UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIESEXCHANGE ACT OF 1934
For the quarterly period ended:September 30, 2015
OR
¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIESEXCHANGE ACT OF 1934
For the transition period from ________ to ________
Commission File No. 000-55382
MICROPHASE CORPORATION
(Exact name of registrant as specified in its charter)
| Connecticut | 06-0710848 | |
| (State or other jurisdiction of incorporation) | (IRS Employer Identification No.) |
100 Trap Falls Road Extension, Suite 400
Shelton, CT 06484
(Address of principal executive offices)
(203) 866-8000
(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 past 12 months, 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 (Sec. 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, or a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act:
| Large accelerated filer | ¨ | Accelerated filer | ¨ |
| Non-accelerated filer | ¨ | 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 ¨ Nox
As of November 1, 2015, there were 4,775,306 shares outstanding of the registrant’s common stock.
MICROPHASE CORPORATION
INDEX
Consolidated Balance Sheets
| September 30, | June 30, | |||||||
| 2015 | 2015 | |||||||
| (unaudited) | ||||||||
| ASSETS | ||||||||
| CURRENT ASSETS | ||||||||
| Cash | $ | 198,371 | $ | 127,093 | ||||
| Accounts receivable, net of allowance of $5,000 on September 30, 2015 and June 30, 2015 | 1,105,650 | 881,221 | ||||||
| Inventory | 839,260 | 852,015 | ||||||
| Due from related parties | 30,295 | 28,045 | ||||||
| Prepaid and other current assets | 43,319 | 38,906 | ||||||
| TOTAL CURRENT ASSETS | 2,216,895 | 1,927,280 | ||||||
| Property and equipment, net | 210,690 | 194,160 | ||||||
| OTHER ASSETS | ||||||||
| Cash – restricted | 100,000 | 100,000 | ||||||
| Intangible assets | 470,378 | 474,255 | ||||||
| Investments | 162,933 | 200,000 | ||||||
| Other assets | 43,479 | 43,479 | ||||||
| TOTAL OTHER ASSETS | 776,790 | 817,734 | ||||||
| TOTAL ASSETS | $ | 3,204,375 | $ | 2,939,174 | ||||
| LIABILITIES AND STOCKHOLDERS’ DEFICIT | ||||||||
| CURRENT LIABILITIES | ||||||||
| Credit Facility – Revolving Loan | $ | 1,225,466 | $ | 1,013,406 | ||||
| Accounts payable | 360,092 | 421,915 | ||||||
| Accrued expenses | 1,197,524 | 1,105,943 | ||||||
| Notes Payable – Related Parties, current portion | 227,641 | 169,447 | ||||||
| Asset Acquisition Note(s) Payable | 300,000 | 300,000 | ||||||
| Equity Lines of Credit | 342,907 | 351,997 | ||||||
| Other termed debts – current portion | 28,109 | 32,654 | ||||||
| TOTAL CURRENT LIABILITIES | 3,681,739 | 3,395,362 | ||||||
| Other termed debts, net of current portion | 37,449 | 40,689 | ||||||
| Notes Payable – Related Parties, net of current portion | 239,543 | 290,799 | ||||||
| COMMITMENTS AND CONTINGENCIES | ||||||||
| STOCKHOLDERS’ DEFICIT | ||||||||
| 6% cumulative preferred stock, $100 par value, 200,000 shares authorized, 26,943 shares issued and outstanding on September 30, 2015 and June 30, 2015, respectively | 2,694,300 | 2,694,300 | ||||||
| Common stock, no par value, 7,800,000 shares authorized, 4,775,306 shares issued and outstanding at September 30, 2015 and June 30, 2015, respectively | 6,976,533 | 6,976,533 | ||||||
| Additional Paid In Capital | 2,396,711 | 2,396,711 | ||||||
| Accumulated Other Comprehensive Income (loss) | (37,067 | ) | — | |||||
| Accumulated Deficit | (12,784,833 | ) | (12,855,220 | ) | ||||
| TOTAL STOCKHOLDERS’ DEFICIT | (754,356 | ) | (787,676 | ) | ||||
| TOTAL LIABILITIES AND STOCKHOLDERS’ DEFICIT | $ | 3,204,375 | $ | 2,939,174 | ||||
The accompanying notes are an integral part of these consolidated financial statements.
| F-1 |
Consolidated Statements of Operations
| For The Three Months Ended | ||||||||
| September 30, | ||||||||
| 2015 | 2014 | |||||||
| (unaudited) | (unaudited) | |||||||
| Revenues | $ | 2,451,855 | $ | 1,929,183 | ||||
| Cost of Sales | 1,415,183 | 1,105,055 | ||||||
| Gross Profit | 1,036,672 | 824,128 | ||||||
| Selling, General and Administrative Expenses | (703,000 | ) | (683,230 | ) | ||||
| Engineering and Research expenses | (206,314 | ) | (207,243 | ) | ||||
| Non-operating Income (Loss) | 2,250 | 2,250 | ||||||
| Interest (Expense and Credit costs) net | (58,171 | ) | (62,688 | ) | ||||
| (Loss) From Operations, before Income Taxes | $ | 71,437 | $ | (126,783 | ) | |||
| Income Taxes | (1,050 | ) | - | |||||
| Net Income (Loss) | $ | 70,387 | $ | (126,783 | ) | |||
| Basic Net income (loss) per share: | $ | 0.015 | $ | (0.036 | ) | |||
| Diluted Net income (loss) per share: | $ | 0.011 | $ | (0.036 | ) | |||
| Weighted Average Number of Shares Outstanding: | ||||||||
| Basic | 4,775,306 | 3,510,033 | ||||||
| Diluted | 6,122,456 | 3,510,033 | ||||||
The accompanying notes are an integral part of these consolidated financial statements.
| F-2 |
Consolidated Statements of Comprehensive Income (Loss)
| For The Three Months Ended | ||||||||
| September 30, | ||||||||
| 2015 | 2014 | |||||||
| (unaudited) | (unaudited) | |||||||
| Net income (loss) | $ | 70,387 | $ | (126,783 | ) | |||
| Other comprehensive income (loss): | ||||||||
| Net unrealized gain (loss) on securities available-for-sale, net of income taxes | (37,067 | ) | (18,867 | ) | ||||
| Total comprehensive income (loss) | $ | 33,320 | $ | (145,650 | ) | |||
The accompanying notes are an integral part of these consolidated financial statements.
| F-3 |
Statement of Changes in Stockholders’ Deficit
For the Three Months Ended September 30, 2015 (Unaudited)
| Other | ||||||||||||||||||||||||||||||||
| Preferred Stock | Common Stock | Comprehensive | Accumulated | |||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Paid In Capital | Loss | Deficit | Amount | |||||||||||||||||||||||||
| Balance, June 30, 2015 | 26,943 | $ | 2,694,300 | 4,775,306 | $ | 6,976,533 | $ | 2,396,711 | $ | - | $ | (12,855,220 | ) | $ | (787,676 | ) | ||||||||||||||||
| Unrealized investment loss during the quarter ended September 30, 2015 | (37,067 | ) | (37,067 | ) | ||||||||||||||||||||||||||||
| Net Income For the Three Months Ended September 30, 2015, (unaudited) | 70,387 | 70,387 | ||||||||||||||||||||||||||||||
| Balance, September 30, 2015, (unaudited) | 26,943 | $ | 2,694,300 | 4,775,306 | $ | 6,976,533 | $ | 2,396,711 | $ | (37,067 | ) | $ | (12,784,833 | ) | $ | (754,356 | ) | |||||||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
| F-4 |
Consolidated Statements of Cash Flows
| For The Three Months Ended | ||||||||
| September 30, | ||||||||
| 2015 | 2014 | |||||||
| (unaudited) | (unaudited) | |||||||
| Cash Flow From Operating Activities: | ||||||||
| Net Income (Loss) | $ | 70,387 | $ | (126,783 | ) | |||
| Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: | ||||||||
| Depreciation and amortization | 23,266 | 22,552 | ||||||
| Increase (decrease) in allowance for doubtful accounts and inventory reserve | - | 3,779 | ||||||
| Changes in assets and liabilities: | ||||||||
| Accounts receivable | (224,429 | ) | 362,229 | |||||
| Inventories | 12,755 | 20,092 | ||||||
| Other current assets | (4,413 | ) | (38,508 | ) | ||||
| Accounts payable | (61,823 | ) | (85,114 | ) | ||||
| Accrued expenses | 98,519 | 91,802 | ||||||
| Customer deposits | - | (35,370 | ) | |||||
| Due to/from related parties mPhase & Edson Realty | (2,250 | ) | 2,422 | |||||
| Net cash provided by (used in) operating activities | $ | (87,988 | ) | $ | 217,101 | |||
| Cash Flow (used in) Investing Activities: | ||||||||
| Investments in common stock | - | (200,000 | ) | |||||
| Purchase of intangible assets | - | (50,000 | ) | |||||
| Purchase of fixed assets | (35,919 | ) | - | |||||
| Net Cash (used in) investing activities | $ | (35,919 | ) | $ | (250,000 | ) | ||
| Cash Flow provided by (used in) Financing Activities: | ||||||||
| Proceeds from issuance of common stock | - | 169,550 | ||||||
| Proceeds (Repayment) from credit facility – revolving loan (net) | 212,060 | (256,608 | ) | |||||
| Payments of equity lines of credit | (9,090 | ) | (4,125 | ) | ||||
| Payments of long-term debt | (1,858 | ) | (2,932 | ) | ||||
| Payments on acquisition notes | - | (180,000 | ) | |||||
| Payments of capital lease obligations | (3,934 | ) | (3,629 | ) | ||||
| Payments to related parties | - | (3,155 | ) | |||||
| Payments of extended term arrangement | (1,993 | ) | (1,113 | ) | ||||
| Net cash provided by (used in) financing activities | $ | 195,185 | $ | (282,012 | ) | |||
| Net increase (decrease) in cash | $ | 71,278 | $ | (314,911 | ) | |||
| CASH AND CASH EQUIVALENTS, beginning of period | $ | 127,093 | $ | 445,080 | ||||
| CASH AND CASH EQUIVALENTS, end of period | $ | 198,371 | $ | 130,169 | ||||
The accompanying notes are an integral part of these consolidated financial statements.
| F-5 |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 — BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS
Microphase Corporation (the “Company”) is a design to manufacture original equipment manufacturer (OEM) industry leader delivering world-class radio frequency (RF) and microwave filters, diplexers, multiplexers, detectors, switch filters, integrated assemblies and detector logarithmic video Amplifiers (DLVA) to the military, aerospace and telecommunications industries. Sales to military markets represent 100% of sales. The Company has two manufacturing facilities, one in Shelton, Connecticut and one in Folsom, California.
BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and pursuant to the regulations of the Securities Exchange Commission (the “SEC”). Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments considered necessary for a fair presentation have been included. Operating results for the three months ending September 30, 2015 are not necessarily indicative of the results that may be expected for a full fiscal year. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company’s Annual Report on Form 10-K for the year ended June 30, 2015. As of June 30, 2015, we had an accumulated deficit of $12,855,220 and a total stockholders’ deficit of $787,676. As of September 30, 2015, we had an accumulated deficit of $12,784,833 (unaudited) and a total stockholders’ deficit of $754,356 (unaudited). A significant amount of capital will be necessary to sustain, grow and advance our business and these conditions raise substantial doubt about our ability to continue as a going concern, as expressed in our Auditor’s report.
The Company’s ability to continue as a going concern and its future success is dependent upon its ability to raise capital in the near term to: (1) satisfy its current obligations, (2) continue its research and development efforts, and (3) allow the successful wide scale development, deployment and marketing of its products.
PROPERTY AND EQUIPMENT — Stated at cost. Provision for depreciation and amortization for financial reporting and income tax purposes is made by annual charges to operations principally under the following methods and estimated useful lives:
| Method | Years | |||
| Leasehold Improvements | Straight Line | 7 | ||
| Property held under capital leases | Straight Line | 5 | ||
| Furniture and fixtures | Straight Line | 7 | ||
| Machinery and equipment | Straight Line | 5 | ||
| Computer equipment | Straight Line | 3 | ||
| Transportation equipment | Straight Line | 5 |
MAINTENANCE AND REPAIRS— Charged to expenses as incurred. Cost of major replacements and renewals are capitalized. Upon retirement or other disposition of equipment and improvements, the cost and related depreciation is removed from the accounts, and any gain or loss is recognized in income.
INVENTORIES — are stated at the lower of average cost or market under the first-in, first-out method. The Company regularly reviews inventory quantities on hand and records a provision for excess and obsolete inventory primarily based on our estimated forecast of product demand, anticipated end of product life and production requirements.
| F-6 |
OTHER LONG LIVED ASSETS — The Company reviews long-term assets for impairment whenever events or circumstances indicate that the carrying amount of those assets may not be recoverable. The Exclusive License associated with the Microsemi Inc. (“Microsemi”) asset acquisition was valued at $56,861, was ascribed a perpetual life and is subject to evaluation annually for impairment. The Exclusive License associated with the Dynamac Strategic agreement discussed below in Note 13 was valued at $350,000, the contract price, has an unlimited contractual life and is also subject to evaluation annually for impairment. The Company also assesses these assets for impairment based on their future cash flows. Management has determined that there was no impairment charge to be recorded for the year ended June 30, 2015 and the three months ended September 30, 2015. The Customer Lists and Non-Compete agreements associated with the Microsemi asset acquisition were ascribed useful lives of 7 and 5 years respectively. Amortization expense recorded for these intangible assets was $3,878 and $3,878 for the three months ended September 30, 2015 and 2014, respectively.
ACCOUNTS RECEIVABLE — Management records receivables at net realizable value and they generally do not bear interest. This value includes an allowance for estimated uncollectible accounts to reflect any loss anticipated on the accounts receivable balances which is charged to the provision for doubtful accounts. We calculate this allowance based on our history of write-offs, level of past due accounts and economic status of the customers. We consider a receivable delinquent if it is unpaid after 180 days after it is due.
ACCOUNTING ESTIMATES — Management uses estimates and assumptions in preparing financial statements in accordance with generally accepted accounting principles. Those estimates and assumptions affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities, and the reported revenues and expenses. Actual results could vary from the estimates that were assumed in preparing the financial statements.
COMPENSATED ABSENCES — Employees of the Company are entitled to vacation pay depending on length of service and current salary. Unused vacation days are only carried over to the subsequent year under special approval by management. The Company has provided for vacation liabilities in the accompanying financial statements.
RESEARCH AND DEVELOPMENT EXPENSES — The Company charges the cost of research and development to operations when incurred.
REVENUE RECOGNITION — As required, Microphase has adopted the SEC Staff Accounting Bulletin (“SAB”) No. 104, “Revenue Recognition in Financial Statements,” which provides guidelines on applying generally accepted accounting principles to revenue recognition based on interpretations and practices of the SEC. The Company recognizes revenue when products are shipped and title passes to the customer.
PRINCIPLES OF CONSOLIDATION — The accompanying consolidated financial statements include the accounts of the Company and its subsidiaries. All intercompany accounts and transactions have been eliminated.
EARNINGS (LOSS) PER SHARE — Basic earnings (loss) per share (“EPS”) is determined by dividing the net earnings (loss) by the weighted-average number of shares of common shares outstanding during the period. Diluted EPS is determined by dividing net earnings (loss) by the weighted average number of common shares used in the basic EPS calculation plus the number of common shares that would be issued assuming conversion of all potentially dilutive securities (such as stock options, preferred stock subsequent to October 4, 2014, and convertible securities) outstanding under the treasury stock method. On October 4, 2014 the shareholders approved a convertible feature in preferred stock, such preferred stock at par value convertible into common shares at agreed upon market value. For the Three Months Ended September 30, 2015 fully diluted shares outstanding were based upon a conversion price of $2.00 for the convertible feature in preferred stock.
Recent Accounting Pronouncements—The Company is evaluating several pronouncements issued by the FASB which may result in the adoption by the Company of these standards in upcoming accounting periods as follows:
On April 7, 2015, the FASB issued Accounting Standards Update 2015-03, Interest—Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs, which requires entities to present debt issuance costs related to a recognized debt liability as a direct deduction from the carrying amount of that debt liability. The guidance in Update 2015-03 (see below) does not address presentation or subsequent measurement of debt issuance costs related to line-of-credit arrangements. Given the absence of authoritative guidance within Update 2015-03 for debt issuance costs related to line-of-credit arrangements, the SEC staff would not object to an entity deferring and presenting debt issuance costs as an asset and subsequently amortizing the deferred debt issuance costs ratably over the term of the line-of-credit arrangement, regardless of whether there are any outstanding borrowings on the line-of-credit arrangement. to be effective for Fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015; which for us would be our fiscal 2016 and although early adoption is permitted for this standard, the Company has not adopted nor determined its applicability.
| F-7 |
Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date -In May 2014, the FASB issued a comprehensive new revenue recognition standard that supersedes nearly all revenue recognition guidance under U.S. GAAP and supersedes some cost guidance for construction-type and production-type contracts. The guidance in this standard is principles-based, and accordingly, entities will be required to use more judgment and make more estimates than under prior guidance, including identifying contract performance obligations, estimating variable consideration to include in the contract price and allocating the transaction price to separate performance obligations. The guidance in this standard is applicable to all contracts with customers, regardless of industry-specific or transaction-specific fact patterns. Additionally, this standard provides guidance for transactions that were not previously addressed comprehensively (e.g., service revenue, contract modifications and licenses of intellectual property) and modifies guidance for multiple-element arrangements. The core principle of this standard is that entities 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 and services. To help financial statement users better understand the nature, amount, timing and potential uncertainty of the revenue that is recognized, this standard requires significantly more interim and annual disclosures. This standard allows for either “full retrospective” adoption (application to all periods presented) or “modified retrospective” adoption (application to only the most current period presented in the financial statements, as well as certain additional required footnote disclosures). On July 9, 2015, the FASB approved a one-year deferral of the effective date, while permitting entities to elect to adopt one year earlier on the original effective date. As a result, this standard is now effective for fiscal years, and interim reporting periods within those years, beginning after December 15, 2017, which for us is our fiscal 2019. We are currently evaluating the impact this standard will have on our financial position, results of operations and cash flows.
- ASU 2015-11 - Inventory (Topic 330): Simplifying the Measurement of Inventory. For public business entities, the pending content that links to this paragraph shall be effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years, which for us is our fiscal 2018. We are currently evaluating the impact this standard will have on our financial position, results of operations and cash flows.
- ASU 2014-15 - Presentation of Financial Statements Going Concern (Subtopic 20540): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern to be effective for Annual periods ending after December 15, 2016, and interim periods within annual periods beginning after December 15, 2016; which for us would be our fiscal 2018 and although early adoption is permitted for this standard, the Company has not adopted nor determined its applicability.
Compensation Stock -Compensation (Topic 718): Accounting for Share Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period (a consensus of the FASB Emerging Issues Task Force) to be effective for Annual periods beginning after December 15, 2015, and interim periods within annual periods beginning after December 15, 2015; which for us would be our fiscal 2017 and although early adoption is permitted for this standard, the Company has not adopted nor determined its applicability.
In April 2014, the FASB issued an accounting standards update that raises the threshold for disposals to qualify as discontinued operations and allows companies to have significant continuing involvement and continuing cash flows with discontinued operations. This standard also requires additional disclosures for discontinued operations and new disclosures for individually material disposal transactions that do not meet the definition of a discontinued operation. This standard is to be applied prospectively and is effective for fiscal years, and interim reporting periods within those years, beginning after December 15, 2014, which for us is our fiscal 2016. Early adoption is permitted, but only for disposals (or classifications as held for sale) that have not been reported in financial statements previously issued or available for issuance. The adoption of this standard in the current year has not and is not expected to have a material impact on our financial position, results of operations or cash flows.
| F-8 |
NOTE 2 — SUPPLEMENTAL CASH FLOW INFORMATION
| For the three months ended September 30, | ||||||||
| 2015 | 2014 | |||||||
| Statement of Operation Information: | (Unaudited) | (Unaudited) | ||||||
| Cash paid for state taxes | $ | 1,850 | $ | - | ||||
| Interest Paid (net interest income) | $ | 51,233 | $ | 47,528 | ||||
| Non Cash Investing and Financing Activities: | ||||||||
| Assets acquired with debt financing | $ | - | $ | 300,000 | ||||
NOTE 3 — INVENTORIES CONSIST OF THE FOLLOWING:
| September 30, 2015 | June 30, 2015 | |||||||
| (unaudited) | ||||||||
| Amount | Amount | |||||||
| Raw materials | $ | 431,984 | $ | 402,761 | ||||
| Work-in-process | 444,276 | 486,254 | ||||||
| Reserve | (37,000 | ) | (37,000 | ) | ||||
| Total | $ | 839,260 | $ | 852,015 | ||||
The inventory reserve was increased by $25,000 in our west division and reduced by $10,000 in our east division during the year ended June 30, 2015. No changes were made to the inventory reserve for the three months ended September 30, 2015.
| F-9 |
NOTE 4 — PROPERTY AND EQUIPMENT:
Property and equipment was comprised of the following:
| September 30, 2015 | June 30, 2015 | |||||||
| (unaudited) | ||||||||
| Leasehold Improvements | $ | 40,288 | $ | 8,290 | ||||
| Computers, machinery & equipment | 3,198,864 | 3,194,943 | ||||||
| Furniture and fixtures | 122,350 | 122,350 | ||||||
| Transportation equipment | 40,438 | 40,438 | ||||||
| Property held under capital leases | 56,013 | 56,013 | ||||||
| 3,457,953 | 3,422,034 | |||||||
| Less: accumulated depreciation and amortization | (3,247,263 | ) | (3,227,874 | ) | ||||
| Total | $ | 210,690 | $ | 194,160 | ||||
Depreciation expense was $19,389 and $18,675 in the three months ended September 30, 2015 and 2014, respectively.
NOTE 5 — ACCRUED AND OTHER EXPENSES:
Accrued expenses were comprised of the following:
| September 30, 2015 | June 30, 2015 | |||||||
| (unaudited) | ||||||||
| Salaries, wages and other compensation, including $332,815 to related parties at September 30, 2015 (unaudited) and June 30, 2015, respectively | $ | 732,191 | $ | 678,729 | ||||
| Royalties | 217,922 | 190,924 | ||||||
| Professional fees | 186,044 | 135,000 | ||||||
| Commissions | 37,936 | 37,936 | ||||||
| Other miscellaneous accruals | 23,431 | 63,354 | ||||||
| $ | 1,197,524 | $ | 1,105,943 | |||||
| F-10 |
Note 6 — Fair Value of Financial Instruments:
The fair value of a financial instrument is the amount at which the instrument could be exchanged in a current transaction between willing parties, other than in a forced or liquidation sale. Quoted market prices are used to establish fair value when they are available and other valuation techniques are utilized to estimate the fair value of financial instruments that do not have quoted market prices.
The Company has long term debt with fixed interest rates, the carrying amount of which may be different from fair value as of September 30, 2015 and June 30, 2015. The Company decided that it is not practical to estimate the fair value of these financial instruments on the basis that they are held-to-maturity debts which have no immediately available market information on the fair value and the cost of making assumptions and applying estimation methodologies to assess the fair value estimates exceeds the benefit. Information pertinent to estimating the fair value such as carrying amount, effective interest rate, maturity and repayment term are disclosed in Notes 7, 8, 9 & 10.
The Company has applied the fair value concepts to its available-for-sale securities. As such, the valuation techniques used to measure fair value is based on the source of the data used to develop the prices. The priority of these sources is defined as follows:
Level 1 — quoted prices in active markets.
Level 2 — other than quoted prices that are directly or indirectly observable.
Level 3 — unobservable inputs for the asset or liability.
Marketable securities, classified as available-for-sale securities, are measured at fair market value (Level 1) on a recurring basis as of June 30, 2015 amounted to $200,000. The amount at September 30, 2015 was $162,933.
NOTE 7 — REVOLVING CREDIT LINE
| September 30, 2015 | June 30, 2015 | |||||||
| (unaudited) | ||||||||
| The Company entered into a revolving loan agreement with Gerber Finance, Inc. (“Gerber”) in February of 2012 for a maximum of $1,500,000, which was amended to $1,150,000 in November of 2013. As of September 30, 2015 this line is negotiated to increase to $1,400,000. Under this agreement, the Company can receive funds based on a borrowing base, which consists of various percentages of accounts receivable, inventory, a restricted cash account held by Gerber, and equipment. In connection with this agreement, the Company is subject to an annual facility fee (1.75%) on each anniversary, monthly collateral monitoring fees of $1,500 and other fees, plus interest currently at the rate of 7%. | $ | 1,225,466 | $ | 1,013,406 | ||||
The interest expense on this loan for the three months ended September 30, 2015 and 2014 was $27,433 and $28,000, respectively and the fees for 2015 and 2014 were $9,710 and $4,500, respectively. The effective interest rate for 2015 and 2014 was 9.64% & 15.67%, respectively.
There are financial covenants set forth in the Gerber agreement of February 3, 2012 and as amended on February 24, 2012. The covenants, covering among other things tangible net worth and net loss, were not effective until September 30, 2012. The Company has not received notice of default since curing its financial reporting covenants in January, 2015.
Approximate Value of collateral at balance sheet dates —
| September 30, 2015 | June 30, 2015 | |||||||
| (unaudited) | ||||||||
| Inventories | $ | 839,260 | $ | 852,015 | ||||
| Accounts Receivable | 1,105,650 | 881,221 | ||||||
| $ | 1,944,910 | $ | 1,733,236 | |||||
| F-11 |
NOTE 8 — Equity Lines of Credit
The Company had previously guaranteed the payment of an Equity Line of Credit with Wells Fargo Bank totaling up to $250,000, the proceeds of which the Company received from a concurrent loan from Edson when the credit line was funded on August 15, 2008. As of June 30, 2015, this first line of credit had $250,000 available, secured by residential real estate owned by the former vice president, of which $232,466 was outstanding, with an interest rate of 3.35%. As of September 30, 2015, this line of credit has $250,000 available, secured by residential real estate owned by the former vice president, of which $228,416 is outstanding, with an interest rate of 3.35%.
The Company charged operations $1,940 and $2,040 for interest on this line of credit in the quarters ended September 30, 2015 and 2014, respectively.
Effective June 30, 2014, the Company also has guaranteed to its president, and a general member of MHC, the majority shareholder, individually as signatory’s, the repayment of a second Equity Line of Credit with Wells Fargo Bank. As of June 30, 2015 the second line of credit had $150,000 available, secured by the president’s principal residence, of which $119,531 was outstanding, with an interest rate of 3.0%. As of September 30, 2015, this line of credit has $150,000 available, secured by the president’s principal residence, of which $114,491 is outstanding, with an interest rate of 3.00%.
The Company charged operations $910 and $1,005 for interest on this line of credit in the quarters ended September 30, 2015 and 2014, respectively.
Note 9 — Related Party Transactions
mPhase Technologies, Inc. (“mPhase”) — The Company has some common management and common significant shareholders with mPhase and had owned a total of 42,793,354 shares of this publicly-traded company. As of June 30, 2014, the shares were transferred to two officers as partial payment of loans due to them by the Company; the transfer was valued at $34,235 based upon the closing trading price for these shares on that date and has not held any ownership interest in mPhase since.
The Company sublet office space to mPhase until March 31, 2015. As of June 30, 2015, mPhase owed the Company $28,045. Rent expense was $0 and $9,525 for the quarters ended September 30, 2015 and 2014, respectively. At September 30, 2015, mPhase owed the Company $30,295.
| Notes Payable — Related Parties: | ||||||||
| September 30, 2015 | June 30, 2015 | |||||||
| (unaudited) | ||||||||
| Officers and Stockholders: | ||||||||
| Payable in monthly payments of $2,000 as revised, including interest at 6% through September, 2017, of which $180,000 was converted into 1,800 shares of preferred stock during Fiscal Year Ended June 30, 2015. | $ | 44,925 | $ | 44,258 | ||||
| Former Employee: | ||||||||
| Payable in monthly payments of $7,600 as revised, including interest at 6% through September, 2017 of which $170,000 was converted into 113,333 shares of common stock during Fiscal Year Ended June 30, 2015. | $ | 171,141 | 168,599 | |||||
| Stockholders: | ||||||||
| Two notes payable to individuals with monthly payments of $2,715 and $2,750 as revised, including interest at 6% through September, 2017 | $ | 122,965 | 121,140 | |||||
| Other Related Parties: | ||||||||
| Payable in monthly payments of $875 as revised, including interest at 6% through September, 2017 | $ | 19,345 | 19,058 | |||||
| Two identical notes payable in monthly payments of $2,425 each as revised, including interest at 6% through April, 2017 | $ | 108,808 | 107,191 | |||||
| Total | 467,184 | 460,246 | ||||||
| Less: current portion | (227,641 | ) | (169,447 | ) | ||||
| Long-term portion | $ | 239,543 | $ | 290,799 | ||||
The Company charged operations $6,938 and $15,160 for interest on these loans for the quarters ended September 30, 2015 and 2014, respectively.
| F-12 |
Note 10 — Other termed debts
Other termed debts consist of: (i) Long-term Debt, (ii) Capital Leases , & (iii) Extended Payment Arrangements.
| Long-term Debt: | ||||||||
| September 30, 2015 | June 30, 2015 | |||||||
| (unaudited) | ||||||||
| People's General Bank | ||||||||
| Overdraft protection credit line loan; up to $20,000 available at June 30, 2015, with minimum payments based upon a twenty four month payout from most recent utilization, or $215 plus interest at June 30, 2015. | $ | 6,931 | $ | 7,542 | ||||
| Ford Credit Company: | ||||||||
| Payable in monthly payments of $499, including interest at 4.90% through April, 2019 secured by transportation equipment. | $ | 19,657 | $ | 20,904 | ||||
| Total | $ | 26,588 | $ | 28,446 | ||||
| Less: current portion | (12,012 | ) | (12,623 | ) | ||||
| Long-term portion | $ | 14,576 | $ | 15,823 | ||||
The Company charged operations $533 and $738 in interest on these loans for the quarters ended September 30, 2015 and 2014, respectively.
Capital Leases: |
The Company is the lessee of equipment under capital leases expiring through March, 2016. The assets are recorded at the fair market value as of the date of the leases. The assets are amortized over their estimated productive lives. Amortization is included in depreciation expense.
| September 30, 2015 | June 30, 2015 | |||||||
| (unaudited) | ||||||||
| The following is a summary of property held under capital leases: | ||||||||
| Property held under capital leases | $ | 56,013 | $ | 56,013 | ||||
| Less: accumulated amortization | (41,076 | ) | (38,276 | ) | ||||
| Net property under capital leases | $ | 14,937 | $ | 17,737 | ||||
| September 30, 2015 | June 30, 2015 | |||||||
| (unaudited) | ||||||||
| The following is a summary of balances due under capital leases: | ||||||||
| Total minimum lease payments | $ | 8,340 | $ | 12,510 | ||||
| Less: amount representing interest | (213 | ) | (449 | ) | ||||
| Present value of net minimum lease payments | 8,127 | 12,061 | ||||||
| Less: current portion | (8,127 | ) | (12,061 | ) | ||||
| Long-term portion | $ | - | $ | - | ||||
Interest expense charged to operations under capital leases was $324 and $623 for the quarters ended September 30, 2015 and 2014, respectively.
Extended Payment arrangements: |
The Company is responsible for paying a former employee, disability benefits under a prior self-insured plan, through April, 2019. The plan requires monthly payments until the participant attains age 65. Interest has been imputed on this obligation at 5%.
| September 30, 2015 | June 30, 2015 | |||||||
| (unaudited) | ||||||||
| Total of extended disability benefits | $ | 33,719 | $ | 36,152 | ||||
| Less: amount representing interest | (2,876 | ) | (3,316 | ) | ||||
| Present value of disability benefits | 30,843 | 32,836 | ||||||
| Less: current portion | (7,970 | ) | (7,970 | ) | ||||
| Long-term portion | $ | 22,873 | $ | 24,866 | ||||
Interest expense charged to operations for the extended disability payments was $402 and $498 for the quarters ended September 30, 2015 and 2014, respectively.
Summary totals for Other termed debts consist of: (i) Long-term Debt, (ii) Capital Leases , & (iii) Extended Payment Arrangements.
| September 30, 2015 | June 30, 2015 | |||||||
| (unaudited) | ||||||||
| Total minimum long term debt, capital lease & extended disability payments | $ | 65,558 | $ | 73,343 | ||||
| Less: current portion | (28,109 | ) | (32,654 | ) | ||||
| Long-term portion | $ | 37,449 | $ | 40,689 | ||||
| F-13 |
Note 11 — Stockholders’ Equity:
Microphase Corporation has authorized capital of 7,800,000 shares of common stock with no par value and 200,000 shares of preferred stock with $100 par value per share, with 6% cumulative dividends when declared.
On October 4, 2014, at a special meeting of the shareholders of the Company, the shareholders approved amendments to the Certificate of Incorporation of the Company to: (1) Increase its authorized common stock from 4,800,000 shares of common stock without par value to 50,000,000 shares of common stock without par value; for economic reasons the Board of Directors has implemented an increase to 7,800,000 shares; (2) increase its authorized preferred stock from 200,000 shares, $100 par value per share, to 2,000,000 shares of 6% convertible preferred stock, for economic reasons this increase in quantity of authorized preferred share has yet to be implemented, $100 par value per share. Each outstanding and hereafter issued share of the preferred stock will: i) continue to be entitled to a cash dividend, payable quarterly on the last business day of each fiscal quarter of the Company, commencing with the fiscal quarter ended December 31, 2014, if and when declared by the Company’s board of directors (the “Board”) . These dividends will be cumulative, will accrue if not declared by the Board, and must be paid before any dividends or other distributions are made to the common shareholders, be entitled, on liquidation of the Company, to receive $100 per share plus accrued dividends before any distributions are made to the common shareholders, be convertible at the option of the holder into common stock of the Company at a price agreeable to the holders of the preferred stock.
Common Stock
During the three months ended September 30, 2014, the Company issued 125,098 shares of its common stock to accredited investors in private placements of its common stock to accredited investors pursuant to Section 4(2) of the Securities Act of 1933, as amended, which included 32,098 shares to finders and after $16,450 of placement fees, generated $169,550 net proceeds to the Company.
During the three months ended September 30, 2015, the Company issued no shares of its common stock.
Preferred Stock
The preferred stock, with respect to dividends, liquidation payments, and liquidation rights, ranks senior to the common stock and of the Company. Holders of Preferred Stock are entitled to receive, when and as declared by the Board of Directors, dividends, at the annual rate of 6% of the stated par value, or $100 per share. Dividends are cumulative and accrue from the effective date of issuance of the Preferred Stock until declared.
During the three months ended September 30, 2015 and 2014, the Company issued no shares of its preferred stock.
In December 2014, the Board declared $494,735 of dividends on preferred shares outstanding as of September 30, 2014 and authorized the payment in 329,825 shares common stock using a conversion rate of $1.50 per share, charging an additional $164,193 to retained deficit for the loss on the settlement of the dividend payable.
As of September 30, 2015, 26,943 preferred shares are outstanding and cumulative undeclared dividends on preferred stock are $156,516.
Reserved Shares
The Board approved the implementation of the 2015 stock option plans, reserving 250,000 shares of common stock for this plan. To date no options to acquire shares of common stock have been granted.
| F- 14 |
Note 12 — Major Customers and Segments:
The Company had two customers during the year ended June 30, 2015 which each accounted for more than 10% of sales.
The Company recorded sales of $3,689,132 with the two customers during the year ended 2015. These sales represented 45% of total sales for the fiscal year. At June 30, 2015 these customers owed $383,464 to the Company.
The Company recorded sales of $1,428,581 and $1,151,407, with three and four customers, for the three months ended September 30, 2015 and 2014, respectively. These sales represent 58% and 68% of sales for the three months ended September 30, 2015 and 2014, respectively. At September 30, 2015, those 3 customers owed the Company $707,301.
Sales to U.S. customers represented 86% of sales in fiscal 2015. Sales to U.S. customers represented 86% and 88% of sales for the three months ended September 30, 2015 and 2014, respectively.
Note 13 — Commitments and Contingencies:
In connection with the Microsemi acquisition, the Company signed a lease for 4,000 square feet of space at Microsemi’s facility in Folsom, CA. The initial terms of the lease were $8,400 per month rent with a term of one year. The commitment for fiscal 2014 was $75,600. The lease was renegotiated in April 2014 with a new rent of $7,000 per month beginning in June 2014. The lease was renegotiated again in February 2015 with new rent of $8,500 per month from February 1, 2015 to June 30, 2015, then $10,000 per month from July 1, 2015 to December 31, 2015, and then $12,000 per month from January 1, 2016 to June 30, 2016. The end of the lease is currently June 2016. The commitment for fiscal year 2015 is $91,500.
Beginning November 27, 2013 through April 17, 2015, the Company leased back a portion of the building it previously owned for $10,103 per month. The rent expense for the period November 27, 2013 to June 30, 2014 was $79,721. Under the terms of the lease, either party could terminate the lease with 90 days prior notice. This lease was terminated and the Company moved to Shelton, Connecticut on April 21, 2015, to a facility with 15,000 square feet with monthly rent of $15,000, for a 7-year term with annual escalations of 3%.
The Company has employment contracts with four executives with total annual salaries of $720,000 plus Company benefits. Two of the contracts are at will and two continue to February 2018. The Company also has a consulting contract with its General Manager for $192,000 per year plus certain benefits which continues until terminated by either party.
The Company leases 4 vehicles under operating leases expiring in 2016 through 2018. As of September 30, 2015 the future minimum rental payments for fiscal 2016 are $36,541.
We are subject to legal proceedings and other claims arising out of the conduct of our business, including proceedings and claims relating to commercial and financial transactions; government contracts and sub-contracts; alleged lack of compliance with applicable laws and regulations; production partners; product liability; patent and trademark infringement; employment disputes; and environmental, safety and health matters. Some potential legal proceedings and claims could seek damages, fines or penalties in substantial amounts or remediation of environmental contamination. As a government sub-contractor, we are subject to audits, reviews and investigations to determine whether our operations are being conducted in accordance with applicable regulatory requirements. Under federal government procurement regulations, certain claims brought by the U.S. Government could result in our suspension or debarment from U.S. Government contracting for a period of time. On the basis of information presently available, we do not believe that there are any existing proceedings or potential claims that would have a material effect on our financial position or results of operations.
On August 8, 2014, the Company signed a strategic partnership agreement with Dynamac, Inc. to develop, manufacture and market a portfolio of low cost RF/Microwave and Millimeter-wave calibrated test probes and related universal test platforms. The Company agreed to pay a one-time licensing and rights fee of $350,000 of which $50,000 was paid in the first quarter of fiscal 2015, and the remaining $300,000 was originally due in the second quarter. The Company also agreed to pay a 25% royalty fee based on the list price of each product sold by the Company. The Company has a first right of refusal to purchase the product line for $2.5 million for 3 years from the date of the agreement. The Company is presently renegotiating payment terms, royalty rates and entity structure, as well as the expected delivery date of the initial proto-type products.
| F- 15 |
ITEM 2. MANAGEMENT’S DISCUSSION OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS
The following Management’s Discussion and Analysis (“MD&A”) is intended to assist in an understanding of our financial condition and results of operations. This MD&A is provided as a supplement to, and should be read in conjunction with, the accompanying financial statements, financial data and related notes. Except for the historical information contained herein, the discussions in MD&A contain forward-looking statements that involve risks and uncertainties. All forward-looking statements included in this report are based on information available to us on the date hereof, and we assume no obligation to update any such forward-looking statements. You are cautioned not to place undue reliance on these forward-looking statements. Our future results could differ materially from those discussed herein.
CAUTIONARY STATEMENT PURSUANT TO SAFE HARBOR PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995:
Some of the statements contained in or incorporated by reference in this Form 10-Q discuss the Company’s plans and strategies for its business or state other forward-looking statements, as this term is defined in the Private Securities Litigation Reform Act of 1995. The words “anticipate,” “believe,” “estimate,” “expect,” “plan,” “intend,” “should,” “seek,” “will,” and similar expressions are intended to identify these forward-looking statements, but are not the exclusive means of identifying them. These forward-looking statements include, among others, statements concerning the Company’s expectations regarding its working capital requirements, gross margin, results of operations, business, growth prospects, competition and other statements of expectations, beliefs, future plans and strategies, anticipated events or trends, and similar expressions concerning matters that are not historical facts. Any forward-looking statements contained in this Quarterly Report on Form 10-Q are subject to risks and uncertainties that could cause actual results to differ materially from those results expressed in or implied by the statements contained herein.
RESULTS OF OPERATIONS OVERVIEW
Microphase Corporation designs and manufactures custom RF (radio frequency) and microwave products from DC to 40 GHz. Our products include components, subsystems and multi-function assemblies for the military and commercial markets. The Company has been in business for over 58 years and is one of the oldest and most established RF and microwave products companies in the industry.
The Company’s RF and microwave products enable the transmission, reception and processing of high frequency signals in defense electronics, homeland security systems and telecommunication networks. Our RF products are typically used in high frequency applications and include filters, switch filters, diplexers, multiplexers, detectors, detector logarithmic video amplifiers (DLVA) and multi-function assemblies. The end products in which the Company’s products are used include fighter planes, missiles, submarines, ships, drones, and IED jammers. Customers include Lockheed Martin, Raytheon, Saab, Rockwell Collins, L3 Communications and Northrup Grumman. Sales to the military markets comprised 100% of sales for 2014 and 2015.
Many years of deficit spending have caused U.S. Government budgets to come under significant pressure in recent years. In particular, the Budget Control Act of 2011 resulted in automatic spending reductions known as sequestration, through budget caps for both defense and non-defense spending. According tousgovernmentspending.com spending on Military Defense has gone from $693.5 billion in the government fiscal year 2010 (ending September 30) to $705.6 billion in 2011, $677.9 billion in 2012, $633.4 billion in 2013, $603.5 in 2014 and $597.5 in 2015. This decrease has had a significant negative impact on Microphase’s customers, with a resultant negative impact on Microphase’s results during and prior to the past three fiscal years.
The Company has been selling the same products to the same customers for many years. While every product order is manufactured to each customer’s specifications, the overall product offering has not changed. The Company believes it will need to introduce new products to the market in order to grow sales and its strategy for doing so is outlined on page 4 in the paragraph titled “Current Status and Management’s Plans.” The Company has been addressing the working capital shortage by raising additional debt from insiders, by executing private placements of common stock, and by its debt facility with Gerber Finance, Inc.
ACQUISITIONS
The Company is responding to the decrease in the defense budget by pursuing acquisitions of companies or product lines which are similar and/or related to existing product lines. In March of 2013 the Company acquired the assets of a DLVA manufacturing business in Folsom, California from Microsemi Corp. for $100,000 in cash plus a $650,000 note with payments through December 2014. That business, which we operate as a division and is referred to as “Microphase West”, contributed $2,112,922 in revenues and net operating losses of ($169,634) in fiscal 2015 and $552,150 in revenues and net operating losses of ($89,418) in the first quarter ended September 30, 2015.
| 2 |
On July 9, 2014, the Company executed a securities purchase agreement with AmpliTech Group Inc. of Bohemia, N.Y. to purchase, as amended, 8,666,666 AmpliTech common shares at $0.023 per share for a total purchase price of $200,000. The purchase price was made up of two installments of $100,000. To date the investment has been a passive investment in the public stock of the AmpliTech.
On August 8, 2014, the Company signed a strategic partnership agreement with Dynamac, Inc. to develop, manufacture and market a portfolio of low cost RF/Microwave and Millimeter-wave calibrated test probes and related universal test platforms. The Company agreed to pay a one-time licensing and rights fee of $350,000 of which $50,000 was paid in the first quarter of fiscal 2015, and the remaining $300,000 was originally due in the second quarter. The Company also agreed to pay a 25% royalty fee based on the list price of each product sold by the Company. The Company has a first right of refusal to purchase the product line for $2.5 million for 3 years from the date of the agreement. The Company is presently renegotiating payment terms, royalty rates and entity structure, as well as the expected delivery date of the initial proto-type products.
THREE MONTHS ENDED SEPTEMBER 30, 2015 VS. SEPTEMBER 30, 2014
Revenues. Total revenues for the three months ended September 30, 2015 were $2,451,855, up from $1,929,183, in 2014, an increase of $522,672 or 27%. The revenue increase for the current period was primarily due an increase in sales to three major customers, and an increase in sales to a major foreign customer as a result of the restart of an existing program. The increase in sales to domestic customers was $418,976 and the increase to foreign customers was $103,696. The increase in sales is also partially due to the Company being able to purchase the parts necessary to complete and ship more orders compared to the period in 2014 when it was not able to source all the parts needed due to cash constraints.
Cost of sales. Cost of sales increased $310,128 for the three months ended September 30, 2015 from $1,105,055 in 2014 to $1,415,183, an increase of 28%. This increase in cost of sales is primarily due to the increase in revenues. The gross profit margin for the 2014 period was 43% and for 2015 was 42%. The decrease in gross margin was primarily due to an increase in cost of goods sold due to an inventory adjustment at Microphase West.
General and Administrative Expenses. Selling, general and administrative expenses were $683,230 for the three months ended September 30, 2014 compared to $703,000 for the three months ended September 30, 2015, an increase of $19,770 or 3%. SG&A expenses increased primarily due to increased expenses in connection with going public including D&O insurance premiums and investor relations and also due to increased compensation expense at Microphase West.
Engineering and Research Expenses. Engineering and research expenses for the three months ended September 30, 2015 were down from $207,243 to $206,314 in the same period in 2014, a decrease of $929, or 0.5%. Engineering and research expenses were essentially flat year over year.
Non-operating Income (Loss). Non-operating income (loss) was $2,250 in the three months ended September 30, 2014 and the same in 2015. This is from the lease of a vehicle to mPhase Technologies, Inc.
Interest (Expense and Credit costs) net. Interest expense and credit costs decreased from $62,688 during the three months ended September 30, 2014 to $58,171 for the current period in 2015, a decrease of $4,517. The lower interest costs in 2015 are primarily the result of the lower debt levels of the loans by related parties.
Net Income. The Company recorded net income of $70,387 for the three months ended September 30, 2015 as compared to a loss of ($126,783) for the same period ended September 30, 2014, an improvement of $197,170. The primary factor for this improvement is the increase in revenues. This represents basic income per common share of $0.015 in 2015 as compared to a loss per common share of ($0.036) in 2014, based upon basic weighted average common shares outstanding during the three month periods ending September 30, 2015 and September 30, 2014 of 4,775,306 and 3,510,033 respectively. This represents diluted income per common share of $0.011 in 2015 as compared to a loss per common share of $(0.36) in 2014, based upon diluted weighted average common shares outstanding during the same periods, of 6,122,456 and 3,510,033, respectively.
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LIQUIDITY AND CAPITAL RESOURCES
Through the three months ended September 30, 2015, the Company reported net income of $70,387 and had cash and cash equivalents of $198,371. At September 30, 2015, we had an accumulated deficit of $12,784,833. At September 30, 2015, the Company had a working capital deficit of $1,464,844 as compared to a working capital deficit of $1,468,082 as of June 30, 2015, a decrease of $3,238 in the deficit. Our financial condition raises substantial doubt that we will be able to continue as a “going concern”, and our independent auditors included an explanatory paragraph regarding this uncertainty in their report on our financial statements as of June 30, 2015 when we had an accumulated deficit of $12,855,220 and a working capital deficit of $1,468,082.
During the three month period in 2015 the cash used in operating activities was ($87,988), primarily because of net income of $70,387, which was offset by an increase in accounts receivable of $224,429, a decrease in accounts payable of $61,823, and an increase in amounts due from related parties of $2,250. Cash provided by operating activities increased due to depreciation and amortization of $23,266, to a decrease in inventory of $12,755, and to an increase in accrued expenses of $98,519.
During the three month period in 2014 the cash from operating activities was $217,101, primarily because of the loss of ($126,783) was supplemented by a reduction in accounts receivable of $362,229, depreciation and amortization of $22,552, a decrease in inventory of $20,092, a decrease in amounts due from related parties of $2,422, and an increase in accrued expenses of $91,802. Cash provided by operating activities was reduced by a decrease in accounts payable of $85,114, and a decrease in customer deposits of $35,370.
Cash (Used In) Investing Activities consisted of the purchase of $35,919 of fixed assets during the three month period in 2015 as compared to a $200,000 investment in Amplitech common stock and a $50,000 payment on the Dynamac co-venture during the three month period in 2014.
The Company has financed its operations in recent years primarily through a debt facility with a financial firm, loans from officers and related parties and since April of 2013 the private placement of common stock to accredited investors.
During the three months ended September 30, 2015, the Company did not issue any shares of its common stock. During the three months ended September 30, 2014, the Company issued 125,098 shares of its common stock to accredited investors in private placements of its common stock pursuant to Section 4(2) of the Securities Act of 1933, as amended, which included 32,098 shares to finders. The issuance generated $169,550 net proceeds to the Company after $16,450 of placement fees.
The Company entered into a revolving credit facility with Gerber Finance, Inc. (“Gerber”) in 2012 with a maximum for this line, as amended, of $1,400,000. The outstanding balance as of September 30, 2015 was $1,225,466 and as of June 30, 2015 was $1,013,406. Under this agreement the Company receives funds based on a borrowing base which consists of various percentages of certain assets. The current interest rate is 7% and there is an annual facility fee of 1.75% plus monthly collateral monitoring fees of $1,500 and other fees.
Financing activities provided $195,185 during the three month period in 2015, primarily from the increased borrowings of $212,060 from our line from Gerber, reduced by debt service of $9,090 for our equity lines, $1,858 for long term debt, $3,934 capital leases and $1,993 for payments for extended term arrangement. For the same period in 2014 financing activities (used) $282,012 of our funds, which consisted primarily of $169,550 proceeds from private placements, discussed above, reduced by debt service of $4,125 for our equity lines, $2,932 for long term debt, $3,629 capital leases, $1,113 for payments for extended term arrangement, $3,155 for related parties as well as $256,608 of payments on the Gerber line and a $180,000 pay down of acquisition notes.
CURRENT STATUS AND MANAGEMENT’S PLAN OF OPERATIONS
The Company has been seeking to diversify its market focus beyond its legacy products. By utilizing our current capability together and positioning ourselves through targeted acquisitions, strategic alliances and product partnering we believe we can augment our current product offerings and will further enable us to continue to introduce a mix of Military Electronic Defense, Department of Homeland Security and commercial products for the wireless telecom, autonomous auto, test & measurements, and medical instrumentation markets. This strategy should enable Microphase to broaden its customer base and reduce risk by spreading its revenue base across multiple market sectors. Targeted strategic acquisitions should increase our market share and technology value of our product lines as well as broaden our product offering and diversify our customer base.
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The Company anticipates that over the next eighteen months it may need between $1,000,000 and $3,000,000 of additional capital to implement our plan of operations. We have continued to improve operations relating to our legacy products, which has resulted in increased sales volume and a net profit in the current quarter. We may also need to issue shares of the Company’s common stock to maintain and fund the existing strategic alliances, product partnering and those targeted acquisitions the Company believes it can integrate in a productive manner. Having integrated the business that we acquired from Microsemi Corp., now known as Microphase West, we plan to finalize and implement our strategic partnership with Dynamac to develop, manufacture and market a portfolio of low cost RF/Microwave and Millimeter-wave calibrated test probes and related universal test platforms. We will also continue to develop and work on additional strategic opportunities.
The Company’s ability to continue as a going concern and its future success is dependent upon its ability to raise capital in the near term to: (1) satisfy its current obligations, (2) continue its research and development efforts, and (3) successfully continue the development, marketing and delivery of its products.
CRITICAL ACCOUNTING POLICIES, ESTIMATES AND ASSUMPTIONS
The SEC defines critical accounting policies as those that are, in management’s view, most important to the portrayal of our financial condition and results of operations and those that require significant judgments and estimates.
The discussion and analysis of our financial condition and results of operations is based upon our financial statements that have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets and liabilities. On an on-going basis, we evaluate our estimates including the allowance for doubtful accounts, the salability and recoverability of inventory, income taxes and contingencies. We base our estimates on historical experience and on other assumptions that we believe to be reasonable under the circumstances, the results of which form our basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
We cannot predict what future laws and regulations might be passed that could have a material effect on our results of operations. We assess the impact of significant changes in laws and regulations on a regular basis and update the assumptions and estimates used to prepare our financial statements when we deem it necessary.
Allowance for Doubtful Accounts
The Company provides an allowance for doubtful accounts equal to the estimated uncollectible amounts. The Company’s estimate is based on historical collection experience and a review of the current status of Accounts Receivable. It is reasonably possible that the Company’s estimate of the allowance for doubtful accounts will change in the future.
Depreciation and Amortization
Property and equipment are recorded at cost. Depreciation is provided over the estimated useful lives of the related assets using the straight-line method for financial statement purposes. The Company uses other depreciation methods (generally, accelerated depreciation methods) for tax purposes where appropriate. Amortization of leasehold improvements is computed using the straight-line method over the shorter of the remaining lease term or the estimated useful lives of the improvements.
Income Taxes
The Company accounts for income taxes under the provisions of Financial Accounting Standards Board’s (“FASB”) Accounting Standards Codification (“ASC”) 740 “Income Tax ”. ASC 740 requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred tax assets and liabilities are determined based on the differences between the financial statement carrying amounts and tax bases of certain assets and liabilities using enacted tax rates in effect in the years in which the differences are expected to reverse. The deferred tax assets and liabilities are classified according to the financial statement classification of the assets and liabilities generating the differences. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. The Company has adopted the provisions of FASB ASC 740-10-05 “Accounting for Uncertainty in Income Taxes”. The ASC clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements. The ASC prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. The ASC provides guidance on de-recognition, classification, interest and penalties, accounting in interim periods, disclosure and transition.
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Inventory Obsolescence
Inventory quantities and related values are analyzed at the end of each fiscal quarter to determine those items that are slow moving or obsolete. An inventory reserve is recorded for those items determined to be slow moving with a corresponding charge to cost of goods sold. Inventory items that are determined obsolete are written off currently with a corresponding charge to cost of goods sold.
Revenue Recognition
Revenues and costs of revenues are recognized during the period in which the products are shipped. The Company applies the provisions of FASB Accounting Standards Codification (“ASC”) 605-10, Revenue Recognition in Financial Statements ASC 605-10, which provides guidance on the recognition, presentation, and disclosure of revenue in financial statements filed with the SEC. ASC 605-10 outlines the basic criteria that must be met to recognize revenue and provides guidance for disclosure related to revenue recognition policies. In general, the Company recognizes revenue for sale of products when (i) persuasive evidence of an arrangement exists, (ii) delivery has occurred, (iii) the fee is fixed or determinable, and (iv) the collectability is reasonably assured.
The Company’s sources of revenue are from the sale of various component amplifiers and filters. Revenue is recognized upon shipment of such products, FOB shipping point. The Company offers a 100% satisfaction guarantee against defects for 90 days after the sale of their product except for a few circumstances. There are no maintenance or service contracts related to any product sale.
OFF BALANCE SHEET TRANSACTIONS
As of November 1, 2015, we did not have any off-balance sheet arrangements.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is not exposed to changes in interest rates as the Company has no debt arrangements and no investments in certain held-to-maturity securities. Under our current policies, we do not use interest rate derivative instruments to manage exposure to interest rate changes. A hypothetical 100 basis point adverse move in interest rates along the entire interest rate yield curve would not materially affect the fair value of any financial instruments at September 30, 2015.
ITEM 4. CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures.
Under the supervision and with the participation of our management, including the Chief Executive Officer and Chief Financial Officer, we have evaluated the effectiveness of our disclosure controls and procedures as required by Exchange Act Rule 13a-15(b) as of the end of the period covered by this report. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that these disclosure controls and procedures are effective.
(b) Changes in Internal Control over Financial Reporting.
There were no changes in our internal control over financial reporting during the quarter ended September 30, 2015 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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We are currently not involved in any litigation that we believe could have a material adverse effect on our financial condition or results of operations. There is no action, suit, proceeding, inquiry or investigation before or by any court, public board, government agency, self-regulatory organization or body pending or, to the knowledge of the executive officers of our company or any of our subsidiaries, threatened against or affecting our company, our common stock, any of our subsidiaries or of our companies or our subsidiaries’ officers or directors in their capacities as such, in which an adverse decision could have a material adverse effect.
We believe there are no changes that constitute material changes from the risk factors previously disclosed in our Annual Report on Form 10-K for the Fiscal Year Ended June 30, 2015, filed with the SEC on September 28, 2015.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
No shares were issued.
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ITEM 3. DEFAULTS UPON SENIOR SECURITIES .
There has been no default in the payment of principal, interest sinking or purchase fund installment, or any other material default, with respect to indebtedness of the Company.
ITEM 4. MINE SAFETY DISCLOSURES.
Not applicable.
There is no other information required to be disclosed under this item which was not previously disclosed.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
| EXHIBITS | ||
| 31.1 | Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes - Oxley Act of 2002.* | |
| 31.2 | Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes - Oxley Act of 2002.* | |
| 32.1 | Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes - Oxley Act of 2002.* | |
| 32.2 | Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes - Oxley Act of 2002.* | |
| 101.INS | XBRL Instance Document | |
| 101.SCH | XBRL Taxonomy Extension Schema Document | |
| 101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document | |
| 101.DEF | XBRL Taxonomy Extension Definition Linkbase Document | |
| 101.LAB | XBRL Taxonomy Extension Label Linkbase Document | |
| 101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document |
| * | filed herewith. |
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Pursuant to the requirements of the Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant, has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| MICROPHASE CORPORATION | ||
| Dated: November 9, 2015 | By: | /s/ Necdet Ergul |
| Name: | Necdet Ergul | |
| Title: | Chief Executive Officer (Principal Executive Officer) | |
| By: | /s/James Ashman | |
| Name: | James Ashman | |
| Title: | Chief Financial Officer | |
| (Principal Financial Officer) | ||
| (Principal Accounting Officer) | ||
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