decrease was primarily due to a
combination of lower average interest rates and lower average borrowings during Q2 FY 11.
Interest rate swap
An unrealized gain of $23,869 was recorded for Q2 FY 11 as compared to an unrealized gain of $18,927 recorded in Q2 FY
10 to reflect the change in fair value of the interest rate swap agreement entered into in April 2007 to mitigate interest rate fluctuations on our term loan.
Provision for income taxes
Our effective tax rate for Q2 FY 11 was
42.3% as compared to 42.2% for Q2 FY 10.
Twenty-six Weeks Ended September 25, 2010 compared to September 26,
2009
Net sales
Net sales for the twenty-six weeks ended September 25, 2010 were $18,350,839, an increase of $1,617,672, or 10% as compared to $16,733,167 for the twenty-six weeks ended September 26, 2009.
Approximately $2.2 million of the increase is due to an increase in sales of integrated component sub-systems for defense jamming and electronic system modernization applications and approximately $0.8 million was due to an increase in component
sales. These increases were offset by a decrease of approximately $0.7 million related to the beta test portion of a purchase agreement for an RFID application and a decrease of approximately $0.6 million related to a space based components
application which were recorded in the first half of fiscal 2010.
Gross margin
Gross margin for the twenty-six weeks ended September 25, 2010 was approximately 35% as compared to approximately 32% for the
twenty-six weeks ended September 26, 2009. The gross margin increased due to improved margins in components due to increased sales without a corresponding increase in costs.
18
Research and
development
Research and development expense for the twenty-six weeks ended September 25, 2010 was $830,938 as
compared to $846,062 for the twenty-six weeks ended September 26, 2009, a slight decrease of $15,124 or 2%. Spending on a high power digital pre-distortion amplifier product line decreased and was offset by an increase in spending on new
applications for commercial components. Our research and development expense varies to a certain degree based upon emerging technologies, shifts in product requirements and our assessment of future business opportunities.
Selling, general and administrative
Selling, general and administrative expense for the twenty-six weeks ended September 25, 2010 was $3,625,477 as compared to $3,836,564 for the twenty-six weeks ended September 26, 2009,
representing a decrease of $211,087 or 5%. Approximately $113,000 of the decrease was due to lower bad debt expense resulting from the partial recovery of a previously reserved receivable. Approximately $47,000 of the decrease was due to lower stock
compensation expense, due to fewer stock options being granted and some outstanding options being fully expensed. Approximately $122,000 of the decrease was due to lower legal, audit and other professional fees. These decreases were offset by a net
increase of approximately $70,000 for payroll and spending in all other areas.
Amortization of intangible assets
Amortization expense attributable to our intangible assets related to the acquisitions of Stealth, MICA and RFID
remained constant at $174,048 for the twenty-six weeks ended September 25, 2010 as compared to the twenty-six weeks ended September 26, 2009.
Interest expense
Interest expense for the twenty-six weeks ended
September 25, 2010 was $213,227 as compared to $268,443 for the twenty-six weeks ended September 26, 2009, a decrease of $55,216. The decrease was primarily due to lower average borrowings and lower average interest rates in Fiscal 2011 as
compared to Fiscal 2010.
Interest rate swap
An unrealized gain of $55,409 was recorded for the twenty-six weeks ended September 25, 2010 as compared to an unrealized gain of
$54,610 recorded for the twenty-six weeks ended September 26, 2009 to reflect the change in fair value of the interest rate swap agreement entered into in April 2007 to mitigate interest rate fluctuations on our term loan.
Provision for income taxes
Our effective tax rate for the twenty-six weeks ended September 25, 2010 was 42.3% as compared to 42.2% for the twenty-six weeks ended September 26, 2009.
Backlog
Our backlog is approximately $29 million as of September 25, 2010 as compared to approximately $31 million as of September 26, 2009.
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
$893,262 and $482,442, respectively, at September 25, 2010 and March 31, 2010. Working capital defined as accounts receivable, unbilled revenue, inventory, prepaid expenses, other current assets net of accounts payable, accrued expenses
and deferred revenue was $13,383,671 and $11,961,963 at September 25, 2010 and March 31, 2010, respectively. Borrowings under our revolving line of credit were $5,487,836 and $4,234,435 at September 25, 2010 and March 31, 2010,
respectively.
Our current ratio was approximately 1.77 at September 25, 2010 as compared to 1.81 at March 31, 2010.
In the twenty-six weeks ended September 25, 2010 net cash provided by operating activities was $462,642 as compared to
$751,683 for the twenty-six weeks ended September 26, 2009.
In the twenty-six weeks ended September 25, 2010, cash
provided by net income after adjusting for non-cash items including depreciation, amortization, stock-based compensation, changes in working capital reserves and an unrealized gain on interest rate swap was approximately $2.0 million. Approximately
$1.4 million was used for working capital needs. Of this amount, approximately $0.3 million was used for receivables and unbilled/deferred revenue, approximately $1.2 million was used to fund inventory requirements as a result of increased sales
levels and approximately $0.1 million was provided by prepaid tax asset utilization. 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.
19
In the twenty-six
weeks ended September 26, 2009, cash provided by net income after adjusting for non-cash items including depreciation, amortization, stock-based compensation, changes in working capital reserves and an unrealized gain on interest rate swap was
approximately $1.2 million. Approximately $0.5 million was used to fund working capital needs. Of the amount, approximately $1.4 million was used to fund receivables as a result of higher sales and approximately $0.4 million was used to fund
inventory requirements. A tax refund net of tax payments provided approximately $0.6 million, increases in accounts payable and accrued expenses provided approximately $0.5 million and cash received and recorded as deferred revenue provided
approximately $0.2 million
Net cash used in investing activities was $628,496 during the twenty-six weeks ended
September 25, 2010 as compared to $735,382 in the twenty-six weeks ended September 26, 2009. In the twenty-six weeks ended September 25, 2010 and September 26, 2009, investing activities was solely comprised of capital
expenditures.
Net cash provided by financing activities was $576,674 during the twenty-six weeks ended September 25,
2010 as compared to net cash used for financing activities of $93,799 during the twenty-six weeks ended September 26, 2009.
In the twenty-six weeks ended September 25, 2010, we borrowed approximately $1.2 million from our line of credit, repaid term debt of approximately $0.6 million and paid approximately $0.1 million
for capital lease obligations. In addition, approximately $0.1 million of a deferred tax asset related to the cancellation of non-qualified stock options was charged to additional paid in capital.
In the twenty-six weeks ended September 26, 2009, we borrowed approximately $0.7 million from our line of credit, repaid term debt
of approximately $0.6 million and repaid $0.2 million of capital lease obligations.
We believe that cash and cash equivalents
on hand, anticipated future cash receipts, and borrowings available under our line of credit will be sufficient to meet our obligations as they become due for the next twelve months. However, a decrease in our sales or demand for our products would
likely adversely affect our working capital amounts. As part of our business strategy, we occasionally evaluate potential acquisitions of businesses, products and technologies. Accordingly, a portion of our available cash may be used at any time for
the acquisition of complementary products or businesses. These potential transactions may require substantial capital resources, which, in turn, may require us to seek additional debt or equity financing. There are no assurances that we will be able
to consummate any such transaction. There are no current plans to raise additional debt or equity capital, nor is there a projected need to raise any such capital.
Term Loan and Revolver
In March 2007, we entered into a credit facility
consisting of a $6.5 million five year secured term loan and a $5.0 million three year revolving line of credit, which replaced the then existing $6.0 million term loan entered into in June 2005. In December 2008 we extended the term of the
revolving line of credit for two years.
We entered into an interest rate swap agreement in April 2007 to mitigate interest
rate fluctuations on the term loan. At the end of each reporting period we record the current fair value of the interest rate swap on the balance sheet. Any unrealized gain or loss on the swap is included in earnings.
On August 13, 2010 we entered into an amended term loan and revolving line of credit agreement. Under the terms of the amended
revolving line of credit agreement, the revolving line of credit was increased from $5.0 million to $7.5 million and extended by one year. The revolving line of credit now expires on March 31, 2013. At September 25, 2010 we were in
compliance with our bank covenants. Under the terms of the amended term loan and revolving line of credit agreement we are required to maintain certain financial covenants on a quarterly and annual basis, including total funded debt to EBITDA not
exceeding 2.5:1, minimum debt service coverage of 1.25:1, a minimum current ratio of 1.25:1 and minimum tangible net worth of $9.2 million. For the fiscal year ended March 31, 2011, the debt service coverage covenant is required to be at least
1.10:1 except that for the third quarter of Fiscal 2011 the minimum ratio is 0.85:1.
The term loan and revolving line of
credit are guaranteed by the Company and its subsidiaries and secured by substantially all of our assets. The term loan is payable in quarterly principal installments of $325,000 plus accrued interest at the rate of 5.2% plus the applicable margin.
At September 25, 2010, $2,275,000 was outstanding under the term loan and our interest rate was 7.95%. The final payment for the term loan is in April 2012.
The revolving line of credit bears interest at LIBOR plus the applicable margin. At September 25, 2010, $5,488,000 was outstanding under our revolving line of credit and our interest rate was 3.01%.
We had approximately $2.0 million available under the line of credit at September 25, 2010.
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For the twenty-six
weeks ended September 26, 2009, 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 trailing twelve months EBITDA covenants. We also obtained an
Amendment and Waiver Agreement to the term loan and revolver agreements to waive the EBITDA covenants and to substitute modified quarterly EBITDA covenants through March 31, 2010. Under the terms of the amendment, the interest rate increased
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. On March 31, 2010 the waiver for our EBITDA covenants expired and we returned to the
original terms of the agreement which were modified on August 13, 2010 as described above.
Capital leases
Commercial capital leases payable are reflected at their present value based upon interest rates of approximately
6.8% per annum, and are secured by the underlying assets. The assets are depreciated over their estimated useful lives. Included in the current portion of long-term debt is $254,087 for capital lease obligations. Included in long-term debt net
of current portion is $71,333 for capital lease obligations. The remaining interest associated with our capital lease obligations amounts to approximately $14,600 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.
21
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Item 3.
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Quantitative and Qualitative Disclosures about Market Risk
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We are exposed to a variety of market risks, including changes in interest rates primarily as a result of our borrowing and investing activities.
We are subject to interest rate exposure on our revolving line of credit. Our revolving line of credit interest rate is tied to LIBOR. We
have entered into an interest rate swap agreement to minimize our exposure to interest rate fluctuations on our term debt. Our interest rate swap has not been designated as a hedging instrument, therefore changes in fair value are recognized in
earnings.
We conduct our transactions with foreign customers in U.S. dollars. Although we are not subject to the risks of
foreign currency fluctuations directly, demand from foreign customers may be affected by the relative change in value of the customer’s currency to the value of the U.S. dollar. Changes in the relative value of the U.S. dollar may also change
our prices relative to the prices of our foreign competitors.
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Item 4.
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Controls and Procedures
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Evaluation of disclosure controls and procedures
—As of September 25, 2010, the Company carried out an evaluation, under
the supervision and with the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as
defined in Rules 13a- 15(e) and 15d- 15(e) of the Securities Exchange Act of 1934 (the “Exchange Act”)). Based upon that evaluation, the Chief Executive Officer and the Chief Financial Officer concluded that the Company’s disclosure
controls and procedures were effective as of September 25, 2010 to provide reasonable assurance that material information relating to the Company required to be disclosed by the Company in reports that it files or submits under the Exchange Act
is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms and that such information is accumulated and communicated to management, including the Company’s
Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
Changes in internal control
—There were no changes in the Company’s internal controls over financial reporting that
occurred during the second quarter of Fiscal 2011 that materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
Important considerations
—The effectiveness of our disclosure controls and procedures is subject to various inherent
limitations, including cost limitations, judgments used in decision making, assumptions about the likelihood of future events, the soundness of our systems, the possibility of human error, and the risk of fraud. Because of these limitations, there
can be no assurance that any system of disclosure controls and procedures will be successful in preventing all errors or fraud or in making all material information known in a timely manner to the appropriate levels of management.
22
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, 2010, and in our other documents filed with the Securities and Exchange Commission, as well as the cautionary statements made elsewhere in the Annual Report and in this report, before making a
decision to invest in our securities. Such cautionary statements are applicable to all forward-looking statements wherever they appear in this report. If any of the events described therein occur, our business, financial conditions and results of
operations may be materially adversely affected. In that event, the trading price of our securities could decline, and you could lose all or part of your investment.
There have been no material changes to the risk factors previously disclosed in the Company’s Annual Report on Form 10-K for the fiscal year ended March 31, 2010.
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10.1
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Amendment to Commercial Loan Agreement and Loan Documents, by and between, Micronetics, Inc., Microwave & Video Systems, Inc., Microwave Concepts, Inc., Stealth Microwave, Inc.,
MICA Microwave Corporation and RBS Citizens National Association (successor by merger to Citizens Bank New Hampshire), dated August 13, 2010 (incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K filed by the Company on August
18, 2010).
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10.2
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Amended and Restated Revolving Credit Note, dated August 13, 2010 issued by Micronetics, Inc. to RBS Citizens National Association (successor by merger to Citizens Bank New
Hampshire) (incorporated by reference to Exhibit 10.2 to the Current Report on Form 8-K filed by the Company on August 18, 2010).
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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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23
SIGNATURE
In accordance with the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to
be signed on its behalf by the undersigned thereunto duly authorized.
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MICRONETICS, INC.
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Dated: November 2, 2010
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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: November 2, 2010
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By:
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/
S
/ C
ARL
L
UEDERS
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Carl Lueders,
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Chief Financial Officer
(Principal Financial and Accounting Officer)
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