UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

x

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended:  March 31, 2017

 

OR

 

¨

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from ________ to ________

 

Commission File No. 000-55382

 

MICROPHASE CORPORATION

(Exact name of registrant as specified in its charter)

 

Delaware		06-0710848
(State or other jurisdiction of incorporation)		(IRS Employer Identification No.)

 

100 Trap Falls Road Extension, Suite 400

Shelton, CT 06484

(Address of principal executive offices)

 

(203) 866-8000

(Registrant’s telephone number, including area code)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12 months, and (2) has been subject to such filing requirements for the past 90 days.  Yes  x   No  ¨

 

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

 

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

 

Large accelerated filer	¨	Accelerated filer	¨
Non-accelerated filer	¨ (Do not check if a smaller reporting company)	Smaller reporting company	x
		Emerging growth company	¨

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨

 

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

 

As of May 19, 2017, there were 2,436,485 shares outstanding of the registrant’s common stock.

 

 

MICROPHASE CORPORATION

 

INDEX

 

		PAGE
PART I	FINANCIAL INFORMATION
Item 1	Condensed Consolidated Balance Sheets March 31, 2017 (Unaudited) and June 30, 2016	F-1
	Unaudited Condensed Consolidated Statements of Operations — Three Months Ended March 31, 2017 and 2016	F-2
	Unaudited Condensed Consolidated Statements of Operations — Nine Months Ended March 31, 2017 and 2016	F-3
	Unaudited Condensed Consolidated Statements of Comprehensive Income (Loss) — Three Months Ended March 31, 2017 and 2016	F-4
	Unaudited Condensed Consolidated Statements of Comprehensive Income (Loss) — Nine Months Ended March 31, 2017 and 2016	F-5
	Unaudited Condensed Consolidated Statement of Changes in Stockholders’ Deficit — Nine Months Ended March 31, 2017	F-6
	Unaudited Condensed Consolidated Statements of Cash Flow — Nine Months Ended March 31, 2017 and 2016	F-7
	Notes to Condensed Consolidated Financial Statements (Unaudited)	F-8
Item 2	Management’s Discussion and Analysis of Financial Condition and Results of Operations	2
Item 3	Quantitative and Qualitative Disclosures about Market Risk	11
Item 4	Controls and Procedures	11
PART II	OTHER INFORMATION	12
Item 1.	Legal Proceedings	12
Item 1A.	Risk Factors	12
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	12
Item 3.	Defaults Upon Senior Securities	13
Item 4.	Mine Safety Disclosures	13
Item 5.	Other Information	13
Item 6	Exhibits and Reports on Form 8-K	13
	Signature Page	14

 

 

MICROPHASE CORPORATION

 

Condensed Consolidated Balance Sheets

 

		March 31,				June 30,
		2017				2016
		(unaudited)
ASSETS
CURRENT ASSETS
Cash		$	17,723			$	81,224
Accounts receivable, net of allowance of $5,000 March 31, 2017 and June 30, 2016			339,705				1,092,482
Inventory			702,724				872,014
Due from related parties			33,295				33,295
Prepaid and other current assets			160,690				63,742
TOTAL CURRENT ASSETS			1,254,137				2,142,757
Property and equipment, net			104,996				158,979
OTHER ASSETS
Cash – restricted			100,000				100,000
Intangible assets			97,111				2,629,170
Marketable securities			676,000				200,000
Deposits on Purchase			1,000,000				-
Deferred offering costs			-				260,000
Other assets-lease deposit			43,479				43,479
TOTAL OTHER ASSETS			1,916,590				3,232,649
TOTAL ASSETS		$	3,275,723			$	5,534,385
LIABILITIES AND STOCKHOLDERS’ DEFICIT
CURRENT LIABILITIES
Credit Facility – Revolving Loan		$	902,505			$	1,474,129
Accounts payable			792,183				553,331
Accrued expenses			1,253,650				1,134,729
Deferred Revenue & Customer Deposits			73,200				117,800
Notes Payable – Related Parties, current portion			393,282				137,150
Other current obligations			725,856				-
Asset Acquisition Note Payable-current portion			-				975,345
Equity Lines of Credit-current portion			38,376				38,132
Other termed debts – current portion			13,714				13,714
TOTAL CURRENT LIABILITIES			4,192,766				4,444,330
Other termed debts, net of current portion			317,946				26,975
Notes Payable – Related Parties, net of current portion			180,394				257,857
Asset Acquisition Note Payable			-				1,045,080
Equity Lines of Credit, net of current portion			273,387				281,161
Deferred Lease Obligation			104,644				81,189
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS’ DEFICIT
6% cumulative preferred stock, $100 par value, 200,000 shares authorized, designated as series A Convertible Preferred, 15,382 shares issued and outstanding on March 31, 2017 (unaudited) and June 30, 2016, respectively			1,538,200				1,538,200
Common stock, $0.0001 par value, 20,000,000 shares authorized and, 2,436,485 and 2,067,040 shares issued and outstanding at March 31, 2017 (unaudited) and June 30, 2016, respectively			244				207
Additional Paid In Capital			13,449,602				11,799,037
Accumulated Other Comprehensive Income			476,000				–
Accumulated Deficit			(17,257,460	)			(13,939,651	)
TOTAL STOCKHOLDERS’ DEFICIT			(1,793,414	)			(602,207	)
TOTAL LIABILITIES AND STOCKHOLDERS’ DEFICIT		$	3,275,723			$	5,534,385

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

   

MICROPHASE CORPORATION

 

Condensed Consolidated Statements of Operations

 

		For the Three Months Ended
		March 31,
		2017				2016
		(unaudited)				(unaudited)
Revenues		$	1,065,661			$	1,952,817
Cost of Sales			800,989				1,374,194
Gross Profit			264,672				578,623
Selling, General and Administrative Expenses (including non-cash stock related charges of $83,852 and $140,000 for the three months ended March 31, 2017 and 2016. For the 3 months ended March 31, 2017, SG&A included a one-time expense of $430,000 of previously Deferred Offering Costs.)			1,129,174				825,650
Engineering and Research expenses			173,399				258,410
Other Income (Expense)			2,687				(106,857	)
Interest (Expense and Credit costs) net			(122,654	)			(98,832	)
Net Income (Loss) before Income Taxes			(1,157,868	)			(711,126	)
Income Taxes			-				(5,750	)
Net Income (Loss)		$	(1,157,868	)		$	(716,876	)
Basic Net income (loss) per share:		$	(0.48	)		$	(0.13	)
Diluted Net income (loss) per share:		$	(0.48	)		$	(0.13	)
Weighted Average Number of Shares Outstanding:
Basic			2,428,152				1,898,680
Diluted			2,428,152				1,898,680

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

  

MICROPHASE CORPORATION

 

Condensed Consolidated Statements of Operations

 

		For the Nine Months Ended
		March 31,
		2017				2016
		(unaudited)				(unaudited)
Revenues		$	3,582,458			$	7,002,891
Cost of Sales			2,629,156				4,136,725
Gross Profit			953,302				2,866,166
Selling, General and Administrative Expenses (including non-cash stock related charges of $615,602 and $475,400 for the nine months ended March 31, 2017 and 2016. For the 9 months ended March 31, 2017, SG&A included a one-time expense of $430,000 of previously Deferred Offering Costs.)			2,925,143				2,596,430
Engineering and Research expenses			572,380				725,874
Other Income (Expense)			(420,513	)			(110,625	)
Interest (Expense and Credit costs) net			(352,025	)			(216,290	)
Net Income (Loss) before Income Taxes			(3,316,759	)			(783,053	)
Income Taxes			(1,050	)			(46,117	)
Net Income (Loss)		$	(3,317,809	)		$	(829,170	)
Basic Net income (loss) per share:		$	(1.48	)		$	(0.16	)
Diluted Net income (loss) per share:		$	(1.48	)		$	(0.16	)
Weighted Average Number of Shares Outstanding:
Basic			2,242,459				1,710,981
Diluted			2,242,459				1,710,981

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

    

MICROPHASE CORPORATION

 

Condensed Consolidated Statements of Comprehensive Income (Loss)

 

		For The Three Months Ended
		March 31,
		2017				2016
		(unaudited)				(unaudited)
Net income (loss)		$	(1,157,868	)		$	(716,876	)
Other comprehensive income (loss):
Net unrealized gain (loss) on securities available-for-sale, net of income taxes			130,000				18,000
Total comprehensive income (loss)		$	(1,027,868	)		$	(698,876	)

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

   

MICROPHASE CORPORATION

 

Condensed Consolidated Statements of Comprehensive Income (Loss)

 

		For The Nine Months Ended
		March 31,
		2017				2016
		(unaudited)				(unaudited)
Net income (loss)		$	(3,317,809	)		$	(829,170	)
Other comprehensive income (loss):
Net unrealized gain (loss) on securities available-for-sale, net of income taxes			476,000				-
Total comprehensive income (loss)		$	(2,841,809	)		$	(829,170	)

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

   

MICROPHASE CORPORATION

 

Condensed Consolidated Statement of Changes in Stockholders’ Deficit

For the Nine Months Ended March 31, 2017

(Unaudited)

 

																						Accumulated
																		Additional				Other
		Preferred Stock								Common Stock (par value $.0001)								Paid In				Comprehensive				Accumulated
		Shares				Amount				Shares				Amount				Capital				Income				Deficit				Amount
Balance, June 30, 2016			15,382			$	1,538,200				2,067,040			$	207			$	11,799,037				-			$	(13,939,651	)		$	(602,207	)
Issuance of common stock and options for services											125,000				13				615,589												615,602
Issuance of Common Stock and warrants in Private Placements, net of $65,000 costs											144,445				14				584,986												585,000
Unrealized gain on marketable securities																							476,000								476,000
Issuance of common stock to Dynamac in connection with the Second Amendment to Purchase Agreement dated November 22, 2016											100,000				10				449,990												450,000
Net Loss For the Nine Months Ended March 31, 2017																											(3,317,809	)			(3,317,809	)
Balance, March 31, 2017			15,382			$	1,538,200				2,436,485			$	244			$	13,449,602			$	476,000			$	(17,257,460	)		$	(1,793,414	)

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

   

MICROPHASE CORPORATION

 

Condensed Consolidated Statements of Cash Flows

 

		For the Nine Months Ended
		March 31,
		2017				2016
		(unaudited)				(unaudited)
Cash Flow Provided by (Used In) Operating Activities:
Net Loss		$	(3,317,809	)		$	(829,170	)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Dynamac Contract Revision Fee			450,000				-
Depreciation and amortization			65,617				70,154
Non-cash charges relating to issuance of common stock for services			615,602				475,400
Amortization of debt discount			11,750				-
Loss on Settlement of Liabilities			-				107,375
Gain on sale of asset			(5,000	)			-
Deferred Offering Cost charges			430,000
Changes in assets and liabilities:
Accounts receivable			752,777				210,711
Inventories			169,290				78,571
Other assets			424,802				(17,047	)
Deferred Rent			23,455				-
Accounts payable			238,850				141,270
Accrued Expenses			(23,452	)			96,788
Customer deposits & deferred revenue			(44,600	)			18,300
Due to/from related parties			-				(5,250	)
Net cash provided by (Used in) operating activities		$	(208,718	)		$	347,102
Cash Flow Used in Investing Activities:
Purchase of intangible assets		$	-			$	(459,027	)
Deposits on Purchase			(1,000,000	)			-
Sale of fixed asset			5,000				-
Purchase of fixed assets			-				(47,202	)
Net Cash used in investing activities		$	(995,000	)		$	(506,229	)
Cash Flow Provided by (Used in) Financing Activities:
Proceeds from issuance of common stock		$	585,000			$	-
(Payments) Proceeds from revolving credit facility (net)			(571,624	)			163,604
Proceeds from short term notes, net of placement fees of $70,500			634,500				-
Proceeds from Overdraft Facility & Other Notes			53,900				-
Payments of equity lines of credit			(7,530	)			(27,579	)
Payments of long-term debt			(13,528	)			(11,329	)
Proceeds from DECD loan			300,000				-
Payments of capital lease obligations			-				(10,695	)
Advances from related parties			165,000				25,000
Payments to Related Parties			-				(27,320	)
Payments of extended term arrangement			(5,501	)			(5,978	)
Net cash provided by financing activities		$	1,140,217			$	105,703
Net decrease in cash		$	(63,501	)		$	(53,424	)
CASH, beginning of period		$	81,224			$	127,093
CASH, end of period		$	17,723			$	73,669

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

   

MICROPHASE CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

NOTE 1 — BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

NATURE OF OPERATIONS

 

Microphase Corporation (the “Company”) is a design-to-manufacture original equipment manufacturer (OEM) industry leader delivering world-class radio frequency (RF) and microwave filters, diplexers, multiplexers, detectors, switch filters, integrated assemblies and detector logarithmic video amplifiers (DLVA) to the military, aerospace and telecommunications industries. Sales to military markets represent 100% of sales. The Company is headquartered in Shelton, Connecticut.

 

BASIS OF PRESENTATION

 

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and pursuant to the regulations of the Securities Exchange Commission (the “SEC”). Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements and should be read in conjunction with the consolidated financial statements and related disclosures for the year ended June 30, 2016 which was filed with the Securities & Exchange Commission on form 10K on October 3, 2016. In the opinion of management, all adjustments considered necessary for a fair presentation have been included. Operating results for the three and nine months ending March 31, 2017 are not necessarily indicative of the results that may be expected for a full fiscal year. The accompanying unaudited condensed consolidated financial statements include the accounts of the Company and its subsidiaries which include (1) Microphase West LLC, for all periods presented herein (albeit the operations of this subsidiary were moved into our Shelton, Connecticut facility), and (2) Microphase Instruments LLC, since October 23, 2015. All intercompany accounts and transactions have been eliminated.

 

For further information, refer to the consolidated financial statements and footnotes thereto included in the Company’s Annual Report on Form 10-K for the year ended June 30, 2016. As of June 30, 2016, we had an accumulated deficit of $13,939,651 and a total stockholders’ deficit of $602,207. As of March 31, 2017, we had an accumulated deficit of $17,257,460 and a total stockholders’ deficit of $1,793,414. A significant amount of capital will be necessary to sustain, grow and advance our business and these conditions raise substantial doubt about our ability to continue as a going concern, as expressed in the report of our Independent Registered Public Accounting Firm for the year ended June 30, 2016.

 

The Company’s ability to continue as a going concern and its future success is dependent upon its ability to raise capital in the near term to: (1) satisfy its current obligations, (2) continue its research and development efforts, and (3) allow the successful wide scale development, deployment and marketing of its products.

 

PROPERTY AND EQUIPMENT — Are stated at cost. Provision for depreciation and amortization for financial reporting and income tax purposes is made by annual charges to operations principally under the following methods and estimated useful lives:

 

		Method		Years
Leasehold Improvements		Straight Line		7
Property held under capital leases		Straight Line		5
Furniture and fixtures		Straight Line		7
Machinery and equipment		Straight Line		5
Computer equipment		Straight Line		3
Transportation equipment		Straight Line		5

 

MAINTENANCE AND REPAIRS — Charged to expenses as incurred. Cost of major replacements and renewals are capitalized. Upon retirement or other disposition of equipment and improvements, the cost and related depreciation is removed from the accounts, and any gain or loss is recognized in income.

 

INVENTORIES — Are stated at the lower of average cost or market under the first-in, first-out method. The Company regularly reviews inventory quantities on hand and records a provision for excess and obsolete inventory primarily based on our estimated forecast of product demand, anticipated end of product life and production requirements.

 

 

  

NOTE 1 — BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - ( continued )

 

OTHER LONG LIVED ASSETS — The Company reviews long-term assets for impairment whenever events or circumstances indicate that the carrying amount of those assets may not be recoverable. The Company assesses these assets for impairment based on their future cash flows. Management has determined that there was no impairment charge to be recorded for the nine months ended March 31, 2017.

 

ACCOUNTS RECEIVABLE — Management records receivables at net realizable value and they generally do not bear interest. This value includes an allowance for estimated uncollectible accounts to reflect any loss anticipated on the accounts receivable balances which is charged to the provision for doubtful accounts. We calculate this allowance based on our history of write-offs, level of past due accounts and economic status of the customers. We consider a receivable delinquent if it is unpaid after 180 days after it is due.

 

ACCOUNTING ESTIMATES — Management uses estimates and assumptions in preparing financial statements in accordance with generally accepted accounting principles. Those estimates and assumptions affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities, and the reported revenues and expenses. Actual results could vary from the estimates that were assumed in preparing the financial statements.

 

COMPENSATED ABSENCES — Employees of the Company are entitled to vacation pay depending on length of service and current salary. Vacation days accrued in a given year are available in the following year. A limit of 5 days of unused vacation may be carried over to a subsequent year. The Company has provided for vacation liabilities in the accompanying financial statements.

 

RESEARCH AND DEVELOPMENT EXPENSES — The Company charges the cost of research and development to operations when incurred.

 

REVENUE RECOGNITION — The Company recognizes revenues when persuasive evidence of an arrangement exists, the product has been shipped, the price is fixed and collectability is reasonably assured.  Revenue is recognized net of estimated sales returns and allowances.

 

GRANT INCOME — During the nine months ended March 31, 2017 the Company was awarded and received the proceeds of a Small Business Express Matching Grant in an amount of $100,000 from the state of Connecticut in connection with the move of our California operation to Connecticut and with the development of the T & M products to be acquired. State grant funding requires a dollar for dollar match on behalf of the Company, which the Company’s obligation was considered funded in full prior to the Grant award. During the nine months ended March 31, 2017 the Company recorded $26,800 as a reduction in Selling, General & Administrative expenses for qualified expenditures incurred in the period and at March 31, 2017 has included $73,200 in deferred revenue. Qualified expenditures for capital assets will be recognized as income over the life of the assets based upon the amortization or depreciation of any capitalized assets acquired with grant funds.

 

DEFERRED OFFERING COSTS — At March 31, 2017, the Company has $0 in deferred offering costs directly associated with its impending initial public offering. Due to a delayed IPO process beyond 90 days, the Company expensed the previously deferred offering costs of $430,000, as of March 31, 2017. At June 30, 2016, the Company had $260,000 in deferred costs.

 

RECLASSIFICATIONS — Certain prior year amounts have been reclassified in our Condensed Consolidated Financial Statements to conform to current year classifications

 

   

NOTE 1 — BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - ( continued )

 

EARNINGS (LOSS) PER SHARE — Basic earnings (loss) per share (“EPS”) is determined by dividing the net earnings (loss) by the weighted-average number of shares of common shares outstanding during the period. Diluted EPS is determined by dividing net earnings (loss) by the weighted average number of common shares used in the basic EPS calculation plus the number of common shares that would be issued assuming conversion of all potentially dilutive securities (such as stock options, preferred stock and convertible securities) outstanding under the treasury stock method. As of March 31, 2017 we have outstanding (i) options to purchase 75,000 shares, (ii) 15,382 shares of preferred stock convertible into 341,823 shares, and (iii) $637,027 of debts (related party loans and accrued wages) to related parties convertible into 141,562 shares of our Common stock. In periods reporting a loss the inclusion of warrants and potential common shares to be issued in connection with convertible debt have an anti-dilutive effect on diluted loss per share and have been omitted in such computation.

 

RECENT ACCOUNTING PRONOUNCEMENTS — The Company is evaluating several pronouncements issued by the FASB which may result in the adoption by the Company of these standards in upcoming accounting periods as follows:

 

ACCOUNTING STANDARDS ISSUED BUT NOT YET EFFECTIVE —

 

The Company is evaluating several pronouncements issued by the FASB which may result in the adoption by the Company of these standards in upcoming accounting periods as follows:

 

ASU 2014-09 — In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers” (“ASU 2014-09”), which requires entities to recognize revenue in a way that depicts the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled to in exchange for those goods or services. The new guidance also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. Adoption can occur using one of two prescribed transition methods. In 2016, the FASB issued four amendments to ASU 2014-09. We have begun a limited evaluation of the provisions of ASU 2014-09 and the impact, if any, it may have on our financial position and results of operations. Our evaluation work to date includes the training of ASU 2014-09, contract review and an assessment of the distribution model for which we recognize revenue for our products when shipped. We have approximately 10 customer contracts which require an assessment and believe we have sufficient time for the implementation of ASU 2014-09.

 

ASU 2015-11 — Inventory (Topic 330): Simplifying the Measurement of Inventory. For public business entities, the content that links to this paragraph shall be effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years, which for us is our first quarter of fiscal 2018. We are currently evaluating the impact this standard will have on our financial position, results of operations and cash flows.

 

ASU 2016-02 — In February 2016, the FASB issued a new lease standard that supersedes existing lease guidance under GAAP. This standard requires lessees to record most leases on their balance sheets but recognize expenses on their income statements in a manner similar to existing lease guidance under GAAP. Entities are required to use a modified retrospective approach for leases that exist or are entered into after the beginning of the earliest comparative period in the financial statements, with the option to use certain relief. Full retrospective application is prohibited. This standard is effective for fiscal years, and interim reporting periods within those years, beginning after December 15, 2018, which for us is our fiscal 2020. We are currently evaluating the impact this standard will have on our financial position, results of operations and cash flows.

 

 

NOTE 1 — BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - ( continued )

 

ASU 2014-15 — Presentation of Financial Statements Going Concern (Subtopic 20540): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern to be effective for Annual periods ending after December 15, 2016, and interim periods within annual periods beginning after December 15, 2016; which for us would be the third and fourth quarters of our fiscal 2018 and although early adoption is permitted for this standard, the Company has yet to adopt this standard.

 

ASU 2016-09 — In March 2016, the FASB issued an accounting standards update making final targeted amendments to the accounting for employee share-based payments. These amendments will require entities to recognize the income tax effects of awards when the awards vest or are settled, will change an employer’s accounting for an employee’s use of shares to satisfy the employer’s statutory income tax withholding obligation and will require entities to elect whether to account for forfeitures of share-based payments by either recognizing forfeitures of awards as they occur or estimating the number of awards expected to be forfeited as is currently required. The required method of adoption varies by amendment. This accounting standards update is effective for fiscal years, and interim reporting periods within those years, beginning after December 15, 2017, which for us is our first quarter of fiscal 2019. Early adoption is permitted in any annual or interim period, but all of the guidance is required to be adopted in the same period and any adjustments must be reflected as of the beginning of the fiscal year. We are currently evaluating the impact this accounting standards update will have on our financial position, results of operations and cash flows.

 

ASU 2015-17 — Deferred Taxes (topic 740): For a particular tax-paying component of an entity and within a particular tax jurisdiction, all current deferred tax liabilities and assets shall be offset and presented as a single amount and all noncurrent deferred tax liabilities and assets, as well as any related valuation allowance, shall be offset and presented as a single noncurrent amount. However, an entity shall not offset deferred tax liabilities and assets attributable to different tax-paying components of the entity or to different tax jurisdictions. For public business entities, the amendments in this Update are effective for financial statements issued for annual periods beginning after December 15, 2016, and interim periods within those annual periods, which for us is our first quarter of fiscal 2018. Early adoption is permitted in any annual or interim period, but all of the guidance is required to be adopted in the same period and any adjustments must be reflected as of the beginning of the fiscal year. We are currently evaluating the impact this accounting standards update will have on our financial position, results of operations and cash flows.

  

ASU 2016-15 The FASB recently issued ASU 2016-15 to clarify whether the certain items should be categorized as operating, investing or financing in the statement of cash flows. For public business entities, the amendments in this Update are effective for financial statements issued for annual periods beginning after December 15, 2017, and interim periods within those fiscal years, which for us is our fiscal 2019. Early adoption is permitted in any annual or interim period, but all of the guidance is required to be adopted in the same period and any adjustments must be reflected as of the beginning of the fiscal year. We are currently evaluating the impact this accounting standards update will have on our financial position, results of operations and cash flows.

 

ASU 2016-18 Statement of Cash Flows (Topic 230) : Restricted Cash (A Consensus of the FASB Emerging Issues Task Force) : The new standard requires the statement of cash flows explain the change during the period in the total cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Entities will also be required to reconcile such total to amounts on the balance sheet and disclose the nature of the restrictions. The Company has a restricted cash balance of $100,000 on the Condensed Consolidated Balance Sheet. The nature of the restriction is that the $100,000 is pledged and held by our financing company, Gerber Finance, as collateral in the Borrowing Base Collateral (BBC) calculations which determine what amounts we are allowed to borrow from time to time.

  

  

NOTE 2 — SUPPLEMENTAL CASH FLOW INFORMATION

 

		For the nine months ended
		March 31,
		2017				2016
		(Unaudited)				(Unaudited)
Statement of Operation Information:
Cash paid for income taxes		$	1,850			$	46,367
Interest Paid		$	293,223			$	192,872
Non Cash Investing and Financing Activities:
Assets acquired with debt financing			-				1,720,425
Conversion of $252,815 of unpaid compensation into 56,184 shares of common stock with beneficial conversion feature interest of $84,272			-				337,086
Conversion of $69,310 of related party loans, including $39,366 accrued interest thereon, into 15,400 shares of common stock with beneficial conversion feature interest of $23,103			-				92,414
Conversion of 11,516 shares of preferred stock into 85,637 shares of common stock		$	-			$	1,156,100

 

NOTE 3 — INVENTORIES

 

Inventories consist of the following:

 

		March 31				June 30,
		2017				2016
		Amount				Amount
		(unaudited)
Raw materials		$	405,879			$	423,670
Work-in-process			333,845				485,344
Reserve			(37,000	)			(37,000	)
Total		$	702,724			$	872,014

 

In August 2016, Microphase West operations were transferred to the Shelton Connecticut plant. As of March 31, 2017 Microphase West inventory was combined with the Shelton Connecticut inventory. The inventory reserves were similarly combined to equal $37,000 for March 31, 2017.

 

NOTE 4 — PROPERTY AND EQUIPMENT:

 

Property and equipment was comprised of the following:

 

		March 31				June 30,
		2017				2016
		Amount				Amount
		(unaudited)
Leasehold Improvements		$	40,288			$	40,288
Computers, machinery & equipment			3,210,147				3,210,147
Furniture and fixtures			122,350				122,350
Transportation equipment			26,527				40,438
Property held under capital leases			56,013				56,013
			3,455,325				3,469,236
Less: accumulated depreciation and amortization			(3,350,329	)			(3,310,257	)
Total		$	104,996			$	158,979

 

Depreciation expense was $17,994 and $19,566 during the three months ended March 31, 2017 and 2016, respectively.

 

Depreciation expense was $53,983 and $58,521 during the nine months ended March 31, 2017 and 2016, respectively.

 

  

NOTE 5 — PREPAID AND OTHER CURRENT ASSETS:

 

Prepaid and Other Current Assets were comprised of the following:

 

		March 31,				June 30,
		2017				2016
		(unaudited)
Consulting fees Spartan		$	80,000			$	-
Other Current Assets			80,690				63,742
Total		$	160,690			$	63,742

 

See also “Bridge notes” discussed in Note 9 (OTHER CURRENT OBLIGATIONS)

 

NOTE 6 — ACCRUED EXPENSES:

 

Accrued expenses were comprised of the following:

 

		March 31,				June 30,
		2017				2016
		(unaudited)
Salaries, wages and other compensation, including $63,352 to a former officer and director at March 31, 2017 and June 30, 2016		$	425,680			$	470,273
Royalties			150,386				146,449
Professional fees			462,500				372,500
Commissions			37,936				37,936
Interest			92,268				47,144
Other miscellaneous accruals			84,880				60,427
		$	1,253,650			$	1,134,729

 

401 (K) Employee Benefit Plan:

 

The Company sponsors a 401(K) plan for all eligible employees. Employee contributions are based on a percentage of compensation. Employer contributions for both matching and profit sharing are discretionary and determined annually by management.

 

Deferred Lease Obligation

 

At March 31, 2017 the Company has $104,644 of deferred lease obligation associated with the amendment in May of 2016 for its long term lease on the Shelton, Connecticut facility.

 

  

NOTE 7 — FAIR VALUE OF FINANCIAL INSTRUMENTS:

 

The fair value of a financial instrument is the amount at which the instrument could be exchanged in a current transaction between willing parties, other than in a forced or liquidation sale. Quoted market prices are used to establish fair value when they are available and other valuation techniques are utilized to estimate the fair value of financial instruments that do not have quoted market prices.

 

The Company has long term debt with fixed interest rates, the carrying amount of which may be different from fair value as of March 31, 2017 and June 30, 2016. The Company decided that it is not practical to estimate the fair value of these financial instruments on the basis that they are held-to-maturity debts which have no immediately available market information on the fair value and the cost of making assumptions and applying estimation methodologies to assess the fair value estimates exceeds the benefit. Information pertinent to estimating the fair value such as carrying amount, effective interest rate, maturity and repayment term are disclosed in Notes 8, 9, and 10.

 

The Company has applied the fair value concepts to its available-for-sale securities. As such, the valuation techniques used to measure fair value is based on the source of the data used to develop the prices. The priority of these sources is defined as follows:

 

Level 1 — quoted prices in active markets.

Level 2 — other than quoted prices that are directly or indirectly observable.

Level 3 — unobservable inputs for the asset or liability.

 

Marketable securities, classified as available-for-sale securities, are measured at fair market value (Level 1) on a recurring basis. As of March 31, 2017 these amounted to $676,000.

 

NOTE 8 — REVOLVING CREDIT LINE

 

		March 31, 2017				June 30,  2016
			(unaudited)
The Company entered into a revolving loan agreement with Gerber Finance, Inc. (Gerber) in February of 2012 for a maximum of $1,500,000, which was amended to $1,150,000 in November of 2013, and then to $1,400,000 in September 2015.  Under this agreement, the Company can receive funds based on a borrowing base, which consists of various percentages of accounts receivable, inventories, a restricted cash account held by Gerber, and equipment. In connection with this agreement, the Company is subject to an annual facility fee (1.75%) on each anniversary, monthly collateral monitoring fees of $1,500 and other fees. Since September 30, 2016, this line has a limit of $1,400,000 and the interest is currently at the base rate of 7.25%. For the months of March through September 2016, we incurred an additional 2.5% interest charge per month on over-advance amounts that exceeded the collateral borrowing base and briefly (less than one week) a separate additional charge of 2.5% for exceeding the limit of $1,400,000 in June 2016. This excess utilization was eliminated in early July 2016.		$	902,505			$	1,474,129

 

The interest expense for the three months ended March 31, 2017 and 2016, respectively, was $37,344 and $47,361, and the fees for the same period ended March 31, 2017 and 2016 were $10,625 and $11,332. The interest expense for the nine months ended March 31, 2017 and 2016, respectively, was $124,077 and $104,849, and the fees for the same period ended March 31, 2017 and 2016 were $31,875 and $31,109. The effective annualized interest rate for the nine months ended March 31, 2017 was 19.40% and for same nine months in 2016 was 11.72%.

 

There are financial covenants set forth in the Gerber agreement of February 3, 2012 and as amended on February 24, 2012. As of March 31, 2017 the Company was not in compliance with three financial covenants regarding minimum levels of net worth, net income and subordinated debt. The Company received a waiver from Gerber regarding these covenants on November 15, 2016.

 

Approximate Value of collateral at balance sheet dates —

 

		March 31, 2017				June 30,  2016
		(unaudited)
Inventories		$	702,724			$	872,014
Accounts Receivable			339,705				1,092,482
Total		$	1,042,429			$	1,964,496

 

 

NOTE 9 — OTHER CURRENT OBLIGATIONS

 

BRIDGE NOTES

In October 2016, the Company issued notes for bridge loans for a total $705,000 from accredited investors that generated $634,500 in net proceeds to the Company after deducting $70,500 of placement fees to our selling agent, Spartan Capital Securities, LLC (“Spartan”). Concurrently, the Company entered into a one year agreement with Spartan for investment banking services which provided for: (1) $120,000 of consulting fees that were paid in cash from the proceeds of the bridge loans; and (2) $90,000 payable to the agent in shares of our common stock upon completion of the Offering, at the per share value of the Initial Public Offering. The Company used the proceeds to pay the second installment payment due to Dynamac, per the revised Acquisition schedule discussed in footnote 11. The Company charged operations $23,795 for interest on these notes during the nine months ended March 31, 2017.

 

The terms of this bridge debt are pursuant to note purchase agreements with purchasers that are accredited investors, for notes in the aggregate amount of $705,000, at an interest rate of 10% per annum (The “Notes’), from financing sources identified and placed by Spartan Capital Securities, LLC (“Spartan”) in accordance with a certain Selling Agreement by and between the Company and Spartan dated October 13, 2016. Each of the Notes will be repaid as follows: (i) in the event that the public offering of the Company’s securities that is contemplated pursuant to a registration statement on Form S-1 filed with the SEC on July 28, 2016 (the “Offering”) closes prior to the first anniversary of the issuance date of such Note, the amount is equal to (A) the entire original principal amount of such Note multiplied by 1.25 plus (B) the interest, if any, accrued quarterly, every 90 days, beginning on the date that is 90 days from the issuance date of such Note on the entire outstanding principal amount, will be due and payable by no later than five days from the date of the Offering; or (ii) in the event that the Offering has not closed prior to the first anniversary of the issuance date of such Note, on such first anniversary of the issuance date of such Note, the amount that is equal to (A) the amount that is equal to the entire original principal amount of such Note multiplied by 1.25. plus, (B) the interest accrued quarterly, every 90 days, beginning on the date that is 90 days from the issuance date of such Note on the entire outstanding principal amount will be due and payable. In the event that the Offering closes on a date that is sooner than 90 days from the issuance date of the Notes, no interest will accrue.

 

PRIVATE LOAN

In December 2016, the Company also received a loan from a contract consultant of $33,900. The loan was initiated through a credit card company, and the Company is paying the monthly minimum credit card payments on this balance until it is paid in full. The loan is to be paid back from the proceeds of the closing of the earlier of the Offering or an interim financing. $717 in fees relating to this transaction were added to the principal balance in December 2016, and subsequently in March 2017 a payment of $10,000 was made on this loan. As of March 31, 2017, the balance was $24,617.

 

OVERDRAFT CREDIT LINE

In December 2016, the Company utilized a $20,000 overdraft credit line at People’s General Bank with an annual interest rate of 15%. As of March 31, 2017, the balance of that overdraft credit line was $19,444. The Company charged operations $681 for interest on this credit line during the nine months ended March 31, 2017.

 

NOTE 10 — EQUITY LINES OF CREDIT & OTHER TERMED DEBTS:

 

EQUITY LINES OF CREDIT:

 

The Company had previously guaranteed the payment under the terms of an assumption agreement, as amended, of an Equity Line of Credit with Wells Fargo Bank totaling up to $250,000, the proceeds of which the Company received from a concurrent loan from Edson Realty Inc. which was a related party-owned realty holding company at the time the credit line was funded on August 15, 2008. As of June 30, 2016, this first line of credit had $250,000 available, secured by residential real estate owned by a former COO of the Company, of which $218,290 was outstanding, with an interest rate of 3.35%. As of March 31, 2017, this line of credit has $250,000 available, of which $216,303 is outstanding, with an interest rate of 3.35%.

 

The Company charged operations $1,822 and $1,884 for interest on this line of credit in the three months ended March 31, 2017 and 2016, respectively. The Company charged operations $5,491 and $5,743 for interest on this line of credit in the nine months ended March 31, 2017 and 2016, respectively.

  

Effective June 30, 2014, the Company also has guaranteed to the CEO at the time, under the terms of an assumption agreement, as amended, the repayment of a second Equity Line of Credit with Wells Fargo Bank. The Company received working capital loans from the CEO which were from funds drawn against this Equity Line of Credit. As of June 30, 2016 the second line of credit had $150,000 available, secured by the CEO’s principal residence, of which $101,003 was outstanding, with an interest rate of 3.0%. As of March 31, 2017, this line of credit has $150,000 available, of which $95,460 is outstanding, with an interest rate of 3.00%.

 

The Company charged operations $726 and $813 for interest on this line of credit in the three months ended March 31, 2017 and 2016, respectively. The Company charged operations $2,224 and $2,575 for interest on this line of credit in the nine months ended March 31, 2017 and 2016, respectively.

 

  

NOTE 10 — EQUITY LINES OF CREDIT & OTHER TERMED DEBTS:  - ( continued )

  

Other termed debts consist of: (i) Long-term Debt & (ii) Extended Payment Arrangements.

 

Long-term Debt:

 

		March 31, 2017				June 30,  2016
		(unaudited)
Ford Credit Company:
Payable in monthly payments of $499, including interest at 4.90% through April, 2019 secured by transportation equipment.		$	12,295			$	15,823
Total		$	12,295			$	15,823
Less: current portion			(5,336	)			(5,336)	)
Long-term portion		$	6,959			$	10,487

 

The Company charged operations $169 and $220 in interest for these loans for the three months ended March 31, 2017 and 2016, respectively. The Company charged operations $468 and $707 in interest for these loans for the nine months ended March 31, 2017 and 2016, respectively.

 

Extended Payment arrangements:

 

The Company is responsible for paying a former employee, disability benefits under a prior self-insured plan, through April, 2019. The plan requires monthly payments until the participant attains age 65. Interest has been imputed on this obligation at 5%.

 

		March 31, 2017				June 30,  2016
		(unaudited)
Total of extended disability benefits		$	20,436			$	26,721
Less: amount representing interest			(1,071	)			(1,855)	)
Present value of disability benefits			19,365				24,866
Less: current portion			(8,378	)			(8,378)	)
Long-term portion		$	10,987			$	16,488

 

Interest expense charged to operations for the extended disability payments was $255 and $353 for the three months ended March 31, 2017 and 2016, respectively. Interest expense charged to operations for the extended disability payments was $834 and $1,133 for the nine months ended March 31, 2017 and 2016, respectively.

 

Small Business Express Job Creation Incentive loan:		March 31, 2017				June 30,  2016
		(unaudited)
State of Connecticut Small Business Express Program loan, funded August 2016, initial amount of $300,000 at an interest rate of 3.0% for a term of 10 years. Principal and interest payments are deferred for the first year of the loan.		$	300,000			$	-
Total		$	300,000			$	-
Less: current portion			-				-
Long-term portion		$	300,000			$	-

 

Summary totals for Other termed debts consist of: (i) Long-term Debt & (ii) Extended Payment Arrangements.

 

		March 31, 2017				June 30,  2016
		(unaudited)
Total minimum long term debt & extended disability payments		$	331,660			$	40,689
Less: current portion			(13,714	)			(13,714)	)
Long-term portion		$	317,946			$	26,975

 

 

NOTE 11 — ACQUIRED INTANGIBLE ASSETS & PREPAYMENTS FOR FUTURE ACQUISITION:

 

The Company acquired certain assets including specific inventory and fixed assets from a RF products manufacturer, Microsemi Corp-RF Integrated Solutions (“Microsemi”), which had eliminated providing certain RF products similar to that of the Company for approximately 10 customers. The acquisition was pursuant to a contract, originally dated March 27, 2013, which provided for a $100,000 down payment and a note payable for $650,000, with payments through December, 2014 as amended. The total purchase price of $750,000 was allocated to tangible assets inventory and fixed assets associated with these specific RF services, and $155,277 intangible assets consisting of a customer list, non-compete clause and an exclusive license. The Contract also provided for 5% royalty on certain RF products.

 

On August 8, 2014 the Company initially signed a strategic partnership agreement with Dynamac, Inc. to develop, manufacture and market a portfolio of low cost RF/Microwave and Millimeter-wave calibrated test probes and related universal test platforms.

 

On January 21, 2016, Microphase Instruments LLC, a subsidiary of Microphase Corporation (the “Company”) entered into a Purchase Agreement (the “Agreement”) with Dynamac, Inc. (the “Seller”), pursuant to which the Company agreed to acquire all the assets of a line of proprietary RF and microwave test and measurement products, as well as related intellectual property (the “Dynamac Assets”).

 

On November 2, 2016, the Company entered into that certain First Amendment to Purchase Agreement with Dynamac (the “Dynamac Amendment”), pursuant to which, among other things, the Company agreed that Dynamac would retain ownership of the Dynamac assets until the Company has paid all amounts owed pursuant to the Dynamac agreement, with such amounts due within 10 days of the closing of the offering of the Company’s common stock as contemplated in the Registration Statement on Form S-1 filed with the SEC on July 28, 2016 (the “Offering”). The Company has accounted for the conditions of ownership being retained by Dynamac until the full balance is paid off (as described in the Form 8K) by removing the Intangible Assets and the Note Payable and treating the two Dynamac payments totaling $1,000,000 as Deposits / Prepayments for the future purchase of Dynamac. Refer to F-18 for payment schedules.

 

Dynamac agreed that the first installment of such purchase price, in the amount of $559,000 would not be due until November 22, 2016, with subsequent payments due and payable as follows: (i) remaining balance of $1,500,000 shall be due and payable to Dynamac within 10 days of the closing of an initial public offering (“IPO”) of common stock of the Company (the “Offering Payment”); or (ii) if the IPO is delayed or does not close, Instruments shall continue to make the remaining three payments of $550,000 each according to the payment schedule contained in the Dynamac Agreement. As further consideration, the Company issued Dynamac 100,000 shares of restricted common stock of the Company. The shares were valued at $450,000 and included in other income (expense) in the statement of operations. Pursuant to the Second Dynamac Amendment dated November 22, 2016, the deadline for the first installment of such purchase price, in the amount of $559,000, was extended until December 9, 2016. Payment of this $559,000 for the first installment of this Second Dynamac Amendment was made in early December 2016.

 

 

Microsemi

 

The Exclusive License associated with the Microsemi Inc. (“Microsemi”) asset acquisition was valued at $56,861, was ascribed a perpetual life and is subject to evaluation annually for impairment. Management has determined that there was no impairment charge to be recorded for the nine months ended March 31, 2017 and 2016. Customer Lists and Non-Compete agreements associated with the Microsemi asset acquisition were ascribed useful lives of 7 and 5 years respectively. The consideration paid for this portion of business was allocated to the tangible and intangible assets acquired and liabilities assumed based on their estimated fair values at the acquisition date. We assigned $155,277 to identifiable intangible assets, which consist of a customer list, non-compete clause and an exclusive license. The acquired intangible assets will be amortized over their estimated lives, which range from 5 to 10 years, primarily using accelerated amortization methods based on the cash flow streams used to value those assets. The exclusive license has a contractual indefinite life and is reviewed annually for impairment. There was no excess of the purchase price over the estimated fair value of the net assets acquired and as such no goodwill was recorded. Amortization expense recorded for these intangible assets was $3,878 and $3,878 for the three months ended March 31, 2017 and 2016, respectively. Amortization expense recorded for these intangible assets was $11,634 and $11,634 for the nine months ended March 31, 2017 and 2016, respectively.

  

Dynamac

 

The Dynamac License was recorded at cost. The Company deposited $50,000 and provided a $300,000 note payable toward the initial contract during fiscal 2015 which was subsequently revised by the Dynamac agreement of January 21, 2016.

 

The assets acquired in the Dynamac agreement of January 21, 2016 have been valued at the contract price in our initial measurement, resulting in intangible assets other than goodwill, primarily Intellectual Property consisting of two (2) patents with remaining lives of over 12 years each, a portfolio of product prototypes to be patented, trade secrets, know-how, confidential information and other intellectual property. We expect to incur additional costs to apply for fifty-two (52) new patents, in addition to various trademarks and copyrights.

 

During FY 2016, there were two amendments to the Dynamac acquisition. For the 1st Amendment dated November 2, 2016, 100,000 shares (valued at $4.50/share) of Microphase were transferred to Dynamac to allow the extension of the second payment to be beyond the original August 22, 2016 date, until the new date of November 22, 2016. The cost for this extension was $450,000, of which $450,000 was expensed in the second Quarter. The second Amendment dated November 22, 2016 extended the deadline for the second payment to be December 9, 2016. The second payment was completed on December 9, 2016 in accordance with the amended Acquisition schedule.

 

As of March 31, 2017, two prepayments have been made totaling $1,000,000 (plus $59,000 interest) for the future acquisition of Dynamac’s Test & Measurement business. Three remaining payments are due of $550,000 each by February 22, 2017, August 22, 2017, and February 22, 2018. In February 2017, a three month extension was granted on the required payment of $550,000 due February 22, 2017 and pursuant to a further extension, such payment together with $10,000 in late fees is now due by June 2, 2017. Failure to make any of the remaining payments could result in the loss of the transaction and all payments made previously.

 

   

Our Acquisitions have resulted in the following Asset allocation:

 

		March 31				June 30,
		2017				2016
		(unaudited)
Intellectual Property		$	-			$	2,520,425
Customer List			73,017				73,017
Non-Compete Clause			25,399				25,399
Exclusive License			56,861				56,861
Total			155,277				2,675,702
Accumulated Amortization			(58,166)				(46,532)	)
Net Total		$	97,111			$	2,629,170

 

Asset Acquisition Note Payable is comprised of the following:

 

		March 31,				June 30,
		2017				2016
		(unaudited)
Asset Acquisition Note Payable-current portion
- Dynamac agreement – net of debt discount		$	-			$	975,345
Asset Acquisition Note Payable, net of current portion
- Dynamac agreement – net of debt discount			-				1,045,080
Total Asset acquisition note payable		$	-			$	2,020,425

 

The Dynamac agreement, as revised, of January 21, 2016 was funded by the $50,000 original deposit paid in connection with the previous agreement, $350,000 paid at closing, $100,000 paid in February 2016, and a series of four $550,000 payments payable on the note semi-annually, due in August 2016 and 2017 and February 2017 and 2018. The Company imputed interest at 7%, its most favorable credit line rate, and as such is valued at $2,020,425.

 

On November 2, 2016, the Company entered into a First Amendment to Purchase Agreement with Dynamac (the “Dynamac Amendment”, and the January Dynamac Agreement, as amended by the Dynamac Amendment, the “Dynamac Transaction”), pursuant to which, among other things, the Company agreed that Dynamac would retain ownership in the Dynamac Assets until the Company has delivered all amounts owed pursuant to the Dynamac Transaction, with such amounts due within 10 days of the closing of the Offering and the Company to pay such amounts from the proceeds thereof. The Company has accounted for the conditions of ownership being retained by Dynamac until the full balance is paid off (as described in the Form 8K) by removing the Intangible Assets and the Note Payable and treating the two Dynamac payments totaling $1,000,000 as Deposits / Prepayments for the future purchase of Dynamac.

 

Dynamac agreed that the first installment of such purchase price, in the amount of $559,000 would not be due until November 22, 2016, with subsequent payments due and payable as follows: (i) remaining balance of $1,500,000 shall be due and payable to Dynamac within 10 days of the closing of an initial public offering (“IPO”) of common stock of the Company (the “Offering Payment”); or (ii) if the IPO is delayed or does not close, Instruments shall continue to make the remaining three payments of $550,000 each according to the payment schedule contained in the Dynamac Agreement. As further consideration, the Company issued Dynamac 100,000 shares of restricted common stock of the Company valued at $450,000. Pursuant to the Second Dynamac Amendment dated November 22, 2016, the deadline for the first installment of such purchase price, in the amount of $559,000, was extended until December 9, 2016. Payment of this $559,000 for the first installment of this Second Dynamac Amendment was made in early December 2016. Three remaining payments are due of $550,000 each by February 22, 2017, August 22, 2017, and February 22, 2018. In February 2017, the Company and Dynamac agreed to a three month extension for the $550,000 payment originally due February 22, 2017, and pursuant to a further extension, such payment together with $10,000 in late fees is now due by June 2, 2017.

 

   

NOTE 12 — RELATED PARTY TRANSACTIONS:

 

The Company had activities with related parties during the fiscal years 2016 and 2015. The Company sublet office space until March 31, 2015 and a vehicle in fiscal 2015 to mPhase Technologies, Inc. (“mPhase’). In fiscal 2016, the rent recorded was $0 for the office space and $9,000 for the vehicle. At March 31, 2017, there was no cost for the vehicle. At March 31, 2017 and June 30, 2016, mPhase owed the Company $33,295.

 

Notes Payable — Related Parties:
		March 31, 2017				June 30,  2016
		(unaudited)
Officer:
Note payable to the interim CEO / past President for a loan during the 2nd quarter FY 2017, payable in 24 months, at 3% annual rate. During the three months ended March 31, 2017, the interim CEO loaned an additional $45,000. The exact terms of both loans now are being worked on.		$	70,703
Former Employee:
A former employee and past Officer over the last quarter loaned several amounts at different times totaling $90,000. We have set the interest rate at 3%, and the exact terms of the loan are being worked on.			90,438
Note payable to a Note Holder formerly employed by the Company, payable in monthly payments of $7,600 as revised in November 2015, with interest at 6% until paid in full. This Note Holder subordinated his debt to the revolving line discussed in Note 7, in February 2012, and converted $170,000 of his debt into 37,778 shares of common stock during the Fiscal year ended June 30, 2015. During FY 2016, the Company has sought to revise the payment schedule with the Note Holder, and to date the parties have not agreed to a revised repayment schedule and the note is in arrears. In May 2016, this lender initiated a Notice of Default and Demand for Payment, and in July 2016 the Note Holder initiated litigation to collect this debt in full. While the Company still seeks a mutually agreeable settlement, the Company believes this debt will be settled for an amount substantially the same as recorded in the financial statement.		$	159,432				152,434
Stockholders:
Two notes previously payable to individuals with monthly payments of $2,715 and $2,750 as revised, including interest at 6% through September 2017. In January 2016, these two notes and loan amortization schedules were revised with monthly payments of $910 and $980 respectively, including interest at 3% through August 2019. The monthly payment amounts increase by $130 and $140 every 4 months, per the revised schedule.		$	121,462				118,762
Other Related Parties:
Previously payable to this individual in monthly payments of $875 as revised, including interest at 6% through September 2017. In January 2016, this note and loan amortization schedule was revised with a monthly payment of $280, including interest at 3% through August 2019. The monthly payment amount increases by $40 every 4 months, per the revised schedule. This individual advanced an additional $5,000 during the quarter.		$	24,196				18,754
Two notes previously payable to two individuals with identical monthly payments of $2,425 each as revised, including interest at 6% through April 2017. In January 2016, these two notes and loan amortization schedules were revised with monthly payments of $840 each, including interest at 3% through August 2019. The monthly payment amount increases by $120 every 4 months, per the revised schedule.		$	107,444				105,057
Total		$	573,675			$	395,007
Less: current portion			(393,282	)			(137,150	)
Long-term portion		$	180,394			$	257,857

 

The Company and the note holders (except for the former employee as discussed above) have agreed to revised repayment schedules for 42 months commencing December 2015. As of March 31, 2017, the Company was in arrears on ten payments of the revised repayment schedules for each of the note holders.

 

The Company charged operations $5,198 and $3,014 for interest on these loans for the three months ended March 31, 2017 and 2016, respectively. The Company charged operations $13,669 and $15,777 for interest on these loans for the nine months ended March 31, 2017 and 2016, respectively.

 

   

NOTE 13 — STOCKHOLDERS’ EQUITY:

 

On December 5, 2016, there was a Special meeting of Stockholders whereby the stockholders approved (1) the change of the Company’s state of incorporation from Connecticut to Delaware and (2) a one-for-three reverse stock split of the original stock, with a new capitalization structure. Pursuant to the Company’s proposed reincorporation in the State of Delaware, the Company is authorized by its Certificate of Incorporation to issue an aggregate of 22,000,000 shares, of which 20,000,000 are for shares of common stock, $0.0001 par value per share, 200,000 are for shares of preferred stock, par value $100 per share, all of which have been designated as Series A Convertible Stock and 1,800,000 are for shares of “blank check” preferred stock, having such designations, rights and preferences as the Board of Directors may determine, in its sole discretion, from to time. As of March 31, 2017, 2,436,485 shares of Common Stock and 15,382 shares of Preferred Stock were issued and outstanding, respectively.

 

Common Stock

 

During the three months ended March 31, 2016, the Company issued 23,333 common shares to two officers and the consultant GM for services, valued at $140,000, which was charged to operations in the quarter ending March 31, 2016.

 

During the three months ended March 31, 2017, the Company issued 16,667 shares of its common stock to a consultant for services rendered, valued at $75,000. For the nine months ended March 31, 2017, the Company issued 33,333 shares of its common stock to this consultant for final services rendered, valued at $150,000, and the Company also issued 91,667 shares to two officers and the consultant GM for services rendered, valued at $412,500.

 

During the nine months ended March 31, 2016, the Company issued no shares of its common stock in private placements.

 

During the nine months ended March 31, 2017, the Company completed a private placement for 144,445 shares issuable to accredited investors in an interim private placement of our common stock pursuant to section 4(2) of the Securities Act of 1933, as amended. Net proceeds of $585,000 were generated for the Company, after deducting $65,000 of placement fees. The terms also provide for 144,445 shares issuable upon exercise of warrants issued in connection with the private placement discussed above at an exercise price of $2.50 per share. Additionally, the Company entered into a one year agreement for investment banking services which calls for $61,200 of consulting fees to be paid in cash from the proceeds of this placement and $50,000 to be paid in common stock, at the per share value of the Offering, upon completion of the Offering.

 

   

NOTE 13 — STOCKHOLDERS’ EQUITY - ( continued )

 

Preferred Stock

 

The Preferred Stock, with respect to dividends, liquidation payments, and liquidation rights, ranks senior to the common stock and of the Company. Holders of Preferred Stock are entitled to receive, when and as declared by the Board of Directors, dividends, at the annual rate of 6% of the stated par value, or $100 per share. Dividends are cumulative and accrue from the effective date of issuance of the Preferred Stock until declared.

 

As of March 31, 2017, 15,382 shares of Preferred Stock are outstanding and cumulative undeclared dividends on preferred stock are $313,576.

 

Reserved Shares

 

Stock Options

 

The Board approved the implementation of a stock option plan in January 2015, for which the Company did not seek ratification by the shareholders, reserving 250,000 shares of Common Stock for this plan; however, such plan has not yet been set forth in a formal document adopted by the board. During the year ended June 30, 2016 the Company granted options, as part of this plan, to an Officer and Director for services to purchase 75,000 shares of Common Stock, with an exercise price of $2.00, with a term of 7 years, and which rights vest over the next three years as follows; 25,000 shares were exercisable immediately and 25,000 shares vest each October 1 of 2016 and 2017. The total value of these options was estimated to be $106,200 using the Black Scholes method, based on an assumed volatility of 112.5% and an interest rate of .09%. $53,102 and $35,400 was charged to operations in the nine months ending March 31, 2017 and 2016, deferring the balance of which $17,698 will be charged pro-rata on a monthly basis.

 

Director Compensation

 

As of December 31, 2016, additional options were authorized to be granted to 3 new directors of the Board. The Company has committed to compensate to each of the three new Directors of the Board up to $25,000 in stock ($6,250 per quarter) and $25,000 in options ($6,250 per quarter) for their services for the year. As of March 31, 2017, the exact details of the transition of the new Board and their compensation packages are still being worked on.

   

Series A Preferred Shares currently convertible

 

As of March 31, 2017, 15,382 preferred shares were outstanding and cumulative undeclared dividends on preferred stock were $313,576. The preferred shares are convertible into 341,823 shares of the Company’s common stock at $4.50, and the dividends, if declared, are convertible into 69,684 common shares stock also at $4.50, until such time the Company’s common stock begins trading.

 

Certain Debts currently convertible

 

As of March 31, 2017, $573,675 of loans from related parties and $63,352 of unpaid compensation are convertible into 127,484 and 14,078 shares of the Company’s common stock at $4.50, respectively, until such time the Company’s common stock begins trading.

  

   

NOTE 14 — MAJOR CUSTOMERS AND SEGMENTS:

 

The Company recorded sales of $770,196 and $1,369,084 with three and four customers for the three months ended March 31. 2017 and 2016 respectively. These customers represent 72% and 70% of sales for the three months ended March 31, 2017 and 2016. At March 31, 2017, those three customers owed the Company $169,011.

 

The Company recorded sales of $2,155,541 and $3,841,987 with four and three customers for the nine months ended March 31, 2017 and 2016 respectively. These customers represent 61% and 55% of sales for the nine months ended March 31, 2017 and 2016. At March 31, 2017, those four customers owed the Company $169,011.

 

Sales to U.S. customers represented 53% and 93% of sales for the three months ended March 31, 2017 and 2016, respectively. Sales to U.S. customers represented 76% and 86% of sales for the nine months ended March 31, 2017 and 2016, respectively.

 

NOTE 15 — COMMITMENTS AND CONTINGENCIES:

 

The Company moved to Shelton, Connecticut on April 21, 2015, to a facility with 15,000 square feet with monthly rent of $15,000, for a 7-year term with annual escalations of 3%. In December 2015 the Company committed to rent additional space in connection with the acquisition of the Dynamac proprietary line. In June 2016 the monthly rent became $18,400 and in August 2016 $24,740. The total commitment on this lease for remaining 6 months of fiscal year 2017 is approximately $148,442. The Company has received notice from the landlord that the Company is currently in default under such lease. A restructured plan to catch-up on the rent has been arranged with the landlord, and the Company is currently on track with that plan.

 

The Company leases 3 vehicles under operating leases expiring in 2016 through 2018. As of March 31, 2017 the future minimum rental payments for fiscal 2017 are $6,003.

 

5 year Shelton Facility lease and Car lease schedules as of March 31, 2017:

 

Fiscal year		Shelton Facility Lease				Car leases				Total
2017		$	74,221			$	6,003			$	80,224
2018			304,989				10,394				315,383
2019			314,051				-				314,051
2020			323,351				-				323,351
2021			332,890				-				332,890
Thereafter			708,362				-				708,362
Total		$	2,057,864			$	16,397			$	2,074,261

 

THE COMPANY HAS MATERIAL TERMED DEBT SERVICE COMMITMENTS AT March 31, 2017 AS DISCUSSED IN NOTES 10, 11 & 12 SUMMARIZED AS FOLLOWS:

 

		RELATED PARTY LOANS				OTHER TERMED DEBT				EQUITY LINES OF CREDIT				SMALL BUSINESS EXPRESS JOB CREATION INCENTIVE LOAN				TOTAL
EFFECTIVE INTEREST RATE as of March 31, 2017			4.1	%			5.5	%			3.3	%			3	%
2017		$	390,278			$	11,509			$	37,375			$	-			$	439,162
2018			84,815				10,552				39,509				26,996				161,872
2019			63,482				9,599				234,879				30,308				338,268
2020			35,100				-				-				31,229				66,329
2021			-				-				-				32,179				32,179
thereafter			-				-				-				179,288				179,288
Total		$	573,675			$	31,660			$	311,763			$	300,000			$	1,217,098

 

 

NOTE 15 — COMMITMENTS AND CONTINGENCIES:- ( continued )

 

Employment and Consultant Contracts:

 

The Company had previously entered into employment contracts with two officers through 2015 that provided for a stated salary of $250,000 per year, plus company benefits. These contracts were subject to other items and included a non-compete covenant. In Fiscal 2015 the Company entered into updated three year employment agreements with these two employees, one as an officer, currently the Company’s President, and one as a strategic consultant upon his resignation as an officer and director. These updated contracts include base compensation of $225,000 per year plus company benefits, severance provisions and non-competition covenants for both individuals. As of March 31, 2017 and June 30, 2016, the Company owed $63,352 and $80,000 to these individuals, respectively.

 

In Fiscal 2015 the Company also entered into three year employment contracts with two new officers for at will employment with base compensation of $160,000 and $150,000 per year plus company benefits, respectively. Effective July 1, 2016 the Company revised these agreements with these two officers. These updated contracts include base compensation of $175,000 and $165,000 per year plus company benefits, severance provisions and non-competition covenants for both officers.

 

Effective July 1, 2016 the Company executed a modification to the consulting contract with the general manager through February 1, 2019. The updated contract includes base compensation of $192,000 per year with contract termination fees, comparable to the severance provisions for officers, and non-competition covenants.

 

On December 1, 2016, the Board of Directors was reorganized as part of the Initial Public Offering process. Necdet Ergul resigned as the Chief Executive Officer, President and Chairman of the Company. Mr. Ergul’s resignation from the position of Chief Executive Officer and Chairman is effective as of December 1, 2016, and the resignation from President is effective as of the date that the Company’s Board notifies Mr. Ergul that the Department of Defense has granted Mr. Ghadaksaz the necessary security clearance to carry on certain of its operations. The resignation is not the result of any disagreement with the Company on any matter relating to the Company’s operations, policies or practices. James Ashman, the Company’s Chief Financial Officer, resigned as a member of the Company’s Board effective immediately upon the Company’s filing of Amendment No. 2 to the Company’s Registration Statement on Form S-1 (the “S-1 Amendment”). The resignation is not of any disagreement with the Company on any matter relating to the Company’s operations, policies or practices. In addition, Mr. Ashman entered into an amended and restated employment agreement. Jeffrey Peterson resigned as a member of the Company’s Board effective immediately upon the Company’s filing of the S-1 Amendment. The resignation is not the result of any disagreement with the Company on any matter relating to the Company’s operations, policies or practices. Paul DeCoster resigned as a member of the Company’s Board effective immediately upon the Company’s filing of the S-1 Amendment. The resignation is not the result of any disagreement with the Company on any matter relating to the Company’s operations, policies or practices. Michael Ghadaksaz, the Chief Technology Officer and Chief Marketing Officer of the Company, was appointed Chief Executive Officer and Chairman of the Board. In conjunction with such appointment, the Company and Mr. Ghadaksaz entered into an amended and restated employment agreement. Brian Kelly, the Company’s General Manager was appointed Chief Operating Officer and a Director, effective upon the closing of the Offering. In conjunction with such appointment, the Company and Mr. Kelly entered into an amended and restated employment agreement. The Board appointed Mr. Bill White, Dr. Fernado Fernandez and Mr. Frank Russomanno as members of the Board, effective upon the Company’s filing of the S-1 Amendment. The Company expects to enter into a director agreement and indemnification agreement with each such new director.

 

On December 1, 2016, the Company revised employment contracts (per the above) with Messrs. Ghadaksaz, Ashman, Kelly and Ergul.

 

Mr. Ghadaksaz entered into an employment agreement with the Company dated as of December 1, 2016 (the “Ghadaksaz Agreement”). The initial term of the Ghadaksaz Agreement is for a period of one (1) year, commencing on December 1, 2016 (the “Initial Term”). The term of the Employment Agreement will be automatically extended for additional terms of one (1) year each (each a “Renewal Term” and together with the Initial Term, the “Term”), unless either the Company or Mr. Ghadaksaz gives prior written notice of non-renewal to the other party no later than sixty (60) days prior to the expiration of the then current Term. During the Term, the Company will pay Mr. Ghadaksaz an annual base salary of $295,000. Mr. Ghadaksaz will receive a one-time cash incentive bonus in the amount of $75,000, payable within 30 days of the closing of the Offering and may receive an annual cash bonus as determined by the Board and based on the review and recommendation of the Compensation Committee of the Board. Mr. Ghadaksaz has also received an equity grant of 33,333 shares of the Company’s restricted stock.

 

Mr. Ashman entered into an employment agreement with the Company dated as of December 6, 2015 which was subsequently revised as of July 1, 2016 and Amended and Restated on December 1, 2016 (as amended and restated, the “Ashman Agreement”). The initial term of the Ashman Agreement is for a period of three (3) years, commencing on December 1, 2016 (the “Initial Term”). The term of the Employment Agreement will be automatically extended for additional terms of one (1) year each (each a “Renewal Term” and together with the Initial Term, the “Term”), unless either the Company or Mr. Ashman gives prior written notice of non-renewal to the other party no later than sixty (60) days prior to the expiration of the then current Term. During the Term, the Company will pay Mr. Ashman an annual base salary of $190,000. Mr. Ashman will receive a one-time cash incentive bonus in the amount of $30,000, payable within 30 days of the closing of the offering and may receive an annual cash bonus as determined by the Board and based on the review and recommendation of the Compensation Committee of the Board. Mr. Ashman has also received an equity grant of 11,667 shares of the Company’s restricted stock.

 

   

NOTE 15 — COMMITMENTS AND CONTINGENCIES:- ( continued )

 

Mr. Kelly entered into an employment agreement with the Company dated as of December 1, 2016 (the “Kelly” Agreement) effective upon the closing of the Offering (the “Effective Date”). The initial term of the Kelly Agreement is for a period of three (3) years, commencing on the Effective Date (the “Initial Term”). The term of the Employment Agreement will be automatically extended for additional terms of one (1) year each (each a “Renewal Term” and together with the Initial Term, the “Term”), unless either the Company or Mr. Kelly gives prior written notice of non-renewal to the other party no later than sixty (60) days prior to the expiration of the then current Term. During the Term, the Company will pay Mr. Kelly an annual base salary of $235,000. Mr. Kelly will receive a one-time cash incentive bonus in the amount of $30,000, payable within 30 days of the closing of the offering and may receive an annual cash bonus as determined by the Board and based on the review and recommendation of the Compensation Committee of the Board. Mr. Kelly has also received an equity grant of 25,000 shares of the Company’s restricted stock.

 

Mr. Ergul entered into an employment agreement with the Company dated as of December 1, 2016 (the “Ergul Agreement”), pursuant to which Mr. Ergul will receive $75,000 per year in base compensation, in addition to certain benefits, for serving as the Company’s Chief Technical Advisor. The term of the Ergul Agreement shall continue through February 1, 2018, and Mr. Ergul may receive severance for terminations under circumstances other than for Cause (as such term is defined therein). The Ergul Agreement contains provisions regarding indemnification, confidentiality, and non-competition, among others. Mr. Ergul is continuing to serve as the Company’s President until such time as the Board notifies him that Mr. Ghadaksaz has received the necessary security clearance from the Department of Defense.

 

As of March 31, 2017, two prepayments have been made totaling $1,000,000 (plus $59,000 interest) for the future acquisition of Dynamac’s Test & Measurement business. Three remaining payments are due of $550,000 each by February 22, 2107, August 22, 2017, and February 22, 2018. In February 2017, a three month extension was granted on the required payment of $550,000 due February 22, 2017 and pursuant to a further extension, such payment together with $10,000 in late fees is now due by June 2, 2017. Failure to make any of the remaining payments could result in the loss of the transaction and all payments made previously.

 

The Company has committed to compensate to each of the three new Directors of the Board $25,000 in stock ($6,250 per quarter) and $25,000 in options ($6,250 per quarter) for their services for the year. As of March 31, 2017, the exact details of the transition of the new Board and their compensation packages are still being worked on.

  

We are subject to legal proceedings and other claims arising out of the conduct of our business, including proceedings and claims relating to commercial and financial transactions; government contracts and sub-contracts; alleged lack of compliance with applicable laws and regulations; production partners; product liability; patent and trademark infringement; employment disputes; and environmental, safety and health matters. Some potential legal proceedings and claims could seek damages, fines or penalties in substantial amounts or remediation of environmental contamination. As a government sub-contractor, we are subject to audits, reviews and investigations to determine whether our operations are being conducted in accordance with applicable regulatory requirements. Under federal government procurement regulations, certain claims brought by the U.S. Government could result in our suspension or debarment from U.S. Government contracting for a period of time. On the basis of information presently available, we do not believe that there are any existing proceedings or potential claims that would have a material effect on our financial position or results of operations.

 

Starting in January 2017, in order to reduce payroll costs, the Company arranged with the State of Connecticut a work furlough program for selected employees. By doing this, staff could take off a day or two each week without pay from the Company, if their job could allow for it, and the state would compensate them for that unemployment time off. The State of Connecticut allows for such a cost savings plan for up to 6 months.

 

Effective February 11, 2017, Michael Ghadaksaz resigned as the Company’s Chief Executive Officer, Chief Technology Officer and Chairman of the Board, and from any and all other positions to which he may have been appointed or held with the Company and/or its subsidiaries. Such resignation was accepted by the Board on February 12, 2017.

 

Effective February 16, 2017, the Board appointed Necdet Ergul as the Company’s Interim Chief Executive Officer. Mr. Ergul is the Company’s President and Chief Technical Adviser and has previously served as the Company Chief Executive Officer and Chairman of the Board.

 

NOTE 16 — SUBSEQUENT EVENTS:

 

On April 28, 2017, the Board appointed Mr. Necdet Ergul and Mr. Jay Biderman as members of the Board, by unanimous written consent, effective immediately. Mr. Biderman is a CPA with tax and accounting experience. Mr. Ergul is the founder of the Company, previously served on the Board, and is currently interim CEO.

 

On April 28, 2017, Mr. Fernando Fernandez, Mr. Bill White, and Mr. Frank Russomanno resigned as members of the Board of Directors of Microphase Corporation, effective immediately. The resignations are not the result of any disagreements with the Company on any matters relating to the Company’s known operations, policies or practices.

 

On April 28, 2017, Microphase and certain Microphase shareholders entered into a Stock Exchange Agreement (“SEA”) with Digital Power Corporation (“DPW”), a NYSE-listed California corporation. The Stock Exchange Agreement can be referred to in recent public 8-K filings by both Microphase Corporation and Digital Power Corporation. The SEA allows for the exchange of stock by DPW and certain Microphase shareholders, whereby Digital Power Corporation will receive 50.2% of the fully diluted shares of Microphase. Pursuant to the agreement, DPW will lend Microphase certain funds. This action was approved by Microphase’s Board of Directors and is consistent with the wishes of the majority shareholders. Pursuant to the closing of the SEA, DPW will elect a majority of the members of the Board of Directors of Microphase.

 

As of May 10, 2017, Microphase is late in filing its Federal and State taxes for the year ending June 30, 2016. The extension due date for the filings was April 15, 2017. The Company is taking action now to bring these tax filings up-to-date. The Company does not anticipate any material tax being due.

 

  

ITEM 2.

MANAGEMENT’S DISCUSSION OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS

 

This quarterly report on Form 10-Q and other reports filed by Microphase Corporation (the “Company”) from time to time with the SEC (collectively, the “Filings”) contain or may contain forward-looking statements and information that are based upon beliefs of, and information currently available to, the Company’s management as well as estimates and assumptions made by Company’s management. Readers are cautioned not to place undue reliance on these forward-looking statements, which are only predictions and speak only as of the date hereof. When used in the Filings, the words “anticipate,” “believe,” “estimate,” “expect,” “future,” “intend,” “plan,” or the negative of these terms and similar expressions as they relate to the Company or the Company’s management identify forward-looking statements. Such statements reflect the current view of the Company with respect to future events and are subject to risks, uncertainties, assumptions, and other factors, including the risks relating to the Company’s business, industry, and the Company’s operations and results of operations. Should one or more of these risks or uncertainties materialize, or should the underlying assumptions prove incorrect, actual results may differ significantly from those anticipated, believed, estimated, expected, intended, or planned.

 

Although the Company believes that the expectations reflected in the forward-looking statements are reasonable, the Company cannot guarantee future results, levels of activity, performance, or achievements. Except as required by applicable law, including the securities laws of the United States, the Company does not intend to update any of the forward-looking statements to conform these statements to actual results.

 

Our financial statements are prepared in accordance with accounting principles generally accepted in the United States (“GAAP”). These accounting principles require us to make certain estimates, judgments and assumptions. We believe that the estimates, judgments and assumptions upon which we rely are reasonable based upon information available to us at the time that these estimates, judgments and assumptions are made. These estimates, judgments and assumptions can affect the reported amounts of assets and liabilities as of the date of the financial statements as well as the reported amounts of revenues and expenses during the periods presented. Our financial statements would be affected to the extent there are material differences between these estimates and actual results. In many cases, the accounting treatment of a particular transaction is specifically dictated by GAAP and does not require management’s judgment in its application. There are also areas in which management’s judgment in selecting any available alternative would not produce a materially different result. The following discussion should be read in conjunction with our financial statements and notes thereto appearing elsewhere in this report.

 

RESULTS OF OPERATIONS OVERVIEW

 

Microphase Corporation designs and manufactures custom RF (radio frequency) and microwave products from DC to 40 GHz. Our products include components, subsystems and multi-function assemblies for the military and commercial markets. The Company has been in business for over 60 years and is one of the oldest and most established RF and microwave products companies in the industry.

 

The Company’s RF and microwave products enable the transmission, reception and processing of high frequency signals in defense electronics, homeland security systems and telecommunication networks. Our RF products are typically used in high frequency applications and include filters, switch filters, diplexers, multiplexers, detectors, detector logarithmic video amplifiers (DLVA) and multi-function assemblies. The end products in which the Company’s products are used include fighter planes, missiles, submarines, ships, drones and IED jammers. Customers include Lockheed Martin, Raytheon, Saab, BAE Systems and the U. S. Government. Sales to the military markets comprised 100% of sales for 2016 and the first six months of fiscal 2017.

 

Many years of deficit spending have caused U.S. Government budgets to come under significant pressure in recent years. In particular, the Budget Control Act of 2011 resulted in automatic spending reductions known as sequestration, through budget caps for both defense and non-defense spending. According to usgovernmentspending.com spending on Military Defense has gone from $693.5 billion in the government fiscal year 2010 (ending September 30) to $705.6 billion in 2011, $677.9 billion in 2012, $633.4 billion in 2013, $603.5 in 2014, $597.5 in 2015, $604.5 in 2016, and $617.0 in 2017. While there has been a small increase for each of the last two fiscal years, this decrease from $705.6 billion in 2011 has had a significant negative impact on Microphase’s customers, with a resultant negative impact on Microphase’s results during and prior to the past three fiscal years.

 

The Company has been selling the same products to the same customers for many years. While every product order is manufactured to each customer’s specifications, the overall product offering has not changed substantially. The Company believes it will need to introduce new products to the market in order to grow sales, in accordance with its strategy described in “Current Status and Management’s Plans.” The Company has been addressing its working capital needs by raising additional debt from insiders, by executing private placements of common stock and debt, and through its debt facility with Gerber Finance, Inc.

 

In December 2016, an existing customer placed a $1.5 million order with the Company, raising our sales backlog as of 12/31/16 above $4.6 million. As of March 31, 2017, our sales backlog was $4.2 million.

 

  

Growth Strategy

 

While our core market historically has been the military electronics defense industry, we intend to leverage our high-frequency RF and microwave expertise to expand into high growth sectors of the wireless and RF microwave industries where we believe that we can command significant leadership. Our strategic plan for future growth is to develop and/or acquire proprietary technologies and solutions that will improve upon existing solutions and products in the areas of cost, size, weight, reliability and performance.

 

As a customer-driven global provider of RF/Microwave components, devices, and integrated assemblies, we plan to expand in emerging technology markets, including fifth generation (5G) wireless mobile communications, commercial drone systems, and the Internet of Things (“IoT”), which provides for advanced interconnection of devices, systems, and services within the existing Internet infrastructure and is expected to rely heavily on wireless links to enable automation in nearly all fields from residential to commercial, healthcare and industrial markets.

 

The Company is working to develop innovative solutions that we expect will drive our strategic roadmap for long-term growth and profitability. This strategy could enable Microphase to broaden its customer base and reduce risk by spreading its revenue base across multiple market sectors. Acquisitions and strategic combinations or joint ventures, if completed successfully, could increase our market share and the technology value of our product lines as well as broaden our product offerings and diversify our customer base.

 

ACQUISITIONS AND STRATEGIC TRANSACTIONS

 

The Company has been pursuing the acquisition of companies and product lines which are similar and/or related to the Company’s existing product lines and which may provide the Company with opportunities to expand beyond military markets. On March 27, 2013, the Company acquired the assets of a DLVA manufacturing business in Folsom, California from Microsemi Corp. pursuant to a purchase agreement (the “Microsemi Agreement”) for a purchase price comprised of $100,000 in cash plus a $650,000 note, which was paid in full prior to its maturity in December 2014 (the “Microsemi Transaction”). The assets acquired pursuant to the Microsemi Transaction were operated as a division and referred to as “Microphase West,” until such operations were moved to Shelton, Connecticut in July 2016.

 

On July 9, 2014, the Company executed a securities purchase agreement with AmpliTech Group Inc., a Nevada corporation located in Bohemia, New York (“Amplitech”), to purchase, as amended, 8,666,666 shares of the common stock of Amplitech at $0.023 per share for a total purchase price of $200,000. AmpliTech designs, engineers and assembles amplifiers for micro-wave components primarily for communication systems. As of March 31, 2017, we owned 18.8% of the outstanding shares of the common stock of Amplitech. To date, this has been a passive investment. As of March 31, 2017, based on a closing price of $0.078 per share, the value of such shares of Amplitech was $676,000.

 

On January 21, 2016, the Company entered the test and measurement (“T&M”) industry by entering into a purchase agreement (as subsequently amended, the “Dynamac Agreement”) with Dynamac, Inc. (“Dynamac”), pursuant to which the Company agreed to acquire certain assets in a line of proprietary RF and microwave test and measurement products, as well as related intellectual property (“Dynamac Assets”). On November 2, 2016, the Company entered into that certain First Amendment to Purchase Agreement with Dynamac (the “Dynamac Amendment”), pursuant to which, among other things, the Company agreed that Dynamac would retain ownership of the Dynamac assets until the Company has paid all amounts owed pursuant to the Dynamac agreement, with such amounts due within 10 days of the closing of the Offering. The Company intends to pay all amounts owed to Dynamac pursuant to the Dynamac agreement from the proceeds thereof. The Company has accounted for the conditions of ownership being retained by Dynamac until the full balance is paid off (as described in the Form 8K) by removing the Intangible Assets and the Note Payable and treating the two Dynamac payments totaling $1,000,000 as Deposits / Prepayments for the future purchase of Dynamac.

 

As of March 31, 2017, pursuant to the Dynamac Agreement, two payments have been made totaling $1,000,000 (plus $59,000 interest) for the future acquisition of Dynamac’s Test & Measurement business and three payments remain outstanding: $560,000 due by June 2, 2017, $550,000 due by August 22, 2017, and $550,000 due by February 22, 2018. Failure to make any of the remaining payments could result in the loss of the transaction and all payments made previously.

  

 We believe the Dynamac Assets will enable us to grow sales revenue in accordance with our growth strategy.

 

On April 28, 2017, Microphase and certain Microphase shareholders entered into a Share Exchange Agreement (“SEA”) with Digital Power Corporation (“DPW”), a NYSE-listed California corporation. Pursuant to the SEA, DPW will exchange shares of its stock for shares of Microphase held by certain Microphase shareholders, whereby Digital Power Corporation will receive a majority of the issued and outstanding shares of Microphase. Pursuant to the SEA, DPW will lend Microphase certain funds. Upon the closing of the SEA, DPW will cause to be elected a majority of the members of the Board of Directors of Microphase.

 

  

THREE MONTHS ENDED MARCH 31, 2017 VS. MARCH 31, 2016

 

Revenues.   Total revenues for the three months ended March 31, 2017 were $1,065,661, down from $1,952,817 in the same period in 2016, a decrease of $887,156 or 45%. The revenue decrease we believe was primarily due to a reduction in overall customer orders resulting from general uncertainty among customers due to the election in the fall. The reduced shipments limited our ability to purchase some parts in a timely fashion which had a negative impact on revenues. Additionally, there was a slow-down for the quarter on an important program, due to a critical vendor part not being available. This program resumed in January 2017. The decrease in domestic revenues was $1,259,127 in that period for 2017, compared to the same period in 2016, whereas there was an increase in revenues from foreign customers of $371,575 during those same periods.

 

Cost of Sales.   Cost of sales decreased $573,205 for the three-month period ended March 31, 2017 from $1,374,194 in 2016 to $800,989 in 2017, a decrease of 42%. The decrease in the cost of sales was primarily due to the decrease in revenues. The gross profit margin for that same period for 2016 was 30%, whereas the gross profit margin for the same 2017 period was 25%. The decrease in the gross profit margin was due to a less profitable product mix. A slow-down for the quarter on an important program, due to a critical vendor part not being available, added to the less profitable product mix.

 

General and Administrative Expenses.   Selling, general and administrative expenses were $1,129,174 for the 3 months ended March 31, 2017 compared to $825,650 for the same period in 2016, an increase of $303,524 or approximately 37%. The increase resulted from the Company expensing, as of March 31, 2017, $430,000 of previously deferred offering costs, due to a delay in the IPO process greater than 90 days. This increase in SG&A expenses was offset by a decrease resulting from reduced stock-based compensation expenses of $56,150, larger savings in SG&A resulting from the move of the California operations to Connecticut, and this quarter’s utilization and savings from a State of Connecticut work furlough program.

 

Engineering and Research Expenses.   Engineering and research for the three months ended March 31, 2017 were $173,399 compared to $258,410 in the same period in 2016, a decrease of $85,011 or 33%. The decrease in Engineering and Research expenses, period over period, resulted from all California Engineering expenses ending due to the move of the California operations in July 2016, plus decreases in Connecticut Engineering & Research expenses over that period, mainly attributable to the state furlough program which began in January 2017.

 

Other Income (Expense).   For the three months ended March 31, 2017, non-operating income was $2,687, resulting from a small gain in the selling of a used company car. For the three months ended March 31, 2016, non-operating loss was ($106,857), which resulted from a loss on the settlement of liabilities with an officer who converted his loans to the Company & unpaid compensation into common stock.

 

Interest (Expense and Credit costs) net.   Interest expense and credit costs were $98,832 for the three months ended March 31, 2016 and $122,654 for the three months ended March 31, 2017, an increase of $23,822. The higher interest costs in 2017 were primarily the result of increased interest rates on over-advances from the Gerber Loan facility, plus approximately $35,000 accrued interest on the Dynamac Loan repayment plan.

 

Net Income (Loss).   The Company recorded a net loss of ($1,157,868) for the three months ended March 31, 2017, as compared to net loss of $(716,876) for the same period in 2016, an increase of $440,992 in the loss. The increase in the Net Loss was primarily due to the Company expensing, as of March 31, 2017, $430,000 of previously deferred offering costs, due to a delay in the IPO process greater than 90 days. There was also a small increase in Net Loss caused by the significant decline in revenues period over period and lower gross margins due to a less profitable mix of products. These declines were offset by reduced stock-based compensation & fees and by reduced expenses relating to a conversion of debt to stock in three month period ended March 31, 2016.

 

This represents basic (loss) per common share of $(0.48) for the 3 months ended March 31, 2017 as compared to basic (loss) per common share of $(0.13) for the same period in 2016, based upon basic weighted average common shares outstanding of 2,428,152 and 1,898,680, respectively.

 

  

NINE MONTHS ENDED MARCH 31, 2017 VS. MARCH 31, 2016

 

Revenues.   Total revenues for the nine months ended March 31, 2017 were $3,582,458, down from $7,002,891 in the same period in 2016, a decrease of $3,420,433 or 49%. The revenue decrease we believe was primarily due to a reduction in overall customer orders resulting from general uncertainty among customers due to the election in the fall. The reduced shipments limited our ability to purchase some parts in a timely fashion. The move of the California plant in July 2016 and the transfer of inventory and work in process back to the Connecticut plant contributed to reduced shipments. Also, there was a significant slow-down on an important program, due to a critical vendor part not being available. This program did not regain momentum until just recently in January 2017. The decrease in domestic revenues was $3,309,408 in that period for 2017 compared to the same period in 2016, and the decrease in revenues from foreign customers was $111,025 for those same periods.

 

Cost of Sales.   Cost of sales decreased $1,507,569 for the nine-month period ended March 31, 2017 from $4,136,725 in 2016 to $2,629,156 in 2017, a decrease of 36%. The decrease in the cost of sales was primarily due to the decrease in revenues. The gross profit margin for that same period for 2016 was 41%, whereas the gross profit margin for the same 2017 period was 27%. The decrease in the gross profit margin was due to lower volume and to a less profitable product mix. A significant slow-down for most of the nine month period on an important program, due to a critical vendor part not being available, added to the less profitable product mix.

 

General and Administrative Expenses.   Selling, general and administrative expenses were $2,925,143 for the 9 months ended March 31, 2017 compared to $2,596,430 for the same period in 2016, an increase of $328,713 or approximately 13%. The increase primarily resulted from the Company expensing $430,000 of previously deferred offering costs, due to a delay in the IPO process greater than 90 days. The increase in SG&A resulted also from an increase of stock-based compensation of $140,260, period over period, offset by savings resulting from the California plant move, management reductions of salary for savings over the 9 month period, and a recent utilization of the State of Connecticut’s work furlough program.

 

Engineering and Research Expenses.   Engineering and research expenses for the nine months ended March 31, 2017 were $572,380 compared to $725,874 in the same period in 2016, a decrease of $153,494 or 21%. The decrease in Engineering and Research expenses, period over period, resulted from all California Engineering expenses ending due to the California plant move in July 2016, plus small decreases in Connecticut Engineering & Research expenses over that period, partly attributable to the implementation recently of the State of Connecticut’s work furlough program.

 

Other Income (Expense).   Non-operating (loss) was $(110,625) for the nine months ended March 31, 2016 and $(420,513) for the same period in 2017, an increase of the non-operating loss of $(309,888). The increase in the loss primarily resulted from a $450,000 extension fee expense for the 9 months ended March 31, 2017 to extend the Dynamac Acquisition payment deadline, compared to a $107,375 loss on the conversion of debt to stock for an officer in 2016.

 

Interest (Expense and Credit costs) net.   Interest expense and credit costs were $216,290 for the nine months ended March 31, 2016 and $352,025 for the nine months ended March 31, 2017, an increase of $135,735. The higher interest costs in 2017 were primarily the result of increased interest rates on over-advances from the Gerber Loan facility plus approximately $105,000 accrued interest on the Dynamac Loan repayment plan.

 

Net Income (Loss).   The Company recorded a net loss of ($3,317,809) for the nine months ended March 31, 2017, as compared to net loss of $(829,170) for the same period in 2016, an increase in the net loss of ($2,488,639). The bulk of the increase in the Net Loss was caused by the significant decline in revenues period over period. Added to this were: increased non-cash stock compensations of 140,200; Microphase Instruments lease expenses; extra costs relative to the move of our California operations to Connecticut in July 2016; the $450,000 extension fee amount to extend the Dynamac acquisition payment timetable; the $430,000 one-time expense of previously deferred offering costs (due to a delay in the IPO process greater than 90 days); and continued extra costs in the “going public” process.

 

This represents a basic (loss) per common share of $(1.48) for the nine months ended March 31, 2017 as compared to a basic (loss) per common share of $(0.16) for the same period in 2016, based upon basic weighted average common shares outstanding of 2,242,459 and 1,710,981 respectively.

 

  

LIQUIDITY AND CAPITAL RESOURCES

 

Through the nine months ended March 31, 2017, the Company reported net loss of $3,317,809 and had cash of $17,723. At March 31, 2017, we had an accumulated deficit of $17,257,460. At March 31, 2017, the Company had a working capital deficit of $2,938,629 as compared to a working capital deficit of $2,301,573 as of June 30, 2016, an increase in the working capital deficit of $637,056.

 

Our financial condition raises substantial doubt that we will be able to continue as a “going concern”, and our Independent Registered Public Accounting Firm included an explanatory paragraph regarding this uncertainty in their report on our financial statements as of June 30, 2016 when we had an accumulated deficit of $13,939,651 and a working capital deficit of $2,301,573.

 

During the nine months ended March 31, 2017, the cash from operating activities was $(208,718) primarily because of the net loss of ($3,317,809) was offset by depreciation and amortization of $65,617, by non-cash charges related to stock compensation of $615,602, by a non-cash $450,000 Dynamac Contract revision fee, by non-cash deferred offering costs of $430,000, and by $11,750 amortization of debt discount. The cash from operating activities was decreased by a decrease in accrued expenses of $23,452, a decrease in customer deposits and deferred revenue of $44,600, and a gain on the sale of a fixet asset of $5,000. The cash from operating activities was increased by the reduction in other current assets of $424,802, by a reduction in accounts receivable of $757,777, the reduction of inventory of $169,290, the increase of accounts payable of $238,852, and the increase of deferred rent of $23,455.

 

During the nine-month period in 2016, the cash from operating activities was $347,102, primarily because the net loss of $(829,170) was offset by $475,400 of non-cash charges relating to stock compensation. Cash provided by operating activities was also increased primarily due to depreciation and amortization of $70,154, to decreases in inventory of $78,571 and accounts receivable of $210,711, and to increases in accounts payable of $141,270 and accrued expenses of $96,788

 

Cash (Used In) Investing Activities consisted of deposits on purchases of ($1,000,000), relative to the Dynamac acquisition and its related Amendment for the nine month period ended in March 31, 2017, offset by $5,000 in the sale of a fixed asset. Cash (Used In) Investing Activities for the same nine month period in 2016 was $(47,202) for the purchase of fixed assets and $(459,027) for the purchase of intangible assets related to the test & measurement business.

 

The Company has financed its operations in recent years primarily through a debt facility with a financial firm, loans from officers and related parties, and since April 2013 the private placement of common stock to accredited investors.

 

The Company entered into a revolving credit facility with Gerber Finance, Inc (“Gerber”) in 2012 with a maximum for this line, as amended, of $1,400,000. The outstanding balance as of March 31, 2017 was $902,505 and as of June 30, 2016 was $1,474,129. Under this agreement the Company receives funds based on a borrowing base which consists of various percentages of certain assets. The current interest rate is 7%, and there is an annual facility fee of 1.75%, plus monthly collateral monitoring fees of $1,500 and other fees. As of March 31, 2017 the Company was not in compliance with these financial covenants regarding minimum levels of net worth, net income and subordinated debt. The Company has received a waiver from Gerber regarding these covenants on November 15, 2016 and has been in discussions with Gerber regarding resolving the noncompliance.

 

Cash from Financing activities totaled $1,140,217 during the nine-month period ending March 31, 2017, primarily from the $571,624 pay down of the borrowings from our line from Gerber, $7,530 payments on equity credit lines, $5,501 payments on extended term arrangements, and $13,528 payments of long term debt. There was an increase in financing activities from a Note from the State of Connecticut for $300,000, the issuance of common stock for $585,000, proceeds from a loan with Spartan Capital for $634,500, proceeds of a short-term note and overdraft facility for $53,900 and Related Party loans of $165,000.

 

Financing activities provided $105,703 during the nine month period in 2016, primarily from the increased borrowings of $163,604 from our line from Gerber and $25,000 from officers, reduced by debt service of $27,579 for our equity lines, $11,329 for long term debt, $10,695 capital leases, $5,978 for payments for the extended term arrangement, and $27,320 payments to related parties.

 

During the nine months ended March 31, 2017, the Company completed a private placement for 144,445 shares issuable to accredited investors in an interim private placement of our common stock pursuant to section 4(2) of the Securities Act of 1933, as amended. Net proceeds of $585,000 were generated for the Company, after deducting $65,000 of placement fees. The terms also provide for 144,445 shares issuable upon exercise of warrants issued in connection with the private placement discussed above at an exercise price of $2.50 per share. Additionally, the Company entered into a one-year agreement for investment banking services which calls for $61,200 of consulting fees to be paid in cash from the proceeds of this placement and $50,000 to be paid in common stock, at the per share value of the Offering, upon completion of the Offering.

 

In December 2016, the Company also received a loan from a contract consultant of $33,900. Since the loan was initiated through a credit card company, the Company is paying the monthly minimum credit card payments on this balance until it is paid in full. The Company paid $10,000 down on this loan amount during the quarter ended March 31, 2017. As of March 31, 2017, the balance was $24,617. The entire loan is to be paid back with proceeds of the closing of the earlier of the Offering or an interim financing.

 

In December 2016, the Company utilized an overdraft credit line at People’s General Bank. The Company utilized the maximum available amount of $20,000 at the end of December 31, 2016. The balance, as of March 31, 2017 on this overdraft credit line was $19,444.

  

  

The terms and conditions of the purchase agreement with Dynamac require semi-annual payments due in February 2017, August 2017 and February 2018 of $550,000, which the Company imputed interest at 7%, its most favorable credit line rate, and as such was valued at $2,020,425 as of September 30, 2016. The payment owed to Dynamac in August 2016 had a grace period until October 22, 2016. On November 2, 2016, the Company entered into that certain First Amendment to Purchase Agreement with Dynamac (the “Dynamac Amendment” and, the January Dynamac Agreement, as amended by the Dynamac Amendment, the “Dynamac Transaction”), pursuant to which, among other things, the Company agreed that Dynamac would retain ownership in the Dynamac Assets until the Company has delivered all amounts owed pursuant to the Dynamac Transaction, with such amounts due upon closing of the Offering and the Company to pay such amounts from the proceeds thereof. The Company has accounted for the conditions of ownership being retained by Dynamac until the full balance is paid off (as described in the Form 8K) by removing the Intangible Assets and the Note Payable and treating the two Dynamac payments totaling $1,000,000 as Deposits / Prepayments for the future purchase of Dynamac.

 

Dynamac agreed that the first installment of such purchase price, in the amount of $559,000 would not be due until November 22, 2016, with subsequent payments due and payable as follows: (i) remaining balance of $1,500,000 shall be due and payable to Dynamac within 10 days of the closing of an initial public offering (“IPO”) of common stock of the Company (the “Offering Payment”); or (ii) if the IPO is delayed or does not close, Instruments shall continue to make the remaining three payments of $550,000 each according to the payment schedule contained in the Dynamac Agreement. As further consideration, the Company issued Dynamac 100,000 shares of restricted common stock of the Company valued at $450,000. Pursuant to the Second Dynamac Amendment dated November 22, 2016, the deadline for the first installment of such purchase price, in the amount of $559,000, was extended until December 9, 2016. Payment of this $559,000 for the first installment of this Second Dynamac Amendment was made in early December 2016. Failure to make a payment when due could result in the loss of the transaction and any payments made previously.

  

  

The amounts owed by the Company pursuant to the related party notes are ten months in arrears.

 

THE COMPANY HAS MATERIAL TERMED DEBT SERVICE COMMITMENTS AT MARCH 31, 2017 AS DISCUSSED IN NOTES 10, 11 & 12 SUMMARIZED AS FOLLOWS:

 

		RELATED PARTY LOANS				OTHER TERMED DEBT				EQUITY LINES OF CREDIT				SMALL BUSINESS EXPRESS JOB CREATION INCENTIVE LOAN				TOTAL
EFFECTIVE INTEREST RATE as of March 31, 2017			4.1	%			5.5	%			3.3	%			3	%
2017		$	390,278			$	11,509			$	37,375			$	—			$	439,163
2018			84,815				10,552				39,509				26,996				161,872
2019			63,482				9,599				234,879				30,308				338,268
2020			35,100				—				—				31,229				66,329
2021			—				—				—				32,179				32,179
thereafter			—				—				—				179,288				179,288
Total		$	573,675			$	31,660			$	311,763			$	300,000			$	1,217,098

 

In October 2016, the Company issued notes for bridge loans for a total $705,000 from accredited investors that generated $634,500 in net proceeds to the Company after deducting $70,500 of placement fees. Additionally, the Company entered into a one-year agreement for investment banking services which calls for $120,000 of consulting fees to be paid in cash from the proceeds of the bridge loans and $90,000 to be paid in common stock, at the per share value of the Initial Public Offering, upon the completion of the Offering. The Company used the proceeds to pay the second installment payment due to Dynamac, per the revised Acquisition schedule listed in the footnote 11.

 

The terms of this bridge debt are pursuant to note purchase agreements with purchasers that are accredited investors, for notes in the aggregate amount of $705,000, at an interest rate of 10% per annum (the “Notes’), from financing sources identified and placed by Spartan Capital Securities, LLC (“Spartan”) in accordance with a certain Selling Agreement by and between the Company and Spartan on October 13, 2016. Each of the Notes will be repaid as follows: (i) in the event that the Offering closes prior to the first anniversary of the issuance date of such Note, the amount is equal to (A) the entire original principal amount of such Note multiplied by 1.25 plus (B) the interest, if any, accrued quarterly, every 90 days, beginning on the date that is 90 days from the issuance date of such Note on the entire outstanding principal amount, will be due and payable by no later than five days from the date of the Offering; or (ii) in the event that the Offering has not closed prior to the first anniversary of the issuance date of such Note, on such first anniversary of the issuance date of such Note, the amount that is equal to (A) the amount that is equal to the entire original principal amount of such Note multiplied by 1.25. plus, (B) the interest accrued quarterly, every 90 days, beginning on the date that is 90 days from the issuance date of such Note on the entire outstanding principal amount will be due and payable. In the event that the Offering closes on a date that is sooner than 90 days from the issuance date of the Notes, no interest will accrue.

 

During the nine months ended March 31, 2017, the Company issued 100,000 shares of its common stock to Dynamac pursuant to the Dynamac Agreement valued at $450,000. In addition, a total of 91,666 shares of its common stock valued at $412,500 were issued to executives pursuant to employment agreements. Also, the Company issued 16,667 shares of its common stock to a consultant for services rendered valued at $75,000 during each of the 2^nd and 3^rd quarters.

 

During the nine months ended March 31, 2017, the Company completed a private placement for 144,445 shares to accredited investors in an interim private placement of our common stock pursuant to section 4(2) of the Securities Act of 1933, as amended. Net proceeds of $585,000 were generated for the Company, after deducting $65,000 of placement fees. The terms also provide for 144,445 shares issuable upon exercise of warrants issued in connection with the private placement discussed above at an exercise price of $2.50 per share. Additionally, the Company entered into a one-year agreement for investment banking services which calls for $61,200 of consulting fees to be paid in cash from the proceeds of this placement and $50,000 to be paid in common stock, at the per share value of the Offering, upon completion of the Offering.

 

On April 28, 2017, Microphase and certain Microphase shareholders entered into a Stock Exchange Agreement (“SEA”) with Digital Power Corporation (“DPW”), a NYSE-listed corporation. The Stock Exchange Agreement is described in detail in recent 8-K filings by both Microphase Corporation and DPW. The SEA allows for the exchange of stock between DPW and certain Microphase shareholders, whereby Digital Power Corporation will acquire 50.2% of the fully diluted shares of Microphase. Pursuant to the agreement, DPW will lend Microphase certain funds. This action was approved by Microphase’s Board of Directors and is consistent with the wishes of the majority shareholders. Pursuant to the closing of the SEA, DPW will elect a majority of the members of the Board of Directors of Microphase.

 

As of May 18, 2017, pursuant to the SEA, $200,000 was funded to Microphase in the form of a loan by DPW. With the closure of the SEA expected in late May 2017, additional funding from DPW is expected.

 

Regarding the initial public offering (“IPO”), it is the intention of both Microphase and DPW to continue the IPO process, the first step of which is the closure of the Share Exchange Agreement.

 

  

CURRENT STATUS AND MANAGEMENT’S PLAN OF OPERATIONS

 

The Company has been seeking to diversify its market focus beyond its core products. By utilizing our current capabilities together with positioning ourselves through targeted acquisitions, strategic alliances and product partnering we believe we can augment our current product offerings enabling us to continue to introduce a mix of new military and commercial products for the wireless telecom, autonomous auto, test & measurements, and medical instrumentation markets. This strategy should enable Microphase to broaden its customer base and reduce risk by spreading its revenue base across multiple market sectors. Targeted strategic acquisitions should increase our market share and the technology value of our product lines as well as broaden our product offering and diversify our customer base.

 

The Company plans on continuing financing operations through its debt facility with Gerber Financial, the issuance of debt to management, the settlement of debts for equity, and the sale of common and preferred securities though private placements, until such time it can complete its initial public offering, when and if declared effective, as described in its registration statement and impending amendment(s) on Form S-1, during fiscal 2018. The Company also continues to boost efforts to increase the sales of its traditional RF and DLVA business and anticipates the product growth plan to include the launch of its initial T&M products by the later portion of calendar 2017 implementing the assets to be acquired from Dynamac pursuant to the amended purchase agreement. Management continues to take steps in fiscal 2017 to contain operating expenses, including a reduction in the number of employees, primarily by consolidating all of its traditional design to manufacture RF and DLVA business into the Shelton, Connecticut location. The Company has expanded its facility in square footage and utility as such to house both our traditional RF and DLVA business and enable the launch and delivery of its initial T&M products.

 

Management believes that these steps will permit the Company to maintain the continuation of our traditional operations, and should we become further capitalized, allow us to implement our product growth plan, which we believe will enable the Company to achieve and maintain a level of operations which generates sustainable profitability and to continue as a going concern. However there can be no assurance that this will be the case.

 

CRITICAL ACCOUNTING POLICIES, ESTIMATES AND ASSUMPTIONS

 

The SEC defines critical accounting policies as those that are, in management’s view, most important to the portrayal of our financial condition and results of operations and those that require significant judgments and estimates.

 

The discussion and analysis of our financial condition and results of operations is based upon our financial statements that have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets and liabilities. On an on-going basis, we evaluate our estimates including the allowance for doubtful accounts, the salability and recoverability of inventory, income taxes and contingencies. We base our estimates on historical experience and on other assumptions that we believe to be reasonable under the circumstances, the results of which form our basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

 

We cannot predict what future laws and regulations might be passed that could have a material effect on our results of operations. We assess the impact of significant changes in laws and regulations on a regular basis and update the assumptions and estimates used to prepare our financial statements when we deem it necessary.

 

Allowance for Doubtful Accounts

 

The Company provides an allowance for doubtful accounts equal to the estimated uncollectible amounts. The Company’s estimate is based on historical collection experience and a review of the current status of Accounts Receivable. It is reasonably possible that the Company’s estimate of the allowance for doubtful accounts will change in the future.

 

Depreciation and Amortization

 

Property and equipment are recorded at cost. Depreciation is provided over the estimated useful lives of the related assets using the straight-line method for financial statement purposes. The Company uses other depreciation methods (generally, accelerated depreciation methods) for tax purposes where appropriate. Amortization of leasehold improvements is computed using the straight-line method over the shorter of the remaining lease term or the estimated useful lives of the improvements.

 

  

Income Taxes

 

The Company accounts for income taxes under the provisions of Financial Accounting Standards Board’s (“FASB”) Accounting Standards Codification (“ASC”) 740 “Income Tax”. ASC 740 requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred tax assets and liabilities are determined based on the differences between the financial statement carrying amounts and tax bases of certain assets and liabilities using enacted tax rates in effect in the years in which the differences are expected to reverse. The deferred tax assets and liabilities are classified according to the financial statement classification of the assets and liabilities generating the differences. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. The Company has adopted the provisions of FASB ASC 740-10-05 “Accounting for Uncertainty in Income Taxes”. The ASC clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements. The ASC prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. The ASC provides guidance on de-recognition, classification, interest and penalties, accounting in interim periods, disclosure and transition.

 

Inventory Obsolescence

 

Inventory quantities and related values are analyzed at the end of each fiscal quarter to determine those items that are slow moving or obsolete. An inventory reserve is recorded for those items determined to be slow moving with a corresponding charge to cost of goods sold. Inventory items that are determined obsolete are written off currently with a corresponding charge to cost of goods sold.

 

Revenue Recognition

 

Revenues and costs of revenues are recognized during the period in which the products are shipped. The Company applies the provisions of FASB Accounting Standards Codification (“ASC”) 605-10, Revenue Recognition in Financial Statements ASC 605-10, which provides guidance on the recognition, presentation, and disclosure of revenue in financial statements filed with the SEC. ASC 605-10 outlines the basic criteria that must be met to recognize revenue and provides guidance for disclosure related to revenue recognition policies. In general, the Company recognizes revenue for sale of products when (i) persuasive evidence of an arrangement exists, (ii) delivery has occurred, (iii) the fee is fixed or determinable, and (iv) the collectability is reasonably assured.

 

The Company’s sources of revenue are from the sale of various component detector log video amplifiers and filters. Revenue is recognized upon shipment of such products, FOB shipping point. The Company offers a 100% satisfaction guarantee against defects for 90 days after the sale of their product except for a few circumstances. There are no maintenance or service contracts related to any product sale.

 

OFF BALANCE SHEET TRANSACTIONS

 

As of March 31, 2017, we did not have any off-balance sheet arrangements.

 

  

ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

The Company is not exposed to changes in interest rates as the Company has no debt arrangements and no investments in certain held-to-maturity securities. Under our current policies, we do not use interest rate derivative instruments to manage exposure to interest rate changes. A hypothetical 100 basis point adverse move in interest rates along the entire interest rate yield curve would not materially affect the fair value of any financial instruments at March 31, 2017.

 

ITEM 4.

CONTROLS AND PROCEDURES

 

(a) Evaluation of Disclosure Controls and Procedures.

 

Under the supervision and with the participation of our management, including the Interim Chief Executive Officer and Chief Financial Officer, we have evaluated the effectiveness of our disclosure controls and procedures as required by Exchange Act Rule 13a-15(b) as of the end of the period covered by this report. Based on that evaluation, the Interim Chief Executive Officer and Chief Financial Officer have concluded that these disclosure controls and procedures are effective.

 

(b) Changes in Internal Control over Financial Reporting.

 

There were no changes in our internal control over financial reporting during the quarter ended March 31, 2017 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

  

PART II. OTHER INFORMATION

 

ITEM 1.

LEGAL PROCEEDINGS

 

We are currently not involved in any litigation that we believe could have a material adverse effect on our financial condition or results of operations. There is no action, suit, proceeding, inquiry or investigation before or by any court, public board, government agency, self-regulatory organization or body pending or, to the knowledge of the executive officers of our company or any of our subsidiaries, threatened against or affecting our company, our common stock, any of our subsidiaries or of our companies or our subsidiaries’ officers or directors in their capacities as such, in which an adverse decision could have a material adverse effect.

 

ITEM 1A.

RISK FACTORS.

 

We believe there are no changes that constitute material changes from the risk factors previously disclosed in our Annual Report on Form 10-K for the Fiscal Year Ended June 30, 2016, filed with the SEC on October 3, 2016.

 

ITEM 2.

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.

 

During the nine months ended March 31, 2017 the Company issued 21,667 shares of its Common Stock to two Officers and Directors for services, valued at $97,500, which was charged to operations. During the same period, the Company issued 100,000 shares of its common stock, valued at $450,000, to Dynamac pursuant to the Dynamac Agreement. In addition, a total of 70,000 shares of its common stock, valued at $315,000, were issued to top executives pursuant to revised employment agreements. During that same 9 month period, the Company also issued 33,333 shares of its common stock, valued at $150,000, to a consultant for services rendered.

 

During the nine months ended March 31, 2017, the Company completed a private placement for 144,445 shares issuable to accredited investors in an interim private placement of our common stock pursuant to section 4(2) of the Securities Act of 1933, as amended. Net proceeds of $585,000 were generated for the Company, after deducting $65,000 of placement fees. The terms also provide for 144,445 shares issuable upon exercise of warrants issued in connection with the private placement discussed above at an exercise price of $2.50 per share. Additionally, the Company entered into a one year agreement for investment banking services which calls for $61,200 of consulting fees to be paid in cash from the proceeds of this placement and $50,000 to be paid in common stock, at the per share value of the Offering, upon completion of the Offering.

 

The above issuances were made in reliance on an exemption from registration set forth in Section 4(a)(2) of the Securities Act of 1933, as amended, and/or Regulation D promulgated there under.

 

  

ITEM 3.

DEFAULTS UPON SENIOR SECURITIES.

 

There has been no default in the payment of principal, interest sinking or purchase fund installment, or any other material default, with respect to indebtedness of the Company.

 

ITEM 4.

MINE SAFETY DISCLOSURES.

 

Not applicable.

 

ITEM 5.

OTHER INFORMATION.

 

There is no other information required to be disclosed under this item which was not previously disclosed.

 

ITEM 6.

EXHIBITS

  

EXHIBITS
10.1		Third Amendment to Purchase Agreement by and among Microphase Instruments, LLC, Dynamac, Inc. and Microphase Corporation, dated as of February 21, 2017 (incorporated herein by reference to the Company’s Current Report on Form 8-K filed with the SEC on February 28, 2017)

  

  

17.1		Letter of resignation from Michael Ghadaksaz *
31.1		Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes - Oxley Act of 2002.*
31.2		Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes - Oxley Act of 2002.*
32.1		Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes - Oxley Act of 2002.*
32.2		Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes - Oxley Act of 2002.*
101.INS		XBRL Instance Document*
101.SCH		XBRL Taxonomy Extension Schema Document*
101.CAL		XBRL Taxonomy Extension Calculation Linkbase Document*
101.DEF		XBRL Taxonomy Extension Definition Linkbase Document*
101.LAB		XBRL Taxonomy Extension Label Linkbase Document*
101.PRE		XBRL Taxonomy Extension Presentation Linkbase Document*

 

* filed herewith

 

  

SIGNATURES

 

Pursuant to the requirements of the Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant, has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

	MICROPHASE CORPORATION
Dated: May 22, 2017	By:	/s/ Necdet Ergul
	Name:	Necdet Ergul
	Title:	Interim Chief Executive Officer (Principal Executive Officer)
	By:	/s/  James Ashman
	Name:	James Ashman
	Title:	Chief Financial Officer
		(Principal Financial Officer)
		(Principal Accounting Officer)