DEWEY ELECTRONICS CORP - FORM 10-Q

Attached files

file	filename
EX-32 - CERTIFICATION - DEWEY ELECTRONICS CORP	dewy_ex321.htm
EX-32 - CERTIFICATION - DEWEY ELECTRONICS CORP	dewy_ex322.htm
EX-31.2 - CERTIFICATION - DEWEY ELECTRONICS CORP	dewy_ex312.htm
EX-31.1 - CERTIFICATION - DEWEY ELECTRONICS CORP	dewy_ex311.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10 - Q

(Mark One)

x QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2015

o TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from__________to____________

Commission File No. 0-2892

THE DEWEY ELECTRONICS CORPORATION

A New York Corporation		No. 13-1803974
		I.R.S. Employer Identification

27 Muller Road

Oakland, New Jersey 07436

(201) 337-4700

Indicate by check mark whether the registrant has (1) 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) been subject to such filing requirements for the past 90 days. YES x NO o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). YES x No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer o Accelerated filer o

Non-accelerated filer o Smaller reporting company x

(Do not check if a smaller reporting company)

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

APPLICABLE ONLY TO CORPORATE ISSUERS

State the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 1,362,031 at November 16, 2015.

THE DEWEY ELECTRONICS CORPORATION

INDEX

		Page No.

Part I Financial Information

Item 1. Condensed Financial Statements		3

Condensed Balance Sheets - September 30, 2015(unaudited) and June 30, 2015		3

Condensed Statements of Operations - Three-months Ended September 30, 2015 and 2014 (unaudited)		4

Condensed Statements of Comprehensive Loss - Three-months Ended September 30, 2015 and 2014 (unaudited)		4

Condensed Statements of Cash Flows - Three-months Ended September 30, 2015 and 2014 (unaudited)		5

Notes to Condensed Financial Statements (unaudited)		6

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations		12

Item 4. Controls and Procedures		20

Part II Other Information

Item 6. Exhibits		20

PART I: FINANCIAL INFORMATION

ITEM 1.CONDENSED FINANCIAL STATEMENTS

THE DEWEY ELECTRONICS CORPORATION

CONDENSED BALANCE SHEETS

	SEPTEMBER 30,			JUNE 30,
	2015			2015
ASSETS:	(unaudited)
CURRENT ASSETS:
Cash and cash equivalents	$	293,778		$	347,598
Accounts receivable		589,767			1,329,327
Inventories		2,426,770			2,031,232
Prepaid expenses and other current assets		67,833			73,204

TOTAL CURRENT ASSETS		3,378,148			3,781,361

PLANT, PROPERTY AND EQUIPMENT:
Land and improvements		651,015			651,015
Building and improvements		1,948,165			1,948,165
Machinery and equipment		3,341,910			3,332,356
Furniture and fixtures		268,699			268,700
		6,209,789			6,200,236
Less accumulated depreciation		5,357,705			5,348,560
		852,084			851,676

DEFERRED COSTS		65,095			65,095

TOTAL ASSETS	$	4,295,327		$	4,698,132

LIABILITIES AND STOCKHOLDERS’ EQUITY:
CURRENT LIABILITIES:
Note payable – current portion	$	500,000		$	500,000
Trade accounts payable		285,945			348,253
Accrued expenses and other liabilities		206,702			443,798
Accrued compensation and benefits payable		149,879			200,186
Accrued pension costs		201,014			203,757
TOTAL CURRENT LIABILITIES		1,343,540			1,695,994

LONG-TERM PENSION LIABILITY		1,017,439			1,051,005

TOTAL LIABILITIES		2,360,979			2,746,999

STOCKHOLDERS’ EQUITY:
Preferred stock, par value $1.00; authorized 250,000 shares, issued and outstanding-none		--			--
Common stock, par value $.01; authorized 3,000,000 shares; 1,693,397 shares issued and 1,362,031 shares outstanding at September 30, 2015 and June 30, 2015		16,934			16,934
Additional paid-in capital		2,882,842			2,882,842
Retained earnings		380,277			430,628
Accumulated other comprehensive loss		(858,677	)		(892,243	)
		2,421,376			2,438,161
Less: Treasury stock 331,366 shares at cost		(487,028	)		(487,028	)

TOTAL STOCKHOLDERS’ EQUITY		1,934,348			1,951,133
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	4,295,327		$	4,698,132

See accompanying notes to condensed financial statements

THE DEWEY ELECTRONICS CORPORATION

CONDENSED STATEMENTS OF OPERATIONS

(UNAUDITED)

	THREE-MONTHS ENDED SEPTEMBER 30,
	2015			2014

Revenues	$	1,205,032		$	1,298,834

Cost of revenues		802,549			945,345

Gross profit		402,483			353,489

Selling, general & administrative		448,363			385,765

Operating loss		(45,880	)		(32,276	)

Interest expense		(3,601	)		(3,660	)

Other expense – net		(870	)		(1,434	)

Loss before income taxes		(50,351	)		(37,370	)

Provision for income tax		--			--

NET LOSS	$	(50,351	)	$	(37,370	)


NET LOSS PER COMMON SHARE-BASIC	$	(0.04	)	$	(0.03	)
NET LOSS PER COMMON SHARE-DILUTED	$	(0.04	)	$	(0.03	)



Weighted average number of shares outstanding:
Basic		1,362,031			1,362,031
Diluted		1,362,031			1,362,031

CONDENSED STATEMENTS OF COMPREHENSIVE LOSS

(UNAUDITED)

	THREE MONTHS ENDED SEPTEMBER 30,
	2015			2014

Other comprehensive loss

Net loss	$	(50,351	)	$	(37,370	)
Amortization of actuarial gains and losses		33,566			31,208

Comprehensive loss	$	(16,785	)	$	(6,162	)

See accompanying notes to condensed financial statements

THE DEWEY ELECTRONICS CORPORATION

CONDENSED STATEMENTS OF CASH FLOWS

(UNAUDITED)	THREE-MONTHS ENDED
	SEPTEMBER 30,
	2015			2014

CASH FLOWS FROM OPERATING ACTIVITIES
Net loss	$	(50,351	)	$	(37,370	)
Adjustments to reconcile net loss to
Net cash provided by operating activities:
Depreciation		9,145			8,325
Provision for inventory reserve		6,577			15,001
Decrease in accounts receivable		739,560			1,014,692
Increase in inventories		( 402,115	)		(184,645	)
Decrease in prepaid expenses and
other current assets		5,371			18,033
Decrease in trade accounts payable		( 62,308	)		(223,124	)
(Decrease)/Increase in accrued expenses and other liabilities		(237,096	)		78,994
(Decrease)/Increase in accrued compensation and
benefits payable		(50,307	)		42,953
Decrease in accrued pension costs		( 2,743	)		(34,593	)
Total adjustments		6,084			735,636

NET CASH (USED IN)/ PROVIDED BY OPERATING ACTIVITIES		( 44,267	)		698,266

CASH FLOWS FROM INVESTING ACTIVITIES:
Expenditures for plant, property and equipment		(9,553	)		(1,224	)

NET CASH USED IN INVESTING ACTIVITIES		(9,553	)		(1,224	)

CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from/(repayment of) short term borrowings		--			500,000
Repayment of long term debt		--			--

NET CASH USED IN FINANCING ACTIVITIES		--			(500,000	)

NET (DECREASE) / INCREASE IN CASH AND CASH EQUIVALENTS		( 53,820	)		197,042

CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD		347,598			480,107

CASH AND CASH EQUIVALENTS AT END OF PERIOD	$	293,778		$	677,149

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION

Interest paid	$	3,601		$	5,431

See accompanying notes to condensed financial statements

THE DEWEY ELECTRONICS CORPORATION

NOTES TO CONDENSED FINANCIAL STATEMENTS

(UNAUDITED)

1. Significant Accounting Policies

Basis of Presentation

The accompanying unaudited condensed financial statements have been prepared by The Dewey Electronics Corporation (the “Company”) pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”) for interim reporting. Certain information and disclosures normally included in notes to financial statements have been condensed or omitted pursuant to such rules and regulations, but resultant disclosures are in accordance with accounting principles generally accepted in the United States of America as they apply to interim reporting. The condensed financial statements should be read in conjunction with the financial statements and the notes thereto in the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2015 (the “2015 Form 10-K”).

In the opinion of the Company’s management, the accompanying unaudited condensed financial statements contain all adjustments (consisting of normal recurring adjustments) necessary to present fairly, in all material respects, the Company’s financial position as of September 30, 2015, and the results of operations and cash flows for the three-months then ended. The results of operations and cash flows for the period ended September 30, 2015 are not necessarily indicative of the results of operations or cash flows to be expected for any subsequent quarter or the full fiscal year ending June 30, 2016.

As of September 30, 2015, there have been no material changes to any of the significant accounting policies described in our 2015 Form 10-K.

Liquidity

During the three months ended September 30, 2015, the Company had a net loss of approximately $50,000 and net cash outflows from operations of approximately $44,000. Net cash outflows were principally due to the net loss, increases in inventories, decreases in accrued expenses and other liabilities, accrued compensation and benefits payable, and were partly offset by a decrease in accounts receivable.

The Company believes that the Company’s current cash and its line of credit, which currently expires February 28, 2016, combined with billings at the time of delivery of products, will be sufficient to support short-term liquidity requirements, working capital needs and capital expenditures at their current or expected levels. However, if our performance expectations fall short (including our failure to generate expected levels of sales) or our expenses exceed expectations, or if the commitment under the line of credit becomes unavailable, we may need to secure additional financing and/or reduce our expenses to continue our operations. Our failure to do so would have a material adverse impact on our prospects and financial condition. There can be no assurance that any contemplated additional financing will be available on terms acceptable to us, if at all. If required, we believe we would be able to reduce our expenses to a sufficient level to continue to operate as a going concern.

As of the date of this Quarterly Report the Company is in discussions with the Bank, to renew the Line of Credit until November 30, 2016. In the interim, the Bank has extended the expiration date of the Line of Credit from November 30, 2015 to February 28, 2016 to allow adequate time to negotiate a new agreement. In the event the Line of Credit is not renewed on terms acceptable to the Company, the Company may have to take actions to address this situation, including but not limited to, seeking other financing sources (though no assurances can be given that such financing can be obtained or, if obtained, the timing thereof).

Revenue Recognition

Revenues and earnings for orders for replacement parts and other short term business, including generators not ordered under the 2kW contract described below, are recorded when deliveries of product are made and title and risk of loss have been transferred to the customer and collection is probable.

Revenues and estimated earnings under long-term defense contracts (including research and development contracts) are recorded using the percentage-of-completion method of accounting, measured as the percentage of costs incurred to estimated total costs of each contract. These calculations require management to estimate the cost to complete open orders. Changes between those estimates and the actual cost of completion of delivery orders impact the revenue recognition in each reporting period. Estimates are adjusted as necessary on a quarterly basis. For research and development contracts total costs incurred are compared to total expected costs for each contract. As of September 30, 2015 the Company had no uncompleted contracts on which revenue has been recognized on a percentage of completion basis.

For those contracts where revenue has been recognized using the percentage-of-completion method of accounting, provisions for estimated losses on uncompleted contracts are made in the period in which such losses are determined. Changes in job performance, job conditions, and estimated profitability may result in revisions to costs and income and are recognized in the period in which the revisions are determined.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and reported amounts of revenues and expenses during the reporting period. These estimates include, among others, lower of cost or market estimates for inventories, realization of deferred tax assets, revenue recognition and certain accrued expenses. Actual results could differ from those estimates.

Income Taxes

Under the asset and liability method of accounting for taxes under ASC Topic 740, “Income Taxes”, deferred tax assets and liabilities are recognized for future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. The effect on deferred tax assets and liabilities of a change in tax laws is recognized in the results of operations in the period the new laws are enacted. A valuation allowance is recorded to reduce the carrying amounts of deferred tax assets unless it is more likely than not, that such assets will be realized.

The Company accounts for uncertain tax positions in accordance with Generally Accepted Accounting Principles in the U.S. Income tax positions must meet a more-likely-than-not recognition in order to be recognized in the financial statements. The Company recognizes potential accrued interest and penalties related to unrecognized tax benefits within operations as income tax expense. As new information becomes available, the assessment of the recognition threshold and the measurement of the associated tax benefit of uncertain tax positions may result in financial statement recognition or derecognition.

2. Accounting Standards Updates Not Yet Effective

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (ASU) 2014-09 Revenue from Contracts with Customers, which outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. ASU 2014-09 requires an entity to recognize revenue depicting the transfer of 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. ASU 2014-09 will also result in enhanced revenue related disclosures. ASU 2014-09 originally provided that it would be effective for fiscal years, and interim reporting periods within those years, beginning after December 15, 2016.

In August 2015, the FASB issued Accounting Standards Update (ASU) 2015-14 Revenue from Contracts with Customers - Deferral of Effective Date, which deferred the effective adoption date of ASU 2014-09 to apply to fiscal years and interim reporting periods within those years beginning after December 15, 2017.

In August 2014, the FASB issued Accounting Standards Update (ASU) 2014-15 Presentation of Financial Statements – Going Concern, which provides guidance on determining when and how to disclose going-concern uncertainties in the financial statements. The new standard requires management to perform interim and annual assessments of an entity’s ability to continue as a going concern within one year of the date the financial statements are issued. An entity must provide certain disclosures if “conditions or events raise substantial doubt about the entity’s ability to continue as a going concern.” This ASU applies to all entities and is effective for annual periods ending after December 15, 2016, and interim periods thereafter, with early adoption permitted.

In July 2015, the FASB issued Accounting Standards Update (ASU) 2015-11, "Inventory (Topic 330): Simplifying the Measurement of Inventory", which requires an entity to measure in scope inventory at the lower of cost and net realizable value. Subsequent measurement is unchanged for inventory measured using LIFO or the retail inventory method. This ASU does not apply to inventory that is measured using last-in, first-out (LIFO) or the retail inventory method. This ASU applies to all other inventory, which includes inventory that is measured using first-in, first-out (FIFO) or average cost. It is effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years, and should be applied prospectively with earlier application permitted as of the beginning of an interim or annual reporting period. The Company expects to adopt this ASU when effective and is currently evaluating the effect of ASU 2015-11 on its consolidated financial statements.

Other Accounting Standards Updates not effective until after September 30, 2015 are not expected to have a material effect on the Company’s financial position or results of operations.

3. Inventories

Inventories consist of:

	September 30, 2015		June 30, 2015

Finished Goods	$	96,995	$	115,563
Work In Progress		1,193,109		752,711
Raw Materials		1,136,666		1,162,958
Total	$	2,426,770	$	2,031,232

The increase in inventory is primarily due to increased work in progress production orders needed to complete new generator sets to be shipped in subsequent months against existing customer delivery orders.

4. Taxes on Income

The Company has provided a valuation allowance against its net deferred tax assets as it believes that it is more likely than not that it will not realize these tax attributes. The Company has approximately $1,065,000 and $129,000 of federal and state net deferred tax assets respectively, primarily arising from net operating loss carryforwards, expiring beginning in 2017. In the three month period ended September 30, 2015 these federal and state net deferred tax assets increased by approximately $17,000 and $3,000, respectively, as a result of a net loss for the period.

5. Loss Per Share

Net loss per share has been presented pursuant to ASC Topic 260, “Earnings per Share”. Basic net loss per share is computed by dividing reported net loss available to common shareholders by weighted average shares outstanding for the period. Diluted net loss per share is computed by dividing reported net loss available to common shareholders by weighted average shares outstanding for the period, adjusted for the dilutive effect of common stock equivalents, which consist of stock options, using the treasury stock method.

The table below sets forth the reconciliation of the numerators and denominators of the basic and diluted net loss per common share computations. For the three months ended September 30, 2015 and September 30, 2014, respectively, all outstanding stock options (33,200 shares on September 30, 2015 and 37,200 shares on September 30, 2014) were excluded from the computation of earnings per share due to their anti-dilutive effect.

	Three-months Ended September 30,
	2015								2014
	Net Loss			Shares		Per Share Amount			Net Loss			Shares		Per Share Amount
Basic net loss
per common share	$	(50,351	)		1,362,031	$	(.04	)	$	(37,370	)		1,362,031	$	(.03	)

Effect of dilutive Securities		--			--		--			--			--		--
Diluted net loss per common share	$	(50,351	)		1,362,031	$	(.04	)	$	(37,370	)		1,362,031	$	(.03	)

6. Stock Option Plan

On September 22, 2011, the Board of Directors of the Company adopted the Company’s 2011 Stock Option Plan, which was approved by the shareholders of the Company on December 8, 2011. Under this plan options to purchase a maximum of 133,000 shares of common stock may be granted to any employee of the Company, including officers. Such options may be either incentive stock options or non-qualified options and must be granted with an exercise price no less than the fair market value of the stock on the date of the grant. No stock options have been granted under this plan.

On December 2, 1998, the Company adopted its Stock Option Plan of 1998 which was amended and restated effective December 5, 2001, pursuant to which options to purchase a maximum of 85,000 shares of common stock may be granted to executives and key employees. Incentive stock options have been granted under this plan with an exercise price no less than fair market value of the stock on the date of grant. Outstanding options generally are exercisable for ten years from the date of grant, except for three grants totaling 8,700 options which are exercisable for a 5-year term. Outstanding options have expiration dates ranging from December 12, 2015 to September 21, 2021. No additional options may be granted under this plan.

There were no stock options granted in the first quarter of fiscal 2016 (quarter ended September 30, 2015) or in the first quarter of fiscal 2015 (quarter ended September 30, 2014). The Company recorded no stock option compensation expense for either of the three month periods ended September 30, 2015 or September 30, 2014.

For the full fiscal year ending June 30, 2016, the Company does not expect any stock option compensation expense based on stock options already granted and assuming no further option grants during the remainder of the fiscal year. However, our assessment of the compensation expense will be affected by the number of stock options actually granted (if any) during the remainder of the year as well as the number of outstanding options that are forfeited.

Stock option transactions for the Company’s employee stock option plans for the quarter ended September 30, 2015 are as follows:

			Weighted
			Average
	Shares		Exercise Price
Beginning balance		33,200	$	1.96
Granted		--		--
Exercised		--		--
Cancelled or expired		--		--
Ending balance		33,200		1.96
Options exercisable at end of period		33,200		1.96

7. Notes Payable

On April 27, 2009, the Company entered into a $500,000 line of credit (the “Line of Credit”) with TD Bank, NA (the “Bank”). On November 2, 2011, the Company and the Bank entered into a modification of the Line of Credit, effective as of October 31, 2011, which reduced the maximum borrowing amount to $375,000, removed the minimum interest rate of 4.25% on outstanding borrowings and extended the Line of Credit to November 30, 2012. No other terms of the Company’s April 27, 2009 revolving term note to the Bank were changed. On November 16, 2012, the Company and the Bank entered into a further modification of the Line of Credit, effective as of November 30, 2012, which returned the maximum borrowing amount to $500,000 and extended the Line of Credit to November 30, 2013. No other terms of the Company’s revolving term note to the Bank (previously amended and restated as of October 31, 2011) were changed.

On November 8, 2013, the Company and the Bank entered into a modification of the Line of Credit, effective November 15, 2013, to temporarily increase the maximum borrowing amount under the Line of Credit from $500,000 to $1,000,000 for the six month period November 15, 2013 to May 15, 2014 (after which it returned to $500,000). At the same time the Company and the Bank entered into a further modification of the Line of Credit, effective as of November 30, 2013, to extend the Line of Credit to November 30, 2014. In each case, no other terms of the Company’s revolving term note to the Bank (previously amended and restated as of November 30, 2012) were changed.

On November 30, 2014, the Bank notified the Company that it had extended the term of the Line of Credit from November 30, 2014 to November 30, 2015. No other terms of the Company’s revolving term note to the Bank (previously amended and restated as of November 8, 2013) were changed.

The Line of Credit provides among other things for an annual interest rate on borrowings equal to the Bank’s prime rate plus one (1.00) percent and is subject to customary representations, covenants, and default provisions in favor of the Bank. Any loans drawn under the Line of Credit are secured by a first lien on all of the Company’s accounts receivable, machinery, equipment, other personal property and Commercial Mortgages on the Company’s real property. The rate applicable to the Line of Credit at September 30, 2015 was approximately 4.25%. The Company has previously utilized the Line of Credit during periods of increased production requirements and (subject to renewal of the Line of Credit as described below) anticipates that it will continue to utilize this credit facility during future periods of peak production activity.

During fiscal year 2015 the Company repaid $500,000 and subsequently borrowed $500,000 under the Line of Credit. As of June 30, 2015 and September 30, 2015 the Company had outstanding debt of $500,000 against the Line of Credit.

8. Pension Plan

The Company has a non-contributory defined benefit retirement plan covering substantially all its employees. The impact of the plan on operations is as follows:

	THREE-MONTHS ENDED
	SEPTEMBER 30,
	2015			2014
Service cost-benefits earned during the period	$	12,024		$	15,519
Interest cost on projected benefit obligation		32,297			29,411
Expected return on plan assets		(26,855	)		(24,319	)
Amortization of actuarial loss		33,566			31,208
Net periodic pension cost	$	51,032		$	51,819

THE DEWEY ELECTRONICS CORPORATION

ITEM 2.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion should be read in conjunction with the unaudited condensed financial statements, including the notes thereto, appearing elsewhere in this Form 10-Q, and with the audited financial statements, including the notes thereto, appearing in the Company’s 2015 Form 10-K. Certain statements in this report may be deemed “forward-looking statements” within the meaning of Section 21E of the Securities Exchange Act of 1934. All statements, other than statements of historical fact that address activities, events or developments that the Company or management intends, expects, projects, believes or anticipates will or may occur in the future are forward-looking statements. Such statements are based upon certain assumptions and assessments made by management of the Company in light of its experience and its perception of historical trends, current conditions, expected future developments and other factors it believes to be appropriate. The forward-looking statements included in this report are also subject to a number of material risks and uncertainties, including but not limited to economic, governmental, competitive and technological factors affecting the Company’s operations, markets, products, services and prices and, specifically, the factors discussed below under “Financing Activities”, and “Company Strategy – General” and “Long-Term Strategy”, and in Item 1 (Description of Business) of the Company’s 2015 Form 10-K under the subheading “Operational Risks”. Such forward-looking statements are not guarantees of future performance and actual results, developments and business decisions may differ from those envisaged by such forward-looking statements.

The Company’s operating cycle is long-term and includes various types of products and varying delivery schedules. Accordingly, results of a particular period or period-to-period comparisons of recorded revenues and earnings may not be indicative of future operating results. The following comparative analysis should be viewed in this context.

Critical Accounting Policies and Estimates

The Company’s financial statements and accompanying notes are prepared in accordance with accounting principles generally accepted in the United States of America. Preparing financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. These estimates and assumptions affect the application of our accounting policies. Actual results could differ from these estimates. Critical accounting policies are those that require application of management’s most difficult, subjective or complex judgments, often as a result of matters that are inherently uncertain and may change in subsequent periods. The Company’s critical accounting policies include revenue recognition on contracts and contract estimates, pensions, impairment of long-lived assets, inventory valuation, and valuation of deferred tax assets and liabilities. For additional discussion of the application of these and other accounting policies, see Management’s Discussion and Analysis of Financial Condition and Results of Operations – Critical Accounting Policies and Note 1 of the Notes to the Financial Statements included in the Company’s 2015 Form 10-K.

Business Environment

A significant reduction in Department of Defense spending at the federal level known as “sequestration” went into effect in March of 2013. Sequestration has resulted in a contraction of spending across the Department of Defense and has also created uncertainty in our customers about the continuation of funding and about initiating new programs. This uncertainty has led to a far larger reduction in actual spending than the legislated reduction, primarily due to delays in contract awards and the reduction or elimination of some programs. Since the Company derives virtually all its revenues from Government defense business, any delays in contract awards would significantly and adversely affect our future revenues and liquidity. These factors are contributing to a more difficult and more challenging business environment, and have already adversely affected revenues in the quarter reported in this Quarterly Report. This uncertainty as well as the reduction in overall Government spending may continue through this Government fiscal year, ending September 2016, and we can give no assurances that this uncertainty or reduction in spending would end after such fiscal year.

Results of Operations – Revenues

Revenues and earnings for orders for replacement parts and other short term business are recorded when deliveries of product are made and title and risk of loss have been transferred to the customer and collection is probable.

Revenues for the first quarter of fiscal year 2016 (the three month period ended September 30, 2015) were $93,802 lower when compared to the first quarter of fiscal year 2015 (the three month period ended September 30, 2014). The decrease in revenues was principally due to reduced shipments of the Company’s legacy 2kW generator sets. The Company also recorded increases in sales of replacement parts and significant levels of shipments of additional new products, consisting of pumps, bead breakers and other generator sets. For further discussion of management initiatives regarding revenues see “Company Strategy” below.

For the three months ended September 30, 2015 production efforts to provide the Armed Forces with diesel operated generator sets provided approximately -30% of revenues compared to approximately 67% for the first quarter of fiscal year 2015. Bead breakers provided approximately 12% of revenues for the first quarter of fiscal year 2016 and provided no revenues in the first quarter of fiscal year 2015. Replacement parts provided approximately 58% of revenues for the first quarter of fiscal year 2016 and approximately 32% of revenues for the same period in fiscal year 2015. Customer funded research and development provided no revenues in the first quarter of fiscal year 2016 compared to 2% of revenue from customer funded research and development in the same period in fiscal year 2015.

The aggregate value of the Company’s backlog of sales orders was $3.2 million on September 30, 2015. The Company’s backlog of sales orders was $4.0 million on September 30, 2014. It is estimated that a significant portion of the present backlog will be billed during the next 9 months and be recognized as fiscal year 2016 revenues with the balance being recognized in fiscal years 2017 through 2019.

Gross Profit

Gross profit is affected by a variety of factors including, among other items, sales volume, product mix, product pricing, and product costs.

The Company earned a gross profit of $402,483 or 33% of revenues for the three months ended September 30, 2015 compared to a gross profit of $353,489 or 27% of revenues for the same period in 2014. The higher gross profit for the first quarter of fiscal year 2016 was the result of the change in product mix including an increase in sales of higher margin Goodman Ball, Incorporated (“Goodman Ball”) products (see “Company Strategy” below) as well as an increase in sales of higher margin replacement parts and significant levels of shipments of additional new products noted above under “Revenues”.

Selling, General and Administrative Expenses

Selling, General and Administrative Expenses for the first three months of fiscal year 2016 were $448,363 or 37% of revenues compared to $385,765 or 30% of revenues in the first three months of fiscal year 2015. The most significant changes in expense and the approximate amounts of the changes were increases in consulting fees ($72,000), recruiting fees ($23,000) and legal and professional fees ($5,000), partly offset by a decrease in general corporate expense of ($43,000).

Interest Expense

The Company had interest expense of $3,601 and $3,660 in the three month periods ended September 30, 2015 and September 30, 2014 respectively.

Other Expense – Net

Amounts reported as other expense represent the net effect of interest income and miscellaneous items such as the sale of scrap, bank transaction fees and other like items.

Other expense of $870 for the three months ended September 30, 2015 was comprised primarily of franchise taxes and miscellaneous bank fees.

Other expense of $1,434 for the three months ended September 30, 2014 was comprised primarily of franchise taxes and miscellaneous bank fees.

Loss Before Income Taxes

Loss before income taxes was $50,351 for the three months ended September 30, 2015. Loss before income taxes was $37,370 for the three months ended September 30, 2014.

Income Taxes

Deferred tax assets and liabilities are recognized for the expected tax consequences of temporary differences between the tax bases of assets and liabilities and their financial statement reported amounts and for tax loss and credit carry-forwards.

A valuation allowance is provided against deferred tax assets when it is determined to be more likely than not that these amounts will not be realized.

Liquidity and Capital Resources

Historically, the Company’s capital expenditures, debt servicing requirements and working capital needs have been financed by cash flow from operations, progress payments on various Government contracts (based on cost incurred) and a line of credit, described under “Financing Activities” below. As of September 30, 2015, the Company had no material capital expenditure commitments. Management believes that the Company’s current cash and its line of credit, which (as described below) currently expires on February 28, 2016, combined with progress payments as well as billings at the time of delivery of products will be sufficient to support short-term liquidity requirements, working capital needs and capital expenditures at their current or expected levels. However, if our performance expectations fall short (including our failure to generate expected levels of sales) or our expenses exceed expectations, or if the commitment under the Line of Credit becomes unavailable, we may need to secure additional financing and/or reduce our expenses to continue our operations. Our failure to do so would have a material adverse impact on our prospects and financial condition. There can be no assurance that any contemplated additional financing will be available on terms acceptable to us, if at all. If required, we believe we would be able to reduce our expenses to a sufficient level to continue to operate as a going concern.

At September 30, 2015, the Company’s working capital was $2,034,608 compared to $2,085,367 at June 30, 2015.

The ratio of current assets to current liabilities was 2.51 to 1 at September 30, 2015 and 2.23 to 1 at June 30, 2015.

The following table is a summary of the Statements of Cash Flows in the Company’s Financial Statements:

	Three Months ended September 30,
	2015			2014
Net cash provided by(used in)
Operating activities	$	(44,267	)	$	698,266
Investing activities		(9,553	)		(1,224	)
Financing activities		--			(500,000	)

Operating Activities:

Adjustments to reconcile net income to net cash provided by operations are presented in the Condensed Statements of Cash Flows in the Company’s Financial Statements.

Net cash used in operating activities for the three month period ended September 30, 2015 was principally due to the net loss, increases in inventories, decreases in accrued expenses and other liabilities, accrued compensation and benefits payable, and was partly offset by a decrease in accounts receivable.

Net cash provided by operating activities in the three month period ended September 30, 2014 was comprised primarily of net loss before depreciation and amortization, decreases in accounts receivable and prepaid expenses, and an increase in accrued costs. These amounts were partly offset by an increase in inventories and decreases in accounts payable and accrued pension costs.

The Company expenses its research and development costs as incurred. These costs consist primarily of salaries and material costs. For the three month period ended September 30, 2015 the Company did not incur any research and development costs. For the three month period ended September 30, 2014, the Company expensed $3,071 of research and development costs. Research and development projects performed under contract for customers are billed to the customer and are recorded as contract costs as they are incurred.

Investing Activities:

During the first three months of fiscal 2016, net cash of $9,553 was used in investing activities. The entire amount was used for capital expenditures, principally for the acquisition of computers and tooling.

During the first three months of fiscal 2015, net cash of $1,224 was used in investing activities. The entire amount was used for capital expenditures, principally for the acquisition of additional production and test equipment.

Financing Activities:

As of the date of this Quarterly Report the Company is in discussions with the Bank to renew the Line of Credit from its current expiration date of February 28, 2016 until November 30, 2016. In the event the Line of Credit is not renewed on terms acceptable to the Company, the Company may have to take actions to address this situation, including but not limited to, seeking other financing sources (though no assurances can be given that such financing can be obtained or, if obtained, the timing thereof).

The Company did not use any cash in financing activities during the fiscal quarter ended September 30, 2015.

The Company owns approximately 90 acres of land and the building, which it occupies in Bergen County, New Jersey, adjacent to an interchange of Interstate Route 287. The Company is continuing to actively pursue possible methods of monetizing 68 undeveloped and unused acres of this property, by its sale and/or development. This endeavor has become more complex with the implications of New Jersey’s “Highlands Water Protection and Planning Act”.

The Act identifies approximately 400,000 acres of New Jersey as The Highlands Preservation Area. Pursuant to the statute, this area has the most onerous restrictions on future development. The Company’s property is in this area, and further development would not be permitted without a waiver or other relief from the State. The Company continues to believe that there are strong reasons why its property should not be subject to the severe restrictions of the preservation area, and is attempting to affect a solution.

Since the Act was passed in June of 2004, the State repeatedly delayed promulgation of final regulations and a master plan. Originally expected in 2005, final regulations and a master plan were approved by the Governor on September 5, 2008. At the same time the Governor issued executive order 114 further defining the framework by which the Highlands Council, other State agencies, and both county and municipal governments are to work together. The Company believes that a regulatory environment has developed within which monetization of the land may be possible. In light of these events, the Company is actively assessing its options. However, no assurances can be given that the Company’s efforts will be successful, that a satisfactory valuation will be achieved, or that resolution will be timely.

In May 2008, the Company entered into a contract to sell a small parcel of land, approximately 7 acres, for $205,000. The land is physically separated from the main parcel of the Company’s property by an interstate highway and is contained within the Highlands Preservation Area. Among other things, the sale of the land is subject to approval for development by the Highlands Commission and various state and local government agencies. Accordingly, the Company can make no assurance that the sale will be successfully consummated or, if consummated, the timing thereof.

In November 2011, the Company and the buyer extended the sales contract described above until December 31, 2012 to allow the buyer additional time to gain the required approvals for development. In recognition of the additional expense on the part of the buyer to obtain the required development approvals the Company agreed to lower the contract price of the parcel by $50,000 to $155,000. In January 2013, the Company and the buyer further extended the sales contract until December 31, 2013 to allow the buyer additional time as described above. During 2014 the buyer continued to expend its own resources on the application process and moving the project forward. In January 2015 the Company and the buyer further extended the sales contract until December 31, 2015. However, the Company can make no assurances that the required approvals will be granted, or if granted, the timing thereof.

Accounting Standards Updates Not Yet Effective

Refer to Note 2. Accounting Standards Updates Not Yet Effective in the Notes to the Condensed Financial Statements section of this Quarterly Report.

Company Strategy - General

Beginning in March of 2013 the environment for Department of Defense contracting business has changed significantly with greatly reduced spending and delays in awarding contracts. This reduced level of business opportunities directly with the U.S. Government, as well as with other Department of Defense contractors, has continued into the Government’s fiscal year ending September 30, 2016, and we can give no assurances that this uncertainty or reduction in spending will end after such fiscal year. Effects of this changed environment have resulted in a continued decrease in the Company’s revenues from sales of generator sets to the U.S. Government and other Government contractors. In this changing business environment the Company has been pursuing new opportunities through foreign military sales and an expansion of its product offerings, most notably with the acquisition of certain product lines from Goodman Ball as discussed below under “Long-Term Strategy”. The results of these efforts are reflected in the composition of the Company’s backlog at September 30, 2015.

The Company’s September 30, 2015 backlog of approximately $3.2 million dollars consisted of approximately $1.3 million of the Company’s traditional products and approximately $1.9 million for former Goodman Ball products, with deliveries scheduled between October 2015 and July 2018.

The Company also continues to work toward selling its 2kW generators through the General Services Administration’s GSA.gov website (as described below) as well as through other websites and sales channels. In order to support these efforts the Company has built some generators and sub-assemblies for inventory in order to have them available for immediate delivery.

Long-Term Strategy

The Company has many years of experience in contracting with the Department of Defense and has been successful in obtaining many contracts to provide a wide array of products and services. Management believes that this experience is a significant positive competitive factor. Management is continuing to explore other areas of business with the Department of Defense, which are capable of providing stability and growth.

The Company has been focused within the market for military compact diesel power generation and is expanding its capabilities to also include power management solutions aimed at delivering power systems with high fuel efficiency that are engineered for operation in austere environments or for unattended operation over extended periods. Although no assurances can be made that this new initiative will be successful, management believes it is a strong addition to the Company’s long-term strategy for growth and targeted diversification. This strategy has three parts: 1) growing the Company’s profitability in areas where the Company already has a strong presence, 2) focused diversification into related markets with existing products and capabilities, and 3) further taking advantage of the Company’s strengths by additional expansion into related product categories.

The Company faces competition in many areas and from companies of various sizes, capabilities and resources. Competitive factors include product quality, technology, product availability, price, and customer service. Management believes that the reputation of the Company in these areas provides a significant positive competitive factor. As part of its overall business strategy management is continuing to expand and reinforce customer awareness of the Company’s current and past performance as a Department of Defense supplier, its product quality and reliability, and its historically strong customer relationships.

The Company’s 10 year indefinite delivery, indefinite quantity contract with the U.S. Army to supply 2kW generator sets expired at the end of November 2013 and deliveries of orders received under this contract have been completed. The Company engaged in negotiations with the U.S. Army for a new three year, sole source, indefinite quantity/indefinite delivery contract to produce 2kW generators; however on May 1, 2014, the Company was notified that the U.S. Army no longer intended to award this contract. The Company anticipates that the Government will continue to require the Company’s 2kW generators, however we are unable to predict whether, when, or to what extent the Government will place orders for these generators. On May 6, 2014 the United States General Services Administration awarded the Company a five year contract to make the Company’s 2kW generator sets available for purchase for national defense purposes by the Department of Defense and other branches of the U.S. Government on the GSA.gov website or by individual “Purchase Orders”. The Company also continues to work to make these generators available through other websites and sales channels.

In approaching the second and third strategic objectives of targeted diversification, the Company is attempting to capitalize on its previous investments in technology to obtain business in related military power markets and to expand into related military product categories.

On February 20, 2013 the Company announced the purchase of certain assets, rights of manufacture and intellectual property from Goodman Ball, a maker of military equipment based in Menlo Park, California. As part of this transaction, among other things, the Company agreed to assume responsibility to maintain certain Goodman Ball contracts with the U.S. Department of Defense that pertain to the acquired product lines, and it took possession of some of Goodman Ball’s existing inventory for these product lines on a consignment basis and agreed to pay Goodman Ball as the inventory is sold to customers. The product lines acquired do not compete with existing product lines of the Company.

The Company believes that, by adding Goodman Ball products to the Company’s list of offerings, this transaction provides a number of opportunities relating to the first and second strategic objectives described above (growing profitability in areas where the Company already has a strong presence and expanding into related markets). At the time of the acquisition, Goodman Ball had no backlog of production orders for these products. The Company made sales for $772,000 of these products in the three month period ended September 30, 2015, and as of September 30, 2015 has orders for an additional $1.9 million of these products in backlog. It is estimated that a significant portion of this Goodman Ball products backlog will be billed during the next 9 months and be recognized as fiscal year 2016 revenues with the balance being recognized in fiscal years 2017 through 2019.

The Company continues to act on the second strategic objective, working to expand into related power markets. Using our expertise in Direct Current power generation we have expanded our capabilities to include entire power

systems integrating our traditional diesel power generation with renewable power sources, energy storage, power distribution and power management. The solutions remain man-portable or of similar scale, and management believes that our best opportunities involve isolated locations or unattended operation. For example we are providing power for another company’s trailer mounted military remote monitoring systems. This type of integration delivers fuel savings as compared to traditional diesel generators while also enabling the optional integration of opportunistic power sources such as solar and wind. These accomplishments build on the Company’s previous accomplishments with vehicle mounted auxiliary power units, while also working with a growing group of partner companies. Management believes these activities can lead to expanded business with new types of military power requirements while also increasing our technical capabilities.

ITEM 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

The Company carried out, under the supervision and with the participation of the Company’s management, including its Chief Executive Officer and Controller, an evaluation of the effectiveness of the design and operation 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 of the end of the fiscal quarter covered by this Form 10-Q. Based upon that evaluation, the Chief Executive Officer and Controller concluded that, as of September 30, 2015, the design and operation of the Company’s disclosure controls and procedures were effective.

Nonetheless, a control system, no matter how well designed and operated, cannot provide absolute assurance that the objectives of the control system are met, and no evaluation of controls can provide absolute assurance that all control issues have been detected.

Changes in Internal Control Over Financial Reporting

There were no changes in the Company’s internal control over financial reporting during the fiscal quarter ended September 30, 2015 that materially affected, or are reasonably likely to affect, the Company’s internal control over financial reporting.

PART II - OTHER INFORMATION

Item 6. Exhibits

See the accompanying Index to Exhibits to this Quarterly Report on Form 10-Q.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of l934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	THE DEWEY ELECTRONICS CORPORATION

Date: November 16, 2015	By:	/s/ John H.D. Dewey
		John H.D. Dewey
		President and Chief Executive Officer


Date: November 16, 2015	By:	/s/ Donna Medica
		Donna Medica
		Controller

THE DEWEY ELECTRONICS CORPORATION

INDEX TO EXHIBITS

The following exhibits are included with this report. For convenience of reference, exhibits are listed according to the numbers assigned in the Exhibit table to Regulation S-K.

Number

31.1	Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2	Certification of Controller Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32.1	Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

32.2	Certification of Controller pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

Attached files

Stock widget

Investing forum

DEWEY ELECTRONICS CORP Reports

Also read