Microwave Filter Company, Inc.
2019
Financial Statements
To the Shareholders:
As can be seen in the Annual Report, the operating performance of MFC improved in FY19. The company
recorded a profit of $180,864 compared to a loss of $16,059 last year. The improvement can primarily be
attributed to an increase in sales of $578,527.
It is expected the demand for C band Satcom filters will be on the rise as 5G technology has been implemented
in various parts of the world. Mitigating the higher power 5G signal is imperative for the proper operation of C
Band earth stations. MFC has been identified as a global leader in the manufacture of Satcom Filters. We have
been engaged with operators, consultants, installers and decision makers regarding the production and
deployment of the next round of solutions.
Industry growth was strongest in the Broadcast/Wireless and Cable market segments. The increases were a
result of these products being incorporated at the system level by one of our OEM partners.
The Company’s largest product group, RF/Microwave, had a 16.8% increase in sales. Microwave’s RF products
are sold primarily to Original Equipment Manufacturers that serve the mobile radio, commercial
communications and defense electronics markets. MFC continues to build relationships with current OEM’s and
was part of many initiatives that resulted in prototype development and campaigns. Acquisition of new OEM’s
helped growth in FY19 and has afforded MFC new opportunities in FY20.
In FY19, MFC invested in professional sales training, CRM management, updated marketing efforts and an
ERP system for production. We believe these enhancements, partnered with a new Website and multimedia
campaign will position MFC to attain a more reliable and profitable future over the coming years.
MFC’s strong financial position, backed by a strong cash position, provides the resources needed to execute our
strategy. The management staff of MFC is optimistic about the future and is particularity appreciative of our
employees during this time,
Sincerely,
Paul W. Mears Robert R. Andrews
Chief Executive Officer Chairman of the Board
2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF 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, 2019.
Product group
Fiscal 2019
Fiscal 2018
Microwave Filter:
RF/Microwave
Satellite
Broadcast TV
Cable TV
Niagara Scientific
Total
Sales backlog at 9/30
$
1,634,760
$
1,400,083
1,011,347
1,176,034
820,514
453,633
84
3,920,338
827,981
$
$
425,787
334,897
5,010
3,341,811
1,301,734
$
$
Fiscal 2019 compared to fiscal 2018
Consolidated net sales for the fiscal year ended September 30, 2019 equaled $3,920,338, an increase of $578,527 or 17.3%, when
compared to consolidated net sales of $3,341,811 during the fiscal year ended September 30, 2018.
MFC's RF/Microwave product sales increased $234,677 or 16.8% to $1,634,760 during the fiscal year ended September 30, 2019
when compared to sales of $1,400,083 during the fiscal year ended September 30, 2018. 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 $350,800 to $1,421,055, or 36.2% of total sales, during the fiscal year
ended September 30, 2019 compared to sales of $1,070,255, or 32% of total sales, during the fiscal year ended September 30, 2018.
These sales are in connection with a multiyear program in which the Company is a subcontractor. The Company continues to invest in
production engineering and infrastructure development to penetrate OEM market segments as they become popular. MFC is
concentrating its technical resources and product development efforts toward potential high volume customers as part of a
concentrated effort to provide substantial long-term growth. Over the last year, MFC, in conjunction with various OEM’s, has
developed and supplied prototypes as well as small production runs in support of new programs being introduced to the marketplace.
It is our belief that a continuation of this effort will help increase sales as well as reinforcing MFC’s position as a quality manufacturer
of RF filters and assemblies.
MFC's Satellite product sales decreased $164,687 or 14% to $1,011,347 during the fiscal year ended September 30, 2019 when
compared to sales of $1,176,034 during the fiscal year ended September 30, 2018. 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.
Management expects demand for these types of filters to continue with the proliferation of earth stations world wide and increased
sources of interference.
3
MFC's Broadcast TV product sales increased $394,727 or 92.7% to $820,514 for the fiscal year ended September 30, 2019 when
compared to sales of $425,787 for the fiscal year ended September 30, 2018. The increase can primarily be attributed to one customer.
MFC's Cable TV product sales increased $118,736 or 35.5% to $453,633 during the fiscal year ended September 30, 2019 when
compared to Cable TV product sales of $334,897 during the fiscal year ended September 30, 2018. 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.
At September 30, 2019, the Company's total backlog of orders, which represents firm orders from customers, equaled $827,981
compared to $1,301,734 at September 30, 2018. The total Company backlog at September 30, 2019 is scheduled to ship during fiscal
2020. 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 increased $314,530 to $1,640,414 during the fiscal year ended September 30, 2019 when compared to gross profit of
$1,325,884 during the fiscal year ended September 30, 2018. The increase in gross profit can be attributed the higher sales volume
providing a higher base to absorb overhead expenses.
Selling, general and administrative (SG&A) expenses increased $125,437 or 9.4% to $1,459,147 during the fiscal year ended
September 30, 2019 when compared to SG&A expenses of $1,333,710 during the fiscal year ended September 30, 2018. The increase
can be attributed to higher payroll costs.
Other income (expense) was an expense of $353 for the fiscal year ended September 30, 2019 compared to expense of $8,183 for the
fiscal year ended September 30, 2018 primarily due to interest expense of $11,084 offset by interest income of $8,039 and
miscellaneous non-operating income of $2,692 for the fiscal year ended September 30, 2019 and interest expense of $13,366 offset by
interest income of $1,243 and miscellaneous non-operating income of $3,940 for the fiscal year ended September 30, 2018. Other
income generally consists of sales of scrap material, the forfeiture of non-refundable deposits and other incidental items.
The Company recorded income taxes of $50 and $50 for the fiscal year ended September 30, 2019 and September 30. 2018. Any
other 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. See Note 7 to the
consolidated financial statements.
4
5
6
MICROWAVE FILTER COMPANY, INC.
AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheets as of September 30, 2019 and 2018 ........................
Consolidated Statements of Operations for the Years
Ended September 30, 2019 and 2018 ................................................................
Consolidated Statements of Stockholders' Equity for the Years
Ended September 30, 2019 and 2018 ................................................................
Consolidated Statements of Cash Flows for the Years
Ended September 30, 2019 and 2018 ................................................................
Notes to Consolidated Financial Statements ..........................................................
Page
8
9
10
11
12-20
7
Microwave Filter Company and Subsidiaries
Consolidated Balance Sheets
September 30,
Unaudited
2019
Audited
2018
Assets
Current assets:
Cash and cash equivalents
$
718,071
$
674,045
Accounts receivable-trade, net of allowance for
doubtful accounts of $4,000 and $4,000
Inventories, net of obsolete inventory reserve
of $491,363 and $463,286
Prepaid expenses and other current assets
Total current assets
Property, plant and equipment, net
Total Assets
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable
Customer deposits
Accrued payroll and related expenses
Accrued compensated absences
Notes Payable - Short Term
Other current liabilities
Total current liabilities
Notes Payable - Long Term
Total other liabilities
Total liabilities
Stockholders' equity:
Common stock, $.10 par value. Authorized 5,000,000 shares
Issued 4,324,140 in 2019 and 2018, Outstanding
2,579,179 in 2019 and 2,579,680 in 2018
Additional paid-in capital
Accumulated deficit
Common stock in treasury, at cost, 1,744,961
shares in 2019 and 1,744,460 shares in 2018
Total stockholders' equity
490,784
402,760
375,747
87,389
1,671,991
272,344
377,603
54,416
1,508,824
261,474
$
1,944,335
$
1,770,298
$
125,851
$
116,938
78,129
47,753
87,667
53,456
15,346
408,202
165,615
165,615
573,817
432,414
3,248,706
615,580 )
1,695,022 )
1,370,518
(
(
35,278
38,711
90,449
51,101
28,838
361,315
219,071
219,071
580,386
(
(
432,414
3,248,706
796,444 )
1,694,764 )
1,189,912
1,770,298
Total Liabilities and Stockholders' Equity
$
1,944,335
$
See independent accountant’s review report and related notes to financial statements.
8
Microwave Filter Company and Subsidiaries
Consolidated Statements of Operations
For the Years Ended September 30
Unaudited
2019
Audited
2018
Net sales
$
3,920,338 $
3,341,811
Cost of goods sold
2,279,924
2,015,927
Gross profit
1,640,414
1,325,884
Selling, general
and administrative expenses
1,459,147
1,333,710
Profit (loss) from operations
181,267
(
7,826 )
Non-operating income (expense)
Interest income
Interest expense
Miscellaneous
8,039
(
11,084 )
(
2,692
1,243
13,366 )
3,940
Profit (loss) before income taxes
180,914
(
16,009 )
Provision for income taxes
(
50 )
(
50 )
NET PROFIT (LOSS)
$
180,864 $ (
16,059 )
Per share data:
Basic and Diluted Earnings (Loss)
Per Common Share
$ 0.07 $ (
0.01 )
Shares used in computing net earnings
(loss) per common share:
Basic and diluted
2,579,392
2,579,681
See independent accountant’s review report and related notes to financial statements.
9
Microwave Filter Company and Subsidiaries
Consolidated Statements of Stockholders’ Equity
For the Years Ended September 30, 2019 and 2018
Additional
Total
Common Stock
Paid-in
Accumulated
Treasury Stock
Stockholders'
Shares
Amt
Capital
Deficit
Shares
Amt
Equity
September 30, 2017 (Audited)
4,324,140
$
432,414 $
3,248,706
$ (
780,385 )
1,744,456
$ (
1,694,761 )
$ 1,205,974
Net loss
Purchase of treasury stock
(
16,059 )
4
(
3 )
(
(
16,059 )
3 )
September 30, 2018 (Audited)
4,324,140
432,414
3,248,706
(
796,444 )
1,744,460
(
1,694,764 )
1,189,912
(Unaudited)
Net profit
Purchase of treasury stock
180,864
180,864
501
(
258 )
(
258 )
September 30, 2019 (Unaudited)
4,324,140
$
432,414 $
3,248,706
$ (
615,580 )
1,744,961
$ (
1,695,022 )
$ 1,370,518
See independent accountant’s review report and related notes to financial statements.
10
Microwave Filter Company and Subsidiaries
Consolidated Statements of Cash Flows
Cash flows from operating activities:
Net profit (loss)
Adjustments to reconcile net profit (loss) to net cash
provided by (used in) operating activities:
Depreciation
Inventory obsolescence provision
Changes in assets and liabilities:
Accounts receivable-trade
Inventories
Prepaid and other current assets
Accounts payable and customer deposits
Accrued payroll, compensated absences and
related expenses
Other current liabilities
Net cash provided by operating activities
Cash flows from investing activities:
Capital expenditures
Net cash used in investing activities
Cash flows from financing activities:
Repayment of note payable
Purchase of treasury stock
Net cash used in financing activities
For the Years Ended September 30
Unaudited
2019
Audited
2018
$
180,864
$ (
16,059 )
50,450
28,077
88,024 )
26,221 )
32,973 )
51,764
6,260
13,492 )
156,705
(
(
(
(
(
(
61,320 )
61,320 )
(
(
51,101 )
258 )
(
51,359 )
72,652
17,893
52,057 )
62,662
26,558 )
3,974
7,040 )
6,815
62,282
7,348 )
7,348 )
48,826 )
3 )
48,829 )
(
(
(
(
(
(
(
(
Net increase in cash and cash equivalents
44,026
6,105
Cash and cash equivalents at beginning of year
674,045
667,940
Cash and cash equivalents at end of year
$
718,071
$
674,045
Supplemental disclosures of cash flows:
Cash paid during the year for :
Interest
Taxes
$
$
11,263
50
$
$
13,538
50
See independent accountant’s review report and related notes to financial statements.
11
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.
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
Effective October 1, 2018, the Company adopted Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with
Customers (Topic 606), using the modified retrospective method. This update outlined a comprehensive new revenue recognition
model designed to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which
the entity expects to be entitled in exchange for those goods or services. The new standard also requires additional quantitative and
qualitative disclosures, as explained below. The adoption allows companies to apply the new revenue standard to reporting periods
beginning in the year the standard is first implemented, while prior periods continue to be reported in accordance with previous
accounting guidance. Since the adoption of Accounting Standards Codification (“ASC”) 606 did not have a significant impact on the
recognition of revenue, the Company did not have an opening retained earnings adjustment or an effect on prior reported periods.
Pursuant to Topic 606, revenues are recognized upon the application of the following steps:
• Identification of the contract, or contracts, with a customer;
• Identification of the performance obligations in the contract;
• Determination of the transaction price;
• Allocation of the transaction price to the performance obligations in the contract; and
• Recognition of revenues when, or as, the contractual performance obligations are satisfied.
The Company accounts for a contract with a client when it has written approval, the contract (or customer sales order) is committed,
the rights of the parties, including payment terms, are identified, the contract has commercial substance and consideration is probable
of collection.
The Company allocates the transaction price to each performance obligation on a standalone selling price basis, as agreed-upon
between the customer and the Company in the related customer sales order.
Revenue is recognized when the performance obligation has been satisfied: at the time products are shipped and title and risk of loss
have passed to the customer, and the collection of the related receivable is probable. Billings in advance of the Company’s
performance of such work are reflected as customer deposits in the accompanying condensed consolidated balance sheet.
12
Product Warranty
The Company has established a warranty reserve which provides for the estimated cost of product returns based upon historical
experience and any known conditions or circumstances. No revenues are recognized in connection with the performance of the
warranty repair or fulfillment function. The warranty obligation is affected by product that does not meet specifications and
performance requirements and any related costs of addressing such matters. Products must be returned within one year of the date of
purchase. The warranty liability was insignificant at September 30, 2019 and September 30, 2018.
Disaggregation of Revenue
The following tables provide details of revenue by major products group:
Product group
Fiscal 2019
Fiscal 2018
Microwave Filter:
RF/Microwave
Satellite
Broadcast TV
Cable TV
Niagara Scientific
Total
Sales backlog at 9/30
d. Cash and Cash Equivalents
Unaudited
Audited
$
1,634,760
$
1,400,083
1,011,347
1,176,034
820,514
453,633
84
3,920,338
827,981
$
$
425,787
334,897
5,010
3,341,811
1,301,734
$
$
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 13ollectability. 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 net realizable value.
Net realizable value is determined as the estimated selling price in the normal course of business minus the cost of completion,
disposal and transportation.
The Company 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.
13
g. Research and Development
Costs in connection with research and development, which amount to $372,702 and $334,851 for the fiscal years 2019 and 2018,
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 income 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
positions 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. There were no dividends declared during the fiscal year
ended September 30, 2019 and 2018. Profit (loss) used in the EPS calculation is net profit (loss) for each year. There were no dilutive
potential shares outstanding for the years ended September 30, 2019 and 2018.
k. Fair Value of Financial Instruments
The carrying value 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 accounting principles generally accepted 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.
14
n.. 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, 2019 and 2018.
o. New Accounting Pronouncements
In February 2016, the FASB issued FASB ASU No. 2016-02, Leases (Topic 842). The core principle of Topic 842 is that a lessee
should recognize the assets and liabilities that arise from leases. For operating leases, a lessee is required to recognize a right-of-use
asset and a lease liability, initially measured at the present value of the lease payments, in the statement of financial position. For
leases with a term of 12 months or less, a lessee is permitted to make an accounting policy election by class of underlying asset not to
recognize lease assets and lease liabilities. The accounting applied by a lessor is largely unchanged from that applied under previous
GAAP. This ASU is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years.
Earlier application is permitted. In transition, lessees and lessors are required to recognize and measure leases at the beginning of the
earliest period presented using a modified retrospective approach. The Company is currently evaluating the effect that the adoption of
this ASU will have on its financial statements.
p. Subsequent Events
Management has evaluated subsequent events though November 27, 2019, the date which the consolidated financial statements
were available for issue.
2. INVENTORIES
Inventories net of provision for obsolescence consisted of the following:
September 30
Unaudited
2019
Audited
2018
Raw materials and stock parts
$
333,638
$
306,658
Work-in-process
Finished goods
16,752
25,357
37,062
33,883
$
375,747
$
377,603
The Company’s reserve for obsolescence equaled $491,363 at September 30, 2019 and $463,286 at September 30, 2018.
15
3. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consisted of the following:
September 30
Unaudited
2019
Audited
2018
$
143,000
$
143,000
1,983,499
3,501,925
1,925,598
7,554,022
7,281,678
1,928,599
3,501,925
1,919,178
7,492,702
7,231,228
$
$
272,344
50,450
$
$
261,474
72,652
Land
Building and improvements
Machinery and equipment
Office equipment and fixtures
Less: Accumulated depreciation
Property, plant and equipment, net
Depreciation expense
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, 2019 and 2018 was $219,071 and $270,172
respectively. Interest accrued as of September 30, 2019 and 2018 was $767 and $946 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:
(Unaudited)
Year Ended
September 30,
Principal
Payments
Interest
Payments
Total
Payments
2020
2021
2022
2023
$
$
53,456
55,972
58,680
50,963
$
8,908
6,392
3,684
1,007
62,364
62,364
62,364
51,970
$
219,071
$
19,991
$
239,062
The Company is required to comply with a loan covenant requiring submission to the Bank of audited financial statements
subsequent to year end. The Company has received a waiver of non-compliance with this covenant.
16
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 2019. The maximum corporate match was 6% of an employee’s compensation during fiscal 2019.
The Company’s matching contributions to the 401-K plan for the years ended September 30, 2019 and 2018 were $67,670 and
$71,392, respectively. Additionally, the Company may make discretionary contributions to the non-contributory profit sharing
plan. These contributions were $0 in 2019 and 2018.
6. OBLIGATIONS UNDER OPERATING LEASES
The Company leases equipment under an operating lease agreement expiring on March 31, 2022. Rental expense under this lease for
the year ended September 30, 2019 was $5,103.
Minimum rental commitments at September 30, 2019 for this lease are:
Year Ended
September 30
Lease
Payments
2020
2021
2022
$
$
6,804
6,804
3,402
17,010
7. INCOME TAXES
The components of the provision for income taxes in the accompanying consolidated statements of operations are as follows:
Currently payable:
Federal
State
Deferred (credit)
Year Ended September 30,
Unaudited
2019
Audited
2018
$
0
$
50
0
$
50
$
0
50
0
50
17
The components of the provision for income taxes differs from the amount that would result from applying the federal statutory rate
for the periods ended September 30, 2019 and 2018 is as follows:
Statutory tax rate
Effect of change in income tax rates
Research and development tax credits
Valuation allowance change
Permanent differences
Year ended September 30,
Unaudited
2019
Audited
2018
Amount
%
Amount
%
$
(
(
(
$
37,992
21.0
%
$
8,797
24.2
%
0 )
18,412 )
19,580 )
(
(
(
-
%)
10.2 %)
10.8
%)
(
(
87,833 )
14,728 )
93,764
(
(
242.1
%)
40.5 %)
258.4
%
0
0
0.0 %
0.0 %
$
0
0
0.0 %
0.0 %
18
The temporary differences which give rise to deferred tax assets and (liabilities) at September 30 are as follows:
Inventory
Accrued warranty
Accrued vacation
Accounts receivable
Accelerated depreciation
Research and development
tax credit carryforward
AMT credit carryforward
NOL carryforward
Valuation allowance
Unaudited
2019
Audited
2018
$
106,771
$
101,398
2,625
14,420
885
24,501
323,769
37,521
187,584
2,625
15,004
885
22,477
305,357
37,521
232,389
( 698,076 )
( 717,656 )
Net deferred tax assets
$
0
$
0
During December 2017, the Tax Cuts and Jobs Act (the “ACT”) was signed into law reducing the Federal corporate income tax rate
from 34 percent to 21 percent. Based on the provisions of the ACT, the Company remeasured their net deferred tax assets applying the
lower income tax rates to the Company’s net deferred tax assets. In addition, in accordance with the applicable Internal Revenue
Code, the Company is required to calculate its current tax provision for fiscal 2018 using a blended corporate tax rate, resulting in a
reduction in the effective current tax rate from 34.00 percent to 24.25 percent. The Company has provided a full valuation allowance
against its net deferred tax assets. Accordingly, no impact arising from the change in the tax rates arising from the provisions of the
ACT is reflected in these consolidated financial statements.
As required by FASB ASC 740 the Company has evaluated the positive and negative evidence bearing upon the realization of its net
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 net deferred tax assets, and, as a result, a valuation allowance was established. The research and
development tax credit carryforwards and NOL carryforwards generated through September 30, 2019, of approximately $320,000 and
$593,000 expire at various times through 2037. Pursuant to the ACT, any of the Company’s newly-generated Federal NOL
carryforwards can be carried forward indefinitely, while being limited to 80% of taxable income (determined without regard to the
deduction.) As of September 30, 2019, the Company’s Federal AMT credit carryforward of approximately $35,000 is available in any
year prior to 2022, in an amount equal to 50% (100% for tax years beginning in 2021) of the excess minimum tax credit for the tax
year, over the amount of the credit allowable for the year against the regular tax liability. The Company is currently open to audit
under the statute of limitations by the Internal Revenue Service for the fiscal years September 30, 2017 through September 30, 2019.
The Company has no uncertain tax positions. As of September 30, 2019 and 2018 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.
19
9. SIGNIFICANT CUSTOMERS
Sales to two customers represented 53.5% of total sales for the fiscal year ended September 30, 2019 compared to sales to one
customer who represented 32% of total sales for the fiscal year ended September 30, 2018. A loss of these customers or programs
related to these customers could materially impact the Company.
10. LEGAL MATTERS
None.
11. 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 & cash equivalents
Working capital
Current ratio
Long-term debt
September 30
2019
$
718,071
$ 1,263,789
4.10 to 1
2018
$
674,045
$ 1,147,509
4.18 to 1
$
165,615
$
219,071
Cash and cash equivalents increased $44,026 to $718,071 at September 30, 2019 when compared to $674,045 at September 30,
2018. The increase was a result of $156,705 in net cash provided by operating activities, $61,320 in net cash used for capital
expenditures, $51,101 in net cash used for repayment of a note payable and $258 in net cash used to purchase treasury stock.
Net cash provided by operating activities fluctuates between periods primarily as a result of differences in sales and net income and
the timing of the collection of accounts receivable, purchase of inventory, and payment of accounts payable.
The $61,320 in fixed asset purchases consisted of $54,900 to replace part of the roof, $4,575 used to purchase computer software
and $1,845 to purchase computer 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, 2019 and 2018 was $219,071 and $270,172,
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, 2019 and 2018, the Company did not have any unconsolidated entities or financial partnerships, such as
entities often referred to as structured finance or special purpose entities, which might have been established for the purpose of
facilitating off-balance sheet arrangements.
20