ITEM 1. BUSINESS.
FORWARD-LOOKING CAUTIONARY STATEMENT
In an effort to provide investors a balanced view of the Company’s current condition and future growth opportunities, this Annual Report on Form 10-K may include comments by the Company’s management about future performance. These statements which are not historical information are “forward-looking statements” pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These, and other forward-looking statements, are subject to business and economic risks and uncertainties that could cause actual results to differ materially from those discussed. These risks and uncertainties include, but are not limited to: risks associated with demand for and market acceptance of existing and newly developed products as to which the Company has made significant investments; general economic and industry conditions; slower than anticipated penetration into the satellite communications, mobile radio and commercial and defense electronics markets; competitive products and pricing pressures; increased pricing pressure from our customers; risks relating to governmental regulatory actions in broadcast, communications and defense programs; as well as other risks and uncertainties, including but not limited to those detailed from time to time in the Company’s Securities and Exchange Commission filings. These forward-looking statements are made only as of the date hereof, and the Company undertakes no obligation to update or revise the forward-looking statements, whether as a result of new information, future events or otherwise. You are encouraged to review Microwave Filter Company’s 2017 Annual Report and other Securities and Exchange Commission filings. Forward looking statements may be made directly in this document or “incorporated by reference” from other documents. You can find many of these statements by looking for words like “believes,” “expects,” “anticipates,” “estimates,” or similar expressions.
GENERAL DEVELOPMENT OF BUSINESS
Microwave Filter Company, Inc. (hereinafter referred to as MFC) was incorporated in New York State on September 26, 1967. MFC is the successor of Microwave Filter Company which was founded in April of 1967.
On July 1, 1990, MFC acquired Niagara Scientific, Inc. (hereinafter referred to as NSI.)
MFC and its subsidiaries are sometimes referred to collectively as the “Company.”
NARRATIVE DESCRIPTION OF BUSINESS
Microwave Filter Company, Inc. (MFC)
Established in 1967 in East Syracuse, New York, MFC occupies a modern 40,000 square foot facility with an impressive complement of analytical and design software, test instrumentation, prototype and manufacturing equipment to create passive filters, components and sub systems in the frequency range of 10 MHz to 50 GHz.
MFC manufactures radio frequency (RF) filters and related components for eliminating interference and facilitating signal processing for such markets as Cable Television, Broadcast, Commercial and Military Communications, Avionics, Radar, Navigation and Defense. The Company designs waveguide, stripline/ microstrip, transmission line, miniature/subminiature and lumped constant filters. Configurations include bandpass, highpass, lowpass, bandstop, multiplexers, tunable notch, tunable bandpass, high power filters, amplitude equalized, delay equalized and filter networks. The Company actively produces over 1,700 standard products and has designed more than 5,000 custom products for specialized applications.
The manufacturing facility includes a modern CAD system, a test department with automated network analyzers to 50 GHz, a high capacity conveyor soldering oven and a fully compliant finishing operation. The Company’s Quality Management System has been certified ISO 9001:2008 recognizing the Company as a quality vendor.
Efficient computer simulation, design and analysis software enhanced by proprietary MFC developed software, allow rapid and accurate filter development at reasonable cost. Automated network analyzers provide rigorous product testing and performance data storage on a serial number basis in most cases.
A network based CAD system allows the transfer of data and programs to the CNC turning and milling centers for fabrication of machined parts. Prototype PC boards are similarly produced by computer controlled PC board mills.
A Grieve high capacity conveyor soldering oven is used for production of large quantity assemblies while smaller production quantities are assembled at hand soldering or brazing stations.
ISO 9001:2008 contract and design review procedures coupled with a QA department that is compliant with MIL-I-45208 inspection systems and MIL-STD-45622 calibration system standards assures process and product integrity.
Other in-house testing facilities include environmental chambers capable of testing products for temperatures of -40 to 200 degrees Celsius and humidity up to 100 percent. Several high power amplifiers are available for power tests. We have 2500 watt capability from 88-108Mhz with 200 watt capability up to 2200 Mhz. Facilities are also available for salt spray, sand and dust, shock and vibration, RFI leakage and altitude testing.
MARKETS
Microwave Filter Company, Inc. (MFC)
RF and Microwave - This market encompasses both commercial and military applications. Filters in defense applications are used for such purposes as air to ground communications, radar and land communications. In commercial areas, filters are used to protect such equipment as receivers, transmitters, transceivers and any other electronics used for signal processing. In addition to filters, this market is also served with MFC’s Ferrosorb product line. Ferrosorb is a microwave absorbing material available in sheets, loads and a variety of other shapes. The product is used to offer protection by shielding signals or absorbing selective bands.
MFC’s RF/Microwave products are sold primarily to Original Equipment Manufacturers that serve the mobile radio, commercial communications and defense electronics markets. The Company continues to invest in production engineering and infrastructure development to penetrate OEM market segments as they become popular. MFC is concentrating its technical resources and product development efforts toward potential high volume customers as part of a concentrated effort to provide substantial long-term growth. The Company is also actively sourcing complimentary products to distribute to augment sales.
Satellite - Microwave filters for removing interference are provided for commercial antennas. A variety of products are available that offer protection and or solutions to interference that affects the feedhorn, downconverter and receiver. An extensive offering of filters are also available for satellite services utilizing the higher KU and KA frequency bands. Management expects the demand for these types of filters to continue with the proliferation of earth stations world wide and increased sources of interference.
Mobile Radio and Data Links - MFC provides filters to a variety of mobile radio services such as cellular telephone, two way radio and paging to eliminate interference in transmit or receive equipment. More recently there has been demand for filters and diplexers for broadband microwave applications for Voice Over Internet Protocol (“VOIP”) with the number of services increasing and ISP use. The advent of license exempt applications has increased the need for interference filtering. With the number of services increasing and our air waves becoming more congested, filters are increasingly important to many transmit operations.
Cable Television (CATV) - The CATV marketplace continues to change as cable operators begin the process of migrating to the latest DOCSIS (Data Over Cable Service Interface Specification) standard, DOCSIS 3.1.
DOCSIS 3.1 continues the evolution of digital CATV systems with the focus of improving spectrum efficiency and providing greater programming flexibility to benefit consumers. These changes move CATV systems from one that is channelized to one segmented into larger frequency blocks. The ultimate goal of DOCSIS 3.1 is to expand the operating frequency capabilities beyond 1700MHz. DOCSIS 3.1 will provide substantial increases in internet speed and allow for increased TV picture resolution; i.e., Ultra High Definition (UHD) or 4K TV and beyond. DOCSIS 3.1 allows CATV operators to remain competitive with their fiber optic counterparts.
MFC primarily serves this market with standard and custom filters used at the headend to process signals and remove interference. A very popular application involves removing or re-routing TV channels to organize programming line ups in multi-dwelling facilities (i.e. hospitals, senior living facilities.)
Since all cable operators initially receive substantial programming via satellite, products from our satellite market cross over into the cable television market. C-band satellite receive systems are prone to various types of terrestrial interference which are curable in many cases by applying MFC bandpass filters.
Broadcast - MFC continues to develop and expand its series of wireless diplexers.
Due to analog to digital conversion within the TV (UHF/VHF) broadcast industry, Microwave Filter Company has developed new filter products to accommodate the wider bandwidths necessary for the digital transmission. In order to accommodate the wider digital TV signal bandwidths, customers have been forced to replace their existing (narrower bandwidth) analog filters with (wider bandwidth) digital filters.
As a result of the recent Broadcast Incentive Auction, UHF channels 38-51 have been auctioned off for Internet Service Provider operations. TV Stations within this channel range that wish to continue broadcasting will be relocated to the remaining UHF spectrum of channels 14-36. This reallocation is expected to align well with MFC’s UHF broadcast filters and combining systems as the changeovers take place.
MFC also continues to serve other segments of the Broadcast industry such as FM radio, STL (TV Studio-to-Transmitter Links) and the BAS (Broadcast Auxiliary Service) band (formerly known as the ENG (Electronic News Gathering) band.)
WORLD TRADE
The Company’s international sales decreased $349,615 or 46.4% to $404,315 for the fiscal year ended September 30, 2017 when compared to international sales of $753,930 during the fiscal year ended September 30, 2016. The decrease in international sales can primarily be attributed to decreases in the sales of the Company’s Satellite and Broadcast TV products.
SUPPLIERS
The Company depends on outside suppliers for raw materials, components and parts, and services. Although items are generally available from a number of suppliers, the Company purchases certain raw materials and components from a single supplier. If such a supplier should cease to supply an item, the Company believes that new sources could be found to provide the raw materials and components. However, manufacturing delays and added costs could result. The Company has not experienced significant delays of this nature in the past, but there can be no assurance that delays in delivery due to supply shortages will not occur in the future. Substantial periods of lead time for delivery of certain materials are sometimes experienced by the Company, making it necessary to inventory varied quantities of materials.
PATENTS AND LICENSES
The Company has no patents, trademarks, copyrights, licenses or franchises of material importance.
SEASONAL FLUCTUATIONS
There are no significant seasonal fluctuations in the Company’s business.
GOVERNMENT CONTRACTS
The Company is not dependent in any material respect on government contracts.
SIGNIFICANT CUSTOMERS
Sales to one customer represented 41.2% of total sales for the fiscal year ended September 30, 2017 compared to 28.1% of total sales for the fiscal year ended September 30, 2016. These sales are in connection with a multiyear program in which the Company is a subcontractor. A loss of this customer or programs related to this customer could materially impact the Company.
EXPORT CONTROLS
Our products are subject to the Export Administration Regulations (“EAR”) administered by the U.S. Department of Commerce and may, in certain instances, be subject to the International Traffic in Arms Regulations (“ITAR”) administered by the U.S. Department of State. EAR restricts the export of defense products, technical data and defense services. We believe that we have implemented internal export procedures and controls in order to achieve compliance with the applicable U.S. export control regulations.
ENVIRONMENTAL REGULATION
Compliance with federal, state and local requirements relating to the discharge of substances into the environment, the disposal of hazardous waste and other activities affecting the environment has been accomplished without material effect on the Company’s liquidity and capital resources, competitive position or financial statements and management believes that such compliance will not have a material effect on the Company’s liquidity and capital resources, competitive position or financial statements in the future
BACKLOG
At September 30, 2017, the Company’s total backlog of orders, which represents firm orders from customers, was $702,665 compared to $314,717 at September 30, 2016. The total Company backlog at September 30, 2017 is scheduled to ship during fiscal 2018. However, backlog is not necessarily indicative of future sales. Accordingly, the Company does not believe that its backlog as of any particular date is representative of actual sales for any succeeding period.
EMPLOYEES
At September 30, 2017, the Company employed 29 full-time and 7 part-time employees.
RESEARCH AND DEVELOPMENT
The Company maintains and expects to continue to maintain an active research and development program. The Company believes that such a program is needed to maintain its competitive position in existing markets and to provide products for emerging markets. Costs in connection with research and development were $326,965 and $360,437 for the fiscal years 2017 and 2016, respectively. Research and development costs are charged to operations as incurred.
COMPETITION
The principal competitive factors facing both MFC are price, technical performance, service and the ability to produce in quantity to specific delivery schedules. Based on these factors, the Company believes it competes favorably in its markets.
AVAILABLE INFORMATION
Our Internet address is www.microwavefilter.com. There we make available, free of charge, our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, our proxy statement and any amendments to those reports or statements filed or furnished pursuant to Section 13(a) and 15(d) of the Securities Exchange Act of 1934, as amended, as soon as reasonably practicable after we electronically file such material with, or furnish it to, the Securities and Exchange Commission (SEC). Our SEC reports can be accessed through the investor relations link of our website. The information found on our website is not part of this or any other report we file with or furnish to the SEC.
The public may read and copy any materials that we file with the SEC at the SEC’s Public Reference Room located at 450 Fifth Street NW, Washington, DC 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC also maintains electronic versions of our reports on its website at www.sec.gov.
ITEM 1A.
ITEM 1A. RISK FACTORS
As a “smaller reporting company”, we are not required to provide information required by this item.
ITEM 1B.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2.
ITEM 2. PROPERTIES.
MFC’s office and manufacturing facility is located at 6743 Kinne Street, East Syracuse, New York. This facility, which is owned by MFC, consists of 40,000 square feet of office and manufacturing space located on 3.7 acres.
On July 2, 2013, Microwave Filter Company, Inc. (the “Company”) entered into a Ten Year Term Loan with KeyBank National Association in the amount of Five Hundred Thousand and No/100 Dollars ($500,000.00). The amount of all advances outstanding together with accrued interest thereon shall be due and payable on July 2, 2023 (“Maturity”). The Company shall pay interest on the outstanding principal balance of this Note at the rate per annum equal to 4.5%. The net proceeds from the Term Loan will be available to provide working capital as needed. The total amount outstanding as of September 30, 2017 and 2016 was $318,998 and $365,650, respectively.
The Company has secured this Note by: (a) a Mortgage, Assignment of Rents, Security Agreement and Fixture Filing which creates a 1st lien on real property situated in the Town of Dewitt, County of Onondaga, and State of New York and known as 6743 Kinne Street, East Syracuse, New York; (b) a General Assignment of Rents and Leases; (c) an Environmental Compliance and Indemnification; and (d) such other security as may now or hereafter be given to Lender as collateral for the loan.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS.
None.
ITEM 4.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Company’s securities are currently quoted on the OTC marketplace (www.otcmarkets.com) under the symbol “MFCO.”
The following table shows the high and low closing sales prices for MFC’s common stock for each full quarterly period within the two most recent fiscal years. The quotations represent prices in the over-the-counter market between dealers in securities. They do not include retail mark-ups, mark-downs or commissions.
The Company had 549 holders of record of its common stock at November 16, 2017. Included in this number are shares held in “nominee” or “street” name and, therefore, the number of beneficial owners of the common stock is believed to be substantially in excess of the foregoing number.
Payment of future dividends, if any, will be at the discretion of the Board of Directors after taking into consideration various factors, including the Company’s financial condition, operating results and current and anticipated cash needs.
ITEM 7.
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Microwave Filter Company, Inc. (MFC) operates primarily in the United States and principally in one industry. The Company extends credit to business customers, including original equipment manufacturers (OEMs), distributors and other end users, based upon ongoing credit evaluations. Microwave Filter Company, Inc. designs, develops, manufactures and sells electronic filters, both for radio and microwave frequencies, to help process signal distribution and to prevent unwanted signals from disrupting transmit or receive operations. Markets served include cable television, television and radio broadcast, satellite broadcast, mobile radio and commercial and defense electronics. NSI’s sales consist of spare parts orders.
RESULTS OF OPERATIONS
The following table sets forth the Company’s net sales by major product group for each of the fiscal years in the two year period ended September 30, 2017. Certain reclassifications were made to last year’s product groupings to conform to the current year presentation.
Fiscal 2017 compared to fiscal 2016
Consolidated net sales for the fiscal year ended September 30, 2017 equaled $3,036,669, a decrease of $508,661 or 14.3%, when compared to consolidated net sales of $3,545,330 during the fiscal year ended September 30, 2016.
MFC’s RF/Microwave product sales increased $150,643 or 10.0% to $1,651,812 during the fiscal year ended September 30, 2017 when compared to sales of $1,501,169 during the fiscal year ended September 30, 2016. MFC’s RF/Microwave products are sold primarily to Original Equipment Manufacturers (OEM) that serve the mobile radio, commercial communications and defense electronics markets. Sales to one OEM customer increased $256,485 to $1,252,005, or 41.2% of total sales, during the fiscal year ended September 30, 2017 compared to sales of $995,520, or 28.1% of total sales, during the fiscal year ended September 30, 2016. These sales are in connection with a multiyear program in which the Company is a subcontractor. Sales to the U.S. Government decreased $89,100 to $39,000 for the fiscal year ended September 30, 2017 when compared to sales of $128,100 for the fiscal year ended September 30, 2016. The Company continues to invest in production engineering and infrastructure development to penetrate OEM market segments as they become popular. MFC is concentrating its technical resources and product development efforts toward potential high volume customers as part of a concentrated effort to provide substantial long-term growth. Over the last year, MFC, in conjunction with various OEM’s, has developed and supplied prototypes as well as small production runs in support of new programs being introduced to the marketplace. It is our belief that a continuation of this effort will help increase sales as well as reinforcing MFC’s position as a quality manufacturer of RF filters and assemblies.
MFC’s Satellite product sales decreased $356,355 or 31.4% to $778,775 during the fiscal year ended September 30, 2017 when compared to sales of $1,135,130 during the fiscal year ended September 30, 2016. The decrease can be attributed to a decrease in demand for filters which suppress strong out-of-band interference caused by military and civilian radar systems and other sources. Despite the decrease in sales, management expects demand for these types of filters to continue with the proliferation of earth stations world wide and increased sources of interference.
MFC’s Cable TV product sales decreased $211,729 or 39.7% to $322,193 during the fiscal year ended September 30, 2017 when compared to Cable TV product sales of $533,922 during the fiscal year ended September 30, 2016. The decrease in sales can primarily be attributed to orders from two customers with specific cable applications last year. Management continues to project flat or a decrease in demand for Cable TV products due to the shift from analog to digital television. Due to the inherent nature of digital modulation versus analog modulation, fewer filters will be required. The Company has developed filters for digital television and there will still be requirements for analog filters for limited applications in commercial and private cable systems.
MFC’s Broadcast TV product sales decreased $90,514 or 24.7% to $276,443 for the fiscal year ended September 30, 2017 when compared to sales of $366,957 for the fiscal year ended September 30, 2016. The decrease can primarily be attributed to a decrease in sales of wireless diplexers which were sold to one customer last year.
At September 30, 2017, the Company’s total backlog of orders, which represents firm orders from customers, equaled $702,665 compared to $314,717 at September 30, 2016. The total Company backlog at September 30, 2017 is scheduled to ship during fiscal 2018. However, backlog is not necessarily indicative of future sales. Accordingly, the Company does not believe that its backlog as of any particular date is representative of actual sales for any succeeding period.
Gross profit decreased $291,478 or 22.4% to $1,008,669 during the fiscal year ended September 30, 2017 when compared to gross profit of $1,300,147 during the fiscal year ended September 30, 2016. The dollar decrease can primarily be attributed to the lower sales volume this year when compared to the same period last year. As a percentage of sales, gross profit equaled 33.2% during the fiscal year ended September 30, 2017 compared to 36.7% during the fiscal year ended September 30, 2016.The decrease can be attributed to higher direct material costs as a percentage of sales primarily due to product sales mix and the lower sales volume this year providing a lower base to absorb expenses.
Selling, general and administrative (SG&A) expenses decreased $67,696 or 5.1% to $1,261,755 during the fiscal year ended September 30, 2017 when compared to SG&A expenses of $1,329,451 during the fiscal year ended September 30, 2016. Planned increases in advertising and promotional expenses were offset by lower payroll and payroll related expenses when compared to the same period last year. The Company has been participating in the New York State Shared Work Program which allows employers to reduce the hours of all or a particular group of employees. The employees whose hours are reduced can receive partial unemployment insurance benefits to supplement their lost wages or elect to use accrued vacation. As a percentage of sales, SG&A expenses increased to 41.6% during fiscal 2017 compared to 37.5% during fiscal 2016 primarily due to the lower sales volume this year when compared to the same period last year providing a lower base to absorb expenses.
Other income (expense) was an expense of $11,130 for the fiscal year ended September 30, 2017 compared to expense of $6,290 for the fiscal year ended September 30, 2016 primarily due to interest expense of $15,545 offset by miscellaneous non-operating income of $4,415 for the fiscal year ended September 30, 2017 and interest expense of $17,680 offset by miscellaneous non-operating income of $11,390 for the fiscal year ended September 30, 2016. Other income generally consists of interest income, sales of scrap material, the forfeiture of non-refundable deposits and other incidental items.
The Company recorded income taxes of $0 for the fiscal year ended September 30, 2017 compared to a benefit for income taxes of $3,000 for the fiscal year ended September 30, 2016. The benefit for fiscal 2016 can be attributed to a prior year’s federal refund. Any provision for income tax expense was fully offset by a reversal of a portion of the Company’s valuation allowance. Any benefit for losses has been subject to a valuation allowance since the realization of the deferred tax benefit is not considered more likely than not. As required by FASB ASC 740 the Company has evaluated the positive and negative evidence bearing upon the realization of its deferred tax assets. The Company has determined that, at this time, it is more likely than not that the Company will not realize all of the benefits of federal and state deferred tax assets, and, as a result, a valuation allowance was established.
LIQUIDITY AND CAPITAL RESOURCES
MFC defines liquidity as the ability to generate adequate funds to meet its operating and capital needs. The Company’s primary source of liquidity has been funds provided by operations and its existing cash balances.
Cash and cash equivalents decreased $255,177 to $667,940 at September 30, 2017 when compared to $923,117 at September 30, 2016. The decrease was a result of $151,379 in net cash used in operating activities, $56,335 in net cash used for capital expenditures, $46,652 in net cash used for repayment of a note payable and $811 in net cash used to purchase treasury stock.
The $151,379 in net cash used in operating activities can primarily be attributed to the net loss of $264,216 net of depreciation expense of $81,488 and favorable changes in assets and liabilities. The decrease of $33,815 in prepaid expenses and other current assets can primarily be attributed to the timing of payments. The increase in accounts payable of $42,579 can primarily be attributed to the timing of purchases and payments. The decrease in accrued compensated absences of $48,452 can primarily be attributed to accrued vacation used during the fiscal year. The Company has been participating in the New York State Shared Work Program which allows employers to reduce the hours of all or a particular group of employees. The employees whose hours are reduced can receive partial unemployment insurance benefits to supplement their lost wages or elect to use accrued vacation.
The capital expenditures of $56,335 consisted primarily of computer hardware and production equipment.
On July 2, 2013, Microwave Filter Company, Inc. (the “Company”) entered into a Ten Year Term Loan with KeyBank National Association in the amount of Five Hundred Thousand and No/100 Dollars ($500,000.00). The amount of all advances outstanding together with accrued interest thereon shall be due and payable on July 2, 2023 (“Maturity”). The Company shall pay interest on the outstanding principal balance of this Note at the rate per annum equal to 4.5%. The net proceeds from the Term Loan will be available to provide working capital as needed. The total amount outstanding as of September 30, 2017 and 2016 was $318,998 and $365,650, respectively.
The Company has secured this Note by: (a) a Mortgage, Assignment of Rents, Security Agreement and Fixture Filing which creates a 1st lien on real property situated in the Town of Dewitt, County of Onondaga, and State of New York and known as 6743 Kinne Street, East Syracuse, New York; (b) a General Assignment of Rents and Leases; (c) an Environmental Compliance and Indemnification; and (d) such other security as may now or hereafter be given to Lender as collateral for the loan.
Management believes that its working capital requirements for the foreseeable future will be met by its existing cash balances, future cash flows from operations and its current credit arrangements.
Off-Balance Sheet Arrangements
At September 30, 2017 and 2016, the Company did not have any unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which might have been established for the purpose of facilitating off-balance sheet arrangements.
Critical Accounting Policies
The Company’s consolidated financial statements are based on the application of accounting principles generally accepted in the United States of America (GAAP). GAAP requires the use of estimates, assumptions, judgments and subjective interpretations of accounting principles that have an impact on the assets, liabilities, revenue and expense amounts reported. The Company believes its use of estimates and underlying accounting assumptions adhere to GAAP and are consistently applied. Valuations based on estimates are reviewed for reasonableness and adequacy on a consistent basis throughout the Company. Primary areas where financial information of the Company is subject to the use of estimates, assumptions and the application of judgment include revenues, receivables, inventories, warranty reserves and taxes.
Revenues from product sales are recorded as the products are shipped and title and risk of loss have passed to the customer, provided that no significant vendor or post-contract support obligations remain and the collection of the related receivable is probable. Billings in advance of the Company’s performance of such work are reflected as customer deposits in the accompanying consolidated balance sheet.
Allowances for doubtful accounts are based on estimates of losses related to customer receivable balances. The establishment of reserves requires the use of judgment and assumptions regarding the potential for losses on receivable balances.
The Company’s inventories are valued at the lower of cost or market. The Company uses certain estimates and judgments and considers several factors including product demand and changes in technology to provide for excess and obsolescence reserves to properly value inventory.
The Company established a warranty reserve which provides for the estimated cost of product returns based upon historical experience and any known conditions or circumstances. Our warranty obligation is affected by product that does not meet specifications and performance requirements and any related costs of addressing such matters.
The Company has deferred tax assets that are reviewed for recoverability and valued accordingly. These assets are evaluated by using estimates of future taxable income streams and the impact of tax planning strategies. Valuations related to tax accruals and assets can be impacted by changes to tax codes, changes in statutory tax rates and the Company’s future taxable income levels. The Company has provided a full valuation allowance against its deferred tax assets.
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
In an effort to provide investors a balanced view of the Company’s current condition and future growth opportunities, this Annual Report on Form 10-K may include comments by the Company’s management about future performance. These statements which are not historical information are “forward-looking statements” pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These, and other forward-looking statements, are subject to business and economic risks and uncertainties that could cause actual results to differ materially from those discussed. These risks and uncertainties include, but are not limited to: risks associated with demand for and market acceptance of existing and newly developed products as to which the Company has made significant investments; general economic and industry conditions; slower than anticipated penetration into the satellite communications, mobile radio and commercial and defense electronics markets; competitive products and pricing pressures; increased pricing pressure from our customers; risks relating to governmental regulatory actions in broadcast, communications and defense programs; as well as other risks and uncertainties, including but not limited to those detailed from time to time in the Company’s Securities and Exchange Commission filings. These forward-looking statements are made only as of the date hereof, and the Company undertakes no obligation to update or revise the forward-looking statements, whether as a result of new information, future events or otherwise. You are encouraged to review Microwave Filter Company’s 2017 Annual Report and other Securities and Exchange Commission filings. Forward looking statements may be made directly in this document or “incorporated by reference” from other documents. You can find many of these statements by looking for words like “believes,” “expects,” “anticipates,” “estimates,” or similar expressions.
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
As a “smaller reporting company”, we are not required to provide information required by this item.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The Financial Statements called for by this item are submitted as a separate section of this report.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
None.
ITEM 9A.
ITEM 9A. CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
Management’s responsibility includes establishing and maintaining adequate internal control over financial reporting. The Company’s management, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end of the period covered by this report. Based on such evaluation, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of such period, the Company’s disclosure controls and procedures were effective as of the end of the period covered by this report.
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
There have been no changes in the Company’s internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the exchange act.
Under the supervision and with the participation of the Company’s management, including our principal executive officer and principal financial officer, the Company conducted an evaluation of its internal control over financial reporting using the criteria set forth in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013. Based on this evaluation, the Company’s management concluded and certifies that its internal control over financial reporting was effective as of September 30, 2017.
This annual report does not include an attestation report of our registered public accounting firm regarding internal control over financial reporting. Our report was not subject to attestation by our registered public accounting firm pursuant to rules of the SEC that permit the Company to provide only management’s report in this annual report.
ITEM 9B.
ITEM 9B. OTHER INFORMATION
None.
PART III
The information called for by “Item 10.
ITEM 15. FINANCIAL STATEMENT SCHEDULES AND EXHIBITS.
(a)1. and 2. Financial Statements and Schedules:
Reference is made to the list of Financial Statements submitted
as a separate section of this report.
(b)Exhibits:
Reference is made to the List of Exhibits submitted as a separate
section of this report.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, Microwave Filter Company, Inc. has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
MICROWAVE FILTER COMPANY, INC.
/S/ Paul W. Mears
By: Paul W. Mears
(Chief Executive Officer)
/S/ Richard Jones
By: Richard Jones
(Vice President and Chief Financial Officer)
Dated: December 8,
Pursuant to the requirements Of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the date indicated:
/S/ Robert R. Andrews
/S/ Carl F. Fahrenkrug
Robert R. Andrews
Carl F. Fahrenkrug
(Director)
(Director)
/S/ Frank Markovich
/S/ Paul W. Mears
Frank Markovich
Paul W. Mears
(Director)
(Director)
/S/ Sidney Chong
Sidney Chong
(Director)
Dated: December 8, 2017
ANNUAL REPORT ON FORM 10-K
MICROWAVE FILTER COMPANY, INC.
AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
ITEM 8, ITEM 15(a)(1) and (2)
All other schedules for which provision is made in the applicable accounting regulation of the Securities and Exchange Commission are not required under the related instructions or are inapplicable and therefore have been omitted.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders
of Microwave Filter Company, Inc.
We have audited the accompanying consolidated balance sheets of Microwave Filter Company, Inc. and subsidiaries as of September 30, 2017 and 2016, and the related consolidated statements of operations, stockholders’ equity, and cash flows for the years then ended. These consolidated financial statements are the responsibility of the entity’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Microwave Filter Company, Inc. and subsidiaries as of September 30, 2017 and 2016, and the results of their operations and their cash flows for each of the years in the two-year period ended September 30, 2017, in conformity with accounting principles generally accepted in the United States of America.
/s/ Dannible & McKee, LLP
Dannible & McKee, LLP
Syracuse, New York
December 6, 2017
Microwave Filter Company and Subsidiaries
Consolidated Balance Sheets
The accompanying notes are an integral part of the consolidated financial statements.
Microwave Filter Company and Subsidiaries
Consolidated Statements of Operations
The accompanying notes are an integral part of the consolidated financial statements.
Microwave Filter Company and Subsidiaries
Consolidated Statements of Stockholders’ Equity
For the Years Ended September 30, 2017 and 2016
The accompanying notes are an integral part of the consolidated financial statements.
Microwave Filter Company and Subsidiaries
Consolidated Statements of Cash Flows
The accompanying notes are an integral part of the consolidated financial statements.
Microwave Filter Company and Subsidiaries
Notes to Consolidated Financial Statements
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a. Nature of Business
Microwave Filter Company, Inc. (MFC) operates primarily in the United States and principally in one industry. The Company extends credit to business customers based upon ongoing credit evaluations. Microwave Filter Company, Inc. designs, develops, manufactures and sells electronic filters, both for radio and microwave frequencies, to help process signal distribution and to prevent unwanted signals from disrupting transmit or receive operations. Markets served include cable television, television and radio broadcast, satellite broadcast, mobile radio, commercial communications and defense electronics. Niagara Scientific, Inc. (NSI), a wholly owned subsidiary, custom designs case packing machines to automatically pack products into shipping cases. Customers are processors of food and other commodity products with a need to reduce labor cost with a modest investment and quick payback. For the last two years, NSI’s sales have consisted of spare parts orders and are insignificant during the year.
b. Basis of Consolidation
The consolidated financial statements include the accounts of Microwave Filter Company, Inc. (MFC) and its wholly-owned subsidiaries, Niagara Scientific, Inc. (NSI) and Microwave Filter International, LTD. (MFI) (dormant); located in Syracuse, New York. All significant intercompany balances and transactions have been eliminated in consolidation.
c. Revenue Recognition
Revenues from product sales are recorded as the products are shipped and title and risk of loss have passed to the customer, provided that no significant vendor or post-contract support obligations remain and the collection of the related receivable is probable. Billings in advance of the Company’s performance of such work are reflected as customer deposits in the accompanying consolidated balance sheet.
d. Cash and Cash Equivalents
The Company’s financial instruments that are exposed to concentrations of credit risk consist primarily of cash and accounts receivable. Cash and cash equivalents consist of cash in banks and money market funds. The Company considers all highly liquid investments with original maturities of three months or less to be cash equivalents. The Company’s cash is held at federally insured institutions and balances may periodically exceed insured limits. The Company has not experienced any losses in such accounts and believes it is not exposed to any significant credit risk with respect to cash. The Company also routinely assesses the financial strength of its customers and, as a consequence, believes that its trade accounts receivable credit risk exposure is limited.
e. Trade Accounts Receivable and Allowance for Doubtful Accounts
Trade accounts receivable are recorded at the invoiced amount and do not bear interest. The allowance for doubtful accounts is the Company’s best estimate of the amount of probable credit losses in the Company’s existing accounts receivable. The Company reviews its allowance for doubtful accounts monthly. Past due balances are reviewed individually for collectibility. Account balances are charged off against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote. The Company does not have any off-balance-sheet credit exposure related to its customers.
f. Inventories and Reserve for Obsolescence
Inventories are stated at the lower of cost determined on the first-in, first-out method or market.
The Company records a reserve for obsolete or excess inventory. The Company considers inventory quantities greater than a three year supply based on current year activity as well as any additional specifically identified inventory to be excess. The Company also provides for the total value of inventories that are determined to be obsolete based on criteria such as customer demand and changing technologies.
g. Research and Development
Costs in connection with research and development, which amount to $326,965 and $360,437 for the fiscal years 2017 and 2016, respectively, are charged to operations as incurred.
h. Property, Plant and Equipment
Property, plant and equipment are recorded at cost. Depreciation is provided using the straight-line method over the estimated useful lives of the respective assets. Buildings and building improvements are depreciated over an estimated service life of 10 to 30 years. Machinery and equipment are depreciated over an estimated useful life of 3 to 10 years. Office equipment and fixtures are depreciated over an estimated useful life of 3 to 10 years. At the time of sale or retirement, the cost and accumulated depreciation are removed from the respective accounts and the resulting gain or loss is recognized in income.
i. Income Taxes
The Company accounts for income taxes under FASB ASC 740-10. Deferred tax assets and liabilities are based on the difference between the financial statement and tax basis of assets and liabilities as measured by the enacted tax rates which are anticipated to be in effect when these differences reverse. The deferred tax provision is the result of the net change in the deferred tax assets and liabilities. A valuation allowance is established when it is necessary to reduce deferred tax assets to amounts expected to be realized. The Company has provided a full valuation allowance against its deferred tax assets.
The Company follows FASB ASC 740-10, which clarifies the accounting for uncertainty in income taxes recognized in an entity’s financial statements and prescribes a recognition threshold and measurement attributes for financial statement disclosure of tax position taken or expected to be taken on a tax return. Additionally, it provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. The Company will include interest on income tax liabilities in interest expense and penalties in operations if such amounts arise. The Company determined it has no uncertain tax positions and therefore no amounts are recorded.
j. Earnings Per Share
The Company presents basic earnings per share (“EPS”), computed based on the weighted average number of common shares outstanding for the period, and when applicable diluted EPS, which gives the effect to all dilutive potential shares outstanding (i.e. options) during the period after restatement for any stock dividends. Income (loss) used in the EPS calculation is net income (loss) for each year. There were no dilutive potential shares outstanding for the years ended September 30, 2017 and 2016.
k. Fair Value of Financial Instruments
The carrying values of the Company cash and cash equivalents, accounts receivable and accounts payable approximate fair value because of the short maturity of those instruments. The carrying value of the Company’s note payable approximates its fair value.
The Company currently does not trade in or utilize derivative financial instruments.
l. Miscellaneous Non-operating Income
Miscellaneous non-operating income generally consists of sales of scrap material and the forfeiture of non-refundable deposits and other incidental items.
m. Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements. Estimates also affect the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
n. Warranty Costs
The Company established a warranty reserve which provides for the estimated cost of product returns based upon historical experience and any known conditions or circumstances. Our warranty obligation is affected by product that does not meet specifications and performance requirements and any related costs of addressing such matters. Warranty costs were approximately $5,000 and $6,000 for the fiscal years ended September 30, 2017 and 2016, respectively.
o. Impairment of Long-Lived Assets
The carrying values of long-lived assets other than goodwill are generally evaluated for impairment only if events or changes in facts and circumstances indicate that carrying values may not be recoverable. Any impairment determined would be recorded in the current period and would be measured by comparing the fair value of the related asset to its carrying value. Fair value is generally determined by identifying estimated undiscounted cash flows to be generated by those assets. No impairments have been recorded for the fiscal years ended September 30, 2017 and 2016.
p. New Accounting Pronouncements
Update 2015-11- Inventory (Topic 330): Simplifying the Measurement of Inventory, is effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. Under the new standard, businesses that use the first-in, first-out (FIFO) or average cost method are required to measure inventory at the lower of cost or net realizable value (“NRV”), as defined, instead of at the lower of cost or market value. Management feels the updated standard, to be adopted on a prospective basis, would not represent a material impact to the Company’s financial statements.
Update 2015-14- Revenue from Contracts with Customers (Topic 606): affects any entity that either enters into contracts with customers to transfer goods or services or enters into contracts for the transfer of nonfinancial assets unless those contracts are within the scope of other standards (for example, insurance contracts or lease contracts). The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The guidance is applicable to annual reporting periods beginning after December 15, 2017, including interim reporting periods within that reporting period. Earlier application is permitted only as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period. The Company is currently evaluating the effect that the adoption of this ASU will have on its financial statements.
Update 2015-17 - Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes addresses the requirement to reclassify all current deferred income tax assets and liabilities on the balance sheet as non-current assets and liabilities, and is effective for financial statements issued for annual periods beginning after December 15, 2016, and interim periods within those annual periods, with early adoption permitted. As explained in Note 7, the Company has provided a full valuation allowance against its deferred tax assets, and thus there will be no impact from the adoption of this updated standard in the current year or on the balance sheet of any of the periods presented.
In February 2016, the FASB issued FASB ASU No. 2016-02, Leases (Topic 842). The core principle of Topic 842 is that a lessee should recognize the assets and liabilities that arise from leases. For operating leases, a lessee is required to recognize a right-of-use asset and a lease liability, initially measured at the present value of the lease payments, in the statement of financial position. For leases with a term of 12 months or less, a lessee is permitted to make an accounting policy election by class of underlying asset not to recognize lease assets and lease liabilities. The accounting applied by a lessor is largely unchanged from that applied under previous GAAP. This ASU is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Earlier application is permitted. In transition, lessees and lessors are required to recognize and measure leases at the beginning of the earliest period presented using a modified retrospective approach. The Company is currently evaluating the effect that the adoption of this ASU will have on its financial statements.
2. INVENTORIES
Inventories net of provision for obsolescence consisted of the following:
The Company’s reserve for obsolescence equaled $445,393 at September 30, 2017 and $435,528 at September 30, 2016.
3. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consisted of the following:
4. NOTES PAYABLE
On July 2, 2013, Microwave Filter Company, Inc. (the “Company”) entered into a Ten Year Term Loan with KeyBank National Association in the amount of Five Hundred Thousand and No/100 Dollars ($500,000.00). The amount of all advances outstanding together with accrued interest thereon shall be due and payable on July 2, 2023 (“Maturity”). The Company shall pay interest on the outstanding principal balance of this Note at the rate per annum equal to 4.5%. The net proceeds from the Term Loan will be available to provide working capital as needed. The total amount outstanding as of September 30, 2017 and 2016 was $318,998 and $365,650 respectively. Interest accrued as of September 30, 2017 and 2016 was $1,113 and $1,280 respectively.
The Company has secured this Note by: (a) a Mortgage, Assignment of Rents, Security Agreement and Fixture Filing which creates a 1st lien on real property situated in the Town of Dewitt, County of Onondaga, and State of New York and known as 6743 Kinne Street, East Syracuse, New York; (b) a General Assignment of Rents and Leases; (c) an Environmental Compliance and Indemnification; and (d) such other security as may now or hereafter be given to Lender as collateral for the loan. The future obligations of the loan are as follows:
5. PROFIT SHARING AND 401-K PLANS
The Company maintains both a non-contributory profit sharing plan and a contributory 401-K plan for all employees over the age of 21 with one year of service. Annual contributions to the profit sharing plan are determined by the Board of Directors and are made from current or accumulated earnings, while contributions to the 401-K plan were matched at a rate of 100% of an employee’s first 6% of contributions during fiscal 2017. The maximum corporate match was 6% of an employee’s compensation during fiscal 2017.
The Company’s matching contributions to the 401-K plan for the years ended September 30, 2017 and 2016 were $70,316 and $84,508, respectively. Additionally, the Company may make discretionary contributions to the non-contributory profit sharing plan. These contributions were $0 in 2017 and 2016.
6. OBLIGATIONS UNDER OPERATING LEASES
The Company leases equipment under an operating lease agreement expiring on December 31, 2018. Rental expense under this lease for the year ended September 30, 2017 was $4,930.
Minimum rental commitments at September 30, 2017 for this lease are:
7. INCOME TAXES
The components of the benefit from income taxes in the accompanying consolidated statements of operations are as follows:
The provision for income taxes differs from the amount that would result from applying the federal statutory rate for the periods ended September 30, 2017 and 2016 as follows:
The temporary differences which give rise to deferred tax assets and (liabilities) at September 30 are as follows:
As required by FASB ASC 740 the Company has evaluated the positive and negative evidence bearing upon the realization of its deferred tax assets. The Company has determined that, at this time, it is more likely than not that the Company will not realize all of the benefits of federal and state deferred tax assets, and, as a result, a valuation allowance was established. The research and development tax credit carry forwards and NOL carry forwards of approximately $288,000 and $830,000 expire in 2036. At September 30, 2017, the Company’s federal AMT credit can be carried forward indefinitely. The Company is currently open to audit under the statute of limitations by the Internal Revenue Service for the fiscal years September 30, 2015 through September 30, 2017. The Company has no uncertain tax positions. As of September 30, 2017 and 2016 there is no accrual for interest or penalties related to uncertain tax positions.
8. INDUSTRY SEGMENT DATA
The Company’s primary business segment involves the operations of Microwave Filter Company, Inc. (MFC) which designs, develops, manufactures and sells electronic filters, both for radio and microwave frequencies, to help process signal distribution and to prevent unwanted signals from disrupting transmit or receive operations.
9. SIGNIFICANT CUSTOMERS
Sales to one customer represented 41.2% of total sales for the fiscal year ended September 30, 2017 compared to 28.1% of total sales for the fiscal year ended September 30, 2016. A loss of this customer or programs related to this customer could materially impact the Company.
10. LEGAL MATTERS
None.
EXHIBIT INDEX
Exhibit No.
Description
3.1
MFC Certificate of Corporation, as amended (incorporated by reference to MFC’s Proxy Statement dated March 14, 1996 for the April 4, 1996Annual Meeting and MFC’s Report on Form 10-Q dated May 14,1996.)
3.2
MFC Amended and Restated Bylaws. (incorporated by reference to MFC’s Proxy Statement dated March 14, 1996 for the April 4, 1996Annual Meeting and MFC’s Report on Form 10-Q dated May 14,1996.)
31.1
Section 13a-14(a)/15d-14(a) Certification of Paul W. Mears
31.2
Section 13a-14(a)/15d-14(a) Certification of Richard L. Jones
32.1
Section 1350 Certification of Paul W. Mears and Richard L. Jones