ITEM
2.
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MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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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, 2017 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 net realizable value.
Net realizable value is determined as the estimated selling price in the normal course of business minus the cost of completion,
disposal and transportation. 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, 2018 vs. THREE MONTHS ENDED JUNE 30, 2017
The
following table sets forth the Company’s net sales by major product group for the three months ended June 30, 2018 and 2017.
Product group
|
|
Fiscal
2018
|
|
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Fiscal
2017
|
|
Microwave Filter (MFC):
|
|
|
|
|
|
|
|
|
RF/Microwave
|
|
$
|
413,611
|
|
|
$
|
394,092
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Satellite
|
|
|
204,474
|
|
|
|
210,703
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|
Cable TV
|
|
|
101,467
|
|
|
|
56,902
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|
Broadcast TV
|
|
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82,588
|
|
|
|
40,286
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|
Niagara Scientific
(NSI):
|
|
|
0
|
|
|
|
665
|
|
Total
|
|
$
|
802,140
|
|
|
$
|
702,648
|
|
|
|
|
|
|
|
|
|
|
Sales backlog
at June 30
|
|
$
|
1,193,829
|
|
|
$
|
463,727
|
|
Net
sales for the three months ended June 30, 2018 equaled $802,140 an increase of $99,492 or 14.2%, when compared to net sales of
$702,648 for the three months ended June 30, 2017.
MFC’s
RF/Microwave product sales increased $19,519 or 5% to $413,611 for the three months ended June 30, 2018 when compared to RF/Microwave
product sales of $394,092 during the same period last year. The Company’s RF/Microwave products are sold primarily to Original
Equipment Manufacturers (OEM) that serve the mobile radio, commercial communications and defense electronics markets. Sales to
one OEM customer increased $38,825 to $323,725 during the three months ended June 30, 2018 compared to sales of $284,900 during
the same period last year. 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 $6,229 or 3% to $204,474 for the three months ended June 30, 2018 when compared to Satellite
product sales of $210,703 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 increased $44,565 or 78.3% to $101,467 for the three months ended June 30, 2018 when compared to Cable
TV product sales of $56,902 during the same period 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 increased $42,302 or 105% to $82,588 for the three months ended June 30, 2018 when compared
to sales of $40,286 during the same period last year. The increase can primarily be attributed to an increase in sales to one
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 $2,621 to $80,072 for the three months ended June 30, 2018 compared to $82,693 for
the same period last year.
MFC’s
sales order backlog equaled $1,193,829 at June 30, 2018 compared to sales order backlog of $463,727 at June 30, 2017. The increase
in backlog can primarily be attributed to orders received from one OEM customer to be shipped over the next fifteen months. 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 45% of the total sales order backlog at June 30,
2018 is scheduled to ship by September 30, 2018.
Gross
profit for the three months ended June 30, 2018 equaled $326,890, an increase of $101,168 or 44.8%, when compared to gross profit
of $225,722 for the three months ended June 30, 2017. The increase in gross profit can primarily be attributed to the higher sales
volume this year providing a higher base to absorb fixed expenses and lower direct material costs as a percentage of sales due
primarily to product sales mix. As a percentage of sales, gross profit equaled 40.8% for the three months ended June 30, 2018
compared to 32.1% for the three months ended June 30, 2017.
Selling,
general and administrative (SGA) expenses for the three months ended June 30, 2018 equaled $345,188, an increase of $51,326 or
17.5%, when compared to SGA expenses of $293,862 for the three months ended June 30, 2017. The increase can be attributed to higher
payroll expenses due to an increase in the number of hours worked versus workshare when compared to the same period last year.
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 Company also hired a sales professional during the beginning of April. As a percentage of
sales, SGA expenses equaled 43% for the three months ended June 30, 2018 compared to 41.8% for the three months ended June 30,
2017.
The
Company recorded a loss from operations of $18,298 for the three months ended June 30, 2018 compared to a loss from operations
of $68,140 for the three months ended June 30, 2017. The improvement can primarily be attributed to the higher sales volume and
higher gross profit this year when compared to the same period last year.
Other
expense was $2,665 for the three months ended June 30, 2018 compared to expense of $2,658 for the three months ended June 30,
2017 primarily due to interest expense of $3,266 offset by miscellaneous non-operating income of $601 for the three months ended
June 30, 2018 and interest expense of $3,813 offset by miscellaneous non-operating income of $1,155 for the three months ended
June 30, 2017. 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, 2018 and 2017. 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, 2018 vs. NINE MONTHS ENDED JUNE 30, 2017
The
following table sets forth the Company’s net sales by major product group for the nine months ended June 30, 2018 and 2017.
Product group
|
|
Fiscal
2018
|
|
|
Fiscal
2017
|
|
Microwave Filter (MFC):
|
|
|
|
|
|
|
|
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RF/Microwave
|
|
$
|
950,099
|
|
|
$
|
1,324,803
|
|
Satellite
|
|
|
877,520
|
|
|
|
567,287
|
|
Cable TV
|
|
|
246,854
|
|
|
|
245,878
|
|
Broadcast TV
|
|
|
244,261
|
|
|
|
165,137
|
|
Niagara Scientific
(NSI):
|
|
|
4,837
|
|
|
|
4,093
|
|
Total
|
|
$
|
2,323,571
|
|
|
$
|
2,307,198
|
|
|
|
|
|
|
|
|
|
|
Sales backlog
at June 30
|
|
$
|
1,193,829
|
|
|
$
|
463,727
|
|
Net
sales for the nine months ended June 30, 2018 equaled $2,323,571, an increase of $16,373 or 0.7%, when compared to net sales of
$2,307,198 for the nine months ended June 30, 2017.
MFC’s
RF/Microwave product sales decreased $374,704 or 28.3% to $950,099, for the nine months ended June 30, 2018 when compared to RF/Microwave
product sales of $1,324,803 during the same period last year. MFC’s RF/Microwave products are sold primarily to OEMs that
serve the mobile radio, commercial communications and defense electronics markets. Sales to one OEM customer decreased $262,880
to $731,450 during the nine months ended June 30, 2018 compared to sales of $994,330 during the same period last year. 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 increased $310,233 or 54.7% to $877,520 for the nine months ended June 30, 2018 when compared to satellite
product sales of $567,287 during the same period last year. The increase in sales can primarily be attributed to the sales of
a new product developed for one customer and an increase in demand for the Company’s filters which suppress strong out-of-band
interference caused by military and civilian radar systems and other sources. Sales to this one customer equaled $247,875 for
the nine months ended June 30, 2018 compared to $33,810 for the nine months ended June 30, 2017. Management expects sales of this
product to continue but is unable to predict demand at this time.
MFC’s
Cable TV product sales increased $976 or 0.4% to $246,854 for the nine months ended June 30, 2018 compared to Cable TV product
sales of $245,878 during the same period 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 increased $79,124 or 47.9% to $244,261 for the nine months ended June 30, 2018 when
compared to sales of $165,137 during the same period last year. The increase can primarily be attributed to an increase in sales
to one 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 $23,576 to $232,239 for the nine months ended June 30, 2018 compared to $255,815
for the same period last year.
MFC’s
sales order backlog equaled $1,193,829 at June 30, 2018 compared to sales order backlog of $463,727 at June 30, 2017. The increase
in backlog can primarily be attributed to orders received from one OEM customer to be shipped over the next fifteen months. 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 45% of the total sales order backlog at June 30,
2018 is scheduled to ship by September 30, 2018.
Gross
profit for the nine months ended June 30, 2018 equaled $877,066, an increase of $129,533 or 17.3%, when compared to gross profit
of $747,533 during the nine months ended June 30, 2017. The increase in gross profit as a percentage of sales can be attributed
to lower direct material costs as a percentage of sales primarily due to product sales mix and lower payroll and payroll related
expenses due to a reduction in head count in production labor and production support positions due to retirement and employee
turnover with the positions not immediately filled. As a percentage of sales, gross profit equaled 37.7% for the nine months ended
June 30, 2018 compared to 32.4% for the nine months ended June 30, 2017.
SG&A
expenses for the nine months ended June 30, 2018 equaled $1,005,301 an increase of $51,816 or 5.4%, when compared to SG&A
expenses of $953,485 during the nine months ended June 30, 2017. The increase can primarily be attributed to increases in payroll
expenses. As a percentage of sales, SGA expenses increased to 43.3% for the nine months ended June 30, 2018 compared to 41.3%
for the nine months ended June 30, 2017.
The
Company recorded a loss from operations of $128,235 for the nine months ended June 30, 2018 compared to a loss from operations
of $205,952 for the nine months ended June 30, 2017. The improvement can primarily be attributed to the higher gross profit this
year when compared to the same period last year.
Other
expense was $6,461 for the nine months ended June 30, 2018 compared to expense of $8,422 for the nine months ended June 30, 2017
primarily due to interest expense of $10,209 offset by miscellaneous non-operating income of $3,748 for the nine months ended
June 30, 2018 and interest expense of $11,831 offset by miscellaneous non-operating income of $3,409 for the nine months ended
June 30, 2017. Other income generally consists of interest income, sales of scrap material, the forfeiture of non-refundable deposits
and other incidental items.
The
provision for income taxes equaled $50 for the nine months ended June 30, 2018 and $0 for the nine months ended June 30, 2017.
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, 2018 and 2017, 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, 2018
|
|
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September
30, 2017
|
|
|
|
|
|
|
|
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Cash & cash equivalents
|
|
$
|
550,054
|
|
|
$
|
667,940
|
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Working capital
|
|
$
|
1,023,329
|
|
|
$
|
1,149,368
|
|
Current ratio
|
|
|
4.5
to 1
|
|
|
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4.24
to 1
|
|
Long-term debt
|
|
$
|
231,855
|
|
|
$
|
270,172
|
|
Cash
and cash equivalents decreased $117,886 to $550,054 at June 30, 2018 when compared to cash and cash equivalents of $667,940 at
September 30, 2017. The decrease was a result of $74,099 in net cash used in operating activities, $7,348 in net cash used for
capital expenditures, $36,436 in net cash used for repayment of a note payable and $3 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 $74,099 in net cash used in operating
activities can primarily be attributed the net loss of $134,746 net of depreciation expense of $54,375.
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.
The
Company plans on spending approximately $55,000 over the next four months on plant improvements.
Management
believes that its working capital requirements for the forseeable future will be met by its existing cash balances, future cash
flows from operations and its current credit arrangements.
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 2017 Annual Report and
Form 10-K for the fiscal year ended September 30, 2017 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.