NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
DECEMBER
31, 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, 2017, 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 three month period ended December 31, 2017 are not necessarily indicative of
the results that may be expected for the year ended September 30, 2018. It is suggested that these condensed financial statements
be read in conjunction with the financial statements and the notes thereto included in the Company’s latest shareholders’
annual report (Form 10-K).
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 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.
Inventories
net of the reserve for obsolescence consisted of the following:
|
|
December
31, 2017
|
|
|
September
30, 2017
|
|
|
|
|
|
|
|
|
Raw
materials and stock parts
|
|
$
|
311,340
|
|
|
$
|
337,462
|
|
Work-in-process
|
|
|
22,998
|
|
|
|
21,861
|
|
Finished
goods
|
|
|
89,640
|
|
|
|
98,835
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
423,978
|
|
|
$
|
458,158
|
|
The
Company’s reserve for obsolescence equaled $445,158 at December 31, 2017 and September 30, 2017. 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 positions 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.
On
December 22, 2017, the Tax Cuts and Jobs Act (the “Act”) was enacted, the Act which among other changes, reduces the
Federal statutory corporate income tax rate from 35% to 21% effective January 1, 2018. Based on the provisions of the Act, the
Company remeasured their net deferred tax assets applying the new lower income tax rates to the Company’s net long term
deferred tax assets. As stated above, the Company has provided a full valuation allowance against its net deferred tax assets.
The actual impact of the Act may differ due to changes in interpretations, assumptions and the issuance of additional guidance.
Note
5. Legal Matters
None.
Note
6. Fair Value of Financial Instruments
The
carrying value 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
Company currently does not trade in or utilize derivative financial instruments.
Note
7. Significant Customers
Net
sales to two significant customers represented 38.5% of the Company’s total sales for the three months ended December 31,
2017 and net sales to one significant customer represented 42.7% of the Company’s total sales for the three months ended
December 31, 2016. A loss of one of these customers or programs related to these customers could significantly impact the Company.
Note
8. Notes Payable
On
July 2, 2013, 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 December 31, 2017 and September 30, 2017 was $306,990 and $318,998 respectively. Interest
accrued as of December 31, 2017 and September 30, 2017 was $1,113 and $1,116 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 be given 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 December 31, 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 December 31, 2017 and 2016.
Note
10. Recent Accounting Pronouncements
Management
has reviewed the most recent accounting pronouncements issued by the various authoritative standard setting bodies:
Update
2015-14-
Revenue from Contracts with Customers (Topic 606)
: affects any entity that either enters into contracts with customers
to transfer goods or services or enters into contracts for the transfer of nonfinancial assets unless those contracts are within
the scope of other standards (for example, insurance contracts or lease contracts). The core principle of the guidance is that
an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects
the consideration to which the entity expects to be entitled in exchange for those goods or services. The guidance is applicable
to annual reporting periods beginning after December 15, 2017, including interim reporting periods within that reporting period.
Earlier application is permitted only as of annual reporting periods beginning after December 15, 2016, including interim reporting
periods within that reporting period. Management plans to evaluate the applicability and impact of the adoption of this standards
update over the coming year.
Update
2015-17
- Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes
addresses the requirement to reclassify
all current deferred income tax assets and liabilities on the balance sheet as non-current assets and liabilities, and is effective
retrospectively for financial statements issued for annual periods beginning after December 15, 2016, and interim periods within
those annual periods. The Company has adopted this standard in the period ended December 31, 2017. As explained in Note 4, the
Company has provided a full valuation allowance against its deferred tax assets, and thus there is no impact from the adoption
of this updated standard in the current year or on the balance sheet of any of the periods presented.
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, 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. Products 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 DECEMBER 31, 2017 vs. THREE MONTHS ENDED DECEMBER 31, 2016
The
following table sets forth the Company’s net sales by major product group for the three months ended December 31, 2017 and
2016.
Product
group
|
|
Fiscal
2018
|
|
|
Fiscal
2017
|
|
Microwave
Filter (MFC):
|
|
|
|
|
|
|
|
|
RF/Microwave
|
|
$
|
239,969
|
|
|
$
|
449,044
|
|
Satellite
|
|
|
359,690
|
|
|
|
162,437
|
|
Cable
TV
|
|
|
78,576
|
|
|
|
123,602
|
|
Broadcast
TV
|
|
|
104,026
|
|
|
|
42,905
|
|
Niagara
Scientific (NSI):
|
|
|
4,655
|
|
|
|
1,386
|
|
Total
|
|
$
|
786,916
|
|
|
$
|
779,374
|
|
|
|
|
|
|
|
|
|
|
Sales
backlog at December 31
|
|
$
|
1,042,517
|
|
|
$
|
709,156
|
|
Net
sales for the three months ended December 31, 2017 equaled $786,916, an increase of $7,542 or 1.0%, when compared to net sales
of $779,374 for the three months ended December 31, 2016.
MFC’s
Satellite product sales increased $197,253 or 121.4% to $359,690 for the three months ended December 31, 2017 when compared to
Satellite product sales of $162,437 during the same period last year. The increase in sales can primarily be attributed to sales
of a new product which was 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 represented
12.6% of sales for the quarter ended December 31, 2017. Based on forecasts, management believes sales of this recently developed
product to this customer will continue.
MFC’s
RF/Microwave product sales decreased $209,075 or 46.6% to $239,969 for the three months ended December 31, 2017 when compared
to RF/Microwave product sales of $449,044 during the same period last year. MFC’s RF/Microwave products are sold primarily
to Original Equipment Manufacturers that serve the mobile radio, commercial communications and defense electronics markets. Sales
to one OEM customer decreased $129,380 to $203,425 or 25.9% of total sales for the three months ended December 31, 2017 compared
to sales of $332,805 or 42.7% of total sales for the three months ended December 31, 2016. These sales are in connection with
a multiyear program in which the Company is a subcontractor. The Company’s backlog of orders with this customer is $902,675
and is scheduled to ship over the next twelve months. Sales to the U.S. Government decreased $26,475 to $4,750 during the three
months ended December 31, 2017 compared to sales of $31,496 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
Cable TV product sales decreased $45,026 or 36.4% to $78,576 for the three months ended December 31, 2017 when compared to Cable
TV product sales of $123,602 during the same period last year. The decrease in sales can be attributed to an order received last
year from one customer with specific cable applications. Management continues to project flat or a decrease in demand for 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 will be 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 $61,121 or 142.5% to $104,026 for the three months ended December 31, 2017
when compared to sales of $42,905 during the same period last year. The increase in sales can primarily be attributed to the UHF
band relocation that has resulted in channel reassignments for hundreds of TV stations across the country. New equipment including
filters and combining systems are needed to help facilitate the changeover.
The
Company’s international sales equaled $60,376 for the three months ended December 31, 2017 when compared to international
sales of $58,130 during the same period last year.
MFC’s
sales order backlog equaled $1,042,517 at December 31, 2017 compared to sales order backlog of $709,156 at December 31, 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. 91.8% of the sales order backlog at December
31, 2017 is scheduled to ship by September 30, 2018.
Gross
profit for the three months ended December 31, 2017 equaled $288,374, an increase of $39,273 or 15.8%, when compared to gross
profit of $249,101 for the three months ended December 31, 2016. As a percentage of sales, gross profit equaled 36.6% for the
three months ended December 31, 2017 compared to 32.0% for the three months ended December 31, 2016. The increase in gross profit
as a percentage of sales can primarily be attributed to lower direct material costs primarily due to product sales mix and lower
payroll and payroll related expenses due to a reduction in headcount in production labor and production support positions due
to retirement and employee turnover with the positions not immediately filled.
Selling,
general and administrative (SGA) expenses for the three months ended December 31, 2017 equaled $326,502, a decrease of $12,249
or 3.6%, when compared to SGA expenses of $338,751 for the three months ended December 31, 2016. The decrease can primarily be
attributed to lower payroll and payroll related expenses during the three months ended December 31, 2017 when compared to the
same period last year. As a percentage of sales, SGA expenses equaled 41.5% for the three months ended December 31, 2017 compared
to 43.5% for the three months ended December 31, 2016 primarily due to the lower SGA expenses this year.
The
Company recorded a loss from operations of $38,128 for the three months ended December 31, 2017 compared to a loss from operations
of $89,650 for the three months ended December 31, 2016. The improvement can primarily be attributed to the higher gross profit
and lower SGA expenses this year when compared to the same period last year.
Other
expense for the three months ended December 31, 2017 was $2,679 compared to other expense of $3,549 for the for the three months
ended December 31, 2016 primarily due to interest expense of $3,580 offset by miscellaneous non-operating income of $901 for the
three months ended December 31, 2017 and interest expense of $4,120 offset by miscellaneous non-operating income of $571 for the
three months ended December 31, 2016. Miscellaneous non-operating income generally consists of sales of scrap material and the
forfeiture of non-refundable deposits and other incidental items.
The
benefit for income taxes equaled $0 for the three months ended December 31, 2017 and December 31, 2016. We have not recognized
any benefit for income taxes. 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. See Notes 1 and 4.
Off-Balance
Sheet Arrangements
At
December 31, 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.
|
|
December
31, 2017
|
|
|
September
30, 2017
|
|
|
|
|
|
|
|
|
Cash
& cash equivalents
|
|
$
|
654,225
|
|
|
$
|
667,940
|
|
Working
capital
|
|
$
|
1,114,037
|
|
|
$
|
1,149,368
|
|
Current
ratio
|
|
|
4.56
to 1
|
|
|
|
4.24
to 1
|
|
Long-term
debt
|
|
$
|
257,607
|
|
|
$
|
270,172
|
|
Cash
and cash equivalents decreased $13,715 to $654,225 at December 31, 2017 when compared to cash and cash equivalents of $667,940
at September 30, 2017. The decrease was a result of $1,707 in net cash used in operating activities and $12,008 in net cash used
for repayment of a note payable.
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.
On
July 2, 2013, 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.
Management
believes that its working capital requirements for at least the next twelve months 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.