Microwave Filter Company, Inc.
2020
Financial Statements
To the Shareholders:
FY2020 was a challenging year given the outbreak of the COVID-19 pandemic. MFC received confirmation as
an essential business from the state of New York pursuant to the revised New York State Executive Order
202.6. MFC remained open following safety guidelines and taking other appropriate actions as needed.
In FY2020 MFC saw a decrease in sales of $813,000 compared to 2019 resulting in a loss of $293,000. It is
unclear how much of the decline in sales is due to the COVID-19 pandemic but MFC believes there was a
material impact. MFC did obtain a PPP loan for $298,282, which if forgiven in full or in part, will mitigate or
eliminate the fiscal year loss. Primarily because of the PPP loan, the cash position of MFC was up $46,000
compared to FY2019.
The Broadcast TV market saw the largest decline of $457,900 or 56%. This decrease was primarily due to
orders from one customer that did not recur in fiscal 2020. MFC believes that the reduction in spending of this
key customer was a result of a reduction of government spending as funds were diverted to combat COVID-19
pandemic.
The Cable TV market saw a decline of $181,000 or 40%. This decrease was primarily due to orders from one
customer that did not recur in fiscal 2020. MFC believes that the reduction in spending of these key customers
was a result of a reduction of government spending as funds were diverted to combat COVID-19 pandemic.
The RF/Microwave market saw a decline of $163,000 or 10%. The Satellite market was steady with a decline of
$11,000 or 1%
While the COVID-19 pandemic will continue to affect the economy in the future, MFC continues to be
optimistic. The company continues to invest in production engineering, product development and developing
OEM partners in key market segments, including 5G, 5G related and other satcom and other RF specialized
solutions. We continue to believe that the 5G and satcom segments will lead to our greatest growth
opportunities, followed by key broadcast and RF segments.
MFC is in a strong financial position. At this time MFC believes it is reasonable to expect that the PPP loan
will be forgiven in full or in part. This cash position is sufficient to provide the resources needed to execute our
strategies. The management of MFC is particularly appreciative of our partners and employees during this
difficult time.
Sincerely,
Carl F. Fahrenkrug, Jr 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.
THE IMPACT OF COVID-19
In March 2020, the coronavirus disease 2019 (“COVID 19”) was declared a pandemic by the World Health Organization and a
national emergency by the U.S. Government.
The financial impact of the COVID 19 pandemic cannot be reasonably estimated at this time as its impact depends on future
developments, which are highly uncertain and cannot be predicted.
In late March, Microwave Filter Company, Inc. received confirmation from the State of New York that we are designated as an
“essential business” pursuant to the revised New York State Executive Order 202.6 with respect to our business function of supply
partner for several essential industries.
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, 2020.
Product group
Fiscal 2019
Fiscal 2020
Microwave Filter:
RF/Microwave
Satellite
Broadcast TV
Cable TV
Niagara Scientific
Total
Sales backlog at 9/30
$
1,471,799
$
1,634,760
1,000,738
1,011,347
362,602
272,338
133
3,107,610
631,764
$
$
820,514
453,633
84
3,920,338
827,981
$
$
Fiscal 2020 compared to fiscal 2019
Consolidated net sales for the fiscal year ended September 30, 2020 equaled $3,107,610, a decrease of $812,728 or 20.7%, when
compared to consolidated net sales of $3,920,338 during the fiscal year ended September 30, 2019.
MFC's RF/Microwave product sales decreased $162,961 or 10% to $1,471,799 during the fiscal year ended September 30, 2020
when compared to sales of $1,634,760 during the fiscal year ended September 30, 2019. 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 decreased $238,434 to $1,182,621, or 38.1% of total sales, during the fiscal year
ended September 30, 2020 compared to sales of $1,421,055, or 36.2% of total sales, during the fiscal year ended September 30, 2019.
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.
3
MFC's Satellite product sales decreased $10,609 or 1% to $1,000,738 during the fiscal year ended September 30, 2020 when
compared to sales of $1,011,347 during the fiscal year ended September 30, 2019. 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.
MFC's Broadcast TV product sales decreased $457,912 or 55.8% to $362,602 for the fiscal year ended September 30, 2020 when
compared to sales of $820,514 for the fiscal year ended September 30, 2019. The decrease can primarily be attributed to one customer.
MFC's Cable TV product sales decreased $181,295 or 40% to $272,338 during the fiscal year ended September 30, 2020 when
compared to Cable TV product sales of $453,633 during the fiscal year ended September 30, 2019. The decrease can primarily be
attributed to one customer. 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, 2020, the Company's total backlog of orders, which represents firm orders from customers, equaled $631,764
compared to $827,981 at September 30, 2019. The total Company backlog at September 30, 2020 is scheduled to ship during fiscal
2021. 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 $562,878 to $1,077,536 during the fiscal year ended September 30, 2020 when compared to gross profit of
$1,640,414 during the fiscal year ended September 30, 2019. The decrease in gross profit can be attributed the lower sales volume
providing a lower base to absorb overhead expenses.
Selling, general and administrative (SG&A) expenses decreased $87,128 or 6% to $1,372,019 during the fiscal year ended
September 30, 2020 when compared to SG&A expenses of $1,459,147 during the fiscal year ended September 30, 2019 . The
decrease can be attributed to lower payroll costs.
Other income (expense) was income of $1,896 for the fiscal year ended September 30, 2020 compared to expense of $353 for the
fiscal year ended September 30, 2019 primarily due to interest expense of $8,719 offset by interest income of $6,092 and
miscellaneous non-operating income of $4,523 for the fiscal year ended September 30, 2020 and 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. 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, 2020 and September 30. 2019. 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, 2020 and 2019 ........................
Consolidated Statements of Operations for the Years
Ended September 30, 2020 and 2019 ................................................................
Consolidated Statements of Stockholders' Equity for the Years
Ended September 30, 2020 and 2019 ................................................................
Consolidated Statements of Cash Flows for the Years
Ended September 30, 2020 and 2019 ................................................................
Notes to Consolidated Financial Statements ..........................................................
Page
8
9
10
11
12-21
7
Microwave Filter Company and Subsidiaries
Consolidated Balance Sheets
September 30,
2020
2019
Assets
Current assets:
Cash and cash equivalents
$
764,169
$
718,071
Accounts receivable-trade, net of allowance for
doubtful accounts of $4,000 and $4,000
Inventories, net of obsolete inventory reserve
of $533,572 and $491,363
Prepaid expenses and other currant assets
Total current assets
Property, plant and equipment, net
Right-of-use lease asset
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
Current portion of lease liability
PPP loan payable
Total current liabilities
Notes Payable - Long Term
Lease liability - net of current portion
Total other liabilities
Total liabilities
Stockholders' equity:
Common stock, $.10 par value. Authorized 5,000,000 shares
Issued 4,324,140 in 2020 and 2019, Outstanding
2,578,630 in 2020 and 2,579,179 in 2019
Additional paid-in capital
Accumulated deficit
Common stock in treasury, at cost, 1,745,510
shares in 2020 and 1,744,961 shares in 2019
Total stockholders' equity
411,567
490,784
371,643
66,561
1,613,940
317,624
9,851
375,747
87,389
1,671,991
272,344
16,060
$
1,941,415
$
1,960,395
$
166,318
$
125,851
54,182
44,282
103,711
55,972
21,672
6,493
298,282
750,912
109,643
3,358
113,001
863,913
432,414
3,248,706
908,217 )
1,695,401 )
1,077,502
(
(
78,129
47,753
87,667
53,456
15,346
6,209
0
414,411
165,615
9,851
175,466
589,877
(
(
432,414
3,248,706
615,580 )
1,695,022 )
1,370,518
1,960,395
Total Liabilities and Stockholders' Equity
$
1,941,415
$
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
2020
2019
Net sales
$
3,107,610 $
3,920,338
Cost of goods sold
2,030,074
2,279,924
Gross profit
1,077,536
1,640,414
Selling, general
and administrative expenses
1,365,215
1,454,044
Operating lease expense
6,804
5,103
(Loss) profit from operations
(
294,483 )
181,267
Non-operating income (expense)
Interest income
Interest expense
Miscellaneous
6,092
(
8,719 )
(
4,523
8,039
11,084 )
2,692
(Loss) profit before income taxes
(
292,587 )
180,914
Provision for income taxes
(
50 )
(
50 )
NET (LOSS) PROFIT
$ (
292,637 ) $
180,864
Per share data:
Basic and Diluted Earnings (Loss)
Per Common Share
$ (
0.11 ) $
0.07
Shares used in computing net earnings
(loss) per common share:
Basic and diluted
2,578,880
2,579,392
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, 2020 and 2019
Additional
Total
Common Stock
Paid-in
Accumulated
Treasury Stock
Stockholders'
Shares
Amt
Capital
Deficit
Shares
Amt
Equity
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
(Unaudited)
Net loss
Purchase of treasury stock
(
292,637 )
549
(
379 )
(
(
292,637 )
379 )
September 30, 2020 (Unaudited)
4,324,140
$
432,414 $
3,248,706
$ (
908,217 )
1,745,510
$ (
1,695,401 )
$ 1,077,502
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 (loss) profit
Adjustments to reconcile net (loss) profit to net cash
(used in) provided by 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
For the Years Ended September 30
2020
2019
$ (
292,637 )
$
180,864
(
(
37,020
42,209
79,217
38,105 )
16,197 )
16,520
12,573
6,326
(
(
(
(
50,450
28,077
88,024 )
26,221 )
32,973 )
51,764
6,260
13,492 )
156,705
Net cash (used in) provided by operating activities
(
153,074 )
Cash flows from investing activities:
Capital expenditures
Net cash used in investing activities
Cash flows from financing activities:
Repayment of note payable
Proceeds from PPP loan
Purchase of treasury stock
Net cash provided by (used in) financing activities
(
(
45,275 )
45,275 )
(
(
61,320 )
61,320 )
(
(
53,456 )
(
51,101 )
298,282
379 )
244,447
0
258 )
51,359 )
(
(
Net increase in cash and cash equivalents
46,098
44,026
Cash and cash equivalents at beginning of year
718,071
674,045
Cash and cash equivalents at end of year
$
764,169
$
718,071
Supplemental disclosures of cash flows:
Cash paid during the year for :
Interest
Taxes
$
$
8,908
$
11,263
50
$
50
See independent accountant’s review report and related notes to financial statements.
Microwave Filter Company and Subsidiaries
11
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
The Company recognizes revenue at a point in time, once control over the finished products has transferred to the customer.
Accordingly, revenue is recognized when the customer takes title and assumes the risks and rewards of ownership, generally at the
time of shipment. When revenue is recognized in accordance with the above terms, the trade receivable is recorded.
Disaggregation of Revenue
The following tables provide details of revenue by major products group:
Product group
Microwave Filter:
RF/Microwave
Satellite
Broadcast TV
Cable TV
Niagara Scientific
Total
Sales backlog at 9/30
Fiscal 2020
Fiscal 2019
$
1,471,799
$
1,634,760
1,000,738
1,011,347
362,602
272,338
133
3,107,610
631,764
$
$
820,514
453,633
84
3,920,338
827,981
$
$
d. Adoption of ASU 2016-02 “Leases”
On October 1, 2018, the Company early adopted ASU 2016-02 “Leases” and all subsequent amendments to the ASU (collectively,
“Topic 842”), which create recognition of assets and liabilities that arise from leases. The Company’s existing lease for office
equipment is classified as an operating lease and is within the scope of Topic 842. Refer to Note 6, Operating Lease Commitments, for
further discussion on the Company’s accounting policies for leases. As a result of the adoption, the lease term is in excess of 12
months was recognized on the balance sheet with a right-of-use asset and liability. Additionally, certain accounts in the prior year
financial statements have been reclassified for comparative purposes to conform with the presentation in the current year consolidated
financial statements. The impact on the consolidated financial statements and opening fiscal 2019 stockholders’ equity was not
material.
e. Product Warranty
12
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, 2020 and September 30, 2019.
f. 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.
g. 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 collectability. 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.
h. 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.
i. Research and Development
Costs in connection with research and development, which amount to $371,612 and $372,702 for the fiscal years 2020 and 2019,
respectively, are charged to operations as incurred.
j. Advertising
The Company expenses advertising costs as incurred. Advertising expense was approximately $23,700 and $24,400 for the years
ended September 30, 2020 and 2019, respectively, and is included in the selling, general and administrative expenses in the
consolidated statements of operations.
k. 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.
l. Income Taxes
13
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.
m. 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, 2020 and 2019. 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, 2020 and 2019.
n. 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.
o. 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.
p. 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.
q. 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, 2020 and 2019.
r. Risks and Uncertainties
14
During fiscal 2020, local, U.S., and world governments have encouraged self-isolation to curtail the spread of the global pandemic,
Coronavirus Disease (COVID-19), by mandating work stoppage in many sectors and imposing limitations on travel and size and
duration of group meetings. Most industries are experiencing disruption to business operations and the impact of reduced consumer
spending. There is unprecedented uncertainty surrounding the duration of the pandemic, its potential economic ramifications, and any
government actions to mitigate them. During the COVID-19 pandemic, the Company’s services have been essential in nature. As the
situation evolves, the Company continues to closely monitor the impact of the COVID-19 pandemic on all aspects of the business,
including how it impacts customers, subcontractors, suppliers, vendors and employees, in addition to how the COVID-19 pandemic
impacts the Company’s ability to provide services to their customers. We believe the ultimate impact of the COVID-19 pandemic on
operating results, cash flows and financial condition is likely to be determined by factors which are uncertain, unpredictable and
outside of the Company’s control. The situation surrounding COVID-19 remains fluid, and if disruptions do arise, they could further
materially adversely impact business.
s. Subsequent Events
Management has evaluated subsequent events though December 4, 2020, 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
2020
2019
Raw materials and stock parts
$
310,664
$
333,638
Work-in-process
Finished goods
27,783
33,196
16,752
25,357
$
371,643
$
375,747
The Company’s reserve for obsolescence equaled $533,572 at September 30, 2020 and $491,363 at September 30, 2019.
15
3. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consisted of the following:
September 30
2020
2019
$
143,000
$
143,000
2,057,549
3,510,175
1,925,598
7,636,322
7,318,698
1,983,499
3,501,925
1,925,598
7,554,022
7,281,678
$
$
317,624
37,020
$
$
272,344
50,450
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, 2020 and 2019 was $165,615 and $219,072
respectively. Interest accrued as of September 30, 2020 and 2019 was $580 and $767 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:
Year Ended
September 30,
Principal
Payments
Interest
Payments
Total
Payments
2021
2022
2023
$
$
55,972
58,680
50,963
$
6,392
3,684
1,007
62,364
62,364
51,970
$
165,615
$
11,083
$
176,698
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
On May 5, 2020, the Company qualified for and received a loan pursuant to the Paycheck Protection Program, a program
implemented by the U.S. Small Business Administration under the Coronavirus Aid, Relief, and Economic Security Act, from a
qualified lender (the “PPP Lender”), for an aggregate principal amount of approximately $298,000 (the "PPP Loan"). The PPP Loan
bears interest at a fixed rate of 1.0% per annum, with the first six months of interest deferred, has a term of five years, and is
unsecured and guaranteed by the U.S. Small Business Administration. The principal amount of the PPP Loan is subject to forgiveness
under the Paycheck Protection Program upon the Company’s request to the extent that the PPP Loan proceeds are used to pay
expenses permitted by the Paycheck Protection Program, including payroll costs, covered rent and mortgage obligations, and covered
utility payments incurred by the Company. The Company intends to apply for forgiveness of the PPP Loan with respect to these
covered expenses, accordingly, the PPP loan has been included in current liabilities. To the extent that all or part of the PPP Loan is
not forgiven, the Company will be required to pay interest on the PPP Loan at a rate of 1.0% per annum. The terms of the PPP Loan
provide for customary events of default including, among other things, payment defaults, breach of representations and warranties,
and insolvency events. The PPP Loan may be accelerated upon the occurrence of an event of default.
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 2020. The maximum corporate match was 6% of an employee’s compensation during fiscal 2020.
The Company’s matching contributions to the 401-K plan for the years ended September 30, 2020 and 2019 were $64,869 and
$67,670, respectively. Additionally, the Company may make discretionary contributions to the non-contributory profit sharing
plan. These contributions were $0 in 2020 and 2019.
6. OPERATING LEASE COMMITMENTS
The Company has entered into an operating lease arrangement for office equipment in Syracuse, NY beginning January 1, 2019.
During the years ended September 30, 2020 and 2019, rent expenses were recognized with the operating lease as fixed rent expense of
$6,804 and $5,103, respectively.
Amounts recognized as a right-of-use asset related to the operating lease in the right-of-use lease asset, while related lease liabilities
are shown as current liabilities and long-term liabilities. As of September 30, 2020 and 2019, right-of-use lease assets and lease
liabilities relating to the operating lease were as follows:
Right-of-use lease asset
Operating lease liabilties:
Current portion of lease liabilities
Lease liability - net of current portion
2019
2020
As adjusted
$
9,851
$
16,060
6,493
3,358
6,209
9,851
17
During the years ended September 30, 2020 and 2019, the Company had the following cash and non –cash activities associated with
operating leases:
2019
2020
As adjusted
Cash paid for amounts included in the
measurement of lease liabilities:
Operating cash flows from operating
leases
$
6,804
$
5,103
No non-cash activity during the period. The establishment of the right-of-use asset and corresponding lease liabilities in both 2020 and
2019 did not require or use cash, and accordingly have been excluded from the statements of cash flows.
Minimum rental commitments at September 30, 2020 for this lease are:
Year Ended
September 30
2021
2022
Amount representing interest
(
$
Lease
Payments
$
6,804
3,402
10,206
355
)
9,851
As of September 30, 2020 and 2019, the weighted-average remaining lease term for the operating lease is 1.5 and 2.5 years,
respectively.
Because the Company does not have access to the rate implicit in the lease, the incremental borrowing rate was utilized as the discount
rate. The weighted average discount rate associated with the operating lease as of September 30,2020 and 2019 is 4.50%.
7. INCOME TAXES
The components of the provision for income taxes in the accompanying consolidated statements of operations are as follows:
Year Ended September 30,
2020
2019
Currently payable:
Federal
State
Deferred (credit)
$
0
$
50
0
$
50
$
0
50
0
50
18
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, 2020 and 2019 is as follows:
Statutory tax rate
Research and development tax credits
Valuation allowance change
Permanent differences
Year ended September 30,
2020
2019
Amount
%
Amount
%
$ (
(
(
(
61,454 )
22,031 )
20,846
21.0
%)
$
7.5 %)
%
7.1
(
(
37,992
18,412 )
19,580 )
(
(
62,639
21.4 %
$
0
0.0 %
$
0
0
21.0
%
10.2 %)
10.8
%)
0.0 %
0.0 %
19
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
2020
2019
$
115,760
$
106,771
2,625
18,629
885
25,490
352,138
37,521
165,872
2,625
14,420
885
24,501
323,769
37,521
187,584
( 718,920 )
( 698,076 )
Net deferred tax assets
$
0
$
0
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, 2020, of approximately $352,000 and
$519,000 expire at various times through 2038. 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.) Pursuant to the CARES Act, there is no limit to the usage of the Company’s NOL through tax years ending before January
1, 2021. For tax years beginning after December 31, 2020, the NOL’s will again be limited to 80% of taxable income (determined
without regard to the deduction.) As of September 30, 2020, the Company’s Federal AMT credit carryforward of approximately
$35,000 is available in any year prior to 2023, in an amount equal to 50% (100% for tax years beginning in 2022) 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, 2020. The Company has no uncertain tax positions. As of September 30, 2020 and 2019, 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 s represented 38.1% of total sales for the fiscal year ended September 30, 2020 compared to sales to two
customers who represented 53.5% of total sales for the fiscal year ended September 30, 2019. A loss of this customer or programs
related to this customer could materially impact the Company.
10. LEGAL MATTERS
None.
20
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
2020
764,169
863,028
2.15 to 1
113,001
$
$
$
2019
$
718,071
$ 1,257,580
4.03 to 1
$
175,466
Cash and cash equivalents increased $46,098 to $764,169 at September 30, 2020 when compared to $718,071 at September 30,
2019. The increase was a result of $153,074 in net cash used in operating activities, $45,275 in net cash used for capital expenditures,
$53,456 in net cash used for repayment of a note payable, $298,282 in proceeds from a PPP loan and $379 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 $45,275 in fixed asset purchases consisted of $37,025 to replace part of the roof and $8,250 used to purchase tooling.
During 2020, the Company received a loan totaling $298,282 from the Small Business Administration (SBA) under the Paycheck
Protection Program of the Coronavirus Aid, Relief and Economic Security (CARES) Act. Some or all of the loan may be forgiven if
certain criteria are met, accordingly, the PPP loan has been included in current liabilities, see Note 4. Otherwise, the loan is unsecured,
has a deferment on payment for 6 months after a decision on forgiveness has been made, then the loan is payable over a negotiated
period of time, and bears interest at 1%.
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, 2020 and 2019 was $165,615 and $219,071,
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
Off-Balance Sheet Arrangements
At September 30, 2020 and 2019, 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.
21