Attached files
UNITED
STATES
SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
FORM 10
- Q
(Mark
One)
☑ QUARTERLY
REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the
quarterly period ended September 30, 2016
☐ TRANSITION
REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the
transition period from__________to____________
Commission File No.
0-2892
THE
DEWEY ELECTRONICS CORPORATION
A New York
Corporation
|
|
I.R.S. Employer
Identification
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|
|
No.
13-1803974
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27
Muller Road
Oakland, New Jersey
07436
(201)
337-4700
Indicate by check
mark whether the registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 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 ☑ 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 the definitions of “large accelerated
filer”, “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange
Act.
Large accelerated
filer
|
☐
|
Accelerated
filer
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☐
|
Non-accelerated
filer
|
☐
|
Smaller reporting
company
|
☑
|
(Do not check if a
smaller reporting company)
|
Indicate by check
mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
YES ☐ NO ☑
APPLICABLE ONLY TO
CORPORATE ISSUERS
State
the number of shares outstanding of each of the issuer’s
classes of common stock, as of the latest practicable date:
1,366,731 at October 26, 2016.
THE
DEWEY ELECTRONICS CORPORATION
INDEX
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Page
No.
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Part I
Financial
Information
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3
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|
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Item 1.
Condensed Financial
Statements
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3
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|
|
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Condensed Balance
Sheets - September 30, 2015(unaudited) and June 30,
2015
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3
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Condensed
Statements of Operations - Three-months Ended September 30, 2015
and 2014 (unaudited)
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4
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Condensed
Statements of Comprehensive Loss - Three-months Ended September 30,
2015 and 2014 (unaudited)
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4
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Condensed
Statements of Cash Flows - Three-months Ended September 30, 2015
and 2014 (unaudited)
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5
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Notes to Condensed
Financial Statements (unaudited)
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6
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Item 2.
Management's
Discussion and Analysis of Financial Condition and Results
of Operations
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11
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Item 4.
Controls and
Procedures
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18
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Part II
Other
Information
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19
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Item
2. Unregistered Sales of Equity Securities and Use of
Proceeds
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19
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Item
5. Other Information
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19
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Item 6.
Exhibits
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19
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2
PART I:
FINANCIAL INFORMATION
ITEM
1.CONDENSED FINANCIAL STATEMENTS
THE
DEWEY ELECTRONICS CORPORATION
CONDENSED
BALANCE SHEETS
|
SEPTEMBER
30,
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JUNE
30,
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|
2016
|
2016
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ASSETS:
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(unaudited)
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|
CURRENT
ASSETS:
|
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Cash
and cash equivalents
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$496,376
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$539,742
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Accounts
receivable
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198,953
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497,862
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Inventories
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2,073,614
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1,889,908
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Prepaid
expenses and other current assets
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95,958
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106,047
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|
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TOTAL
CURRENT ASSETS
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2,864,901
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3,033,559
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|
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PLANT, PROPERTY AND
EQUIPMENT:
|
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Land
and improvements
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651,015
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651,015
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Building
and improvements
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1,957,815
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1,957,815
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Machinery
and equipment
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3,342,690
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3,342,690
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Furniture
and fixtures
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268,700
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268,700
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6,220,220
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6,220,220
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Less accumulated
depreciation
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(5,396,110)
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(5,386,655)
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824,110
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833,565
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|
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DEFERRED
COSTS
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65,095
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65,095
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TOTAL
ASSETS
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$3,754,106
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$3,932,219
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LIABILITIES AND
STOCKHOLDERS’ EQUITY:
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CURRENT
LIABILITIES:
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Note
payable – current portion
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$250,000
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$-
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Trade
accounts payable
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80,477
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123,495
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Accrued
expenses and other liabilities
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208,993
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236,665
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Accrued
compensation and benefits payable
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152,621
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152,573
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Accrued
pension costs
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310,860
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301,229
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TOTAL
CURRENT LIABILITIES
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1,002,951
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813,962
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LONG-TERM PENSION
LIABILITY
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981,640
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1,012,005
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TOTAL
LIABILITIES
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1,984,591
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1,825,967
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STOCKHOLDERS’
EQUITY:
|
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Preferred stock,
par value $1.00; authorized 250,000 shares, issued and
outstanding-none
|
--
|
--
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Common
stock, par value $.01; authorized 3,000,000 shares;
1,693,397 shares
issued; and 1,366,731 shares and 1,362,031 shares
outstanding at September 30, 2016 and June 30, 2016,
respectively
|
16,934
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16,934
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Additional
paid-in capital
|
2,883,970
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2,882,842
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Retained
earnings
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171,608
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546,747
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Accumulated
other comprehensive loss
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(822,878)
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(853,243)
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2,249,634
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2,593,280
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Less: Treasury
stock of 326,666 shares and 331,366 shares at September 30, 2016
and June 30, 2016, respectively, at cost
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(480,119)
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(487,028)
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TOTAL
STOCKHOLDERS’ EQUITY
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1,769,515
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2,106,252
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TOTAL LIABILITIES
AND STOCKHOLDERS’ EQUITY
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$3,754,106
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$3,932,219
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See
accompanying notes to condensed financial statements
3
THE
DEWEY ELECTRONICS CORPORATION
CONDENSED
STATEMENTS OF OPERATIONS
(UNAUDITED)
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THREE-MONTHS
ENDED
SEPTEMBER
30,
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2016
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2015
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Revenues
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$473,225
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$1,205,032
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Cost of
revenues
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535,252
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802,549
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Gross
(loss)/profit
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(62,027)
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402,483
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Selling, general
& administrative
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317,578
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448,363
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Operating
loss
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(379,605)
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(45,880)
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Interest
expense
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--
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(3,601)
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Other
income/(expense) – net
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4,466
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(870)
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Loss before income
taxes
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(375,139)
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(50,351)
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Provision for
income tax
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--
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--
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NET
LOSS
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$(375,139)
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$(50,351)
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NET LOSS PER COMMON
SHARE-BASIC
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$(0.27)
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$(0.04)
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NET LOSS PER COMMON
SHARE-DILUTED
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$(0.27)
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$(0.04)
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Weighted average
number of shares outstanding:
|
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Basic
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1,366,731
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1,362,031
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Diluted
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1,366,731
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1,362,031
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CONDENSED
STATEMENTS OF COMPREHENSIVE LOSS
(UNAUDITED)
|
THREE MONTHS
ENDED
SEPTEMBER
30,
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2016
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2015
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Other comprehensive
loss
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Net
loss
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$(375,139)
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$(50,351)
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Amortization of
actuarial gains and losses
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30,365
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33,566
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Comprehensive
loss
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$(344,774)
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$(16,785)
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See
accompanying notes to condensed financial statements
4
THE
DEWEY ELECTRONICS CORPORATION
CONDENSED
STATEMENTS OF CASH FLOWS
(UNAUDITED)
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THREE-MONTHS
ENDED
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SEPTEMBER
30,
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2016
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2015
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CASH FLOWS FROM
OPERATING ACTIVITIES
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Net
loss
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$(375,139)
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$(50,351)
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Adjustments to
reconcile net loss to
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Net
cash used in operating activities:
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Depreciation
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9,455
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9,145
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Provision
for inventory reserve
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87,448
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6,577
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Decrease
in accounts receivable
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298,909
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739,560
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Increase
in inventories
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(271,154)
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(402,115)
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Decrease
in prepaid expenses and
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other
current assets
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10,089
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5,371
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Decrease
in trade accounts payable
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(43,018)
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(62,308)
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Decrease
in accrued expenses and other liabilities
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(27,672)
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(237,096)
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Increase/(decrease)
in accrued compensation and
|
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|
benefits
payable
|
48
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(50,307)
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Increase/(decrease)
in accrued pension costs
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9,631
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(2,743)
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Total
adjustments
|
73,736
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6,084
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|
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NET CASH USED IN
OPERATING ACTIVITIES
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(301,403)
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(44,267)
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CASH FLOWS FROM
INVESTING ACTIVITIES:
|
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Expenditures
for plant, property and equipment
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--
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(9,553)
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NET CASH USED
IN INVESTING
ACTIVITIES
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--
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(9,553)
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CASH FLOWS FROM
FINANCING ACTIVITIES:
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Proceeds from short
term borrowings
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250,000
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--
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Proceeds from
exercise of stock options
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8,037
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--
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NET CASH USED IN
FINANCING ACTIVITIES
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258,037
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--
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NET DECREASE IN
CASH AND CASH EQUIVALENTS
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(43,366)
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(53,820)
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CASH AND CASH
EQUIVALENTS AT BEGINNING OF PERIOD
|
539,742
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347,598
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CASH AND CASH
EQUIVALENTS AT END OF PERIOD
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$496,376
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$293,778
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SUPPLEMENTAL
DISCLOSURES OF CASH FLOW INFORMATION
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|
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Interest
paid
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$--
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$3,601
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See
accompanying notes to condensed financial statements
5
THE
DEWEY ELECTRONICS CORPORATION
NOTES
TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
1.
Significant Accounting Policies
Basis of Presentation
The
accompanying unaudited condensed financial statements have been
prepared by The Dewey Electronics Corporation (the
“Company”) pursuant to the rules and regulations of the
Securities and Exchange Commission (the “SEC”) for
interim reporting. Certain information and disclosures normally
included in notes to financial statements have been condensed or
omitted pursuant to such rules and regulations, but resultant
disclosures are in accordance with accounting principles generally
accepted in the United States of America as they apply to interim
reporting. The condensed financial statements should be read in
conjunction with the financial statements and the notes thereto in
the Company’s Annual Report on Form 10-K for the fiscal year
ended June 30, 2016 (the “2016 Form
10-K”).
In the
opinion of the Company’s management, the accompanying
unaudited condensed financial statements contain all adjustments
(consisting of normal recurring adjustments) necessary to present
fairly, in all material respects, the Company’s financial
position as of September 30, 2016, and the results of operations
and cash flows for the three-months then ended. The results of
operations and cash flows for the period ended September 30, 2016
are not necessarily indicative of the results of operations or cash
flows to be expected for any subsequent quarter or the full fiscal
year ending June 30, 2017.
As of
September 30, 2016, there have been no material changes to any of
the significant accounting policies described in our 2016 Form
10-K.
Liquidity
During
the three months ended September 30, 2016, the Company had a net
loss of approximately $375,000 and net cash outflows from
operations of approximately $301,000. Net cash outflows were
principally due to the net loss, increases in net inventories, and
decreases in trade accounts payable and accrued expenses and other
liabilities, and were partly offset by a decrease in accounts
receivable.
The
Company believes that the Company’s current cash and its line
of credit, which currently expires November 30, 2017, combined with
progress payments as well as billings at the time of delivery of
products, will be sufficient to support short-term liquidity
requirements, working capital needs and capital expenditures at
their current or expected levels. However, if our performance
expectations fall short (including our failure to generate expected
levels of sales) or our expenses exceed expectations, or if the
commitment under the line of credit becomes unavailable, we may
need to secure additional financing and/or reduce our expenses to
continue our operations. Our failure to do so would have a material
adverse impact on our prospects and financial condition. There can
be no assurance that any contemplated additional financing will be
available on terms acceptable to us, if at all. If required, we
believe we would be able to reduce our expenses to a sufficient
level to continue to operate as a going concern.
6
Revenue Recognition
Revenues
and earnings for orders for replacement parts and other short term
business are recorded when deliveries of product are made and title
and risk of loss have been transferred to the customer and
collection is probable.
Revenues
and estimated earnings under long-term defense contracts (including
research and development contracts) are recorded using the
percentage-of-completion method of accounting, measured as the
percentage of costs incurred to estimated total costs of each
contract. These calculations require management to estimate the
cost to complete open orders. Changes between those estimates and
the actual cost of completion of delivery orders impact the revenue
recognition in each reporting period. Estimates are adjusted as
necessary on a quarterly basis. For research and development
contracts total costs incurred are compared to total expected costs
for each contract. As of September 30, 2016 and 2015 the Company
had no uncompleted contracts on which revenue has been recognized
on a percentage of completion basis.
For
those contracts where revenue has been recognized using the
percentage-of-completion method of accounting, provisions for
estimated losses on uncompleted contracts are made in the period in
which such losses are determined. Changes in job performance, job
conditions, and estimated profitability may result in revisions to
costs and income and are recognized in the period in which the
revisions are determined.
Use of Estimates
The
preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America
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 reported amounts of revenues and expenses during the
reporting period. These estimates include, among others, lower of
cost or market estimates for inventories, realization of deferred
tax assets, revenue recognition and certain accrued expenses.
Actual results could differ from those estimates.
Income Taxes
Under
the asset and liability method of accounting for taxes under ASC
Topic 740, “Income Taxes”, deferred tax assets and
liabilities are recognized for future tax consequences attributable
to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases. The
effect on deferred tax assets and liabilities of a change in tax
laws is recognized in the results of operations in the period the
new laws are enacted. A valuation allowance is recorded to reduce
the carrying amounts of deferred tax assets unless it is more
likely than not, that such assets will be realized.
The
Company accounts for uncertain tax positions in accordance with
Generally Accepted Accounting Principles in the U.S. Income tax
positions must meet a more-likely-than-not recognition in order to
be recognized in the financial statements. The Company recognizes
potential accrued interest and penalties related to unrecognized
tax benefits within operations as income tax expense. As new
information becomes available, the assessment of the recognition
threshold and the measurement of the associated tax benefit of
uncertain tax positions may result in financial statement
recognition or de-recognition.
7
2. Accounting Standards Updates Not Yet Effective
In May
2014, the Financial Accounting Standards Board (“FASB”)
issued Accounting Standards Update (ASU) 2014-09 Revenue from
Contracts with Customers, which outlines a single comprehensive
model for entities to use in accounting for revenue arising from
contracts with customers and supersedes most current revenue
recognition guidance, including industry-specific guidance. This
ASU requires an entity to recognize revenue depicting the transfer
of 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. It will also result in
enhanced revenue related disclosures. ASU 2014-09 originally
provided that it would be effective for fiscal years, and interim
reporting periods within those years, beginning after December 15,
2016. However, in August 2015, the FASB issued Accounting Standards
Update (ASU) 2015-14 Revenue from Contracts with Customers -
Deferral of Effective Date, which deferred the effective adoption
date of “ASU 2014-09” to apply to fiscal years and
interim reporting periods within those years beginning after
December 15, 2017.
The
Company expects to adopt the ASUs described above when effective
and is currently evaluating the effect on its financial statements.
Other Accounting Standards Updates not described above (or in the
Company’s 2016 Form 10-K) and first effective after September
30, 2016 are not expected to have a material effect on the
Company’s financial position or results of
operations.
3. Inventories
Inventories
consist of:
|
September
30,
2016
|
June
30,
2016
|
|
|
|
Finished
Goods
|
$11,420
|
$66,652
|
Work In
Progress
|
1,085,344
|
944,267
|
Raw
Materials
|
976,850
|
878,989
|
Total
|
$2,073,614
|
$1,889,908
|
4. Taxes on Income
The
Company has provided a valuation allowance against its net deferred
tax assets as it believes that it is more likely than not that it
will not realize these tax attributes. The Company has
approximately $1,125,000 and $141,000 of federal and state net
deferred tax assets respectively, primarily arising from net
operating loss carryforwards, expiring beginning in 2017. In the
three month period ended September 30, 2016 these federal and state
net deferred tax assets increased by approximately $128,000 and
$23,000, respectively, as a result of a net loss for the
period.
5. Loss Per
Share
Net
loss per share has been presented pursuant to ASC Topic 260,
“Earnings per Share”. Basic net loss per share is
computed by dividing reported net loss available to common
shareholders by weighted average shares outstanding for the period.
Diluted net loss per share is computed by dividing reported net
loss available to common shareholders by weighted average shares
outstanding for the period, adjusted for the dilutive effect of
common stock equivalents, which consist of stock options, using the
treasury stock method.
8
The
table below sets forth the reconciliation of the numerators and
denominators of the basic and diluted net loss per common share
computations. For the three months ended September 30, 2016 and
September 30, 2015, respectively, all outstanding stock options
(16,000 shares on September 30, 2016 and 33,200 shares on September
30, 2015) were excluded from the computation of earnings per share
due to their anti-dilutive effect.
|
Three-months
Ended September 30,
|
|||||
|
2016
|
2015
|
||||
|
Net
Loss
|
Shares
|
Per Share
Amount
|
Net
Loss
|
Shares
|
Per Share
Amount
|
Basic net
loss
|
|
|
|
|
|
|
per common
share
|
$(375,139)
|
1,366,731
|
$(.27)
|
$(50,351)
|
1,362,031
|
$(.04)
|
|
|
|
|
|
|
|
Effect of
dilutive Securities
|
--
|
--
|
--
|
--
|
--
|
--
|
Diluted net loss
per common share
|
$(375,139)
|
1,366,731
|
$(.27)
|
$(50,351)
|
1,362,031
|
$(.04)
|
6. Stock Option Plan
On
September 22, 2011, the Board of Directors of the Company adopted
the Company’s 2011 Stock Option Plan, which was approved by
the shareholders of the Company on December 8, 2011. Under this
plan options to purchase a maximum of 133,000 shares of common
stock may be granted to any employee of the Company, including
officers. Such options may be either incentive stock options or
non-qualified options and must be granted with an exercise price no
less than the fair market value of the stock on the date of the
grant. No stock options have been granted under this
plan.
On
December 2, 1998, the Company adopted its Stock Option Plan of 1998
which was amended and restated effective December 5, 2001, pursuant
to which options to purchase a maximum of 85,000 shares of common
stock may be granted to executives and key employees. Incentive
stock options have been granted under this plan with an exercise
price no less than fair market value of the stock on the date of
grant. Outstanding options generally are exercisable for ten years
from the date of grant. Outstanding options have expiration dates
ranging from December 2, 2018 to September 21, 2021. No additional
options may be granted under this plan.
There
were no stock options granted in the first quarter of fiscal 2017
(quarter ended September 30, 2016) or in the first quarter of
fiscal 2016 (quarter ended September 30, 2015). The Company
recorded no stock option compensation expense for either of the
three month periods ended September 30, 2016 or September 30,
2015.
For the
full fiscal year ending June 30, 2017, the Company does not expect
any stock option compensation expense based on stock options
already granted and assuming no further option grants during the
remainder of the fiscal year. However, our assessment of the
compensation expense will be affected by the number of stock options actually
granted (if any) during the remainder of the year as well as the
number of outstanding options that are forfeited.
9
Stock
option transactions for the Company’s employee stock option
plans for the quarter ended September 30, 2016 are as
follows:
|
|
Weighted
|
|
|
Average
|
|
Shares
|
Exercise
Price
|
Beginning
balance
|
20,700
|
$1.92
|
Granted
|
--
|
--
|
Exercised
|
(4,700)
|
1.71
|
Cancelled or
expired
|
--
|
--
|
Ending
balance
|
16,000
|
1.98
|
Options exercisable
at end of period
|
16,000
|
1.98
|
7. Notes Payable
The
Company maintains a line of credit (the “Line of
Credit”) with TD Bank, NA (the “Bank”) for
$500,000. On November 4, 2016, the Bank notified the Company that
it has extended the Line of Credit, which was due to expire on
November 30, 2016, for an additional year ending November 30, 2017.
No other terms of the Company’s revolving term note to the
Bank were changed.
The
Line of Credit provides among other things for an annual interest
rate on borrowings equal to the Bank’s prime rate plus 1.00%
and is subject to customary representations, covenants, and default
provisions in favor of the Bank. Any loans drawn under the Line of
Credit are secured by a first lien on all of the Company’s
accounts receivable, machinery, equipment, other personal property
and Commercial Mortgages on the Company’s real property. The
rate applicable to the Line of Credit at September 30, 2016 was
approximately 4.50%. The Company has previously utilized the Line
of Credit during periods of increased production requirements and
anticipates that it will continue to utilize this credit facility
during future periods of peak production activity. As of September
30, 2016, the Company had $250,000 of outstanding borrowings
against the Line of Credit.
8. Pension Plan
The
Company has a non-contributory defined benefit retirement plan
covering substantially all its employees. The impact of the
plan on operations is as follows:
|
THREE-MONTHS
ENDED
|
|
|
SEPTEMBER
30,
|
|
|
2016
|
2015
|
Service
cost-benefits earned during the period
|
$13,894
|
$12,024
|
Interest cost on
projected benefit obligation
|
29,745
|
32,297
|
Expected return on
plan assets
|
(26,623)
|
(26,855)
|
Amortization of
actuarial loss
|
30,365
|
33,566
|
Net periodic
pension cost
|
$47,381
|
$51,032
|
10
THE
DEWEY ELECTRONICS CORPORATION
ITEM
2.
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The
following discussion should be read in conjunction with the
unaudited condensed financial statements, including the notes
thereto, appearing elsewhere in this Form 10-Q, and with the
audited financial statements, including the notes thereto,
appearing in the Company’s 2016 Form 10-K. Certain statements
in this report may be deemed forward-looking statements within the
meaning of Section 21E of the Securities Exchange Act of 1934. All
statements, other than statements of historical fact that address
activities, events or developments that the Company or management
intends, expects, projects, believes or anticipates will or may
occur in the future are forward-looking statements. Such statements
are based upon certain assumptions and assessments made by
management of the Company in light of its experience and its
perception of historical trends, current conditions, expected
future developments and other factors it believes to be
appropriate. The forward-looking statements included in this report
are also subject to a number of material risks and uncertainties,
including but not limited to economic, governmental, competitive
and technological factors affecting the Company’s operations,
markets, products, services and prices and, specifically, the
factors discussed below under “Financing Activities”
and “Long-Term Growth Strategy”, and in Item 1
(Business) of the Company’s 2016 Form 10-K under the
subheading “Operational Risks”. Such forward-looking
statements are not guarantees of future performance and actual
results, developments and business decisions may differ from those
envisaged by such forward-looking statements.
The
Company’s operating cycle is long-term and includes various
types of products and varying delivery schedules. Accordingly,
results of a particular period or period-to-period comparisons of
recorded revenues and earnings may not be indicative of future
operating results. The following comparative analysis should be
viewed in this context.
Critical Accounting Policies and Estimates
The
Company’s financial statements and accompanying notes are
prepared in accordance with accounting principles generally
accepted in the United States of America. Preparing financial
statements requires us to make estimates and assumptions that
affect the reported amounts of assets, liabilities, revenues and
expenses. These estimates and assumptions affect the application of
our accounting policies. Actual results could differ from these
estimates. Critical accounting policies are those that require
application of management’s most difficult, subjective or
complex judgments, often as a result of matters that are inherently
uncertain and may change in subsequent periods. The Company’s
critical accounting policies and estimates include revenue
recognition on contracts and contract estimates, pensions,
impairment of long-lived assets, inventory valuation, and valuation
of deferred tax assets and liabilities. For additional discussion
of the application of these and other accounting policies, see
Management’s Discussion and Analysis of Financial Condition
and Results of Operations – Critical Accounting Policies and
Note 1 of the Notes to the Financial Statements included in the
Company’s 2016 Form 10-K.
Business Environment:
Automatic
budget cuts, known as “sequestration”, began in March
of 2013 and have resulted in significant contraction of spending
across the Department of Defense. They have also created
uncertainty in our customers about the continuation of funding for
our products and the availability of funding to initiate new
programs. This uncertainly has led to a far larger reduction in
actual spending than just the legislated or mandated sequestration
reduction, primarily due to delays in contract awards and the
reduction or elimination of some programs. In addition to
sequestration cuts, over the last few years U.S. forces returned
from Iraq and Afghanistan with excess generators that lessened the
need for replacements. This excess equipment, combined with a
strategic regrouping within the Department of Defense around global
combat, has continued the uncertainty and contraction of the market
for global power products.
11
The
foregoing factors are contributing to a more difficult and more
challenging business environment. This uncertainty as well as the
reduction in overall Government spending may continue through this
Government fiscal year, beginning October 1, 2016, and we can give
no assurances that this uncertainty or reduction in spending would
end after such fiscal year.
For
additional information, please refer to Item 1 (Business) of the
Company’s 2016 Form 10-K.
Results of Operations:
Revenues
Revenues
and earnings for orders for replacement parts and other short term
business are recorded when deliveries of product are made and title
and risk of loss have been transferred to the customer and
collection is probable.
Revenues
and estimated earnings under long-term defense contracts (including
research and development contracts) are recorded using the
percentage-of-completion method of accounting, measured as the
percentage of costs incurred to estimated total costs of each
contract. These calculations require management to estimate the
cost to complete open orders. Changes between those estimates and
the actual cost of completion of delivery orders impact the revenue
recognition in each reporting period. Estimates are adjusted as
necessary on a quarterly basis. For research and development
contracts total costs incurred are compared to total expected costs
for each contract. As of September 30, 2016 the Company had no
uncompleted contracts on which revenue has been recognized on a
percentage of completion basis.
For
those contracts where revenue has been recognized using the
percentage-of-completion method of accounting, provisions for
estimated losses on uncompleted contracts are made in the period in
which such losses are determined. Changes in job performance, job
conditions, and estimated profitability may result in revisions to
costs and income and are recognized in the period in which the
revisions are determined.
For the
three months ended September 30, 2016, production efforts to
provide power products to the U.S. Department of Defense,
Government contractors, and foreign militaries, which includes
diesel operated tactical generator sets and associated equipment,
was approximately $354,000 or 75% of revenues compared to
approximately $501,000 or 42% of revenues for the three months
ended September 30, 2015. Non-power products including replacement
parts and other short-term business accounted for $120,000 or 25%
of revenues in the three months ended September 30, 2016 and
approximately $704,000 or 58% of revenues for the same period in
fiscal year 2016. Customer funded research and development efforts
provided no revenues in either of the first quarters of fiscal
years 2017 and 2016.
Overall,
revenues for the first quarter of fiscal year 2017 (the three month
period ended September 30, 2016) were approximately $732,000 lower
when compared to the first quarter of fiscal year 2016. Almost
two-thirds of the reduction was attributable to non-power products,
where orders that were booked to ship in the first quarter of
fiscal year 2017, instead shipped at the end of fiscal year 2016.
The rest of this reduction resulted from decreases in customer
orders for power products. Management believes that shipments for
non-power products will increase in the remaining three quarters of
fiscal year 2017 resulting in annual sales below fiscal year 2016
levels but exceeding those of fiscal year 2015. In addition,
management believes that shipments for power products will continue
to lag behind fiscal 2016 levels through the third quarter of
fiscal year 2017 but that a substantial increase in shipments of
these products in the fourth quarter will produce annual sales that
are consistent with fiscal 2016 levels.
12
The
above estimates for future periods are based on orders that
management expects to receive but have not yet been received. No
assurances can be made that such orders will be received and, to
the extent received, the timing thereof.
For
further discussion regarding business environment and management
initiatives see “Long-Term Growth Strategy”
below.
The
aggregate value of the Company’s backlog of sales orders was
$2.2 million on September 30, 2016. The Company’s backlog of
sales orders was $3.2 million on September 30, 2015. Most of the
reduction in backlog is due to the decrease in orders for power
products discussed above. It is estimated that a significant
portion of the present backlog will be billed during the next 9
months and be recognized as fiscal year 2017 revenues with the
balance being recognized in fiscal years 2018 through
2020.
Gross Profit
Gross
profit is affected by a variety of factors including, among other
items, sales volume, product mix, product pricing, and product
costs.
The
Company had a gross loss of $62,027 or (13.1%) of revenues for the
three months ended September 30, 2016 compared to a gross profit of
$402,483 or 33% of revenues for the same period in fiscal year
2016. The gross loss for the first quarter of fiscal year 2017 was
primarily due to a decrease in overall sales of both power and
non-power products resulting in production levels which were below
those necessary to absorb overhead. This resulted in unallocated
overhead being expensed in the first quarter of fiscal year 2017.
Management expects factory production to increase in the remainder
of this fiscal year to levels similar to the prior fiscal year, and
therefore the gross profit percentage to largely
recover.
Selling, General and Administrative Expenses
Selling,
General and Administrative Expenses for the first three months of
fiscal year 2017 were $317,578 or 67% of revenues compared to
$448,363 or 37% of revenues in the first three months of fiscal
year 2016. The most significant changes in expense and the
approximate amounts of the changes were decreases in consulting
fees $71,000, compensation $30,000, recruiting fees $23,000 and
other $7,000.
Loss Before Income Taxes
Loss
before income taxes was $375,139 for the three months ended
September 30, 2016. Loss before income taxes was $50,351 for the
three months ended September 30, 2015.
Income Taxes
Deferred
tax assets and liabilities are recognized for the expected tax
consequences of temporary differences between the tax bases of
assets and liabilities and their financial statement reported
amounts and for tax loss and credit carry-forwards.
13
A
valuation allowance is provided against deferred tax assets when it
is determined to be more likely than not that these amounts will
not be realized.
The
Company has provided a valuation allowance against its net deferred
tax assets as it believes that it is more likely than not that it
will not realize these tax attributes. The Company has
approximately $1,125,000 and $141,000 of federal and state net
deferred tax assets respectively, primarily arising from net
operating loss carryforwards, expiring beginning in 2017. In the
three month period ended September 30, 2016 these federal and state
net deferred tax assets increased by approximately $128,000 and
$23,000, respectively, as a result of a net loss for the
period.
Liquidity and Capital Resources
Historically,
the Company’s capital expenditures, debt servicing
requirements and working capital needs have been financed by cash
flow from operations, progress payments on various Government
contracts (based on cost incurred) and a line of credit, described
under “Financing Activities” below. As of September 30,
2016, the Company had no material capital expenditure commitments.
Management believes that the Company’s current cash and its
line of credit, which (as described under “Financing
Activities” below) currently expires on November 30, 2017,
combined with progress payments as well as billings at the time of
delivery of products will be sufficient to support short-term
liquidity requirements, working capital needs and capital
expenditures at their current or expected levels. However, if our
performance expectations fall short (including our failure to
generate expected levels of sales) or our expenses exceed
expectations, or if the commitment under the Line of Credit becomes
unavailable, we may need to secure additional financing and/or
reduce our expenses to continue our operations. Our failure to do
so would have a material adverse impact on our prospects and
financial condition. There can be no assurance that any
contemplated additional financing will be available on terms
acceptable to us, if at all. If required, we believe we would be
able to reduce our expenses to a sufficient level to continue to
operate as a going concern.
At
September 30, 2016, the Company’s working capital was
$1,861,950 compared to $2,219,597 at June 30, 2016.
The
ratio of current assets to current liabilities was 2.86 to 1 at
September 30, 2016 and 3.73 to 1 at June 30, 2016.
The
following table is a summary of the Statements of Cash Flows in the
Company’s Financial Statements:
|
Three Months
ended September 30,
|
|
|
2016
|
2015
|
Net cash provided
by(used in)
|
|
|
Operating
activities
|
$(301,403)
|
$(44,267)
|
Investing
activities
|
--
|
(9,553)
|
Financing
activities
|
258,037
|
--
|
14
Operating Activities:
Adjustments
to reconcile net income to net cash provided by operations are
presented in the Condensed Statements of Cash Flows in the
Company’s Financial Statements.
Net
cash used in operating activities for the three month period ended
September 30, 2016 was principally due to the net loss, an increase
in net inventories, (due to work in progress on generator sets and
non-power products expected to ship this year), and decreases in
trade accounts payable and accrued expenses and other liabilities,
and was partially offset by a decrease in accounts
receivable.
Net
cash used in operating activities in the three month period ended
September 30, 2015 was principally due to the net loss, increases
in inventories, decreases in accrued expenses and other
liabilities, accrued compensation and benefits payable, and was
partly offset by a decrease in accounts receivable.
The
Company expenses its research and development costs as incurred.
These costs consist primarily of salaries and material costs. For
the three month periods ended September 30, 2016 and September 30,
2015 the Company did not incur any research and development costs.
Research and development projects performed under contract for
customers are billed to the customer and are recorded as contract
costs as they are incurred.
Investing Activities:
During
the first three months of fiscal 2017, no cash was used in
investing activities.
During
the first three months of fiscal 2016, net cash of $9,553 was used
in investing activities. The entire amount was used for capital
expenditures, principally for the acquisition of computers and
tooling.
Financing Activities:
The
Company maintains a $500,000 line of credit (the “Line of
Credit”) with TD Bank, NA (the “Bank”). On
November 4, 2016, the Bank notified the Company that it has
extended the Line of Credit, which was due to expire on November
30, 2016, for an additional year ending November 30, 2017. No other
terms of the Company’s revolving term note to the Bank were
changed.
The
Line of Credit provides among other things for an annual interest
rate on borrowings equal to the Bank’s prime rate plus 1.00%
and is subject to customary representations, covenants, and default
provisions in favor of the Bank. Any loans drawn under the Line of
Credit are secured by a first lien on all of the Company’s
accounts receivable, machinery, equipment, other personal property
and Commercial Mortgages on the Company’s real property. The
rate applicable to the Line of Credit at September 30, 2016 was
approximately 4.5%. The Company has previously utilized the Line of
Credit during periods of increased production requirements and
anticipates that it will continue to utilize this credit facility
during future periods of peak production activity.
As of
September 30, 2016 the Company has $250,000 of outstanding
borrowings against the Line of Credit. During fiscal year 2015 the
Company repaid $500,000 which it subsequently re-borrowed and the
Bank gave the Company a waiver for a temporary technical financial
ratio covenant default. During fiscal year 2016 the Company repaid
$500,000. The Company did not use any other cash in financing
activities during fiscal years 2016 and 2015.
The
Company is exploring avenues to monetize its real estate holdings.
For further information, see “Long-Term Growth
Strategy” below.
15
Accounting Standards Updates Not Yet Effective
Refer
to Note 2. Accounting Standards
Updates Not Yet Effective in the Notes to the Condensed
Financial Statements section of this Quarterly Report.
Long-Term Growth Strategy:
The
Company’s business environment over the last few years has
changed significantly due to governmental and industry
developments. There has been a significant reduction in Department
of Defense spending for new programs. This reduction began in 2013
with the automatic federal budget cuts called
“sequestration”. In 2014, the Department of Defense
notified us that it no longer would award a prime contract for 2kW
generators, leading to a reduction in demand for the
Company’s power products. Also, over the last few years U.S.
forces returned from Iraq and Afghanistan with excess generators
thus lessening demand for replacements.
In
response to this new business environment, the Company has designed
and is rolling out an ambitious, multi-faceted long-term strategy
to achieve new opportunities for growth in both existing operations
and new directions. In doing so, we will build upon our experience
in adapting to this challenging business environment, which has for
several years led us to aggressively pursue the diversification of
our product lines and our customer base, including an increased
focus on sales of non-power products and foreign military
sales.
Our new
long-term strategy is intended to exploit the Company’s
existing strengths and build new capabilities in order to increase
revenue, market presence and ultimately profitability in both power
and non-power products and services. Key elements of our new growth
strategy include:
●
Increase Innovation and Extend our Technology
Capabilities. We plan to increase our investment in research
and development to prudently and selectively expand and enhance our
capabilities of product design and performance in both the power
and non-power contexts. We intend to leverage our core competencies
in power and related products with developments and applications
that will economically allow for new offerings to meet new and
different demands in our existing markets.
●
Expand our Sales and Marketing
Capabilities. We intend to increase our investment over time
in our sales organization to aggressively pursue existing and new
relationships with both domestic and foreign military customers of
power and non-power products and services. We believe that with a
modest investment in sales and marketing we can exploit our niche
presence, reputation and relationships to identify, target and
develop new customers and opportunities. We intend to engage one or
more experienced sales and/or marketing personnel to guide and
implement this initiative. In addition, we intend to pursue
strategic acquisitions to enhance and expand relationships with
customers and business partners as discussed below.
●
Increase Penetration with Existing
Customers. To complement our sales and marketing initiative
above, we intend to focus in particular on recent and existing
customers and business partners, including the Department of
Defense, who know us as reliable and competitive, to explore new
opportunities. Our goal is to demonstrate new and expanded
capabilities based in part on the favorable qualities of our
existing products and services as well as our strong reputation, to
sell additional products and services to our existing customers. We
believe that as a relatively small company, we can economically
mine existing relationships for new opportunities.
16
●
Pursue Strategic Acquisitions. We
intend to continue to opportunistically pursue selective
acquisitions and joint ventures to extend our presence into new
markets with new products and realize operational value from our
cost-effective facility, among other benefits. In 2013, the Company
acquired certain assets, rights of manufacture and intellectual
property from Goodman Ball, a maker of military equipment based in
Menlo Park, California. As part of this transaction, among other
things, the Company obtained certain product lines, contracts with
the Department of Defense and its prime contractors, and business
destined for foreign militaries. The Company believes that, by
adding the product lines to the Company’s list of offerings,
the acquisition provided a number of opportunities similar to those
described above. In fiscal 2016, the Company had sales of $2.8
million relating to those product lines acquired from Goodman Ball.
The Company’s long-term strategy includes growth through
acquisitions such as the one from Goodman Ball. Beginning last
year, the Company increased these acquisition efforts with a focus
on other small defense-related companies and/or product lines that
fit within the Company’s profile and complement our growth
goals. In this regard, management believes that the Company’s
best targets have revenue below $10 million, manufacturing that can
be brought into the Company’s factory, products in military
power and energy or that relate to our existing non-power products;
and customers and/or products that are on established long-term
programs. To the extent that such acquisitions are not financed
solely out of cash flow from the acquired business, the Company
will consider raising acquisition capital, which may include
monetizing certain real-estate holdings, either by debt financing
or sale.
●
Monetize Real Estate Assets for Growth.
As described in Item 2 (Properties) of the Company’s 2016
Form 10-K, the Company’s real estate holdings consist of
approximately 90 acres of which approximately 68 acres (including
approximately 20 acres of flat ground) are not used in our
operations. The Company is exploring avenues to monetize and deploy
value that is locked up in these assets. As with the strategic
acquisitions described above, the Company would consider prudent
utilization of such assets to facilitate operational growth that
will be more accretive to stockholders in the long term. Such
assets also may be monetized to acquire assets such as product
lines as opposed to full businesses. The Company will seek guidance
from qualified finance professionals to assist in evaluating and
facilitating the Company’s efforts in this
regard.
We are
encouraged by the fact that in a recent successful real property
tax appeal, our building (including the land used in the
Company’s operations) was appraised for approximately $4.5
million, based on comparable values for 49,000 square feet of
commercial space. With respect to our unused land, although New
Jersey’s “Highlands Water Protection Act and Planning
Act” currently imposes severe restrictions on development, we
believe that there are strong reasons why this property should not
be subject to the restrictions on development. Further, while not
as valuable a potential use as development, we would consider a
transaction with a conservation organization as a means of avoiding
the expense and regulatory uncertainties inherent in a development
transaction.
●
Recruit, Retain, and Develop Talent.
The Company recognizes the need for excellent personnel in
facilitating its multi-pronged growth strategy. Accordingly, in
pursuing acquisitions (and depending on our financing situation) we
intend to deliberately and selectively focus on the recruitment,
development and retention of one or more technically sophisticated
personnel, experienced sales and marketing personnel, finance and
acquisition personnel, and other personnel, all of whom ideally
will be experienced in our industry with companies of similar
profile circumstances.
17
The
foregoing components of the Company’s long-term growth
strategy have been designed to work collectively on an integrated
basis, while individually advancing a separate portion of our
comprehensive growth plan. While we can give no assurances of
success, management believes that it is the right time and in the
stockholders’ best interests to accelerate and innovate these
growth and development efforts. This timing coincides with
management’s heightened belief that the Company’s
business prospects are underappreciated and its common stock is
undervalued. Management is committed to correcting these
misperceptions by aggressively pursuing its long-term growth
strategy and continuously evaluating and enhancing its
effectiveness.
ITEM 4. Controls
and Procedures
Evaluation
of Disclosure Controls and Procedures
The
Company carried out, under the supervision and with the
participation of the Company’s management, including its
Chief Executive Officer and Controller, an evaluation 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) under the Securities Exchange Act of 1934) as of the
end of the fiscal quarter covered by this Form 10-Q. Based upon
that evaluation, the Chief Executive Officer and Controller
concluded that, as of September 30, 2016, the design and operation
of the Company’s disclosure controls and procedures were
effective.
Nonetheless,
a control system, no matter how well designed and operated, cannot
provide absolute assurance that the objectives of the control
system are met, and no evaluation of controls can provide absolute
assurance that all control issues have been detected.
Changes
in Internal Control Over Financial Reporting
There
were no changes in the Company’s internal control over
financial reporting during the fiscal quarter ended September 30,
2016 that materially affected, or are reasonably likely to affect,
the Company’s internal control over financial
reporting.
18
PART II
- OTHER INFORMATION
Item 2.
Unregistered Sales of Equity Securities and Use of
Proceeds
Set
forth below is information regarding securities sold or issued by
us during the three months ended September 30, 2016, that were not
registered under the Securities Act of 1933 (the “Securities
Act”). Also included is the consideration, if any,
received by us for the securities and information relating to the
section of the Securities Act, or rule of the Securities and
Exchange Commission, under which exemption from registration was
claimed.
On
September 16, 2016, we issued an aggregate of 4,700 shares of
common stock upon the exercise of options for aggregate
consideration of $8,037. The shares of common stock issued upon the
exercise of stock options described above were issued under the
exemption set forth in Section 4(a)(2) under the Securities Act and
Regulation D promulgated thereunder relative to transactions by an
issuer not involving any public offering. All recipients either
received adequate information about us or had access, through
employment or other relationships, to such
information.
Item 5.
Other Information
See the
discussion of the extension of the Line of Credit to November 30,
2017 in Note 7. Notes
Payable in the Notes to the Condensed Financial Statements
section of this Quarterly Report.
Item 6.
Exhibits
See the
accompanying Index to Exhibits to this Quarterly Report on Form
10-Q.
19
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of l934, the
registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
|
THE DEWEY
ELECTRONICS CORPORATION
|
|
|
|
|
|
|
Date: November 10,
2016
|
By:
|
/s/ John H.D.
Dewey
|
|
|
|
John H.D.
Dewey
|
|
|
|
President and Chief
Executive Officer
|
|
|
|
|
|
|
|
|
|
Date: November 10,
2016
|
|
/s/ Donna
Medica
|
|
|
|
Donna
Medica
|
|
|
|
Controller
|
20
THE
DEWEY ELECTRONICS CORPORATION
INDEX
TO EXHIBITS
The
following exhibits are included with this report. For convenience
of reference, exhibits are listed according to the numbers assigned
in the Exhibit table to Regulation S-K.
Number
10.1
Letter from TD
Bank, N.A. extending Line of Credit, dated November 4,
2016
31.1
Certification of
Chief Executive Officer Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
31.2
Certification of
Controller Pursuant to Section 302 of the Sarbanes-Oxley Act of
2002
32.1
Certification of
Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
32.2
Certification of
Controller pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002
21