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, 2015

 

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 - 2,581,466 shares as of August 4, 2015.

 

 

 

MICROWAVE FILTER COMPANY, INC.

Form 10-Q

 

Index

 

Item		Page
Part I Financial Information
Item 1. Financial Statements		3
Condensed Consolidated Balance Sheets (unaudited)		3
Condensed Consolidated Statements of Operations (unaudited)		4
Condensed Consolidated Statements of Cash Flows (unaudited)		5
Notes to Condensed Consolidated Financial Statements (unaudited)		6-8
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		9-14
Item 3. Quantitative and Qualitative Disclosures About Market Risk		14
Item 4. Controls and Procedures		14
Part II Other Information		15
Signatures		16

 

 

PART I. FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS

 

Microwave Filter Company and Subsidiaries
Condensed Consolidated Balance Sheets (Unaudited)

 

		June 30, 2015				September 30, 2014
Assets
Current Assets:
Cash and cash equivalents		$	851,020			$	1,081,567
Accounts receivable-trade, net of allowance for doubtful accounts of $4,000 and $4,000			443,384				377,473
Inventories, net			511,158				473,839
Prepaid expenses and other current assets			56,096				89,721
Total current assets			1,861,658				2,022,600
Property, plant and equipment, net			440,156				474,694
Total assets		$	2,301,814			$	2,497,294
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable		$	113,433			$	73,293
Customer deposits			63,367				32,431
Accrued payroll and related expenses			54,793				50,234
Accrued compensated absences			158,604				148,903
Notes payable - short term			44,019				42,593
Other current liabilities			20,500				31,954
Total current liabilities			454,716				379,408
Notes payable - long term			376,951				410,178
Total other liabilities			376,951				410,178
Total liabilities			831,667				789,586
Stockholders’ Equity:
Common stock, $.10 par value Authorized 5,000,000 shares, Issued 4,324,140 shares in 2015 and 2014, Outstanding 2,581,466 shares in 2015 and 2,583,507 in 2014			432,414				432,414
Additional paid-in capital			3,248,706				3,248,706
Retained deficit			(517,258	)			(280,893	)
Common stock in treasury, at cost 1,742,674 shares in 2015 and 1,740,633 shares in 2014			(1,693,715	)			(1,692,519	)
Total stockholders’ equity			1,470,147				1,707,708
Total liabilities and stockholders’ equity		$	2,301,814			$	2,497,294

 

See Accompanying Notes to Condensed Consolidated Financial Statements

 

 

Microwave Filter Company and Subsidiaries

Condensed Consolidated Statements of Operations

(Unaudited)

 

		Three months ended								Nine months ended
		June 30,								June 30,
		2015				2014				2015				2014
Net sales		$	863,372			$	1,019,881			$	2,552,732			$	2,622,303
Cost of goods sold			570,913				560,850				1,639,672				1,585,619
Gross profit			292,459				459,031				913,060				1,036,684
Selling, general and administrative expenses			352,923				364,247				1,143,264				1,089,956
(Loss) income from operations			(60,464	)			94,784				(230,204	)			(53,272	)
Other income (expense), net			(2,959	)			(4,002	)			(8,229	)			(10,115	)
(Loss) income before income taxes			(63,423	)			90,782				(238,433	)			(63,387	)
(Benefit) provision for income taxes			(0	)			(3,597	)			(2,068	)			(3,597	)
Net (loss) income		$	(63,423	)		$	94,379			$	(236,365	)		$	(59,790	)
Per share data:
Basic and diluted earnings (loss) per common share		$	(0.02	)		$	0.04			$	(0.09	)		$	(0.02	)
Shares used in computing net earnings (loss) per common share:
Basic and diluted			2,581,466				2,584,450				2,581,998				2,584,744

 

See Accompanying Notes to Condensed Consolidated Financial Statements

 

 

Microwave Filter Company and Subsidiaries

Condensed Consolidated Statements of Cash Flows

(Unaudited)

 

		Nine months ended
		June 30,
		2015				2014
Cash flows from operating activities:
Net loss		$	(236,365	)		$	(59,790	)
Adjustments to reconcile net loss to net cash (used in) provided by operating activities:
Depreciation			81,313				98,660
Change in operating assets and liabilities:
Accounts receivable-trade			(65,911	)			(30,822	)
Federal and state income tax recoverable			0				37,085
Inventories			(37,319	)			32,779
Prepaid expenses and other assets			33,625				14,418
Accounts payable and customer deposits			71,076				26,556
Accrued payroll and related expenses and compensated absences			14,260				45,620
Other current liabilities			(11,454	)			(760	)
Net cash (used in) provided by operating activities			(150,775	)			163,746
Cash flows from investing activities:
Property, plant and equipment purchased			(46,775	)			(20,736	)
Net cash used in investing activities			(46,775	)			(20,736	)
Cash flows from financing activities:
Repayment of note payable			(31,801	)			(30,391	)
Purchase of treasury stock			(1,196	)			(413	)
Net cash used in financing activities			(32,997	)			(30,804	)
(Decrease) increase in cash and cash equivalents			(230,547	)			112,206
Cash and cash equivalents at beginning of period			1,081,567				939,959
Cash and cash equivalents at end of period		$	851,020			$	1,052,165
Supplemental Schedule of Cash Flow Information:
Interest paid		$	14,972			$	16,382

 

See Accompanying Notes to Condensed Consolidated Financial Statements

 

 

MICROWAVE FILTER COMPANY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2015 

 

Note 1. Summary of Significant Accounting Policies

 

The following condensed balance sheet as of September 30, 2014, which has been derived from audited financial statements, and the unaudited interim condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Regulation S-K. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (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, 2015 are not necessarily indicative of the results that may be expected for the year ended September 30, 2015. For further information, refer to the condensed consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10K for the year ended September 30, 2014.

 

Note 2. Industry Segment Data

 

The Company’s primary business segment involves the operations of Microwave Filter Company, Inc. (MFC) which designs, develops, manufactures and sells electronic filters, both for radio and microwave frequencies, to help process signal distribution and to prevent unwanted signals from disrupting transmit or receive operations. 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 market.

 

Inventories net of reserve for obsolescence consisted of the following:

 

		June 30, 2015				September 30, 2014
Raw materials and stock parts		$	409,281			$	334,891
Work-in-process			23,062				46,292
Finished goods			78,815				92,656
		$	511,158			$	473,839

 

The Company’s reserve for obsolescence equaled $413,447 at June 30, 2015 and September 30, 2014. 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 deferred tax assets.

 

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

 

Note 5. Legal Matters

 

None.

 

Note 6. Fair Value of Financial Instruments

 

The carrying values of the Company cash and cash equivalents, accounts receivable and accounts payable approximate fair value because of the short maturity of those instruments.

 

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

 

Note 7. Significant Customers

 

Sales to one customer represented approximately 34% of total sales for the nine months ended June 30, 2015 compared to approximately 26% of total sales for the nine months ended June 30, 2014. A loss of this customer or programs related to this customer could materially impact the Company.

 

 

Note 8. Notes Payable

 

On July 2, 2013, Microwave Filter Company, Inc. (the “Company”) entered into a Ten Year Term Loan with KeyBank National Association in the amount of Five Hundred Thousand and No/100 Dollars ($500,000.00). The amount of all advances outstanding together with accrued interest thereon shall be due and payable on July 2, 2023 (“Maturity”). The Company shall pay interest on the outstanding principal balance of this Note at the rate per annum equal to 4.5%. The net proceeds from the Term Loan will be available to provide working capital as needed. The total amount outstanding as of June 30, 2015 and September 30, 2014 was $420,970 and $452,771 respectively. Interest accrued as of June 30, 2015 and September 30, 2014 was $1,474 and $1,585, 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 June 30, 2015 and 2014. Income (loss) used in the EPS calculation is net income (loss) for each period. There were no dilutive potential shares outstanding for the periods ending June 30, 2015 and 2014.

 

Note 10. Recent Accounting Pronouncements

 

None applicable.

 

 

MICROWAVE FILTER COMPANY, INC.

 

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

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. (MFC) 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, and taxes. Note 1 to the consolidated financial statements in our Annual Report on Form 10-K for the fiscal year ended September 30, 2014 describes the significant accounting policies used in preparation of the condensed consolidated financial statements. The most significant areas involving management judgments and estimates are described below and are considered by management to be critical to understanding the financial condition and results of operations of the Company.

 

Revenues from product sales are recorded as the products are shipped and title and risk of loss have passed to the customer, provided that no significant vendor or post-contract support obligations remain and the collection of the related receivable is probable. Billings in advance of the Company’s performance of such work are reflected as customer deposits in the accompanying condensed consolidated balance sheet.

 

Allowances for doubtful accounts are based on estimates of losses related to customer receivable balances. The establishment of reserves requires the use of judgment and assumptions regarding the potential for losses on receivable balances.

 

The Company’s inventories are stated at the lower of cost determined on the first-in, first-out method or market. The Company uses certain estimates and judgments and considers several factors including product demand and changes in technology to provide for excess and obsolescence reserves to properly value inventory.

 

The Company established a warranty reserve which provides for the estimated cost of product returns based upon historical experience and any known conditions or circumstances. Our warranty obligation is affected by product that does not meet specifications and performance requirements and any related costs of addressing such matters.

 

The Company accounts for income taxes under FASB ASC 740-10. Deferred tax assets and liabilities are based on the difference between the financial statement and tax basis of assets and liabilities as measured by the enacted tax rates which are anticipated to be in effect when these differences reverse. The deferred tax provision is the result of the net change in the deferred tax assets and liabilities. A valuation allowance is established when it is necessary to reduce deferred tax assets to amounts expected to be realized. The Company has provided a full valuation allowance against its deferred tax assets.

 

 

RESULTS OF OPERATIONS

 

THREE MONTHS ENDED JUNE 30, 2015 vs. THREE MONTHS ENDED JUNE 30, 2014

 

The following table sets forth the Company’s net sales by major product group for the three months ended June 30, 2015 and 2014.

 

Product group		Fiscal 2015				Fiscal 2014
Microwave Filter (MFC):
RF/Microwave		$	471,762			$	595,928
Satellite			222,527				240,423
Cable TV			134,933				160,186
Broadcast TV			32,173				22,708
Niagara Scientific (NSI):			1,977				636
Total		$	863,372			$	1,019,881
Sales backlog at June 30		$	742,052			$	792,917

 

Net sales for the three months ended June 30, 2015 equaled $863,372, a decrease of $156,509 or 15.3%, when compared to net sales of $1,019,881 for the three months ended June 30, 2014. The decrease in sales can primarily be attributed to the decrease in sales of the Company’s RF/Microwave product sales.

 

MFC’s RF/Microwave product sales decreased $124,166 or 20.8% to $471,762 for the three months ended June 30, 2015 when compared to RF/Microwave product sales of $595,928 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. 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. Sales to one OEM customer equaled $330,815 or approximately 38% of total sales for the three months ended June 30, 2015 and $317,394 or approximately 31% of total sales for the three months ended June 30, 2014. Sales to the US Government and other OEM customers were down $137,587 for the three months ended June 30, 2015 when compared to the same period last year which management attributes to the decrease in defense spending. The Company is actively developing new products and continues to pursue opportunities with current and new companies.

 

MFC’s Satellite product sales decreased $17,896 or 7.4% to $222,527 for the three months ended June 30, 2015 when compared to Satellite product sales of $240,423 during the same period last year. The decrease can be attributed to a decrease in demand for the Company’s filters which suppress strong out-of-band interference caused by military and civilian radar systems and other sources. Management attributes a portion of this decrease to the strong dollar since a number of these products are shipped overseas. Export sales decreased $67,753 or 43.3% to $88,704 during the three months ended June 30, 2015 when compared to export sales of $156,457 during the three months ended June 30, 2014.

 

 

MFC’s Cable TV product sales decreased $25,253 or 15.8% to $134,933 for the three months ended June 30, 2015 when compared to Cable TV product sales of $160,186 during the same period last year. Management continues to project a decrease in demand for Cable TV products due to the shift from analog to digital television. Due to the inherent nature of digital modulation versus analog modulation, fewer filters will be required. The Company has developed filters for digital television and there will still be requirements for analog filters for limited applications in commercial and private cable systems.

 

MFC’s Broadcast TV/Wireless Cable product sales increased $9,465 to $32,173 for the three months ended June 30, 2015 when compared to sales of $22,708 during the same period last year. The increase can be attributed to an increase in demand for UHF Broadcast products which are primarily sold to system integrators for rural communities.

 

MFC’s sales order backlog equaled $742,052 at June 30, 2015 compared to sales order backlog of $792,917 at June 30, 2014. However, backlog is not necessarily indicative of future sales. Accordingly, the Company does not believe that its backlog as of any particular date is representative of actual sales for any succeeding period. Approximately 64% of the total sales order backlog at June 30, 2015 is scheduled to ship by September 30, 2015.

 

Gross profit for the three months ended June 30, 2015 equaled $292,459, a decrease of $166,572 or 36.3%, when compared to gross profit of $459,031 for the three months ended June 30, 2014. The decrease in gross profit can be attributed to the lower sales volume this year and higher direct material costs as a percentage of sales this year due to product sales mix. As a percentage of sales, gross profit equaled 33.9% for the three months ended June 30, 2015 compared to 45.0% for the three months ended June 30, 2014. The decrease in gross profit as a percentage of sales can be attributed to the higher direct material costs this year and the lower sales volume this year when compared to the same period last year providing a lower base to absorb expenses.

 

Selling, general and administrative (SGA) expenses for the three months ended June 30, 2015 equaled $352,923, a decrease of $11,324 or 3.1%, when compared to SGA expenses of $364,247 for the three months ended June 30, 2014. As a percentage of sales, SGA expenses increased to 40.9% for the three months ended June 30, 2015 when compared to 35.7% for the three months ended June 30, 2014 due to the lower sales volume this year providing a lower base to absorb expenses.

 

The Company recorded a loss from operations of $60,464 for the three months ended June 30, 2015 compared to income from operations of $94,784 for the three months ended June 30, 2014. The decrease in operating income can primarily be attributed to the lower gross profit this year when compared to the same period last year.

 

Other income (expense) was an expense of $2,959 for the three months ended June 30, 2015 compared to an expense of $4,002 for the three months ended June 30, 2014 primarily due to interest expense of $4,832 and $5,375 for the three months ended June 30, 2015 and 2014, respectively. Other income generally consists of sales of scrap material, stock transfer fees, the forfeiture of non-refundable deposits and other incidental items.

 

The (benefit) provision for income taxes equaled $0 for the three months ended June 30, 2015 and a benefit of $3,597 for the three months ended June 30, 2014. 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 (Prior Authoritative Literature: SFAS 109, Accounting for Income Taxes), the Company has evaluated the positive and negative evidence bearing upon the realization of its deferred tax assets. The Company has determined that, at this time, it is more likely than not that the Company will not realize all of the benefits of federal and state deferred tax assets, and, as a result, a valuation allowance was established.

 

 

NINE MONTHS ENDED JUNE 30, 2015 vs. NINE MONTHS ENDED JUNE 30, 2014

 

The following table sets forth the Company’s net sales by major product group for the nine months ended June 30, 2015 and 2014.

 

Product group		Fiscal 2015				Fiscal 2014
Microwave Filter (MFC):
RF/Microwave		$	1,339,009			$	1,343,680
Satellite			732,949				824,117
Cable TV			362,067				351,077
Broadcast TV			111,705				99,696
Niagara Scientific (NSI):			7,002				3,733
Total		$	2,552,732			$	2,622,303
Sales backlog at June 30		$	742,052			$	792,917

 

Net sales for the nine months ended June 30, 2015 equaled $2,552,732, a decrease of $69,571 or 2.7%, when compared to net sales of $2,622,303 for the nine months ended June 30, 2014. The decrease in sales can primarily be attributed to the decrease in the sales of the Company’s Satellite product sales.

 

MFC’s Satellite product sales decreased $91,168 or 11.1% to $732,949 for the nine months ended June 30, 2015 when compared to satellite product sales of $824,117 during the same period last year. The decrease can be attributed to a decrease in demand for the Company’s filters which suppress strong out-of-band interference caused by military and civilian radar systems and other sources. Management attributes a portion of this decrease to the strong dollar since a number of these products are shipped overseas. Export sales decreased $205,922 or 42.8% to $275,306 during the nine months ended June 30, 2015 when compared to export sales of $481,228 during the nine months ended June 30, 2014.

 

MFC’s RF/Microwave product sales decreased $4,671 or 0.3% to $1,339,009 for the nine months ended June 30, 2015 when compared to RF/Microwave product sales of $1,343,680 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. 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. Sales to one OEM customer equaled $858,752 or approximately 34% of total sales for the nine months ended June 30, 2015 compared to $673,749 or 26% of total sales for the nine months ended June 30, 2014. Sales to the US Government and other OEM customers were down $189,674 for the nine months ended June 30, 2015 when compared to the same period last year which management attributes to the decrease in defense spending. The Company is actively developing new products and continues to pursue opportunities with current and new companies.

 

MFC’s Cable TV product sales increased $10,990 or 3.1% to $362,067 for the nine months ended June 30, 2015 when compared to Cable TV product sales of $351,077 during the same period last year. Management continues to project a decrease in demand for Cable TV products due to the shift from analog to digital television. Due to the inherent nature of digital modulation versus analog modulation, fewer filters will be required. The Company has developed filters for digital television and there will still be requirements for analog filters for limited applications in commercial and private cable systems.

 

MFC’s Broadcast TV/Wireless Cable product sales increased $12,009 or 12.0% to $111,705 for the nine months ended June 30, 2015 when compared to sales of $99,696 during the same period last year. The increase can be attributed to an increase in demand for UHF Broadcast products which are primarily sold to system integrators for rural communities.

 

MFC’s sales order backlog equaled $742,052 at June 30, 2015 compared to sales order backlog of $792,917 at June 30, 2014. However, backlog is not necessarily indicative of future sales. Accordingly, the Company does not believe that its backlog as of any particular date is representative of actual sales for any succeeding period. Approximately 64% of the total sales order backlog at June 30, 2015 is scheduled to ship by September 30, 2015.

 

Gross profit for the nine months ended June 30, 2015 equaled $913,060, a decrease of $123,624 or 11.9%, when compared to gross profit of $1,036,684 for the nine months ended June 30, 2014. As a percentage of sales, gross profit equaled 35.8% for the nine months ended June 30, 2015 compared to 39.5% for the nine months ended June 30, 2014. The decreases in gross profit can primarily be attributed to the lower sales volume this year when compared to the same period last year providing a lower base to absorb expenses and higher direct material costs as a percentage of sales this year primarily due to product sales mix.

 

SG&A expenses for the nine months ended June 30, 2015 equaled $1,143,264, an increase of $53,308 or 4.9%, when compared to SG&A expenses of $1,089,956 for the nine months ended June 30, 2014. The increase can be attributed to higher payroll and payroll related expenses as a result of the reinstatement of vacation benefits which had been suspended during fiscal 2013. The Company has been participating in the New York State Shared Work program which allows employers to reduce the hours of all or a particular group of employees. The employees whose hours are reduced can receive partial unemployment insurance benefits or elect to use accrued vacation. As a percentage of sales, SGA expenses increased to 44.8% for the nine months ended June 30, 2015 compared to 41.6% for the nine months ended June 30, 2014 due to the higher expenses and the lower sales volume this year when compared to the same period last year.

 

The Company recorded a loss from operations of $230,204 for the nine months ended June 30, 2015 compared to a loss from operations of $53,272 for the nine months ended June 30, 2014. The decrease in operating income can be attributed to the lower gross profit and the higher SGA expenses this year when compared to the same period last year.

 

Other income (expense) was an expense of $8,229 for the nine months ended June 30, 2015 compared to an expense of $10,115 for the nine months ended June 30, 2014 primarily due to interest expense of $14,860 and $16,275 for the nine months ended June 30, 2015 and 2014, respectively. Other income generally consists of sales of scrap material, stock transfer fees, the forfeiture of non-refundable deposits and other incidental items.

 

The (benefit) provision for income taxes equaled a benefit of $2,068 for the nine months ended June 30, 2015 and a benefit of $3,597 for the nine months ended June 30, 2014. The tax benefits for both years represented Federal refunds from prior fiscal years. 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 (Prior Authoritative Literature: SFAS 109, Accounting for Income Taxes), the Company has evaluated the positive and negative evidence bearing upon the realization of its deferred tax assets. The Company has determined that, at this time, it is more likely than not that the Company will not realize all of the benefits of federal and state deferred tax assets, and, as a result, a valuation allowance was established.

 

 

Off-Balance Sheet Arrangements

 

At June 30, 2015 and 2014, the Company did not have any unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which might have been established for the purpose of facilitating off-balance sheet arrangements.

 

LIQUIDITY and CAPITAL RESOURCES

 

MFC defines liquidity as the ability to generate adequate funds to meet its operating and capital needs. The Company’s primary source of liquidity has been funds provided by operations.

 

		June 30, 2015				September 30, 2014
Cash & cash equivalents		$	851,020			$	1,081,567
Working capital		$	1,406,942			$	1,643,192
Current ratio			4.09 to 1				5.33 to 1
Long-term debt		$	376,951			$	410,178

 

Cash and cash equivalents decreased $230,547 to $851,020 at June 30, 2015 when compared to cash and cash equivalents of $1,081,567 at September 30, 2014. The decrease was a result of $150,775 in net cash used in operating activities, $46,775 in net cash used for capital expenditures, $31,801 in net cash used for repayment of a note payable and $1,196 in net cash used to purchase treasury stock.

 

The $150,775 in net cash used in operating activities can primarily be attributed to the net loss of $236,365 for the nine months ended June 30, 2015 net of depreciation expense of $81,313.

 

The increase in accounts receivable of $65,911 at June 30, 2015 when compared to September 30, 2014 can primarily be attributed to the higher shipments during the month ended June 30, 2015 when compared to the month ended September 30, 2014. Net sales for the month ended June 30, 2015 equaled $519,206 compared to net sales of $465,797 for the month ended September 30, 2014.

 

The increase in inventories of $37,319 at June 30, 2015 when compared to September 30, 2014 can be attributed to the timing of purchases and our customer’s scheduled delivery dates.

 

The increase in accounts payable of $40,140 at June 30, 2015 when compared to September 30, 2014 can be attributed to the increase in inventories and the timing of purchases and payments to vendors.

 

The increase in customer deposits of $30,936 at June 30, 2015 when compared to September 30, 2014 can be attributed to an increase in down payments on custom orders and an increase in the number of companies paying with credit cards at time of order.

 

Capital expenditures consisted primarily of building improvements and electronic test equipment. The Company does not have any material capital expenditures planned for the forseeable future.

 

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.

 

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 2014 Annual Report and Form 10-K for the fiscal year ended September 30, 2014 and other Securities and Exchange Commission filings. Forward looking statements may be made directly in this document or “incorporated by reference” from other documents. You can find many of these statements by looking for words like “believes,” “expects,” “anticipates,” “estimates,” or similar expressions.

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

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

 

ITEM 4. CONTROLS AND PROCEDURES

 

EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES

 

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

 

CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING

 

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

 

 

PART II - OTHER INFORMATION

 

Item 1. Legal Proceedings

 

None.

 

Item 1A. Risk Factors

 

Not applicable.

 

Item 2. Changes in Securities

 

None during the three months ended June 30, 2015.

 

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 Carl F. Fahrenkrug

 

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

 

32.1 Section 1350 Certification of Carl F. Fahrenkrug and Richard L. Jones

 

 

Signatures

 

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, 2015	/s/ Carl F. Fahrenkrug
(Date)	Carl F. Fahrenkrug
	Chief Executive Officer

 

August 13, 2015	/s/ Richard L. Jones
(Date)	Richard L. Jones
	Chief Financial Officer