UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 OR 15(d) of the Securities Exchange Act of 1934.
For the quarterly period ended June 30, 2019
Commission file number 0-10976
MICROWAVE FILTER COMPANY, INC.
(Exact name of registrant as specified in its charter.)
New York | 16-0928443 | |
(State of Incorporation) | (I.R.S. Employer Identification Number) | |
6743 Kinne Street, East Syracuse, N.Y. | 13057 | |
(Address of Principal Executive Offices) | (Zip Code) |
(315) 438-4700
Registrant’s telephone number, including area code
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports, and (2) has been subject to such filing requirements for the past 90 days.
YES [X] NO [ ]
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
YES [X] NO [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company (as defined in Rule 12b-2 of the Exchange Act).
Large accelerated filer [ ]
Accelerated filer [ ]
Non-accelerated filer [ ] (Do not check if smaller reporting company)
Smaller reporting company [X].
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
YES [ ] NO[X]
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
Common Stock, $.10 Par Value - 2,579,238 shares as of August 1, 2019.
MICROWAVE FILTER COMPANY, INC.
Form 10-Q
Index
2 |
Microwave Filter Company and Subsidiaries
Condensed Consolidated Balance Sheets (Unaudited)
June 30, 2019 | September 30, 2018 | |||||||
Assets | ||||||||
Current Assets: | ||||||||
Cash and cash equivalents | $ | 537,967 | $ | 674,045 | ||||
Accounts receivable-trade, net of allowance for doubtful accounts of $4,000 and $4,000 | 391,186 | 402,760 | ||||||
Inventories, net | 496,027 | 377,603 | ||||||
Prepaid expenses and other current assets | 33,876 | 54,416 | ||||||
Total current assets | 1,459,056 | 1,508,824 | ||||||
Property, plant and equipment, net | 283,561 | 261,474 | ||||||
Total assets | $ | 1,742,617 | $ | 1,770,298 | ||||
Liabilities and Stockholders’ Equity | ||||||||
Current liabilities: | ||||||||
Accounts payable | $ | 107,448 | $ | 116,938 | ||||
Customer deposits | 52,373 | 35,278 | ||||||
Accrued payroll and related expenses | 43,960 | 38,711 | ||||||
Accrued compensated absences | 87,075 | 90,449 | ||||||
Notes payable - short term | 52,846 | 51,101 | ||||||
Other current liabilities | 17,498 | 28,838 | ||||||
Total current liabilities | 361,200 | 361,315 | ||||||
Notes payable - long term | 179,198 | 219,071 | ||||||
Total other liabilities | 179,198 | 219,071 | ||||||
Total liabilities | 540,398 | 580,386 | ||||||
Stockholders’ Equity: | ||||||||
Common stock, $.10 par value Authorized 5,000,000 shares, Issued 4,324,140 shares in 2019 and 2018, Outstanding 2,579,238 shares in 2019 and 2,579,680 in 2018 | 432,414 | 432,414 | ||||||
Additional paid-in capital | 3,248,706 | 3,248,706 | ||||||
Accumulated deficit | (783,911 | ) | (796,444 | ) | ||||
Common stock in treasury, at cost 1,744,902 shares in 2019 and 1,744,460 shares in 2018 | (1,694,990 | ) | (1,694,764 | ) | ||||
Total stockholders’ equity | 1,202,219 | 1,189,912 | ||||||
Total liabilities and stockholders’ equity | $ | 1,742,617 | $ | 1,770,298 |
See Accompanying Notes to Condensed Consolidated Financial Statements
3 |
Microwave Filter Company and Subsidiaries
Condensed Consolidated Statements of Operations
(Unaudited)
Three months ended | Nine months ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
2019 | 2018 | 2019 | 2018 | |||||||||||||
Net sales | $ | 841,310 | $ | 802,140 | $ | 2,746,029 | $ | 2,323,571 | ||||||||
Cost of goods sold | 509,436 | 475,250 | 1,619,110 | 1,446,505 | ||||||||||||
Gross profit | 331,874 | 326,890 | 1,126,919 | 877,066 | ||||||||||||
Selling, general and administrative expenses | 344,736 | 345,188 | 1,113,767 | 1,005,301 | ||||||||||||
Income (loss) from operations | (12,862 | ) | (18,298 | ) | 13,152 | (128,235 | ) | |||||||||
Other income (expense), net | 389 | (2,665 | ) | (569 | ) | (6,461 | ) | |||||||||
Income (loss) before income taxes | (12,473 | ) | (20,963 | ) | 12,583 | (134,696 | ) | |||||||||
Provision for income taxes | - | - | 50 | 50 | ||||||||||||
Net income (loss) income | $ | (12,473 | ) | $ | (20,963 | ) | $ | 12,533 | $ | (134,746 | ) | |||||
Per share data: | ||||||||||||||||
Basic and diluted earnings (loss) per common share | $ | 0.00 | $ | (0.01 | ) | $ | 0.00 | $ | (0.05 | ) | ||||||
Shares used in computing net income (loss) per common share: | ||||||||||||||||
Basic and diluted | 2,579,238 | 2,579,680 | 2,579,451 | 2,579,682 |
See Accompanying Notes to Condensed Consolidated Financial Statements
4 |
Microwave Filter Company and Subsidiaries
Condensed Consolidated Statements of Changes in Stockholders’ Equity
For the Nine Months Ended June 30, 2019
(Unaudited)
Additional | Total | |||||||||||||||||||
Common | Paid in | Accumulated | Treasury | Stockholders’ | ||||||||||||||||
Stock | Capital | Deficit | Stock | Equity | ||||||||||||||||
September 30, 2017 | $ | 432,414 | $ | 3,248,706 | $ | (780,385 | ) | $ | (1,694,761 | ) | $ | 1,205,974 | ||||||||
Net loss | (40,807 | ) | (40,807 | ) | ||||||||||||||||
December 31, 2017 | 432,414 | 3,248,706 | (821,192 | ) | (1,694,761 | ) | 1,165,167 | |||||||||||||
Net loss | (72,976 | ) | (72,976 | ) | ||||||||||||||||
Purchase of treasury stock | (3 | ) | (3 | ) | ||||||||||||||||
March 31, 2018 | 432,414 | 3,248,706 | (894,168 | ) | (1,694,764 | ) | 1,092,188 | |||||||||||||
Net loss | (20,963 | ) | (20,963 | ) | ||||||||||||||||
June 30, 2018 | $ | 432,414 | $ | 3,248,706 | $ | (915,131 | ) | $ | (1,694,764 | ) | $ | 1,071,225 |
Additional | Total | |||||||||||||||||||
Common | Paid in | Accumulated | Treasury | Stockholders’ | ||||||||||||||||
Stock | Capital | Deficit | Stock | Equity | ||||||||||||||||
September 30, 2018 | $ | 432,414 | $ | 3,248,706 | $ | (796,444 | ) | $ | (1,694,764 | ) | $ | 1,189,912 | ||||||||
Net loss | (60,224 | ) | (60,224 | ) | ||||||||||||||||
December 31, 2018 | 432,414 | 3,248,706 | (856,668 | ) | (1,694,764 | ) | 1,129,688 | |||||||||||||
Net income | 85,230 | 85,230 | ||||||||||||||||||
Purchase of treasury stock | (226 | ) | (226 | ) | ||||||||||||||||
March 31, 2019 | 432,414 | 3,248,706 | (771,438 | ) | (1,694,990 | ) | 1,214,692 | |||||||||||||
Net loss | (12,473 | ) | (12,473 | ) | ||||||||||||||||
June 30, 2019 | $ | 432,414 | $ | 3,248,706 | $ | (783,911 | ) | $ | (1,694,990 | ) | $ | 1,202,219 |
See Accompanying Notes to Condensed Consolidated Financial Statements
5 |
Microwave Filter Company and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(Unaudited)
Nine months ended | ||||||||
June 30, | ||||||||
2019 | 2018 | |||||||
Cash flows from operating activities: | ||||||||
Net income (loss) | $ | 12,533 | $ | (134,746 | ) | |||
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: | ||||||||
Depreciation | 39,233 | 54,375 | ||||||
Change in operating assets and liabilities: | ||||||||
Accounts receivable-trade | 11,574 | 40,826 | ||||||
Inventories | (118,424 | ) | 35,134 | |||||
Prepaid expenses and other assets | 20,540 | (4,918 | ) | |||||
Accounts payable and customer deposits | 7,605 | (59,037 | ) | |||||
Accrued payroll and related expenses and compensated absences | 1,875 | (2,843 | ) | |||||
Other current liabilities | (11,340 | ) | (2,890 | ) | ||||
Net cash used in operating activities | (36,404 | ) | (74,099 | ) | ||||
Cash flows from investing activities: | ||||||||
Property, plant and equipment purchased | (61,320 | ) | (7,348 | ) | ||||
Net cash used in investing activities | (61,320 | ) | (7,348 | ) | ||||
Cash flows from financing activities: | ||||||||
Repayment of note payable | (38,128 | ) | (36,436 | ) | ||||
Purchase of treasury stock | (226 | ) | (3 | ) | ||||
Net cash used in financing activities | (38,354 | ) | (36,439 | ) | ||||
Decrease in cash and cash equivalents | (136,078 | ) | (117,886 | ) | ||||
Cash and cash equivalents at beginning of period | 674,045 | 667,940 | ||||||
Cash and cash equivalents at end of period | $ | 537,967 | $ | 550,054 | ||||
Supplemental Schedule of Cash Flow Information: | ||||||||
Interest paid | $ | 8,645 | $ | 10,337 | ||||
Income taxes paid | $ | 50 | $ | 50 |
See Accompanying Notes to Condensed Consolidated Financial Statements
6 |
MICROWAVE FILTER COMPANY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
JUNE 30, 2019
Note 1. Summary of Significant Accounting Policies
In these notes, the terms “MFC” and “Company” mean Microwave Filter Company, Inc. and its subsidiary companies.
The following condensed balance sheet as of September 30, 2018, which has been derived from audited financial statements, and the unaudited interim condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and note disclosures normally included in annual financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to those rules and regulations, although the company believes that the disclosures made are adequate to make the information not misleading. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. The operating results for the nine month period ended June 30, 2019 are not necessarily indicative of the results that may be expected for the year ended September 30, 2019. It is suggested that these condensed financial statements be read in conjunction with the financial statements and the notes thereto included in the Company’s latest shareholders’ annual report (Form 10-K).
Note 2. Industry Segment Data
The Company’s primary business segment involves the operations of Microwave Filter Company, Inc. which designs, develops, manufactures and sells electronic filters, both for radio and microwave frequencies, to help process signal distribution and to prevent unwanted signals from disrupting transmit or receive operations. Markets served include cable television, television and radio broadcast, satellite broadcast, mobile radio, commercial communications and defense electronics.
Note 3. Inventories
Inventories are stated at the lower of cost determined on the first-in, first-out method or net realizable value.
Net realizable value is determined as the estimated selling price in the normal course of business minus the cost of completion, disposal and transportation.
Inventories net of the reserve for obsolescence consisted of the following:
June 30, 2019 | September 30, 2018 | |||||||
Raw materials and stock parts | $ | 403,659 | $ | 306,658 | ||||
Work-in-process | 10,696 | 37,062 | ||||||
Finished goods | 81,672 | 33,883 | ||||||
$ | 496,027 | $ | 377,603 |
7 |
The Company’s reserve for obsolescence equaled $463,286 at June 30, 2019 and September 30, 2018. The Company provides for a valuation reserve for certain inventory that is deemed to be obsolete, of excess quantity or otherwise impaired.
Note 4. Income Taxes
The Company accounts for income taxes under FASB ASC 740-10. Deferred tax assets and liabilities are based on the difference between the financial statement and tax basis of assets and liabilities as measured by the enacted tax rates which are anticipated to be in effect when these differences reverse. The deferred tax provision is the result of the net change in the deferred tax assets and liabilities. A valuation allowance is established when it is necessary to reduce deferred tax assets to amounts expected to be realized. The Company has provided a full valuation allowance against its net deferred tax assets.
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 position taken or expected to be taken on a tax return. Additionally, it provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. The Company 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. There is no provision for Federal income taxes for the three and nine months ended June 30, 2019 and 2018 as net operating loss carryforwards were used to reduce taxable income tax to zero.
Note 5. Legal Matters
None.
Note 6. Fair Value of Financial Instruments
The carrying value of the Company’s cash and cash equivalents, accounts receivable and accounts payable approximate fair value because of the short maturity of those instruments. The carrying value of the Company’s note payable approximates is fair value.
The Company currently does not trade in or utilize derivative financial instruments.
Note 7. Significant Customers
Net sales to two significant customers represented 54.0% of the Company’s total sales for the nine months ended June 30, 2019 and net sales to two significant customer represented 42.1% of the Company’s total sales for the nine months ended June 30, 2018. A loss of one of these customers or programs related to these customers could significantly impact the Company.
8 |
Note 8. Notes Payable
On July 2, 2013, Microwave Filter Company, Inc. (the “Company”) entered into a Ten Year Term Loan with KeyBank National Association in the amount of Five Hundred Thousand and No/100 Dollars ($500,000.00). The amount of all advances outstanding together with accrued interest thereon shall be due and payable on July 2, 2023 (“Maturity”). The Company shall pay interest on the outstanding principal balance of this Note at the rate per annum equal to 4.5%. The net proceeds from the Term Loan will be available to provide working capital as needed. The total amount outstanding as of June 30, 2019 and September 30, 2018 was $232,044 and $270,172, respectively. Interest accrued as of June 30, 2019 and September 30, 2018 was $812 and $946, 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.
Note 9. Earnings Per Share
The Company presents basic earnings per share (“EPS”), computed based on the weighted average number of common shares outstanding for the period, and when applicable diluted EPS, which gives the effect to all dilutive potential shares outstanding (i.e. options) during the period after restatement for any stock dividends. There were no dividends declared during the quarters ended June 30, 2019 and 2018. Income (loss) used in the EPS calculation is net income (loss) for each period. There were no dilutive potential shares outstanding for the periods ended June 30, 2019 and 2018.
Note 10. Recent 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.
9 |
Note 11. Revenue Recognition
Revenue Recognition
Effective October 1, 2018, the Company adopted Accounting Standards Update (“ASU”) No. 2014-09,Revenue from Contracts with Customers (Topic 606), using the modified retrospective method. This update outlined a comprehensive new revenue recognition model designed to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The new standard also requires additional quantitative and qualitative disclosures, as explained below. The adoption allows companies to apply the new revenue standard to reporting periods beginning in the year the standard is first implemented, while prior periods continue to be reported in accordance with previous accounting guidance. Since the adoption of Accounting Standards Codification (“ASC”) 606 did not have a significant impact on the recognition of revenue, the Company did not have an opening retained earnings adjustment or an effect on prior reported periods.
Pursuant to Topic 606, revenues are recognized upon the application of the following steps:
● | Identification of the contract, or contracts, with a customer; |
● | Identification of the performance obligations in the contract; |
● | Determination of the transaction price; |
● | Allocation of the transaction price to the performance obligations in the contract; and |
● | Recognition of revenues when, or as, the contractual performance obligations are satisfied. |
The Company accounts for a contract with a client when it has written approval, the contract (or customer sales order) is committed, the rights of the parties, including payment terms, are identified, the contract has commercial substance and consideration is probable of collection.
The Company allocates the transaction price to each performance obligation on a standalone selling price basis, as agreed-upon between the customer and the Company in the related customer sales order.
Revenue is recognized when the performance obligation has been satisfied: at the time products are shipped and title and risk of loss have passed to the customer, and the collection of the related receivable is probable. Billings in advance of the Company’s performance of such work are reflected as customer deposits in the accompanying condensed consolidated balance sheet.
Product Warranty
The Company has established a warranty reserve which provides for the estimated cost of product returns based upon historical experience and any known conditions or circumstances. No revenues are recognized in connection with the performance of the warranty repair or fulfillment function. The warranty obligation is affected by product that does not meet specifications and performance requirements and any related costs of addressing such matters. Products must be returned within one year of the date of purchase. The warranty liability was insignificant at June 30, 2019 and September 30, 2018.
10 |
Disaggregation of Revenue
The following tables provide details of revenue by major products group:
Product group | Fiscal 2019 | Fiscal 2018 | ||||||
Microwave Filter (MFC): | ||||||||
RF/Microwave | $ | 1,115,731 | $ | 950,099 | ||||
Satellite | 632,505 | 877,520 | ||||||
Cable TV | 361,551 | 246,854 | ||||||
Broadcast TV | 636,158 | 244,261 | ||||||
Niagara Scientific (NSI): | 84 | 4,837 | ||||||
Total | $ | 2,746,029 | $ | 2,323,571 | ||||
Sales backlog at June 30 | $ | 741,835 | $ | 1,193,829 |
11 |
MICROWAVE FILTER COMPANY, INC.
ITEM 2. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
Business Overview
Microwave Filter Company, Inc. operates primarily in the United States and principally in one industry. The Company extends credit to business customers based upon ongoing credit evaluations. Microwave Filter Company, Inc. designs, develops, manufactures and sells electronic filters, both for radio and microwave frequencies, to help process signal distribution and to prevent unwanted signals from disrupting transmit or receive operations. Markets served include cable television, television and radio broadcast, satellite broadcast, mobile radio, commercial communications and defense electronics.
Critical Accounting Policies
The Company’s condensed consolidated financial statements are based on the application of United States generally accepted accounting principles (GAAP). GAAP requires the use of estimates, assumptions, judgments and subjective interpretations of accounting principles that have an impact on the assets, liabilities, revenue and expense amounts reported. The Company believes its use of estimates and underlying accounting assumptions adhere to GAAP and are consistently applied. Valuations based on estimates are reviewed for reasonableness and adequacy on a consistent basis throughout the Company. Primary areas where financial information of the Company is subject to the use of estimates, assumptions and the application of judgment include revenues, receivables, inventories, warranty reserves and taxes. Note 1 to the consolidated financial statements in our Annual Report on Form 10-K for the fiscal year ended September 30, 2018 describes the significant accounting policies used in preparation of the condensed consolidated financial statements. The most significant areas involving management judgments and estimates are described below and are considered by management to be critical to understanding the financial condition and results of operations of the Company.
Effective October 1, 2018, the Company adopted Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers (Topic 606), using the modified retrospective method. This update outlined a comprehensive new revenue recognition model designed to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In general, revenues from product sales are recorded as the products are shipped and title and risk of loss have passed to the customer, provided that no significant vendor or post-contract support obligations remain and the collection of the related receivable is probable. Billings in advance of the Company’s performance of such work are reflected as customer deposits in the accompanying condensed consolidated balance sheet. See Note 11 to the condensed consolidated financial statements.
Allowances for doubtful accounts are based on estimates of losses related to customer receivable balances. The establishment of reserves requires the use of judgment and assumptions regarding the potential for losses on receivable balances.
The Company’s inventories are stated at the lower of cost determined on the first-in, first-out method or net realizable value. Net realizable value is determined as the estimated selling price in the normal course of business minus the cost of completion, disposal and transportation. The Company uses certain estimates and judgments and considers several factors including product demand and changes in technology to provide for excess and obsolescence reserves to properly value inventory.
12 |
The Company accounts for income taxes under FASB ASC 740-10. Deferred tax assets and liabilities are based on the difference between the financial statement and tax basis of assets and liabilities as measured by the enacted tax rates which are anticipated to be in effect when these differences reverse. The deferred tax provision is the result of the net change in the deferred tax assets and liabilities. A valuation allowance is established when it is necessary to reduce deferred tax assets to amounts expected to be realized. The Company has provided a full valuation allowance against its net deferred tax assets.
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 2019 vs. THREE MONTHS ENDED JUNE 30, 2018
The following table sets forth the Company’s net sales by major product group for the three months ended June 30, 2019 and 2018.
Product group | Fiscal 2019 | Fiscal 2018 | ||||||
Microwave Filter (MFC): | ||||||||
RF/Microwave | $ | 323,070 | $ | 413,611 | ||||
Satellite | 210,071 | 204,474 | ||||||
Cable TV | 134,314 | 101,467 | ||||||
Broadcast TV | 173,855 | 82,588 | ||||||
Niagara Scientific (NSI): | 0 | 0 | ||||||
Total | $ | 841,310 | $ | 802,140 | ||||
Sales backlog at June 30 | $ | 741,835 | $ | 1,193,829 |
Net sales for the three months ended June 30, 2019 equaled $841,310, an increase of $39,170 or 4.9%, when compared to net sales of $802,140 for the three months ended June 30, 2018.
MFC’s RF/Microwave product sales decreased $90,541 or 21.9% to $323,070 for the three months ended June 30, 2019 when compared to RF/Microwave product sales of $413,611 during the same period last year. The Company’s RF/Microwave products are sold primarily to Original Equipment Manufacturers that serve the mobile radio, commercial communications and defense electronics markets. Sales to one OEM customer decreased $51,225 to $272,500 for the three months ended June 30, 2019, compared to sales of $323,725 for the three months ended June 30, 2018. 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 $5,597 or 2.7% to $210,071 for the three months ended June 30, 2019 when compared to Satellite product sales of $204,474 during the same period last year.
13 |
MFC’s Cable TV product sales increased $32,847 or 32.4% to $134,314 for the three months ended June 30, 2019 when compared to Cable TV product sales of $101,467 during the same period last year. The increase can primarily be attributed to sales to one customer. Management continues to project flat or a decrease in demand for standard Cable TV products due to the shift from analog to digital television. Due to the inherent nature of digital modulation versus analog modulation, fewer filters are required. The Company has developed filters for digital television and there will still be requirements for analog filters for limited applications in commercial and private cable systems.
MFC’s Broadcast TV/Wireless Cable product sales increased $91,267 to $173,855 for the three months ended June 30, 2019 when compared to sales of $82,588 during the same period last year. The increase can primarily be attributed to sales to one customer.
MFC’s sales order backlog equaled $741,835 at June 30, 2019 compared to sales order backlog of $1,193,829 at June 30, 2018. 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. 96.7% of the total sales order backlog at June 30, 2019 is scheduled to ship by September 30, 2019.
Gross profit for the three months ended June 30, 2019 equaled $331,874, an increase of $4,984 or 1.5%, when compared to gross profit of $326,890 for the three months ended June 30, 2019. The increase can primarily be attributed to the increase in sales. As a percentage of sales, gross profit equaled 39.4% for the three months ended June 30, 2019 compared to 40.8% for the three months ended June 30, 2018.
Selling, general and administrative (SGA) expenses for the three months ended June 30, 2019 equaled $344,736, a decrease of $452 or 0.1%, when compared to SGA expenses of $345,188 for the three months ended June 30, 2018. As a percentage of sales, SGA expenses decreased to 41.0% for the three months ended June 30, 2019 when compared to 43.0% for the three months ended June 30, 2018 primarily due to the higher sales volume this year providing a higher base to absorb expenses.
The Company recorded a loss from operations of $12,682 for the three months ended June 30, 2019 compared to a loss from operations of $18,298 for the three months ended June 30, 2018. The improvement in operating income can primarily be attributed to the higher sales volume this year when compared to the same period last year.
Other income (expense) was income of $389 for the three months ended June 30, 2019 compared to expense of $2,665 for the three months ended June 30, 2018 primarily due to interest expense of $2,722 offset by interest income of $2,416 and miscellaneous non-operating income of $695 for the three months ended June 30, 2019 and interest expense of $3,266 offset by interest income of $248 and miscellaneous non-operating income of $353 for the three months ended June 30, 2018. Other income generally consists of sales of scrap material, the forfeiture of non-refundable deposits and other incidental items.
The provision for income taxes equaled $0 for both the three months ended June 30, 2019 and 2018. Any benefit for losses has been subject to a valuation allowance since the realization of the deferred tax benefit is not considered more likely than not. As required by FASB ASC 740, the Company has evaluated the positive and negative evidence bearing upon the realization of its deferred tax assets. The Company has determined that, at this time, it is more likely than not that the Company will not realize all of the benefits of federal and state deferred tax assets, and, as a result, a valuation allowance was established. See notes 1 and 4.
14 |
NINE MONTHS ENDED JUNE 30, 2019 vs. NINE MONTHS ENDED JUNE 30, 2018
The following table sets forth the Company’s net sales by major product group for the nine months ended June 30, 2019 and 2018.
Product group | Fiscal 2019 | Fiscal 2018 | ||||||
Microwave Filter (MFC): | ||||||||
RF/Microwave | $ | 1,115,731 | $ | 950,099 | ||||
Satellite | 632,505 | 877,520 | ||||||
Cable TV | 361,551 | 246,854 | ||||||
Broadcast TV | 636,158 | 244,261 | ||||||
Niagara Scientific (NSI): | 84 | 4,837 | ||||||
Total | $ | 2,746,029 | $ | 2,323,571 | ||||
Sales backlog at June 30 | $ | 741,835 | $ | 1,193,829 |
Net sales for the nine months ended June 30, 2019 equaled $2,746,029, an increase of $422,458 or 18.2%, when compared to net sales of $2,323,571 for the nine months ended June 30, 2018.
MFC’s RF/Microwave product sales increased $165,632 or 17.4% to $1,115,731 for the nine months ended June 30, 2019 when compared to RF/Microwave product sales of $950,099 during the same period last year. MFC’s RF/Microwave products are sold primarily to OEMs that serve the mobile radio, commercial communications and defense electronics markets. Sales to one OEM customer increased $221,075 to $952,525 for the nine months ended June 30, 2019 compared to sales of $731,450 for the nine months ended June 30, 2018. These sales are in connection with a multiyear program in which the Company is a subcontractor. The Company continues to invest in production engineering and infrastructure development to penetrate OEM market segments as they become popular. MFC is concentrating its technical resources and product development efforts toward potential high volume customers as part of a concentrated effort to provide substantial long-term growth. Over the last year, MFC, in conjunction with various OEM’s, has developed and supplied prototypes as well as small production runs in support of new programs being introduced to the marketplace. It is our belief that a continuation of this effort will help increase sales as well as reinforcing MFC’s position as a quality manufacturer of RF filters and assemblies.
MFC’s Satellite product sales decreased $245,015 or 27.9% to $632,505 for the nine months ended June 30, 2019 when compared to satellite product sales of $877,520 during the same period last year. The decrease in sales can primarily be attributed to a decrease in sales to one customer.
MFC’s Cable TV product sales increased $114,697 or 46.5% to $361,551 for the nine months ended June 30, 2019 when compared to Cable TV product sales of $246,854 during the same period last year. The increase can primarily be attributed to sales to one customer. Management continues to project flat or a decrease in demand for standard Cable TV products due to the shift from analog to digital television. Due to the inherent nature of digital modulation versus analog modulation, fewer filters are required. The Company has developed filters for digital television and there will still be requirements for analog filters for limited applications in commercial and private cable systems.
MFC’s Broadcast TV/Wireless Cable product sales increased $391,897 to $636,158 for the nine months ended June 30, 2019 when compared to sales of $244,261 during the same period last year. The increase in sales can primarily be attributed to sales to one customer.
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MFC’s sales order backlog equaled $741,835 at June 30, 2019 compared to sales order backlog of $1,193,829 at June 30, 2018. 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. 96.7% of the total sales order backlog at June 30, 2019 is scheduled to ship by September 30, 2019.
Gross profit for the nine months ended June 30, 2019 equaled $1,126,919, an increase of $249,853 or 28.5%, when compared to gross profit of $877,066 for the nine months ended June 30, 2018. The increase can primarily be attributed to the increase in sales. As a percentage of sales, gross profit equaled 41.0% for the nine months ended June 30, 2019 compared to 37.7% for the nine months ended June 30, 2018. The increase in gross profit as a percentage of sales can primarily be attributed the higher sales volume providing a higher base to absorb overhead expenses.
SG&A expenses for the nine months ended June 30, 2019 equaled $1,113,767, an increase of $108,466, when compared to SG&A expenses of $1,005,301 for the nine months ended June 30, 2018. The increase can primarily be attributed to higher payroll and payroll related expenses due primarily to the hiring of two sales professionals. As a percentage of sales, SGA expenses decreased to 40.6% for the nine months ended June 30, 2019 compared to 43.3% for the nine months ended June 30, 2018 due primarily to the higher sales volume this year when compared to the same period last year.
The Company recorded income from operations of $13,152 for the nine months ended June 30, 2019 compared to a loss from operations of $128,235 for the nine months ended June 30, 2018. The improvement can primarily be attributed to the higher sales volume this year when compared to last year.
Other expense was $569 for the nine months ended June 30, 2019 compared to $6,461 for the nine months ended June 30, 2018 primarily due to interest expense of $8,511 offset by interest income of $5,418 and miscellaneous non-operating income of $2,524 for the nine months ended June 30, 2019 and interest expense of $10,209 offset by interest income of $920 and miscellaneous non-operating income of $2,828 and for the nine months ended June 30, 2018. Other income generally consists of sales of scrap material, the forfeiture of non-refundable deposits and other incidental items.
The provision for income taxes equaled $50 for the nine months ended June 30, 2019 and June 30, 2018. Any benefit for losses has been subject to a valuation allowance since the realization of the deferred tax benefit is not considered more likely than not. As required by FASB ASC 740, the Company has evaluated the positive and negative evidence bearing upon the realization of its deferred tax assets. The Company has determined that, at this time, it is more likely than not that the Company will not realize all of the benefits of federal and state deferred tax assets, and, as a result, a valuation allowance was established. See notes 1 and 4.
Off-Balance Sheet Arrangements
At June 30, 2019 and 2018, 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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LIQUIDITY and CAPITAL RESOURCES
MFC defines liquidity as the ability to generate adequate funds to meet its operating and capital needs. The Company’s primary source of liquidity has been funds provided by operations.
June 30, 2019 | September 30, 2018 | |||||||
Cash & cash equivalents | $ | 537,967 | $ | 674,045 | ||||
Working capital | $ | 1,097,856 | $ | 1,147,509 | ||||
Current ratio | 4.04 to 1 | 4.18 to 1 | ||||||
Long-term debt | $ | 179,198 | $ | 219,071 |
Cash and cash equivalents decreased $136,078 to $537,967 at June 30, 2019 when compared to cash and cash equivalents of $674,045 at September 30, 2018. The decrease was a result of $36,404 in net used in operating activities, $61,320 in net cash used for capital expenditures, $38,128 in net cash used for repayment of a note payable and $226 used to purchase treasury stock.
Net cash used in operating activities can fluctuate between periods as a result of differences in net income (loss), the timing of the collection of accounts receivable, purchase of inventory and payment of accounts payable.
The increase in inventories of $118,424 when compared to September 30, 2018 can primarily be attributed to customer scheduled deliveries. $717,585 of backlog is scheduled to ship during the fourth quarter.
The $61,320 in fixed asset purchases consisted of $54,900 to replace part of the roof and $4,575 used to purchase computer software and $1,845 to purchase computer equipment.
On July 2, 2013, the Company entered into a Ten Year Term Loan with KeyBank National Association in the amount of Five Hundred Thousand and No/100 Dollars ($500,000.00). The amount of all advances outstanding together with accrued interest thereon shall be due and payable on July 2, 2023 (“Maturity”). The Company shall pay interest on the outstanding principal balance of this Note at the rate per annum equal to 4.5%. The net proceeds from the Term Loan will be available to provide working capital as needed.
Management believes that its working capital requirements for at least the next twelve months will be met by its existing cash balances, future cash flows from operations and its current credit arrangements.
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SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
In an effort to provide investors a balanced view of the Company’s current condition and future growth opportunities, this Quarterly Report on Form 10-Q includes comments by the Company’s management about future performance. These statements which are not historical information are “forward-looking statements” pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These, and other forward-looking statements, are subject to business and economic risks and uncertainties that could cause actual results to differ materially from those discussed. These risks and uncertainties include, but are not limited to: risks associated with demand for and market acceptance of existing and newly developed products as to which the Company has made significant investments; general economic and industry conditions; slower than anticipated penetration into the satellite communications, mobile radio and commercial and defense electronics markets; competitive products and pricing pressures; increased pricing pressure from our customers; risks relating to governmental regulatory actions in broadcast, communications and defense programs; as well as other risks and uncertainties, including but not limited to those detailed from time to time in the Company’s Securities and Exchange Commission filings. These forward-looking statements are made only as of the date hereof, and the Company undertakes no obligation to update or revise the forward-looking statements, whether as a result of new information, future events or otherwise. You are encouraged to review Microwave Filter Company’s 2018 Annual Report and Form 10-K for the fiscal year ended September 30, 2018 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.
ITEM3. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
As a “smaller reporting company” we are not required to provide information required by this item.
ITEM4. | 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.
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Item 1. | Legal Proceedings |
None.
Item 1A. | Rzisk Factors |
Not applicable.
Item 2. | Changes in Securities |
None.
Item 3. | Defaults Upon Senior Securities |
The Company has no senior securities.
Item 4. | Mine Safety Disclosures |
Not applicable.
Item 5. | Other Information |
None.
Item 6. | Exhibits |
a. Exhibits
31.1 Section 13a-14(a)/15d-14(a) Certification of Paul W. Mears
31.2 Section 13a-14(a)/15d-14(a) Certification of Richard L. Jones
32.1 Section 1350 Certification of Paul W. Mears and Richard L. Jones
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Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
MICROWAVE FILTER COMPANY, INC. | ||
August 13, 2019 | /s/Paul W. Mears | |
(Date) | Paul W. Mears | |
Chief Executive Officer | ||
August 13, 2019 | /s/Richard L. Jones | |
(Date) | Richard L. Jones | |
Chief Financial Officer |
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