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EX-32.1 - MICROWAVE FILTER CO INC /NY/ex32-1.htm
EX-31.2 - MICROWAVE FILTER CO INC /NY/ex31-2.htm
EX-31.1 - MICROWAVE FILTER CO INC /NY/ex31-1.htm
EX-3.2 - MICROWAVE FILTER CO INC /NY/ex3-2.htm
EX-3.1 - MICROWAVE FILTER CO INC /NY/ex3-1.htm

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-K

 

 

(Mark one)

 

[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the fiscal year ended September 30, 2018

 

OR

 

[  ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)

 

For the transition period from ____________to____________

 

Commission file number 0-10976

 

Microwave Filter Company, Inc

(Exact name of registrant as specified in its charter)

 

New York   16-0928443
(State or other jurisdiction of
incorporation or organization)
  (I.R.S. Employer
Identification No.)

 

6743 Kinne Street, East Syracuse, NY   13057
(Address of principal executive offices)   (Zip code)

 

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

 

Securities registered pursuant to Section 12(b) of the Act: None

 

Securities registered pursuant to Section 12(g) of the Act:

 

Common stock, par value $.10 per share

Title of class

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

YES [  ] NO [X]

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.

YES [  ] NO [X]

 

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 (§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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [  ]

 

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] Emerging growth company [  ]

 

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

 

The aggregate market value of the voting stock held by non-affiliates of the registrant as of the last business day of the registrant’s most recently completed second fiscal quarter was $1,681,780.

 

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

 

Shares of common stock outstanding at November 16, 2018: 2,579,680

 

 

 

 
 

 

DOCUMENTS INCORPORATED BY REFERENCE

 

Part III: Portions of the Definitive Proxy Statement to be filed with the Securities and Exchange Commission in connection with the solicitation of proxies for the Company’s 2019 Annual Meeting of Shareholders are incorporated by reference into Part III. (With the exception of those portions which are specifically incorporated by reference in this Form 10-K, the Proxy Statement is not deemed to be filed or incorporated by reference as part of this report.)

 

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PART I

 

ITEM 1. BUSINESS.

 

FORWARD-LOOKING CAUTIONARY STATEMENT

 

In an effort to provide investors a balanced view of the Company’s current condition and future growth opportunities, this Annual Report on Form 10-K may include 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 2018 Annual Report 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.

 

GENERAL DEVELOPMENT OF BUSINESS

 

Microwave Filter Company, Inc. (hereinafter referred to as MFC) was incorporated in New York State on September 26, 1967. MFC is the successor of Microwave Filter Company which was founded in April of 1967.

 

On July 1, 1990, MFC acquired Niagara Scientific, Inc. (hereinafter referred to as NSI.)

 

MFC and its subsidiaries are sometimes referred to collectively as the “Company.”

 

NARRATIVE DESCRIPTION OF BUSINESS

 

Microwave Filter Company, Inc. (MFC)

 

Established in 1967 in East Syracuse, New York, MFC occupies a modern 40,000 square foot facility with an impressive complement of analytical and design software, test instrumentation, prototype and manufacturing equipment to create passive filters, components and sub systems in the frequency range of 10 MHz to 50 GHz.

 

MFC manufactures radio frequency (RF) filters and related components for eliminating interference and facilitating signal processing for such markets as Cable Television, Broadcast, Commercial and Military Communications, Avionics, Radar, Navigation and Defense. The Company designs waveguide, stripline/ microstrip, transmission line, miniature/subminiature and lumped constant filters. Configurations include bandpass, highpass, lowpass, bandstop, multiplexers, tunable notch, tunable bandpass, high power filters, amplitude equalized, delay equalized and filter networks. The Company actively produces over 1,700 standard products and has designed more than 5,000 custom products for specialized applications.

 

The manufacturing facility includes a modern CAD system, a test department with automated network analyzers to 50 GHz, a high capacity conveyor soldering oven and a fully compliant finishing operation. The Company’s Quality Management System has been certified ISO 9001:2015 recognizing the Company as a quality vendor.

 

Efficient computer simulation, design and analysis software enhanced by proprietary MFC developed software, allow rapid and accurate filter development at reasonable cost. Automated network analyzers provide rigorous product testing and performance data storage on a serial number basis in most cases.

 

A network based CAD system allows the transfer of data and programs to the CNC turning and milling centers for fabrication of machined parts. Prototype PC boards are similarly produced by computer controlled PC board mills.

 

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A Grieve high capacity conveyor soldering oven is used for production of large quantity assemblies while smaller production quantities are assembled at hand soldering or brazing stations.

 

ISO 9001:2015 contract and design review procedures coupled with a QA department that is compliant with MIL-I-45208 inspection systems and MIL-STD-45622 calibration system standards assures process and product integrity.

 

Other in-house testing facilities include environmental chambers capable of testing products for temperatures of -40 to 200 degrees Celsius and humidity up to 100 percent. Several high power amplifiers are available for power tests. We have 2500 watt capability from 88-108Mhz with 200 watt capability up to 2200 Mhz. Facilities are also available for salt spray, sand and dust, shock and vibration, RFI leakage and altitude testing.

 

MARKETS

 

Microwave Filter Company, Inc. (MFC)

 

RF and Microwave - This market encompasses both commercial and military applications. Filters in defense applications are used for such purposes as air to ground communications, radar and land communications. In commercial areas, filters are used to protect such equipment as receivers, transmitters, transceivers and any other electronics used for signal processing. In addition to filters, this market is also served with MFC’s Ferrosorb product line. Ferrosorb is a microwave absorbing material available in sheets, loads and a variety of other shapes. The product is used to offer protection by shielding signals or absorbing selective bands.

 

MFC’s RF/Microwave products are sold primarily to Original Equipment Manufacturers that serve the mobile radio, commercial communications and defense electronics markets. 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. The Company is also actively sourcing complimentary products to distribute to augment sales.

 

Satellite - Microwave filters for removing interference are provided for commercial antennas. A variety of products are available that offer protection and or solutions to interference that affects the feedhorn, downconverter and receiver. An extensive offering of filters are also available for satellite services utilizing the higher KU and KA frequency bands. Management expects the demand for these types of filters to continue with the proliferation of earth stations world wide and increased sources of interference.

 

Mobile Radio and Data Links - MFC provides filters to a variety of mobile radio services such as cellular telephone, two way radio and paging to eliminate interference in transmit or receive equipment. More recently there has been demand for filters and diplexers for broadband microwave applications for Voice Over Internet Protocol (“VOIP”) with the number of services increasing and ISP use. The advent of license exempt applications has increased the need for interference filtering. With the number of services increasing and our air waves becoming more congested, filters are increasingly important to many transmit operations.

 

Cable Television (CATV) - The CATV marketplace continues to change as cable operators begin the process of migrating to the latest DOCSIS (Data Over Cable Service Interface Specification) standard, DOCSIS 3.1.

 

DOCSIS 3.1 continues the evolution of digital CATV systems with the focus of improving spectrum efficiency and providing greater programming flexibility to benefit consumers. These changes move CATV systems from one that is channelized to one segmented into larger frequency blocks. The ultimate goal of DOCSIS 3.1 is to expand the operating frequency capabilities beyond 1700MHz. DOCSIS 3.1 will provide substantial increases in internet speed and allow for increased TV picture resolution; i.e., Ultra High Definition (UHD) or 4K TV and beyond. DOCSIS 3.1 allows CATV operators to remain competitive with their fiber optic counterparts.

 

MFC primarily serves this market with standard and custom filters used at the headend to process signals and remove interference. A very popular application involves removing or re-routing TV channels to organize programming line ups in multi-dwelling facilities (i.e. hospitals, senior living facilities.)

 

Since all cable operators initially receive substantial programming via satellite, products from our satellite market cross over into the cable television market. C-band satellite receive systems are prone to various types of terrestrial interference which are curable in many cases by applying MFC bandpass filters.

 

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Broadcast – MFC continues to develop and expand its series of wireless diplexers.

 

Due to analog to digital conversion within the TV (UHF/VHF) broadcast industry, Microwave Filter Company has developed new filter products to accommodate the wider bandwidths necessary for the digital transmission. In order to accommodate the wider digital TV signal bandwidths, customers have been forced to replace their existing (narrower bandwidth) analog filters with (wider bandwidth) digital filters.

 

As a result of the recent Broadcast Incentive Auction, UHF channels 38-51 have been auctioned off for Internet Service Provider operations. TV Stations within this channel range that wish to continue broadcasting will be relocated to the remaining UHF spectrum of channels 14-36. This reallocation is expected to align well with MFC’s UHF broadcast filters and combining systems as the changeovers take place.

 

MFC also continues to serve other segments of the Broadcast industry such as FM radio, STL (TV Studio-to-Transmitter Links) and the BAS (Broadcast Auxiliary Service) band (formerly known as the ENG (Electronic News Gathering) band.)

 

WORLD TRADE

 

The Company’s international sales decreased $66,310 or 16.4% to $338,005 for the fiscal year ended September 30, 2018 when compared to international sales of $404,315 during the fiscal year ended September 30, 2017.

 

SUPPLIERS

 

The Company depends on outside suppliers for raw materials, components and parts, and services. Although items are generally available from a number of suppliers, the Company purchases certain raw materials and components from a single supplier. If such a supplier should cease to supply an item, the Company believes that new sources could be found to provide the raw materials and components. However, manufacturing delays and added costs could result. The Company has not experienced significant delays of this nature in the past, but there can be no assurance that delays in delivery due to supply shortages will not occur in the future. Substantial periods of lead time for delivery of certain materials are sometimes experienced by the Company, making it necessary to inventory varied quantities of materials.

 

PATENTS AND LICENSES

 

The Company has no patents, trademarks, copyrights, licenses or franchises of material importance.

 

SEASONAL FLUCTUATIONS

 

There are no significant seasonal fluctuations in the Company’s business.

 

GOVERNMENT CONTRACTS

 

The Company is not dependent in any material respect on government contracts.

 

SIGNIFICANT CUSTOMERS

 

Sales to one customer represented 32% of total sales for the fiscal year ended September 30, 2018 compared to 41.2% of total sales for the fiscal year ended September 30, 2017. These sales are in connection with a multiyear program in which the Company is a subcontractor. A loss of this customer or programs related to this customer could materially impact the Company.

 

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EXPORT CONTROLS

 

Our products are subject to the Export Administration Regulations (“EAR”) administered by the U.S. Department of Commerce and may, in certain instances, be subject to the International Traffic in Arms Regulations (“ITAR”) administered by the U.S. Department of State. EAR restricts the export of defense products, technical data and defense services. We believe that we have implemented internal export procedures and controls in order to achieve compliance with the applicable U.S. export control regulations.

 

ENVIRONMENTAL REGULATION

 

Compliance with federal, state and local requirements relating to the discharge of substances into the environment, the disposal of hazardous waste and other activities affecting the environment has been accomplished without material effect on the Company’s liquidity and capital resources, competitive position or financial statements and management believes that such compliance will not have a material effect on the Company’s liquidity and capital resources, competitive position or financial statements in the future

 

BACKLOG

 

At September 30, 2018, the Company’s total backlog of orders, which represents firm orders from customers, was $1,301,734 compared to $702,665 at September 30, 2017. The total Company backlog at September 30, 2018 is scheduled to ship during fiscal 2019. 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.

 

EMPLOYEES

 

At September 30, 2018, the Company employed 29 full-time, 6 part-time and 2 temporary employees.

 

RESEARCH AND DEVELOPMENT

 

The Company maintains and expects to continue to maintain an active research and development program. The Company believes that such a program is needed to maintain its competitive position in existing markets and to provide products for emerging markets. Costs in connection with research and development were $334,851 and $326,965 for the fiscal years 2018 and 2017, respectively. Research and development costs are charged to operations as incurred.

 

COMPETITION

 

The principal competitive factors facing both MFC are price, technical performance, service and the ability to produce in quantity to specific delivery schedules. Based on these factors, the Company believes it competes favorably in its markets.

 

AVAILABLE INFORMATION

 

Our Internet address is www.microwavefilter.com. There we make available, free of charge, our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, our proxy statement and any amendments to those reports or statements filed or furnished pursuant to Section 13(a) and 15(d) of the Securities Exchange Act of 1934, as amended, as soon as reasonably practicable after we electronically file such material with, or furnish it to, the Securities and Exchange Commission (SEC). Our SEC reports can be accessed through the investor relations link of our website. The information found on our website is not part of this or any other report we file with or furnish to the SEC.

 

The public may read and copy any materials that we file with the SEC at the SEC’s Public Reference Room located at 450 Fifth Street NW, Washington, DC 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC also maintains electronic versions of our reports on its website at www.sec.gov.

 

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ITEM 1A. RISK FACTORS

 

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

 

ITEM 1B. UNRESOLVED STAFF COMMENTS

 

None.

 

ITEM 2. PROPERTIES.

 

MFC’s office and manufacturing facility is located at 6743 Kinne Street, East Syracuse, New York. This facility, which is owned by MFC, consists of 40,000 square feet of office and manufacturing space located on 3.7 acres.

 

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 September 30, 2018 and 2017 was $270,172 and $318,998, respectively.

 

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

 

ITEM 3. LEGAL PROCEEDINGS.

 

None.

 

ITEM 4. MINE SAFETY DISCLOSURES

 

Not applicable.

 

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PART II

 

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.

 

The Company’s securities are currently quoted on the OTC marketplace (www.otcmarkets.com) under the symbol “MFCO.”

 

The following table shows the high and low closing sales prices for MFC’s common stock for each full quarterly period within the two most recent fiscal years. The quotations represent prices in the over-the-counter market between dealers in securities. They do not include retail mark-ups, mark-downs or commissions.

 

Fiscal 2018  High   Low 
         
Oct. 1, 2017 to Dec. 31, 2017  $0.66   $0.59 
Jan. 1, 2018 to Mar. 31, 2018   0.73    0.59 
Apr. 1, 2018 to June 30, 2018   1.00    0.60 
July 1, 2018 to Sept. 30, 2018   0.60    0.57 
           
Fiscal 2017   High    Low 
           
Oct. 1, 2016 to Dec. 31, 2016  $0.65   $0.55 
Jan. 1, 2017 to Mar. 31, 2017   0.79    0.60 
Apr. 1, 2017 to June 30, 2017   0.70    0.61 
July 1, 2017 to Sept. 30, 2017   0.65    0.59 

 

The Company had 548 holders of record of its common stock at November 16, 2018. Included in this number are shares held in “nominee” or “street” name and, therefore, the number of beneficial owners of the common stock is believed to be substantially in excess of the foregoing number.

 

Payment of future dividends, if any, will be at the discretion of the Board of Directors after taking into consideration various factors, including the Company’s financial condition, operating results and current and anticipated cash needs.

 

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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

Microwave Filter Company, Inc. (MFC) operates primarily in the United States and principally in one industry. The Company extends credit to business customers, including original equipment manufacturers (OEMs), distributors and other end users, 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 and commercial and defense electronics. NSI’s sales consist of spare parts orders.

 

RESULTS OF OPERATIONS

 

The following table sets forth the Company’s net sales by major product group for each of the fiscal years in the two year period ended September 30, 2018.

 

Product group  Fiscal 2018   Fiscal 2017 
         
Microwave Filter:          
RF/Microwave  $1,400,083   $1,651,812 
Satellite   1,176,034    778,775 
Broadcast TV   425,787    276,443 
Cable TV   334,897    322,193 
Niagara Scientific   5,010    7,446 
Total  $3,341,811   $3,036,669 
           
Sales backlog at 9/30  $1,301,734   $702,665 

 

Fiscal 2018 compared to fiscal 2017

 

Consolidated net sales for the fiscal year ended September 30, 2018 equaled $3,341,811, an increase of $305,142 or 10%, when compared to consolidated net sales of $3,036,669 during the fiscal year ended September 30, 2017

 

MFC’s RF/Microwave product sales decreased $251,729 or 15.2% to $1,400,083 during the fiscal year ended September 30, 2018 when compared to sales of $1,651,812 during the fiscal year ended September 30, 2017. MFC’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 decreased $181,755 to $1,070,250, or 32% of total sales, during the fiscal year ended September 30, 2018 compared to sales of $1,252,005, or 41.2% of total sales, during the fiscal year ended September 30, 2017. 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 $397,259 or 51% to $1,176,034 during the fiscal year ended September 30, 2018 when compared to sales of $778,775 during the fiscal year ended September 30, 2017. The increase can be attributed to an increase in demand for filters which suppress strong out-of-band interference caused by military and civilian radar systems and other sources. Management expects demand for these types of filters to continue with the proliferation of earth stations world wide and increased sources of interference.

 

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MFC’s Broadcast TV product sales increased $149,344 or 54% to $425,787 for the fiscal year ended September 30, 2018 when compared to sales of $276,443 for the fiscal year ended September 30, 2017. The increase can primarily be attributed to the Broadcast Incentive Auction. This auction repurposed 84 Mhz of frequency spectrum to be allocated to wireless broadband. UHF stations that had been operating in that frequency spectrum would be required to relocate to a lower available channel. Combining networks and other accessories manufactured by MFC make this transition possible.

 

MFC’s Cable TV product sales increased $12,704 or 3.9% to $334,897 during the fiscal year ended September 30, 2018 when compared to Cable TV product sales of $322,193 during the fiscal year ended September 30, 2017. Management continues to project flat or a decrease in demand for Cable TV products due to the shift from analog to digital television. Due to the inherent nature of digital modulation versus analog modulation, fewer filters will be required. The Company has developed filters for digital television and there will still be requirements for analog filters for limited applications in commercial and private cable systems.

 

At September 30, 2018, the Company’s total backlog of orders, which represents firm orders from customers, equaled $1,301,734 compared to $702,665 at September 30, 2017. The total Company backlog at September 30, 2018 is scheduled to ship during fiscal 2019. 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.

 

Gross profit increased $317,215 to $1,325,884 during the fiscal year ended September 30, 2018 when compared to gross profit of $1,008,669 during the fiscal year ended September 30, 2017. The increase in gross profit can be attributed the higher sales volume 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.

 

Selling, general and administrative (SG&A) expenses increased $71,955 or 5.7% to $1,333,710 during the fiscal year ended September 30, 2018 when compared to SG&A expenses of $1,261,755 during the fiscal year ended September 30, 2017. The increase can be attributed to higher payroll costs.

 

Other income (expense) was an expense of $8,183 for the fiscal year ended September 30, 2018 compared to expense of $11,130 for the fiscal year ended September 30, 2017 primarily due to interest expense of $13,366 offset by miscellaneous non-operating income of $5,183 for the fiscal year ended September 30, 2018 and interest expense of $15,545 offset by miscellaneous non-operating income of $4,415 for the fiscal year ended September 30, 2017. Other income generally consists of interest income, sales of scrap material, the forfeiture of non-refundable deposits and other incidental items.

 

The Company recorded income taxes of $50 and $0 for the fiscal year ended September 30, 2018 and September 30. 2017. Any other provision for income tax expense was fully offset by a reversal of a portion of the Company’s valuation allowance. Any benefit for losses has been subject to a valuation allowance since the realization of the deferred tax benefit is not considered more likely than not. As required by FASB ASC 740 the Company has evaluated the positive and negative evidence bearing upon the realization of its deferred tax assets. The Company has determined that, at this time, it is more likely than not that the Company will not realize all of the benefits of federal and state deferred tax assets, and, as a result, a valuation allowance was established. See Note 7 to the consolidated financial statements.

 

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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 and its existing cash balances.

 

   September 30 
   2018   2017 
Cash & cash equivalents  $674,045   $667,940 
Working capital  $1,147,509   $1,149,368 
Current ratio   4.18 to 1    4.24 to 1 
Long-term debt  $219,071   $270,172 

 

Cash and cash equivalents increased $6,105 to $674,045 at September 30, 2018 when compared to $667,940 at September 30, 2017. The decrease was a result of $62,282 in net cash provided by operating activities, $7,348 in net cash used for capital expenditures, $48,826 in net cash used for repayment of a note payable and $3 in net cash used to purchase treasury stock.

 

Net cash provided by operating activities fluctuates between periods primarily as a result of differences in sales and net income and the timing of the collection of accounts receivable, purchase of inventory, and payment of accounts 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 September 30, 2018 and 2017 was $270,172 and $318,998, respectively.

 

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

 

Management believes that its working capital requirements for the foreseeable future will be met by its existing cash balances, future cash flows from operations and its current credit arrangements.

 

Off-Balance Sheet Arrangements

 

At September 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.

 

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Critical Accounting Policies

 

The Company’s consolidated financial statements are based on the application of accounting principles generally accepted in the United States of America (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.

 

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 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. 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. Our warranty obligation is affected by product that does not meet specifications and performance requirements and any related costs of addressing such matters.

 

The Company has deferred tax assets that are reviewed for recoverability and valued accordingly. These assets are evaluated by using estimates of future taxable income streams and the impact of tax planning strategies. Valuations related to tax accruals and assets can be impacted by changes to tax codes, changes in statutory tax rates and the Company’s future taxable income levels. The Company has provided a full valuation allowance against its deferred tax assets.

 

12
 

 

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 Annual Report on Form 10-K may include 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 2018 Annual Report 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 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

 

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

 

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

 

The Financial Statements called for by this item are submitted as a separate section of this report.

 

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.

 

None.

 

13
 

 

ITEM 9A. 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.

 

MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

 

The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the exchange act.

 

Under the supervision and with the participation of the Company’s management, including our principal executive officer and principal financial officer, the Company conducted an evaluation of its internal control over financial reporting using the criteria set forth in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013. Based on this evaluation, the Company’s management concluded and certifies that its internal control over financial reporting was effective as of September 30, 2018.

 

This annual report does not include an attestation report of our registered public accounting firm regarding internal control over financial reporting. Our report was not subject to attestation by our registered public accounting firm pursuant to rules of the SEC that permit the Company to provide only management’s report in this annual report.

 

ITEM 9B. OTHER INFORMATION

 

None.

 

14
 

 

PART III

 

The information called for by “Item 10. Directors, Executive Officers, and Corporate Governance”, “Item 11. Executive Compensation”, “Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters”, “Item 13. Certain Relationships and Related Transactions, and Director Independence” and “Item 14. Principal Accountant Fees and Services”, is hereby incorporated by reference to the Company’s Proxy Statement for its Annual Meeting of Shareholders, to be filed with the SEC pursuant to Regulation 14a under the Securities Exchange Act of 1934, as amended.

 

15
 

 

PART IV

 

ITEM 15. FINANCIAL STATEMENT SCHEDULES AND EXHIBITS.

 

(a) 1. and 2. Financial Statements and Schedules:
   
  Reference is made to the list of Financial Statements submitted as a separate section of this report.

 

(b) Exhibits:
   
  Reference is made to the List of Exhibits submitted as a separate section of this report.

 

16
 

 

SIGNATURES

 

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, Microwave Filter Company, Inc. has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

MICROWAVE FILTER COMPANY, INC.

 

/S/ Paul W. Mears  
By: Paul W. Mears  
  (Chief Executive Officer)  

 

  /S/ Richard Jones  
By: Richard Jones  
  (Vice President and Chief Financial Officer)  

 

Dated: December 5, 2018

 

Pursuant to the requirements Of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the date indicated:

 

/S/ Robert R. Andrews   /S/ Carl F. Fahrenkrug
Robert R. Andrews   Carl F. Fahrenkrug
(Director)   (Director)
     
/S/ Frank Markovich   /S/ Paul W. Mears
Frank Markovich   Paul W. Mears
(Director)   (Director)
     
/S/ Sidney Chong    
Sidney Chong    
(Director)    

 

Dated: December 5, 2018

 

17
 

 

ANNUAL REPORT ON FORM 10-K

 

MICROWAVE FILTER COMPANY, INC.

AND SUBSIDIARIES

 

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

 

ITEM 8, ITEM 15(a)(1) and (2)

 

CONSOLIDATED FINANCIAL STATEMENTS: Page
   
Report of Independent Registered Public Accounting Firm 19
Consolidated Balance Sheets as of September 30, 2018 and 2017 20
Consolidated Statements of Operations for the Years Ended September 30, 2018 and 2017 21
Consolidated Statements of Stockholders’ Equity for the Years Ended September 30, 2018 and 2017 22
Consolidated Statements of Cash Flows for the Years Ended September 30, 2018 and 2017 23
Notes to Consolidated Financial Statements 24-32

 

All other schedules for which provision is made in the applicable accounting regulation of the Securities and Exchange Commission are not required under the related instructions or are inapplicable and therefore have been omitted.

 

18
 

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

To the Board of Directors and Stockholders of Microwave Filter Company, Inc.

 

Opinion on the Financial Statements

 

We have audited the accompanying consolidated balance sheets of Microwave Filter Company, Inc. and Subsidiaries (The “Company”) as of September 30, 2018 and 2017, and the related consolidated statements of operations, stockholders’ equity, and cash flows for the years then ended, and the related notes. In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of September 30, 2018 and 2017, and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.

 

Basis for Opinion

 

These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U. S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

 

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.

 

Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.

 

/s/ Dannible & McKee, LLP

 

Dannible & McKee, LLP

We have served as the Company’s auditor since 2015.

 

Syracuse, New York

December 5, 2018

 

19
 

 

Microwave Filter Company and Subsidiaries

Consolidated Balance Sheets

 

   September 30, 
   2018   2017 
Assets          
Current assets:          
Cash and cash equivalents  $674,045   $667,940 
Accounts receivable-trade, net of allowance for doubtful accounts of $4,000 and $4,000   402,760    350,703 
Inventories, net of obsolete inventory reserve of $463,286 and $445,393   377,603    458,158 
Prepaid expenses and other current assets   54,416    27,858 
Total current assets   1,508,824    1,504,659 
           
Property, plant and equipment, net   261,474    326,778 
           
Total Assets  $1,770,298   $1,831,437 
           
Liabilities and Stockholders’ Equity          
Current liabilities:          
Accounts payable  $116,938   $104,349 
Customer deposits   35,278    43,893 
Accrued payroll and related expenses   38,711    39,710 
Accrued compensated absences   90,449    96,490 
Notes Payable - Short Term   51,101    48,826 
Other current liabilities   28,838    22,023 
Total current liabilities   361,315    355,291 
           
Notes Payable - Long Term   219,071    270,172 
Total other liabilities   219,071    270,172 
Total liabilities   580,386    625,463 
           
Stockholders’ equity:          
Common stock, $.10 par value. Authorized 5,000,000 shares Issued 4,324,140 in 2018 and 2017, Outstanding 2,579,680 in 2018 and 2,579,684 in 2017   432,414    432,414 
Additional paid-in capital   3,248,706    3,248,706 
Accumulated deficit   (796,444)   (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   1,189,912    1,205,974 
Total Liabilities and Stockholders’ Equity  $1,770,298   $1,831,437 

 

The accompanying notes are an integral part of the consolidated financial statements.

 

20
 

 

Microwave Filter Company and Subsidiaries

Consolidated Statements of Operations

 

   For the Years Ended September 30 
   2018   2017 
         
Net sales  $3,341,811   $3,036,669 
           
Cost of goods sold   2,015,927    2,028,000 
           
Gross profit   1,325,884    1,008,669 
           
Selling, general and administrative expenses   1,333,710    1,261,755 
           
Loss from operations   (7,826)   (253,086)
           
Non-operating Income (Expense)          
Interest income   1,243    1,880 
Interest expense   (13,366)   (15,545)
Miscellaneous   3,940    2,535 
           
Loss before income taxes   (16,009)   (264,216)
           
Provision for income taxes   (50)   (0)
           
NET LOSS  $(16,059)  $(264,216)
           
Per share data:          
Basic and Diluted Loss          
Per Common Share  $(0.01)  $(0.10)
           
Shares used in computing net loss per common share:          
Basic and diluted   2,579,681    2,580,271 

 

The accompanying notes are an integral part of the consolidated financial statements.

 

21
 

 

Microwave Filter Company and Subsidiaries

Consolidated Statements of Stockholders’ Equity

For the Years Ended September 30, 2018 and 2017

 

       Additional           Total 
   Common Stock   Paid-in   Accumulated   Treasury Stock   Stockholders’ 
   Shares   Amt   Capital   Deficit   Shares   Amt   Equity 
                             
Balance                                   
September 30, 2016   4,324,140    432,414    3,248,706    (516,169)   1,743,133    (1,693,950)   1,471,001 
                                    
Net loss                  (264,216)             (264,216)
Purchase of treasury stock                       1,323    (811)   (811)
                                    
Balance                                   
September 30, 2017   4,324,140    432,414    3,248,706    (780,385)   1,744,456    (1,694,761)   1,205,974 
                                    
Net loss                  (16,059)             (16,059)
Purchase of treasury stock                       4    (3)   (3)
                                    
Balance                                   
September 30, 2018   4,324,140   $432,414   $3,248,706   $(796,444)   1,744,460   $(1,694,764)  $1,189,912 

 

The accompanying notes are an integral part of the consolidated financial statements.

 

22
 

 

Microwave Filter Company and Subsidiaries

Consolidated Statements of Cash Flows

 

   For the Years Ended September 30 
   2018   2017 
Cash flows from operating activities:          
Net loss  $(16,059)  $(264,216)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:          
Depreciation   72,652    81,488 
Inventory obsolescence provision   17,893    9,865 
Changes in assets and liabilities:          
Accounts receivable-trade   (52,057)   (4,070)
Inventories   62,662    (19,276)
Prepaid and other current assets   (26,558)   33,815 
Accounts payable and customer deposits   3,974    57,654 
Accrued payroll, compensated absences and related expenses   (7,040)   (52,388)
Other current liabilities   6,815    5,749 
Net cash provided by (used in) operating activities   62,282    (151,379)
           
Cash flows from investing activities:          
Capital expenditures   (7,348)   (56,335)
Net cash used in investing activities   (7,348)   (56,335)
           
Cash flows from financing activities:          
Repayment of note payable   (48,826)   (46,652)
Purchase of treasury stock   (3)   (811)
Net cash used in financing activities   (48,829)   (47,463)
           
Net increase (decrease) in cash and cash equivalents   6,105    (255,177)
           
Cash and cash equivalents at beginning of year   667,940    923,117 
           
Cash and cash equivalents at end of year  $674,045   $667,940 
           
Supplemental disclosures of cash flows:          
Cash paid during the year for :          
Interest  $13,538   $15,712 
Taxes  $50   $0 

 

The accompanying notes are an integral part of the consolidated financial statements.

 

23
 

 

Microwave Filter Company and Subsidiaries

Notes to Consolidated Financial Statements

 

 

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

a. Nature of Business

 

Microwave Filter Company, Inc. (MFC) 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.

 

b. Basis of Consolidation

 

The consolidated financial statements include the accounts of Microwave Filter Company, Inc. (MFC) and its wholly-owned subsidiaries, Niagara Scientific, Inc. (NSI) and Microwave Filter International, LTD. (MFI) (dormant); located in Syracuse, New York. All significant intercompany balances and transactions have been eliminated in consolidation.

 

c. Revenue Recognition

 

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 consolidated balance sheet.

 

d. Cash and Cash Equivalents

 

The Company’s financial instruments that are exposed to concentrations of credit risk consist primarily of cash and accounts receivable. Cash and cash equivalents consist of cash in banks and money market funds. The Company considers all highly liquid investments with original maturities of three months or less to be cash equivalents. The Company’s cash is held at federally insured institutions and balances may periodically exceed insured limits. The Company has not experienced any losses in such accounts and believes it is not exposed to any significant credit risk with respect to cash. The Company also routinely assesses the financial strength of its customers and, as a consequence, believes that its trade accounts receivable credit risk exposure is limited.

 

e. Trade Accounts Receivable and Allowance for Doubtful Accounts

 

Trade accounts receivable are recorded at the invoiced amount and do not bear interest. The allowance for doubtful accounts is the Company’s best estimate of the amount of probable credit losses in the Company’s existing accounts receivable. The Company reviews its allowance for doubtful accounts monthly. Past due balances are reviewed individually for collectibility. Account balances are charged off against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote. The Company does not have any off-balance-sheet credit exposure related to its customers.

 

f. Inventories and Reserve for Obsolescence

 

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 records a reserve for obsolete or excess inventory. The Company considers inventory quantities greater than a three year supply based on current year activity as well as any additional specifically identified inventory to be excess. The Company also provides for the total value of inventories that are determined to be obsolete based on criteria such as customer demand and changing technologies.

 

24
 

 

g. Research and Development

 

Costs in connection with research and development, which amount to $334,851 and $326,965 for the fiscal years 2018 and 2017, respectively, are charged to operations as incurred.

 

h. Property, Plant and Equipment

 

Property, plant and equipment are recorded at cost. Depreciation is provided using the straight-line method over the estimated useful lives of the respective assets. Buildings and building improvements are depreciated over an estimated service life of 10 to 30 years. Machinery and equipment are depreciated over an estimated useful life of 3 to 10 years. Office equipment and fixtures are depreciated over an estimated useful life of 3 to 10 years. At the time of sale or retirement, the cost and accumulated depreciation are removed from the respective accounts and the resulting gain or loss is recognized in income.

 

i. 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 deferred tax assets.

 

The Company follows FASB ASC 740-10, which clarifies the accounting for uncertainty in income taxes recognized in an entity’s financial statements and prescribes a recognition threshold and measurement attributes for financial statement disclosure of tax positions taken or expected to be taken on a tax return. Additionally, it provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. The Company will include interest on income tax liabilities in interest expense and penalties in operations if such amounts arise. The Company determined it has no uncertain tax positions and therefore no amounts are recorded.

 

j. 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 fiscal year ended September 30, 2018 and 2017. Loss used in the EPS calculation is net loss for each year. There were no dilutive potential shares outstanding for the years ended September 30, 2018 and 2017.

 

k. Fair Value of Financial Instruments

 

The carrying value of the Company cash and cash equivalents, accounts receivable and accounts payable approximate fair value because of the short maturity of those instruments. The carrying value of the Company’s note payable approximates its fair value.

 

The Company currently does not trade in or utilize derivative financial instruments.

 

l. Miscellaneous Non-operating Income

 

Miscellaneous non-operating income generally consists of sales of scrap material and the forfeiture of non-refundable deposits and other incidental items.

 

m. Use of Estimates

 

The preparation of financial statements in conformity with accounting principles generally accepted in the United States 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. Estimates also affect the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

 

25
 

 

n. Warranty Costs

 

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. Our warranty obligation is affected by product that does not meet specifications and performance requirements and any related costs of addressing such matters. Warranty costs were approximately $5,000 for the fiscal years ended September 30, 2018 and 2017, respectively.

 

o. Impairment of Long-Lived Assets

 

The carrying values of long-lived assets other than goodwill are generally evaluated for impairment only if events or changes in facts and circumstances indicate that carrying values may not be recoverable. Any impairment determined would be recorded in the current period and would be measured by comparing the fair value of the related asset to its carrying value. Fair value is generally determined by identifying estimated undiscounted cash flows to be generated by those assets. No impairments have been recorded for the fiscal years ended September 30, 2018 and 2017.

 

p. New Accounting Pronouncements

 

In February 2016, the FASB issued FASB ASU No. 2016-02, Leases (Topic 842). The core principle of Topic 842 is that a lessee should recognize the assets and liabilities that arise from leases. For operating leases, a lessee is required to recognize a right-of-use asset and a lease liability, initially measured at the present value of the lease payments, in the statement of financial position. For leases with a term of 12 months or less, a lessee is permitted to make an accounting policy election by class of underlying asset not to recognize lease assets and lease liabilities. The accounting applied by a lessor is largely unchanged from that applied under previous GAAP. This ASU is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Earlier application is permitted. In transition, lessees and lessors are required to recognize and measure leases at the beginning of the earliest period presented using a modified retrospective approach. The Company is currently evaluating the effect that the adoption of this ASU will have on its financial statements.

 

26
 

 

2. INVENTORIES

 

Inventories net of provision for obsolescence consisted of the following:

 

   September 30 
   2018   2017 
         
Raw materials and stock parts  $306,658   $337,462 
Work-in-process   37,062    21,861 
Finished goods   33,883    98,835 
           
   $377,603   $458,158 

 

The Company’s reserve for obsolescence equaled $463,286 at September 30, 2018 and $445,393 at September 30, 2017.

 

3. PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment consisted of the following:

 

   September 30 
   2018   2017 
         
Land  $143,000   $143,000 
Building and improvements   1,928,599    1,928,599 
Machinery and equipment   3,501,925    3,497,015 
Office equipment and fixtures   1,919,178    1,916,740 
           
    7,492,702    7,485,354 
Less: Accumulated depreciation   7,231,228    7,158,576 
           
 Property, plant and equipment, net  $261,474   $326,778 
           
Depreciation expense  $72,652   $81,488 

 

27
 

 

4. 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 September 30, 2018 and 2017 was $270,172 and $318,998 respectively. Interest accrued as of September 30, 2018 and 2017 was $946 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 1st lien on real property situated in the Town of Dewitt, County of Onondaga, and State of New York and known as 6743 Kinne Street, East Syracuse, New York; (b) a General Assignment of Rents and Leases; (c) an Environmental Compliance and Indemnification; and (d) such other security as may now or hereafter be given to Lender as collateral for the loan. The future obligations of the loan are as follows:

 

Year Ended   Principal   Interest   Total 
September 30,   Payments   Payments   Payments 
              
 2019    51,101    11,263    62,364 
 2020    53,456    8,908    62,364 
 2021    55,972    6,392    62,364 
 2022    58,680    3,684    62,364 
 2023    50,963    1,007    51,970 
     $270,172   $31,254   $301,426 

 

5. PROFIT SHARING AND 401-K PLANS

 

The Company maintains both a non-contributory profit sharing plan and a contributory 401-K plan for all employees over the age of 21 with one year of service. Annual contributions to the profit sharing plan are determined by the Board of Directors and are made from current or accumulated earnings, while contributions to the 401-K plan were matched at a rate of 100% of an employee’s first 6% of contributions during fiscal 2018. The maximum corporate match was 6% of an employee’s compensation during fiscal 2018.

 

The Company’s matching contributions to the 401-K plan for the years ended September 30, 2018 and 2017 were $71,392 and $70,316, respectively. Additionally, the Company may make discretionary contributions to the non-contributory profit sharing plan. These contributions were $0 in 2018 and 2017.

 

6. OBLIGATIONS UNDER OPERATING LEASES

 

The Company leases equipment under an operating lease agreement expiring on December 31, 2018. Rental expense under this lease for the year ended September 30, 2018 was $4,930.

 

Minimum rental commitments at September 30, 2018 for this lease are:

 

Year Ended  Lease 
September 30  Payments 
2019   1,232 
   $1,232 

 

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7. INCOME TAXES

 

The components of the provision for income taxes in the accompanying consolidated statements of operations are as follows:

 

   Year Ended September 30, 
   2018   2017 
Currently payable:          
Federal  $0   $0 
State   50    0 
Deferred (credit)   0    0 
           
   $50   $0 

 

The components of the provision for income taxes differs from the amount that would result from applying the federal statutory rate for the periods ended September 30, 2018 and 2017 is as follows:

 

   Year ended September 30, 
   2018   2017 
   Amount   %   Amount   % 
Statutory tax rate  $8,797    24.2%  $(89,833)   (34.0)%
Effect of change in income tax rates   (87,833)   (242.1)%   0    0%
Research and development tax credits   (14,728)   (40.5)%   (13,883)   (5.2)%
Valuation allowance change   93,764    258.4%   103,647    39.2%
Permanent differences   0    0.0%   69    0.0%
                     
   $0    0.0%  $0    0.0%

 

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The temporary differences which give rise to deferred tax assets and (liabilities) at September 30 are as follows:

 

   2018   2017 
         
Inventory  $101,398   $157,515 
Accrued warranty   2,625    4,250 
Accrued vacation   15,004    26,347 
Accounts receivable   885    1,432 
Accelerated depreciation   22,477    27,320 
Research and development tax credit carryforward   305,357    288,369 
AMT credit carryforward   37,521    37,521 
NOL carryforward   232,389    268,666 
Valuation allowance   (717,656)   (811,420)
           
Net deferred tax assets  $0   $0 

 

During December 2017, the Tax Cuts and Jobs Act (the “ACT”) was signed into law reducing the Federal corporate income tax rate from 34 percent to 21 percent. Based on the provisions of the ACT, the Company remeasured their net deferred tax assets applying the lower income tax rates to the Company’s net deferred tax assets. In addition, in accordance with the applicable Internal Revenue Code, the Company is required to calculate its current tax provision for fiscal 2018 using a blended corporate tax rate, resulting in a reduction in the effective current tax rate from 34.00 percent to 24.25 percent. The Company has provided a full valuation allowance against its net deferred tax assets. Accordingly, no impact arising from the change in the tax rates arising from the provisions of the ACT is reflected in these consolidated financial statements.

 

As required by FASB ASC 740 the Company has evaluated the positive and negative evidence bearing upon the realization of its net 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 net deferred tax assets, and, as a result, a valuation allowance was established. The research and development tax credit carryforwards and NOL carryforwards generated through September 30, 2017, of approximately $300,000 and $800,000 expire at various times through 2037. Pursuant to the ACT, any of the Company’s newly-generated Federal NOL carryforwards can be carried forward indefinitely, while being limited to 80% of taxable income (determined without regard to the deduction.) As of September 30, 2018, the Company’s Federal AMT credit carryforward of approximately $35,000 is refundable in any year prior to 2022, in an amount equal to 50% (100% for tax years beginning in 2021) of the excess minimum tax credit for the tax year, over the amount of the credit allowable for the year against the regular tax liability. The Company is currently open to audit under the statute of limitations by the Internal Revenue Service for the fiscal years September 30, 2016 through September 30, 2018. The Company has no uncertain tax positions. As of September 30, 2018 and 2017 there is no accrual for interest or penalties related to uncertain tax positions.

 

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8. INDUSTRY SEGMENT DATA

 

The Company’s primary business segment involves the operations of Microwave Filter Company, Inc. (MFC) 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.

 

9. SIGNIFICANT CUSTOMERS

 

Sales to one customer represented 32% of total sales for the fiscal year ended September 30, 2018 compared to 41.2% of total sales for the fiscal year ended September 30, 2017. A loss of this customer or programs related to this customer could materially impact the Company.

 

10. LEGAL MATTERS

 

None.

 

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EXHIBIT INDEX
     
Exhibit No.   Description
     
3.1   MFC Certificate of Corporation, as amended (incorporated by reference to MFC’s Proxy Statement dated March 14, 1996 for the April 4, 1996 Annual Meeting and MFC’s Report on Form 10-Q dated May 14,1996.)
     
3.2   MFC Amended and Restated Bylaws. (incorporated by reference to MFC’s Proxy Statement dated March 14, 1996 for the April 4, 1996 Annual Meeting and MFC’s Report on Form 10-Q dated May 14,1996.)
     
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

 

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