UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

FORM 10-Q

 

 

Quarterly Report Pursuant to Section 13 OR 15(d) of the Securities Exchange Act of 1934.

 

For the quarterly period ended June 30, 2018

 

Commission file number 0-10976

 

 

MICROWAVE FILTER COMPANY, INC.

(Exact name of registrant as specified in its charter.)

 

 

New York		16-0928443
(State of Incorporation)		(I.R.S. Employer Identification Number)
6743 Kinne Street, East Syracuse, N.Y.		13057
(Address of Principal Executive Offices)		(Zip Code)

 

(315) 438-4700
Registrant’s telephone number, including area code

 

 

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 [X] NO [  ]

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 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 [X] 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 (as defined in Rule 12b-2 of the Exchange Act).

 

Large accelerated filer [  ]

Accelerated filer [  ]

Non-accelerated filer [  ] (Do not check if smaller reporting company)

Smaller reporting company [X].

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
YES [  ] NO [X]

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

 

Common Stock, $.10 Par Value - 2,579,680 shares as of August 1, 2018.

 

 

 

MICROWAVE FILTER COMPANY, INC.
Form 10-Q

 

Index

 

Item		Page
Part I Financial Information
Item 1. Financial Statements		3
Condensed Consolidated Balance Sheets (unaudited)		3
Condensed Consolidated Statements of Operations (unaudited)		4
Condensed Consolidated Statements of Cash Flows (unaudited)		5
Notes to Condensed Consolidated Financial Statements (unaudited)		6-8
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		9-15
Item 3. Quantitative and Qualitative Disclosures About Market Risk		16
Item 4. Controls and Procedures		16
Part II Other Information		17
Signatures		18

 

 

Microwave Filter Company and Subsidiaries

Condensed Consolidated Balance Sheets

(Unaudited)

 

		June 30, 2018				September 30, 2017
Assets
Current Assets:
Cash and cash equivalents		$	550,054			$	667,940
Accounts receivable-trade, net of allowance for doubtful accounts of $4,000 and $4,000			309,877				350,703
Inventories, net			423,024				458,158
Prepaid expenses and other current assets			32,776				27,858
Total current assets			1,315,731				1,504,659
Property, plant and equipment, net			279,751				326,778
Total assets		$	1,595,482			$	1,831,437
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable		$	57,319			$	104,349
Customer deposits			31,886				43,893
Accrued payroll and related expenses			40,850				39,710
Accrued compensated absences			92,507				96,490
Notes payable - short term			50,707				48,826
Other current liabilities			19,133				22,023
Total current liabilities			292,402				355,291
Notes payable - long term			231,855				270,172
Total other liabilities			231,855				270,172
Total liabilities			524,257				625,463
Stockholders’ Equity:
Common stock, $.10 par value Authorized 5,000,000 shares, Issued 4,324,140 shares in 2018 and 2017, Outstanding 2,579,680 shares in 2018 and 2,579,684 in 2017			432,414				432,414
Additional paid-in capital			3,248,706				3,248,706
Retained deficit			(915,131	)			(780,385	)
Common stock in treasury, at cost 1,744,460 shares in 2018 and 1,744,456 shares in 2017			(1,694,764	)			(1,694,761	)
Total stockholders’ equity			1,071,225				1,205,974
Total liabilities and  stockholders’ equity		$	1,595,482			$	1,831,437

 

See Accompanying Notes to Condensed Consolidated Financial Statements

 

Microwave Filter Company and Subsidiaries
Condensed Consolidated Statements of Operations
(Unaudited)

 

		Three months ended								Nine months ended
		June 30,								June 30,
		2018				2017				2018				2017
Net sales		$	802,140			$	702,648			$	2,323,571			$	2,307,198
Cost of goods sold			475,250				476,926				1,446,505				1,559,665
Gross profit			326,890				225,722				877,066				747,533
Selling, general and administrative expenses			345,188				293,862				1,005,301				953,485
Loss from operations			(18,298	)			(68,140	)			(128,235	)			(205,952	)
Other expense, net			(2,665	)			(2,658	)			(6,461	)			(8,422	)
Loss before income taxes			(20,963	)			(70,798	)			(134,696	)			(214,374	)
Provision for income taxes			0				0				50				0
Net loss		$	(20,963	)		$	(70,798	)		$	(134,746	)		$	(214,374	)
Per share data:
Basic and diluted loss per common share		$	(0.01	)		$	(0.03	)		$	(0.05	)		$	(0.08	)
Shares used in computing net loss per common share:
Basic and diluted			2,579,680				2,579,928				2,579,682				2,580,459

 

See Accompanying Notes to Condensed Consolidated Financial Statements

 

Microwave Filter Company and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(Unaudited)

 

		Nine months ended
		June 30,
		2018				2017
Cash flows from operating activities:
Net loss		$	(134,746	)		$	(214,374	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation			54,375				60,495
Change in operating assets and liabilities:
Accounts receivable-trade			40,826				43,841
Inventories			35,134				(8,982	)
Prepaid expenses and other assets			(4,918	)			12,553
Accounts payable and customer deposits			(59,037	)			(3,980	)
Accrued payroll and related expenses and compensated absences			(2,843	)			(39,261	)
Other current liabilities			(2,890	)			1,033
Net cash used in operating activities			(74,099	)			(148,675	)
Cash flows from investing activities:
Property, plant and equipment purchased			(7,348	)			(56,335	)
Net cash used in investing activities			(7,348	)			(56,335	)
Cash flows from financing activities:
Repayment of note payable			(36,436	)			(34,819	)
Purchase of treasury stock			(3	)			(662	)
Net cash used in financing activities			(36,439	)			(35,481	)
Net decrease in cash and cash equivalents			(117,886	)			(240,491	)
Cash and cash equivalents at beginning of period			667,940				923,117
Cash and cash equivalents at end of period		$	550,054			$	682,626
Supplemental Schedule of Cash Flow Information:
Interest paid		$	10,337			$	11,953
Income taxes paid			50				0

 

See Accompanying Notes to Condensed Consolidated Financial Statements

 

MICROWAVE FILTER COMPANY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

JUNE 30, 2018

 

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 nine month period ended June 30, 2018 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:

 

		June 30, 2018				September 30, 2017
Raw materials and stock parts		$	308,831			$	337,462
Work-in-process			23,139				21,861
Finished goods			91,054				98,835
		$	423,024			$	458,158

 

 

The Company’s reserve for obsolescence equaled $445,158 at June 30, 2018 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 position taken or expected to be taken on a tax return. Additionally, it provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. The Company determined it has no uncertain tax positions and therefore no amounts are recorded.

 

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 42.1% of the Company’s total sales for the nine months ended June 30, 2018 and net sales to one significant customer represented 43.1% of the Company’s total sales for the nine months ended June 30, 2017. 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, Microwave Filter Company, Inc. (the “Company”) entered into a Ten Year Term Loan with KeyBank National Association in the amount of Five Hundred Thousand and No/100 Dollars ($500,000.00). The amount of all advances outstanding together with accrued interest thereon shall be due and payable on July 2, 2023 (“Maturity”). The Company shall pay interest on the outstanding principal balance of this Note at the rate per annum equal to 4.5%. The net proceeds from the Term Loan will be available to provide working capital as needed. The total amount outstanding as of June 30, 2018 and September 30, 2017 was $282,562 and $318,998 respectively. Interest accrued as of June 30, 2018 and September 30, 2017 was $989 and $1,113, respectively.

 

The Company has secured this Note by: (a) a Mortgage, Assignment of Rents, Security Agreement and Fixture Filing which creates a 1^st lien on real property situated in the Town of Dewitt, County of Onondaga, and State of New York and known as 6743 Kinne Street, East Syracuse, New York; (b) a General Assignment of Rents and Leases; (c) an Environmental Compliance and Indemnification; and (d) such other security as may now or hereafter begiven to Lender as collateral for the loan.

 

Note 9. Earnings Per Share

 

The Company presents basic earnings per share (“EPS”), computed based on the weighted average number of common shares outstanding for the period, and when applicable diluted EPS, which gives the effect to all dilutive potential shares outstanding (i.e. options) during the period after restatement for any stock dividends. There were no dividends declared during the quarters ended June 30, 2018 and 2017. Income (loss) used in the EPS calculation is net income (loss) for each period. There were no dilutive potential shares outstanding for the periods ended June 30, 2018 and 2017.

 

Note 10. Recent Accounting Pronouncements

 

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.

 

 

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. 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				Fiscal 2017
Microwave Filter (MFC):
RF/Microwave		$	413,611			$	394,092
Satellite			204,474				210,703
Cable TV			101,467				56,902
Broadcast TV			82,588				40,286
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):
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				September 30, 2017
Cash & cash equivalents		$	550,054			$	667,940
Working capital		$	1,023,329			$	1,149,368
Current ratio			4.5 to 1				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.

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

As a “smaller reporting company” we are not required to provide information required by this item.

 

ITEM 4. CONTROLS AND PROCEDURES

 

EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES

 

Management’s responsibility includes establishing and maintaining adequate internal control over financial reporting. The Company’s management, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness 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 amended (the “Exchange Act”)) as of the end of the period covered by this report. Based on such evaluation, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of such period, the Company’s disclosure controls and procedures were effective as of the end of the period covered by this report.

CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING

 

There have been no changes in the Company’s internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

 

PART II - OTHER INFORMATION

 

Item 1. Legal Proceedings

 

None.

Item 1A. Risk Factors

 

Not applicable.

Item 2. Changes in Securities

 

None during the three months ended June 30, 2018.

Item 3. Defaults Upon Senior Securities

 

The Company has no senior securities.

Item 4. Mine Safety Disclosures

 

Not applicable.

Item 5. Other Information

 

None.

Item 6. Exhibits

 

a. Exhibits

 

31.1 Section 13a-14(a)/15d-14(a) Certification of Paul W. Mears

 

31.2 Section 13a-14(a)/15d-14(a) Certification of Richard L. Jones

 

32.1 Section 1350 Certification of Paul W. Mears and Richard L. Jones

 

 

Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

	MICROWAVE FILTER COMPANY, INC.
August 13, 2018	/s/ Paul W. Mears
(Date)	Paul W. Mears
	Chief Executive Officer
August 13, 2018	/s/ Richard L. Jones
(Date)	Richard L. Jones
	Chief Financial Officer