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 March 31, 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 May 1, 2019.

 

 

 

MICROWAVE FILTER COMPANY, INC.
Form 10-Q

 

Index

 

Item		Page
Part I Financial Information
Item 1. Financial Statements
Condensed Consolidated Balance Sheets (unaudited)		3
Condensed Consolidated Statements of Operations (unaudited)		4
Condensed Consolidated Statements of Changes in Stockholders’ Equity (unaudited)		5
Condensed Consolidated Statements of Cash Flows (unaudited)		6
Notes to Condensed Consolidated Financial Statements (unaudited)		7-10
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		11-16
Item 3. Quantitative and Qualitative Disclosures About Market Risk		17
Item 4. Controls and Procedures		17
Part II Other Information		18
Signatures		19

 

 

Microwave Filter Company and Subsidiaries

Condensed Consolidated Balance Sheets (Unaudited)

 

		March 31, 2019				September 30, 2018
Assets
Current Assets:
Cash and cash equivalents		$	627,782			$	674,045
Accounts receivable-trade, net of allowance for doubtful accounts of $4,000 and $4,000			357,970				402,760
Inventories, net			431,000				377,603
Prepaid expenses and other current assets			50,655				54,416
Total current assets			1,467,407				1,508,824
Property, plant and equipment, net			296,692				261,474
Total assets		$	1,764,099			$	1,770,298
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable		$	118,151			$	116,938
Customer deposits			30,748				35,278
Accrued payroll and related expenses			57,506				38,711
Accrued compensated absences			82,737				90,449
Notes payable - short term			52,243				51,101
Other current liabilities			15,397				28,838
Total current liabilities			356,782				361,315
Notes payable - long term			192,625				219,071
Total other liabilities			192,625				219,071
Total liabilities			549,407				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			(771,438	)			(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			1,214,692				1,189,912
Total liabilities and stockholders’ equity		$	1,764,099			$	1,770,298

 

See Accompanying Notes to Condensed Consolidated Financial Statements

 

 

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

 

		Three months ended								Six months ended
		March 31,								March 31,
		2019				2018				2019				2018
Net sales		$	1,046,401			$	734,515			$	1,904,719			$	1,521,431
Cost of goods sold			594,501				472,713				1,109,674				971,255
Gross profit			451,900				261,802				795,045				550,176
Selling, general and administrative expenses			367,560				333,611				769,031				660,113
Income (loss) from operations			84,340				(71,809	)			26,014				(109,937	)
Other income (expense), net			940				(1,117	)			(958	)			(3,796	)
Income (loss) before income taxes			85,280				(72,926	)			25,056				(113,733	)
Provision for income taxes			50				50				50				50
Net income (loss)		$	85,230			$	(72,976	)		$	25,006			$	(113,783	)
Per share data:
Basic and diluted earnings (loss) per common share		$	0.03			$	(0.03	)		$	0.01			$	(0.04	)
Shares used in computing net income (loss) per common share:Basic and diluted			2,579,432				2,579,681				2,579,558				2,579,683

 

See Accompanying Notes to Condensed Consolidated Financial Statements

 

 

Microwave Filter Company and Subsidiaries

Condensed Consolidated Statements of Changes in Stockholders’ Equity

For the Six Months Ended March 31, 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

 

						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

 

See Accompanying Notes to Condensed Consolidated Financial Statements

 

 

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

 

		Six months ended
		March 31,
		2019				2018
Cash flows from operating activities:
Net income (loss)		$	25,006			$	(113,783	)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Depreciation			26,102				36,208
Change in operating assets and liabilities:
Accounts receivable-trade			44,790				13,889
Inventories			(53,397	)			20,897
Prepaid expenses and other assets			3,761				(15,125	)
Accounts payable and customer deposits			(3,317	)			(32,419	)
Accrued payroll and related expenses and compensated absences			11,083				5,669
Other current liabilities			(13,441	)			(5,948	)
Net cash provided by (used in) operating activities			40,587				(90,612	)
Cash flows from investing activities:
Property, plant and equipment purchased			(61,320	)			(2,438	)
Net cash used in investing activities			(61,320	)			(2,438	)
Cash flows from financing activities:
Repayment of note payable			(25,304	)			(24,189	)
Purchase of treasury stock			(226	)			(3	)
Net cash used in financing activities			(25,530	)			(24,192	)
Decrease in cash and cash equivalents			(46,263	)			(117,242	)
Cash and cash equivalents at beginning of period			674,045				667,940
Cash and cash equivalents at end of period		$	627,782			$	550,698
Supplemental Schedule of Cash Flow Information:
Interest paid		$	5,878			$	6,993
Income taxes paid		$	50			$	50

 

See Accompanying Notes to Condensed Consolidated Financial Statements

 

 

MICROWAVE FILTER COMPANY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

MARCH 31, 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 six month period ended March 31, 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:

 

		March 31, 2019				September 30, 2018
Raw materials and stock parts		$	335,827			$	306,658
Work-in-process			24,408				37,062
Finished goods			70,765				33,883
		$	431,000			$	377,603

 

 

The Company’s reserve for obsolescence equaled $463,286 at March 31, 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 six months March 31, 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 53.9% of the Company’s total sales for the six months ended March 31, 2019 and net sales to two significant customer represented 42.2% of the Company’s total sales for the six months ended March 31, 2018. A loss of one of these customers or programs related to these customers could significantly impact the Company.

 

 

Note 8. Notes Payable

 

On July 2, 2013, Microwave Filter Company, Inc. (the “Company”) entered into a Ten Year Term Loan with KeyBank National Association in the amount of Five Hundred Thousand and No/100 Dollars ($500,000.00). The amount of all advances outstanding together with accrued interest thereon shall be due and payable on July 2, 2023 (“Maturity”). The Company shall pay interest on the outstanding principal balance of this Note at the rate per annum equal to 4.5%. The net proceeds from the Term Loan will be available to provide working capital as needed. The total amount outstanding as of March 31, 2019 and September 30, 2018 was $244,868 and $270,172 respectively. Interest accrued as of March 31, 2019 and September 30, 2018 was $857 and $946, respectively.

 

The Company has secured this Note by: (a) a Mortgage, Assignment of Rents, Security Agreement and Fixture Filing which creates a 1^st lien on real property situated in the Town of Dewitt, County of Onondaga, and State of New York and known as 6743 Kinne Street, East Syracuse, New York; (b) a General Assignment of Rents and Leases; (c) an Environmental Compliance and Indemnification; and (d) such other security as may now or hereafter 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 March 31, 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 March 31, 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.

 

 

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 March 31, 2019 and September 30, 2018.

 

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		$	792,661			$	536,488
Satellite			422,434				673,046
Cable TV			227,237				145,387
Broadcast TV			462,303				161,673
Niagara Scientific (NSI):			84				4,837
Total		$	1,904,719			$	1,521,431
Sales backlog at March 31		$	916,422			$	928,718

 

 

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.

 

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 MARCH 31, 2019 vs. THREE MONTHS ENDED MARCH 31, 2018

 

The following table sets forth the Company’s net sales by major product group for the three months ended March 31, 2019 and 2018.

 

Product group		Fiscal 2019				Fiscal 2018
Microwave Filter (MFC):
RF/Microwave		$	501,008			$	296,519
Satellite			231,605				313,356
Cable TV			81,376				66,811
Broadcast TV			232,328				57,647
Niagara Scientific (NSI):			84				182
Total		$	1,046,401			$	734,515
Sales backlog at March 31		$	916,422			$	928,718

 

Net sales for the three months ended March 31, 2019 equaled $1,046,401, an increase of $311,886 or 42.5%, when compared to net sales of $734,515 for the three months ended March 31, 2018.

 

MFC’s RF/Microwave product sales increased $204,489 or 69% to $501,008 for the three months ended March 31, 2019 when compared to RF/Microwave product sales of $296,519 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 increased $225,000 to $429,300 for the three months ended March 31, 2019, compared to sales of $204,300 for the three months ended March 31, 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 $81,751 or 26.1% to $231,605 for the three months ended March 31, 2019 when compared to Satellite product sales of $313,356 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 $14,565 or 21.8% to $81,376 for the three months ended March 31, 2019 when compared to Cable TV product sales of $66,811 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 $174,681 to $232,328 for the three months ended March 31, 2019 when compared to sales of $57,647 during the same period last year. The increase can primarily be attributed to sales to one customer.

 

MFC’s sales order backlog equaled $916,422 at March 31, 2019 compared to sales order backlog of $928,718 at March 31, 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. The total sales order backlog at March 31, 2019 is scheduled to ship by September 30, 2019.

 

Gross profit for the three months ended March 31, 2019 equaled $451,900, an increase of $190,098 or 72.6%, when compared to gross profit of $261,802 for the three months ended March 31, 2018. The increase can primarily be attributed to the increase in sales. As a percentage of sales, gross profit equaled 43.2% for the three months ended March 31, 2019 compared to 35.6% for the three months ended March 31, 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.

 

Selling, general and administrative (SGA) expenses for the three months ended March 31, 2019 equaled $367,560, an increase of $33,949 or 10.2%, when compared to SGA expenses of $333,611 for the three months ended March 31, 2018. The increase can be attributed to higher payroll and payroll related expenses offset by a decrease in consulting fees this year when compared to the same period last year. As a percentage of sales, SGA expenses decreased to 35.1% for the three months ended March 31, 2019 when compared to 45.4% for the three months ended March 31, 2018 primarily due to the higher sales volume this year providing a higher base to absorb expenses.

 

The Company recorded income from operations of $84,340 for the three months ended March 31, 2019 compared to a loss from operations of $71,809 for the three months ended March 31, 2018. The increase 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 $940 for the three months ended March 31, 2019 compared to expense of $1,117 for the three months ended March 31, 2018 primarily due to interest expense of $2,777 offset by interest income of $2,230 and miscellaneous non-operating income of $1,487 for the three months ended March 31, 2019 and interest expense of $3,363 offset by interest income of $310 and miscellaneous non-operating income of $1,936 for the three months ended March 31, 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 both the three months ended March 31, 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.

 

 

SIX MONTHS ENDED MARCH 31, 2019 vs. SIX MONTHS ENDED MARCH 31, 2018

 

The following table sets forth the Company’s net sales by major product group for the six months ended March 31, 2019 and 2018.

 

Product group		Fiscal 2019				Fiscal 2018
Microwave Filter (MFC):
RF/Microwave		$	792,661			$	536,488
Satellite			422,434				673,046
Cable TV			227,237				145,387
Broadcast TV			462,303				161,673
Niagara Scientific (NSI):			84				4,837
Total		$	1,904,719			$	1,521,431
Sales backlog at March 31		$	916,422			$	928,718

 

Net sales for the six months ended March 31, 2019 equaled $1,904,719, an increase of $383,288 or 25.2%, when compared to net sales of $1,521,431 for the six months ended March 31, 2018.

 

MFC’s RF/Microwave product sales increased $256,173 or 47.7% to $792,661 for the six months ended March 31, 2019 when compared to RF/Microwave product sales of $536,488 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 $272,300 to $680,025 for the six months ended March 31, 2019 compared to sales of $407,725 for the six months ended March 31, 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 $250,612 or 37.2% to $422,434 for the six months ended March 31, 2019 when compared to satellite product sales of $673,046 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 $81,850 or 56.3% to $227,237 for the six months ended March 31, 2019 when compared to Cable TV product sales of $145,387 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 $300,630 to $462,303 for the six months ended March 31, 2019 when compared to sales of $162,673 during the same period last year. The increase in sales can primarily be attributed to sales to one customer.

 

 

MFC’s sales order backlog equaled $916,422 at March 31, 2019 compared to sales order backlog of $928,718 at March 31, 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. The total sales order backlog at March 31, 2019 is scheduled to ship by September 30, 2019.

 

Gross profit for the six months ended March 31, 2019 equaled $795,045, an increase of $244,869 or 44.5%, when compared to gross profit of $550,176 for the six months ended March 31, 2018. The increase can primarily be attributed to the increase in sales. As a percentage of sales, gross profit equaled 41.7% for the six months ended March 31, 2019 compared to 36.2% for the six months ended March 31, 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 six months ended March 31, 2019 equaled $769,031, an increase of $108,918, when compared to SG&A expenses of $660,113 for the six months ended March 31, 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 40.4% for the six months ended March 31, 2019 compared to 43.4% for the six months ended March 31, 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 $26,014 for the six months ended March 31, 2019 compared to a loss from operations of $109,937 for the six months ended March 31, 2018. The improvement can primarily be attributed to the higher sales volume this year when compared to last year.

 

Other expense was $958 for the six months ended March 31, 2019 compared to $3,796 for the six months ended March 31, 2018 primarily due to interest expense of $5,789 offset by miscellaneous non-operating income of $1,829 and interest income of $3,002 for the six months ended March 31, 2019 and interest expense of $6,943 offset by miscellaneous non-operating income of $2,475 and interest income of $672 for the six months ended March 31, 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 six months ended March 31, 2019 and March 31, 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 March 31, 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.

 

 

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.

 

		March 31, 2019				September 30, 2018
Cash & cash equivalents		$	627,782			$	674,045
Working capital		$	1,110,625			$	1,147,509
Current ratio			4.11 to 1				4.18 to 1
Long-term debt		$	192,625			$	219,071

 

Cash and cash equivalents decreased $46,263 to $627,782 at March 31, 2019 when compared to cash and cash equivalents of $674,045 at September 30, 2018. The decrease was a result of $40,587 in net cash provided by operating activities, $61,320 in net cash used for capital expenditures, $25,304 in net cash used for repayment of a note payable and $226 used to purchase treasury stock.

 

Net cash provided by (used in) operating activities can fluctuate between periods as a result of differences in net income, the timing of the collection of accounts receivable, purchase of inventory and payment of accounts payable.

 

The $61,320 in fixed asset purchases consisted of $54,900 to replace part of the roof, $4,575 to purchase computer software and $1,845 to purchase computer equipment.

 

On July 2, 2013, Microwave Filter Company, Inc. entered into a Ten Year Term Loan with KeyBank National Association in the amount of Five Hundred Thousand and No/100 Dollars ($500,000.00). The amount of all advances outstanding together with accrued interest thereon shall be due and payable on July 2, 2023 (“Maturity”). The Company shall pay interest on the outstanding principal balance of this Note at the rate per annum equal to 4.5%. The net proceeds from the Term Loan will be available to provide working capital as needed.

 

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

 

 

SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995

 

In an effort to provide investors a balanced view of the Company’s current condition and future growth opportunities, this Quarterly Report on Form 10-Q includes comments by the Company’s management about future performance. These statements which are not historical information are “forward-looking statements” pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These, and other forward-looking statements, are subject to business and economic risks and uncertainties that could cause actual results to differ materially from those discussed. These risks and uncertainties include, but are not limited to: risks associated with demand for and market acceptance of existing and newly developed products as to which the Company has made significant investments; general economic and industry conditions; slower than anticipated penetration into the satellite communications, mobile radio and commercial and defense electronics markets; competitive products and pricing pressures; increased pricing pressure from our customers; risks relating to governmental regulatory actions in broadcast, communications and defense programs; as well as other risks and uncertainties, including but not limited to those detailed from time to time in the Company’s Securities and Exchange Commission filings. These forward-looking statements are made only as of the date hereof, and the Company undertakes no obligation to update or revise the forward-looking statements, whether as a result of new information, future events or otherwise. You are encouraged to review Microwave Filter Company’s 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.

 

ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

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

 

ITEM 4.

CONTROLS AND PROCEDURES

 

EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES

 

Management’s responsibility includes establishing and maintaining adequate internal control over financial reporting. The Company’s management, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end of the period covered by this report. Based on such evaluation, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of such period, the Company’s disclosure controls and procedures were effective as of the end of the period covered by this report.

CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING

 

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

 

 

PART II - OTHER INFORMATION

 

Item 1. Legal Proceedings

 

None.

 

Item 1A. Risk Factors

 

Not applicable.

 

Item 2. Changes in Securities

 

The Company purchased 442 shares of common stock at an average price of $.51 per share into treasury during the three months ended March 31, 2019.

 

Item 3. Defaults Upon Senior Securities

 

The Company has no senior securities.

 

Item 4. Mine Safety Disclosures

 

Not applicable.

 

Item 5. Other Information

 

None.

 

Item 6. Exhibits

 

a. Exhibits

 

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

 

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

 

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

 

 

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

 

	MICROWAVE FILTER COMPANY, INC.
May 13, 2019	/s/ Paul W. Mears
(Date)	Paul W. Mears
	Chief Executive Officer
May 13, 2019	/s/ Richard L. Jones
(Date)	Richard L. Jones
	Chief Financial Officer

 

 

 

Exhibit 31.1

 

RULE 13a-14(a) CERTIFICATION

 

I, Paul W. Mears, certify that:

 

1. I have reviewed this report Quarterly Report on Form 10-Q of Microwave Filter Company, Inc.;

 

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f))for the registrant and we have:

 

a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 

c) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

d) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

 

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

 

a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

 

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 

Date: May 13, 2019	/s/ Paul W. Mears
	Paul W. Mears
	Chief Executive Officer

 

 

 

Exhibit 31.2

 

RULE 13a-14(a) CERTIFICATION

I, Richard L. Jones, certify that:

 

1. I have reviewed this Quarterly Report on Form 10-Q of Microwave Filter Company, Inc.;

 

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f))for the registrant and we have:

 

a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 

c) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

d) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

 

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

 

a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

 

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 

Date: May 13, 2019	/s/ Richard L. Jones
	Richard L. Jones
	Chief Financial Officer

 

 

 

 

Exhibit 32.1

 

CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

 

In connection with the Quarterly Report of Microwave Filter Company, Inc. (the “Company”) on Form 10-Q for the period ended March 31, 2019, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), Paul W. Mears, Chief Executive Officer, and Richard L. Jones, Chief Financial Officer, of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

 

(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

 

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

 

Dated: May 13, 2019	/s/ Paul W. Mears
	Paul W. Mears
	Chief Executive Officer
Dated: May 13, 2019	/s/ Richard L. Jones
	Richard L. Jones
	Chief Financial Officer