Item
1. Financial Statements
Microwave
Filter Company and Subsidiaries
Condensed
Consolidated Balance Sheets (Unaudited)
|
|
June 30, 2017
|
|
|
September 30, 2016
|
|
Assets
|
|
|
|
|
|
|
|
|
Current Assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
682,626
|
|
|
$
|
923,117
|
|
Accounts receivable-trade, net of allowance for doubtful accounts of $4,000 and $4,000
|
|
|
302,792
|
|
|
|
346,633
|
|
Inventories, net
|
|
|
457,729
|
|
|
|
448,747
|
|
Prepaid expenses and other current assets
|
|
|
49,120
|
|
|
|
61,673
|
|
Total current assets
|
|
|
1,492,267
|
|
|
|
1,780,170
|
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment, net
|
|
|
347,771
|
|
|
|
351,931
|
|
Total assets
|
|
$
|
1,840,038
|
|
|
$
|
2,132,101
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Stockholders’ Equity
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
70,184
|
|
|
$
|
61,770
|
|
Customer deposits
|
|
|
16,424
|
|
|
|
28,818
|
|
Accrued payroll and related expenses
|
|
|
43,168
|
|
|
|
43,646
|
|
Accrued compensated absences
|
|
|
106,159
|
|
|
|
144,942
|
|
Notes payable - short term
|
|
|
48,269
|
|
|
|
46,652
|
|
Other current liabilities
|
|
|
17,307
|
|
|
|
16,274
|
|
Total current liabilities
|
|
|
301,511
|
|
|
|
342,102
|
|
|
|
|
|
|
|
|
|
|
Notes payable - long term
|
|
|
282,562
|
|
|
|
318,998
|
|
Total other liabilities
|
|
|
282,562
|
|
|
|
318,998
|
|
Total liabilities
|
|
|
584,073
|
|
|
|
661,100
|
|
|
|
|
|
|
|
|
|
|
Stockholders’ Equity:
|
|
|
|
|
|
|
|
|
Common stock, $.10 par value Authorized 5,000,000 shares, Issued 4,324,140 shares in 2017 and 2016,Outstanding 2,579,928
shares in 2017 and 2,581,007 in 2016
|
|
|
432,414
|
|
|
|
432,414
|
|
Additional paid-in capital
|
|
|
3,248,706
|
|
|
|
3,248,706
|
|
Retained deficit
|
|
|
(730,543
|
)
|
|
|
(516,169
|
)
|
Common stock in treasury, at cost 1,744,212 shares in 2017 and 1,743,133 shares in 2016
|
|
|
(1,694,612
|
)
|
|
|
(1,693,950
|
)
|
Total stockholders’ equity
|
|
|
1,255,965
|
|
|
|
1,471,001
|
|
Total liabilities and stockholders’ equity
|
|
$
|
1,840,038
|
|
|
$
|
2,132,101
|
|
See
Accompanying Notes to Condensed Consolidated Financial Statements
Microwave
Filter Company and Subsidiaries
Condensed Consolidated Statements of Operations
(Unaudited)
|
|
Three months ended
|
|
|
Nine months ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
702,648
|
|
|
$
|
928,636
|
|
|
$
|
2,307,198
|
|
|
$
|
2,802,036
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of goods sold
|
|
|
476,926
|
|
|
|
586,255
|
|
|
|
1,559,665
|
|
|
|
1,748,648
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
225,722
|
|
|
|
342,381
|
|
|
|
747,533
|
|
|
|
1,053,388
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative expenses
|
|
|
293,862
|
|
|
|
317,817
|
|
|
|
953,485
|
|
|
|
1,029,338
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income from operations
|
|
|
(68,140
|
)
|
|
|
24,564
|
|
|
|
(205,952
|
)
|
|
|
24,050
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other expense, net
|
|
|
(2,658
|
)
|
|
|
(2,145
|
)
|
|
|
(8,422
|
)
|
|
|
(8,229
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income before income taxes
|
|
|
(70,798
|
)
|
|
|
22,419
|
|
|
|
(214,374
|
)
|
|
|
15,821
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefit for income taxes
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
3,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
$
|
(70,798
|
)
|
|
$
|
22,419
|
|
|
$
|
(214,374
|
)
|
|
$
|
18,821
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per share data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted earnings (loss) per common share
|
|
$
|
(0.03
|
)
|
|
$
|
0.01
|
|
|
$
|
(0.08
|
)
|
|
$
|
0.01
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used in computing net earnings (loss) per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
|
2,579,928
|
|
|
|
2,581,007
|
|
|
|
2,580,459
|
|
|
|
2,581,223
|
|
See
Accompanying Notes to Condensed Consolidated Financial Statements
Microwave
Filter Company and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(Unaudited)
|
|
Nine months ended
|
|
|
|
June 30
|
|
|
|
2017
|
|
|
2016
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
$
|
(214,374
|
)
|
|
$
|
18,821
|
|
|
|
|
|
|
|
|
|
|
Adjustments to reconcile net (loss) income to net cash (used in) provided by operating activities:
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
60,495
|
|
|
|
70,918
|
|
Change in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts receivable-trade
|
|
|
43,841
|
|
|
|
(77,850
|
)
|
Inventories
|
|
|
(8,982
|
)
|
|
|
22,340
|
|
Prepaid expenses and other assets
|
|
|
12,553
|
|
|
|
(4,265
|
)
|
Accounts payable and customer deposits
|
|
|
(3,980
|
)
|
|
|
32,545
|
|
Accrued payroll and related expenses and compensated absences
|
|
|
(39,261
|
)
|
|
|
17,334
|
|
Other current liabilities
|
|
|
1,033
|
|
|
|
(2,807
|
)
|
Net cash (used in) provided by operating activities
|
|
|
(148,675
|
)
|
|
|
77,036
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
Property, plant and equipment purchased
|
|
|
(56,335
|
)
|
|
|
(11,704
|
)
|
Net cash used in investing activities
|
|
|
(56,335
|
)
|
|
|
(11,704
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
Repayment of note payable
|
|
|
(34,819
|
)
|
|
|
(33,228
|
)
|
Purchase of treasury stock
|
|
|
(662
|
)
|
|
|
(235
|
)
|
Net cash used in financing activities
|
|
|
(35,481
|
)
|
|
|
(33,463
|
)
|
|
|
|
|
|
|
|
|
|
Net (decrease) increase in cash and cash equivalents
|
|
|
(240,491
|
)
|
|
|
31,869
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at beginning of period
|
|
|
923,117
|
|
|
|
896,667
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period
|
|
$
|
682,626
|
|
|
$
|
928,536
|
|
|
|
|
|
|
|
|
|
|
Supplemental Schedule of Cash Flow Information:
|
|
|
|
|
|
|
|
|
Interest paid
|
|
$
|
11,953
|
|
|
$
|
13,545
|
|
See
Accompanying Notes to Condensed Consolidated Financial Statements
MICROWAVE
FILTER COMPANY, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
JUNE
30, 2017
Note
1. Summary of Significant Accounting Policies
In
these notes, the terms “MFC” and “Company” mean Microwave Filter Company, Inc. and its subsidiary companies.
The
following condensed balance sheet as of September 30, 2016, which has been derived from audited financial statements, and the
unaudited interim condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the
Securities and Exchange Commission. Certain information and note disclosures normally included in annual financial statements
prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to those rules and
regulations, although the company believes that the disclosures made are adequate to make the information not misleading. In the
opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation
have been included. The operating results for the nine month period ended June 30, 2017 are not necessarily indicative of the
results that may be expected for the year ended September 30, 2017. For further information, refer to the consolidated financial
statements and notes thereto included in the Company’s Annual Report on Form 10K for the year ended September 30, 2016.
Note
2. Industry Segment Data
The
Company’s primary business segment involves the operations of Microwave Filter Company, Inc. which designs, develops, manufactures
and sells electronic filters, both for radio and microwave frequencies, to help process signal distribution and to prevent unwanted
signals from disrupting transmit or receive operations. Markets served include cable television, television and radio broadcast,
satellite broadcast, mobile radio, commercial communications and defense electronics.
Note
3. Inventories
Inventories
are stated at the lower of cost determined on the first-in, first-out method or market.
Inventories
net of the reserve for obsolescence consisted of the following:
|
|
June 30, 2017
|
|
|
September 30, 2016
|
|
|
|
|
|
|
|
|
Raw materials and stock parts
|
|
$
|
337,689
|
|
|
$
|
324,749
|
|
Work-in-process
|
|
|
16,003
|
|
|
|
54,716
|
|
Finished goods
|
|
|
104,037
|
|
|
|
69,282
|
|
|
|
$
|
457,729
|
|
|
$
|
448,747
|
|
The
Company’s reserve for obsolescence equaled $435,528 at June 30, 2017 and September 30, 2016. The Company provides for a
valuation reserve for certain inventory that is deemed to be obsolete, of excess quantity or otherwise impaired.
Note
4. Income Taxes
The
Company accounts for income taxes under FASB ASC 740-10. Deferred tax assets and liabilities are based on the difference between
the financial statement and tax basis of assets and liabilities as measured by the enacted tax rates which are anticipated to
be in effect when these differences reverse. The deferred tax provision is the result of the net change in the deferred tax assets
and liabilities. A valuation allowance is established when it is necessary to reduce deferred tax assets to amounts expected to
be realized. The Company has provided a full valuation allowance against its net deferred tax assets.
FASB
ASC 740-10 clarifies the accounting for uncertainty in income taxes recognized in an entity’s financial statements and prescribes
a recognition threshold and measurement attributes for financial statement disclosure of tax position taken or expected to be
taken on a tax return. Additionally, it provides guidance on derecognition, classification, interest and penalties, accounting
in interim periods, disclosure and transition. The Company determined it has no uncertain tax positions and therefore no amounts
are recorded.
Note
5. Legal Matters
None.
Note
6. Fair Value of Financial Instruments
The
carrying values of the Company’s cash and cash equivalents, accounts receivable and accounts payable approximate fair value
because of the short maturity of those instruments. The carrying value of the Company’s notes payable approximates its fair
value.
The
Company currently does not trade in or utilize derivative financial instruments.
Note
7. Significant Customers
Sales
to one Original Equipment Manufacturer (“OEM”) customer represented 43.1% of total sales for the nine months ended
June 30, 2017 and 28.0% of total sales for the nine months ended June 30, 2016. This one customer represented 28.1%, 32.8% and
24.7% of total sales for the fiscal years ending September 30, 2016, 2015 and 2014, respectively. These sales are in connection
with a multiyear program in which the Company is a subcontractor. A loss of this customer or programs related to this customer
could materially impact the Company.
Note
8. Notes Payable
On
July 2, 2013, Microwave Filter Company, Inc. (the “Company”) entered into a Ten Year Term Loan with KeyBank National
Association in the amount of Five Hundred Thousand and No/100 Dollars ($500,000.00). The amount of all advances outstanding together
with accrued interest thereon shall be due and payable on July 2, 2023 (“Maturity”). The Company shall pay interest
on the outstanding principal balance of this Note at the rate per annum equal to 4.5%. The net proceeds from the Term Loan will
be available to provide working capital as needed. The total amount outstanding as of June 30, 2017 and September 30, 2016 was
$330,831 and $365,650 respectively. Interest accrued as of June 30, 2017 and September 30, 2016 was $1,158 and $1,280, respectively.
The
Company has secured this Note by: (a) a Mortgage, Assignment of Rents, Security Agreement and Fixture Filing which creates a 1
st
lien on real property situated in the Town of Dewitt, County of Onondaga, and State of New York and known as 6743 Kinne
Street, East Syracuse, New York; (b) a General Assignment of Rents and Leases; (c) an Environmental Compliance and Indemnification;
and (d) such other security as may now or hereafter begiven to Lender as collateral for the loan.
Note
9. Earnings Per Share
The
Company presents basic earnings per share (“EPS”), computed based on the weighted average number of common shares
outstanding for the period, and when applicable diluted EPS, which gives the effect to all dilutive potential shares outstanding
(i.e. options) during the period after restatement for any stock dividends. There were no dividends declared during the quarters
ended June 30, 2017 and 2016. Income (loss) used in the EPS calculation is net income (loss) for each period. There were no dilutive
potential shares outstanding for the periods ended June 30, 2017 and 2016.
Note
10. Recent Accounting Pronouncements
Update
2015-11-
Inventory (Topic 330): Simplifying the Measurement of Inventory,
is effective for fiscal years beginning after
December 15, 2016, including interim periods within those fiscal years. Under the new standard, businesses that use the first-in,
first-out (FIFO) or average cost method are required to measure inventory at the lower of cost or net realizable value (“NRV”),
as defined, instead of at the lower of cost or market value. Management feels the updated standard, to be adopted on a prospective
basis, would not represent a material impact to the Company’s financial statements.
MICROWAVE
FILTER COMPANY, INC.
ITEM
2.
|
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|
Business
Overview
Microwave
Filter Company, Inc. operates primarily in the United States and principally in one industry. The Company extends credit to business
customers based upon ongoing credit evaluations. Microwave Filter Company, Inc. designs, develops, manufactures and sells electronic
filters, both for radio and microwave frequencies, to help process signal distribution and to prevent unwanted signals from disrupting
transmit or receive operations. Markets served include cable television, television and radio broadcast, satellite broadcast,
mobile radio, commercial communications and defense electronics.
Critical
Accounting Policies
The
Company’s condensed consolidated financial statements are based on the application of United States generally accepted accounting
principles (GAAP). GAAP requires the use of estimates, assumptions, judgments and subjective interpretations of accounting principles
that have an impact on the assets, liabilities, revenue and expense amounts reported. The Company believes its use of estimates
and underlying accounting assumptions adhere to GAAP and are consistently applied. Valuations based on estimates are reviewed
for reasonableness and adequacy on a consistent basis throughout the Company. Primary areas where financial information of the
Company is subject to the use of estimates, assumptions and the application of judgment include revenues, receivables, inventories,
warranty reserves and taxes. Note 1 to the consolidated financial statements in our Annual Report on Form 10-K for the fiscal
year ended September 30, 2016 describes the significant accounting policies used in preparation of the condensed consolidated
financial statements. The most significant areas involving management judgments and estimates are described below and are considered
by management to be critical to understanding the financial condition and results of operations of the Company.
Revenues
from product sales are recorded as the products are shipped and title and risk of loss have passed to the customer, provided that
no significant vendor or post-contract support obligations remain and the collection of the related receivable is probable. Billings
in advance of the Company’s performance of such work are reflected as customer deposits in the accompanying condensed consolidated
balance sheet.
Allowances
for doubtful accounts are based on estimates of losses related to customer receivable balances. The establishment of reserves
requires the use of judgment and assumptions regarding the potential for losses on receivable balances.
The
Company’s inventories are stated at the lower of cost determined on the first-in, first-out method or market. The Company
uses certain estimates and judgments and considers several factors including product demand and changes in technology to provide
for excess and obsolescence reserves to properly value inventory.
The
Company established a warranty reserve which provides for the estimated cost of product returns based upon historical experience
and any known conditions or circumstances. The warranty obligation is affected by product that does not meet specifications and
performance requirements and any related costs of addressing such matters. Product must be returned within one year of the date
of purchase.
The
Company accounts for income taxes under FASB ASC 740-10. Deferred tax assets and liabilities are based on the difference between
the financial statement and tax basis of assets and liabilities as measured by the enacted tax rates which are anticipated to
be in effect when these differences reverse. The deferred tax provision is the result of the net change in the deferred tax assets
and liabilities. A valuation allowance is established when it is necessary to reduce deferred tax assets to amounts expected to
be realized. The Company has provided a full valuation allowance against its net deferred tax assets.
RESULTS
OF OPERATIONS
THREE
MONTHS ENDED JUNE 30, 2017 vs. THREE MONTHS ENDED JUNE 30, 2016
The
following table sets forth the Company’s net sales by major product group for the three months ended June 30, 2017 and 2016.
Product group
|
|
Fiscal 2017
|
|
|
Fiscal 2016
|
|
Microwave Filter (MFC):
|
|
|
|
|
|
|
|
|
RF/Microwave
|
|
$
|
394,092
|
|
|
$
|
445,105
|
|
Satellite
|
|
|
210,703
|
|
|
|
310,059
|
|
Cable TV
|
|
|
56,902
|
|
|
|
100,663
|
|
Broadcast TV
|
|
|
40,286
|
|
|
|
71,837
|
|
Niagara Scientific (NSI):
|
|
|
665
|
|
|
|
972
|
|
Total
|
|
$
|
702,648
|
|
|
$
|
928,636
|
|
|
|
|
|
|
|
|
|
|
Sales backlog at June 30
|
|
$
|
463,727
|
|
|
$
|
521,254
|
|
Net
sales for the three months ended June 30, 2017 equaled $702,648, a decrease of $225,988 or 24.3%, when compared to net sales of
$928,636 for the three months ended June 30, 2016.
MFC
’
s
RF/Microwave product sales decreased $51,013 or 11.5% to $394,092 for the three months ended June 30, 2017 when compared to RF/Microwave
product sales of $445,105 during the same period last year. The decrease in sales can primarily be attributed to a decrease in
sales to the U.S. Government. Sales to the U.S. Government equaled $0 for the three months ended June 30, 2017 compared to $89,250
during the same period last year. The Company
’
s RF/Microwave products are sold primarily to the U.S. Government and
Original Equipment Manufacturers (OEM) that serve the mobile radio, commercial communications and defense electronics markets.
Sales to one OEM customer increased $76,210 to $284,900, or 40.5% of total sales for the three months ended June 30, 2017, compared
to sales of $208,690 or 22.5% of total sales for the three months ended June 30, 2016. These sales are in connection with a multiyear
program in which the Company is a subcontractor. The Company continues to invest in production engineering and infrastructure
development to penetrate OEM market segments as they become popular. MFC is concentrating its technical resources and product
development efforts toward potential high volume customers as part of a concentrated effort to provide substantial long-term growth.
Over the last year, MFC, in conjunction with various OEM
’
s, has developed and supplied prototypes as well as small
production runs in support of new programs being introduced to the marketplace. It is our belief that a continuation of this effort
will help increase sales as well as reinforcing MFC
’
s position as a quality manufacturer of RF filters and assemblies.
MFC
’
s
Satellite product sales decreased $99,356 or 32.0% to $210,703 for the three months ended June 30, 2017 when compared to Satellite
product sales of $310,059 during the same period last year. The decrease in sales can be attributed to a decrease in demand for
the Company
’
s filters which suppress strong out-of-band interference caused by military and civilian radar systems
and other sources. Despite the decrease in sales, management expects demand for these types of filters to continue with the proliferation
of earth stations world-wide and increased sources of interference.
MFC
’
s
Cable TV product sales decreased $43,761 or 43.5% to $56,902 for the three months ended June 30, 2017 when compared to Cable TV
product sales of $100,663 during the same period last year. The decrease in sales can primarily be attributed to a decrease in
sales from one customer with specific cable applications last year. Management continues to project flat or a decrease in demand
for standard Cable TV products due to the shift from analog to digital television. Due to the inherent nature of digital modulation
versus analog modulation, fewer filters are required. The Company has developed filters for digital television and there will
still be requirements for analog filters for limited applications in commercial and private cable systems.
MFC
’
s
Broadcast TV/Wireless Cable product sales decreased $31,551 or 43.9% to $40,286 for the three months ended June 30, 2017 when
compared to sales of $71,837 during the same period last year. The decrease can primarily be attributed a decrease in sales to
one international customer. The Company has developed new products for this market and is hopeful that sales will increase in
the future.
The
Company’s international sales decreased $182,027 to $82,693 for the three months ended June 30, 2017 compared to $264,720
for the same period last year. The decrease can primarily be attributed to decreases in demand for the Company’s satellite
and broadcast products.
MFC’s
sales order backlog equaled $463,727 at June 30, 2017 compared to sales order backlog of $521,254 at June 30, 2016. However, backlog
is not necessarily indicative of future sales. Accordingly, the Company does not believe that its backlog as of any particular
date is representative of actual sales for any succeeding period. Approximately 54% of the total sales order backlog at June 30,
2017 is scheduled to ship by September 30, 2017.
Gross
profit for the three months ended June 30, 2017 equaled $225,722, a decrease of $116,659 or 34.1%, when compared to gross profit
of $342,381 for the three months ended June 30, 2016. The decrease in gross profit can primarily be attributed to the lower sales
volume this year when compared to the same period last year. As a percentage of sales, gross profit equaled 32.1% for the three
months ended June 30, 2017 compared to 36.9% for the three months ended June 30, 2016. The decrease in gross profit as a percentage
of sales can primarily be attributed to higher direct material costs as a percentage of sales due to product sales mix.
Selling,
general and administrative (SGA) expenses for the three months ended June 30, 2017 equaled $293,862, a decrease of $23,955 or
7.5%, when compared to SGA expenses of $317,817 for the three months ended June 30, 2016. The decrease can primarily be attributed
to decreases in payroll and payroll related expenses. The Company has been participating in the New York State Shared Work program
which allows employers to reduce the hours of all or a particular group of employees. The employees whose hours are reduced can
receive partial unemployment insurance benefits or elect to use accrued vacation. The decrease in payroll costs was partially
offset by an increase in advertising and promotional expenses. A proactive marketing effort is continuing in an effort to increase
market share. As a percentage of sales, SGA expenses equaled 41.8% for the three months ended June 30, 2017 when compared to 34.2%
for the three months ended June 30, 2016 primarily due to the lower sales volume this year providing a lower base to absorb expenses.
The
Company recorded a loss from operations of $68,140 for the three months ended June 30, 2017 compared to income from operations
of $24,564 for the three months ended June 30, 2016. The decrease in operating income can primarily be attributed to the lower
sales volume this year when compared to the same period last year.
Other
expense was $2,658 for the three months ended June 30, 2017 compared to expense of $2,145 for the three months ended June 30,
2016 primarily due to interest expense of $3,813 offset by miscellaneous non-operating income of $1,155 for the three months ended
June 30, 2017 and interest expense of $4,333 offset by miscellaneous non-operating income of $2,188 for the three months ended
June 30, 2016. Other income generally consists of interest income, sales of scrap material, the forfeiture of non-refundable deposits
and other incidental items.
The
benefit for income taxes equaled $0 for the three months ended June 30, 2017 and 2016. Any benefit for losses has been subject
to a valuation allowance since the realization of the deferred tax benefit is not considered more likely than not. As required
by FASB ASC 740, the Company has evaluated the positive and negative evidence bearing upon the realization of its deferred tax
assets. The Company has determined that, at this time, it is more likely than not that the Company will not realize all of the
benefits of federal and state deferred tax assets, and, as a result, a valuation allowance was established.
NINE
MONTHS ENDED JUNE 30, 2017 vs. NINE MONTHS ENDED JUNE 30, 2016
The
following table sets forth the Company’s net sales by major product group for the nine months ended June 30, 2017 and 2016.
Product group
|
|
Fiscal 2017
|
|
|
Fiscal 2016
|
|
Microwave Filter (MFC):
|
|
|
|
|
|
|
|
|
RF/Microwave
|
|
$
|
1,324,803
|
|
|
$
|
1,245,162
|
|
Satellite
|
|
|
567,287
|
|
|
|
883,521
|
|
Cable TV
|
|
|
245,878
|
|
|
|
417,140
|
|
Broadcast TV
|
|
|
165,137
|
|
|
|
248,354
|
|
Niagara Scientific (NSI):
|
|
|
4,093
|
|
|
|
7,859
|
|
Total
|
|
$
|
2,307,198
|
|
|
$
|
2,802,036
|
|
|
|
|
|
|
|
|
|
|
Sales backlog at June 30
|
|
$
|
463,727
|
|
|
$
|
521,254
|
|
Net
sales for the nine months ended June 30, 2017 equaled $2,307,198, a decrease of $494,838 or 17.7%, when compared to net sales
of $2,802,036 for the nine months ended June 30, 2016.
MFC’s
RF/Microwave product sales increased $79,641 or 6.4% to $1,324,803 for the nine months ended June 30, 2017 when compared to RF/Microwave
product sales of $1,245,162 during the same period last year. MFC’s RF/Microwave products are sold primarily to the U. S.
Government and OEMs that serve the mobile radio, commercial communications and defense electronics markets. Sales to one OEM customer
increased $209,090 to $994,330, or 43.1% of total sales for the nine months ended June 30, 2017, compared to sales of $785,240
or 28.0% of total sales for the nine months ended June 30, 2016. These sales are in connection with a multiyear program in which
the Company is a subcontractor. Sales to the U.S. Government decreased $88,355 to $31,495 for the nine months ended June 30, 2017
compared to $119,850 during the same period last year. The Company continues to invest in production engineering and infrastructure
development to penetrate OEM market segments as they become popular. MFC is concentrating its technical resources and product
development efforts toward potential high volume customers as part of a concentrated effort to provide substantial long-term growth.
Over the last year, MFC, in conjunction with various OEM’s, has developed and supplied prototypes as well as small production
runs in support of new programs being introduced to the marketplace. It is our belief that a continuation of this effort will
help increase sales as well as reinforcing MFC’s position as a quality manufacturer of RF filters and assemblies.
MFC’s
Satellite product sales decreased $316,234 or 35.8% to $567,287 for the nine months ended June 30, 2017 when compared to satellite
product sales of $883,521 during the same period last year. The decrease can be attributed to a decrease in demand for the Company’s
filters which suppress strong out-of-band interference caused by military and civilian radar systems and other sources. Despite
the decrease in sales, management expects demand for these types of filters to continue with the proliferation of earth stations
world-wide and increased sources of interference.
MFC’s
Cable TV product sales decreased $171,262 or 41.1% to $245,878 for the nine months ended June 30, 2017 when compared to Cable
TV product sales of $417,170 during the same period last year. The decrease in sales can primarily be attributed a decrease in
sales from two customers with specific cable applications last year. Management continues to project flat or a decrease in demand
for standard Cable TV products due to the shift from analog to digital television. Due to the inherent nature of digital modulation
versus analog modulation, fewer filters are required. The Company has developed filters for digital television and there will
still be requirements for analog filters for limited applications in commercial and private cable systems.
MFC’s
Broadcast TV/Wireless Cable product sales decreased $83,217 or 33.5% to $165,137 for the nine months ended June 30, 2017 when
compared to sales of $248,354 during the same period last year. The decrease can primarily be attributed to a decrease in sales
of wireless diplexers which were sold to one international customer last year.
The
Company’s international sales decreased $378,895 to $255,337 for the nine months ended June 30, 2017 compared to $634,232
for the same period last year. The decrease can primarily be attributed to decreases in demand for the Company’s satellite
and broadcast products.
MFC’s
sales order backlog equaled $463,727 at June 30, 2017 compared to sales order backlog of $521,254 at June 30, 2016. However, backlog
is not necessarily indicative of future sales. Accordingly, the Company does not believe that its backlog as of any particular
date is representative of actual sales for any succeeding period. Approximately 54% of the total sales order backlog at June 30,
2017 is scheduled to ship by September 30, 2017.
Gross
profit for the nine months ended June 30, 2017 equaled $747,533, a decrease of $305,855 or 29.0%, when compared to gross profit
of $1,053,388 for the nine months ended June 30, 2016. The decrease in gross profit can primarily be attributed to the lower sales
volume this year when compared to the same period last year. As a percentage of sales, gross profit equaled 32.4% for the nine
months ended June 30, 2017 compared to 37.6% for the nine months ended June 30, 2016. The decrease can primarily be attributed
to higher direct material costs as a percentage of sales due primarily to product sales mix and the lower sales volume this year
when compared to the same period last year providing a lower base to absorb overhead expenses.
SG&A
expenses for the nine months ended June 30, 2017 equaled $953,485, a decrease of $75,853 or 7.4%, when compared to SG&A expenses
of $1,029,338 for the nine months ended June 30, 2016. The decrease can primarily be attributed to decreases in payroll and payroll
related expenses. The Company has been participating in the New York State Shared Work program which allows employers to reduce
the hours of all or a particular group of employees. The employees whose hours are reduced can receive partial unemployment insurance
benefits or elect to use accrued vacation. The decrease in payroll costs was partially offset by an increase in advertising and
promotional expenses. A proactive marketing effort is continuing in an effort to increase market share. As a percentage of sales,
SGA expenses increased to 41.3 % for the nine months ended June 30, 2017 compared to 36.7% for the nine months ended June 30,
2016 due primarily to the lower sales volume this year when compared to the same period last year.
The
Company recorded a loss from operations of $205,952 for the nine months ended June 30, 2017 compared to income from operations
of $24,050 for the nine months ended June 30, 2016. The loss can primarily be attributed to the lower sales volume this year when
compared to the same period last year.
Other
expense was $8,422 for the nine months ended June 30, 2017 compared to expense of $8,229 for the nine months ended June 30, 2016
primarily due to interest expense of $11,831 offset by miscellaneous non-operating income of $3,409 for the nine months ended
June 30, 2017 and interest expense of $13,429 offset by miscellaneous non-operating income of $5,200 for the nine months ended
June 30, 2016. Other income generally consists of interest income, sales of scrap material, the forfeiture of non-refundable deposits
and other incidental items.
The
benefit for income taxes equaled $0 for the nine months ended June 30, 2017 and a benefit of $3,000 for the nine months ended
June 30, 2016. The benefit for the nine months ended June 30, 2016 can be attributed to a prior year’s federal refund. Any
benefit for losses has been subject to a valuation allowance since the realization of the deferred tax benefit is not considered
more likely than not. As required by FASB ASC 740, the Company has evaluated the positive and negative evidence bearing upon the
realization of its deferred tax assets. The Company has determined that, at this time, it is more likely than not that the Company
will not realize all of the benefits of federal and state deferred tax assets, and, as a result, a valuation allowance was established.
Off-Balance
Sheet Arrangements
At
June 30, 2017 and 2016, the Company did not have any unconsolidated entities or financial partnerships, such as entities often
referred to as structured finance or special purpose entities, which might have been established for the purpose of facilitating
off-balance sheet arrangements.
LIQUIDITY
and CAPITAL RESOURCES
MFC
defines liquidity as the ability to generate adequate funds to meet its operating and capital needs. The Company’s primary
source of liquidity has been funds provided by operations.
|
|
June 30, 2017
|
|
|
September 30, 2016
|
|
|
|
|
|
|
|
|
Cash & cash equivalents
|
|
$
|
682,626
|
|
|
$
|
923,117
|
|
Working capital
|
|
$
|
1,190,756
|
|
|
$
|
1,438,068
|
|
Current ratio
|
|
|
4.95 to 1
|
|
|
|
5.20 to 1
|
|
Long-term debt
|
|
$
|
282,562
|
|
|
$
|
318,998
|
|
Cash
and cash equivalents decreased $240,491 to $682,626 at June 30, 2017 when compared to cash and cash equivalents of $923,117 at
September 30, 2016. The decrease was a result of $148,675 in net cash used in operating activities, $56,335 in net cash used for
capital expenditures, $34,819 in net cash used for repayment of a note payable and $662 used to purchase treasury stock.
Net
cash provided by operating activities can fluctuate between periods as a result of differences in net income, the timing of the
collection of accounts receivable, purchase of inventory and payment of accounts payable. The $148,675 in net cash used in operating
activities can primarily be attributed the net loss of $214,374 net of depreciation expense of $60,495. The decrease of $43,841
in accounts receivable at June 30, 2017 when compared to September 30, 2016 can primarily be attributed to the timing of shipments
and collections. The decrease of $38,783 in accrued compensated absences at June 30, 2017 when compared to September 30, 2016
can primarily be attributed to employees electing to use accrued vacation to cover time off.
The
capital expenditures of $56,335 consisted primarily of computer hardware and production equipment.
On
July 2, 2013, Microwave Filter Company, Inc. entered into a Ten Year Term Loan with KeyBank National Association in the amount
of Five Hundred Thousand and No/100 Dollars ($500,000.00). The amount of all advances outstanding together with accrued interest
thereon shall be due and payable on July 2, 2023 (“Maturity”). The Company shall pay interest on the outstanding principal
balance of this Note at the rate per annum equal to 4.5%. The net proceeds from the Term Loan will be available to provide working
capital as needed.
Management
believes that its working capital requirements for the forseeable future will be met by its existing cash balances and future
cash flows from operations.
SAFE
HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
In
an effort to provide investors a balanced view of the Company’s current condition and future growth opportunities, this
Quarterly Report on Form 10-Q includes comments by the Company’s management about future performance. These statements which
are not historical information are “forward-looking statements” pursuant to the safe harbor provisions of the Private
Securities Litigation Reform Act of 1995. These, and other forward-looking statements, are subject to business and economic risks
and uncertainties that could cause actual results to differ materially from those discussed. These risks and uncertainties include,
but are not limited to: risks associated with demand for and market acceptance of existing and newly developed products as to
which the Company has made significant investments; general economic and industry conditions; slower than anticipated penetration
into the satellite communications, mobile radio and commercial and defense electronics markets; competitive products and pricing
pressures; increased pricing pressure from our customers; risks relating to governmental regulatory actions in broadcast, communications
and defense programs; as well as other risks and uncertainties, including but not limited to those detailed from time to time
in the Company’s Securities and Exchange Commission filings. These forward-looking statements are made only as of the date
hereof, and the Company undertakes no obligation to update or revise the forward-looking statements, whether as a result of new
information, future events or otherwise. You are encouraged to review Microwave Filter Company’s 2016 Annual Report and
Form 10-K for the fiscal year ended September 30, 2016 and other Securities and Exchange Commission filings. Forward looking statements
may be made directly in this document or “incorporated by reference” from other documents. You can find many of these
statements by looking for words like “believes,” “expects,” “anticipates,” “estimates,”
or similar expressions.