See Accompanying Notes to Condensed Consolidated Financial Statements

Microwave Filter Company and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(Unaudited)

See Accompanying Notes to Condensed Consolidated Financial Statements

MICROWAVE FILTER COMPANY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

DECEMBER 31, 2016JUNE 30, 2017

Note 1. Summary of Significant Accounting Policies

In these notes, the terms “MFC” and “Company” mean Microwave Filter Company, Inc. and its subsidiary companies.

The following condensed balance sheet as of September 30, 2016, which has been derived from audited financial statements, and the unaudited interim condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and note disclosures normally included in annual financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to those rules and regulations, although the company believes that the disclosures made are adequate to make the information not misleading. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. The operating results for the threenine month period ended December 31, 2016June 30, 2017 are not necessarily indicative of the results that may be expected for the year ended September 30, 2017. For further information, refer to the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10K for the year ended September 30, 2016.

Note 2. Industry Segment Data

The Company’s primary business segment involves the operations of Microwave Filter Company, Inc. 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. Markets served include cable television, television and radio broadcast, satellite broadcast, mobile radio, commercial communications and defense electronics.

Note 3. Inventories

Inventories are stated at the lower of cost determined on the first-in, first-out method or market.

Inventories net of the reserve for obsolescence consisted of the following:

The Company’s reserve for obsolescence equaled $435,528 at December 31, 2016June 30, 2017 and September 30, 2016. The Company provides for a valuation reserve for certain inventory that is deemed to be obsolete, of excess quantity or otherwise impaired.

Note 4. 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 net deferred tax assets.

FASB ASC 740-10 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 positionsposition 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 determined it has no uncertain tax positions and therefore no amounts are recorded.

Note 5. Legal Matters

None.

Note 6. Fair Value of Financial Instruments

The carrying values of the Company’s 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 notes payable approximates its fair value.

The Company currently does not trade in or utilize derivative financial instruments.

Note 7. Significant Customers

Sales to one Original Equipment Manufacturer (“OEM”) customer represented approximately 43%43.1% of total sales for the threenine months ended December 31, 2016 compared to approximately 30%June 30, 2017 and 28.0% of total sales for the threenine months ended December 31, 2015.June 30, 2016. This one customer has represented approximately 28%28.1%, 33%,32.8% and 25%24.7% of total sales for the fiscal years ending September 30, 2016, 2015 and 2014, respectively. 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.

Note 8. Notes Payable

On July 2, 2013, theMicrowave 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 December 31, 2016June 30, 2017 and September 30, 2016 was $354,175$330,831 and $365,650 respectively. Interest accrued as of December 31, 2016June 30, 2017 and September 30, 2016 was $1,283$1,158 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 1^stlien 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 givenbegiven to Lender as collateral for the loan.

Note 9. 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 quarters ending December 31, 2016ended June 30, 2017 and 2015.2016. Income (loss) used in the EPS calculation is net income (loss) for each period. There were no dilutive potential shares outstanding for the periods ending December 31, 2016ended June 30, 2017 and 2015.2016.

Note 10. Recent Accounting Pronouncements

Management has reviewed the most recent accounting pronouncements issued by the various authoritative standard setting bodies:

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 2015-17- 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 4, 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.

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. Management plans to evaluate the applicability and impact of the adoption of this standards update over the coming year.

MICROWAVE FILTER COMPANY, INC.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Business Overview

Microwave Filter Company, Inc. 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.

Critical Accounting Policies

The Company’s condensed consolidated financial statements are based on the application of United States generally accepted accounting principles (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. Note 1 to the consolidated financial statements in our Annual Report on Form 10-K for the fiscal year ended September 30, 2016 describes the significant accounting policies used in preparation of the condensed consolidated financial statements. The most significant areas involving management judgments and estimates are described below and are considered by management to be critical to understanding the financial condition and results of operations of the Company.

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 condensed 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 stated at the lower of cost determined on the first-in, first-out method 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. The warranty obligation is affected by product that does not meet specifications and performance requirements and any related costs of addressing such matters. ProductsProduct must be returned within one year of the date of purchase.

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 net deferred tax assets.

RESULTS OF OPERATIONS

THREE MONTHS ENDED DECEMBER 31, 2016JUNE 30, 2017 vs. THREE MONTHS ENDED DECEMBER 31, 2015JUNE 30, 2016

The following table sets forth the Company’s net sales by major product group for the three months ended December 31, 2016June 30, 2017 and 2015.2016.

Net sales for the three months ended December 31, 2016June 30, 2017 equaled $779,374, an increase$702,648, a decrease of $11,827$225,988 or 1.5%24.3%, when compared to net sales of $767,547$928,636 for the three months ended December 31, 2015.June 30, 2016.

MFC’sMFC’s RF/Microwave product sales increased $119,348decreased $51,013 or 36.2%11.5% to $449,044$394,092 for the three months ended December 31, 2016June 30, 2017 when compared to RF/Microwave product sales of $329,696$445,105 during the same period last year. MFC’sThe decrease in sales can primarily be attributed to a decrease in sales to the U.S. Government. Sales to the U.S. Government equaled $0 for the three months ended June 30, 2017 compared to $89,250 during the same period last year. The Company’s RF/Microwave products are sold primarily to the U.S. Government and Original Equipment Manufacturers (OEM) that serve the mobile radio, commercial communications and defense electronics markets. Sales to one OEM customer increased $103,435$76,210 to $332,805$284,900, or approximately 43%40.5% of total sales for the three months ended December 31, 2016June 30, 2017, compared to sales of $229,370$208,690 or approximately 30%22.5% of total sales for the three months ended December 31, 2015.June 30, 2016. 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 $99,356 or 32.0% to $210,703 for the three months ended June 30, 2017 when compared to Satellite product sales of $310,059 during the same period last year. The decrease in sales can be attributed to a decrease in demand for the Company’s 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 $43,761 or 43.5% to $56,902 for the three months ended June 30, 2017 when compared to Cable TV product sales of $100,663 during the same period last year. The decrease in sales can primarily be attributed to a decrease in sales from one customer with specific cable applications last year. Management continues to project flat or a decrease in demand for standard 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 are 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/Wireless Cable product sales decreased $31,551 or 43.9% to $40,286 for the three months ended June 30, 2017 when compared to sales of $71,837 during the same period last year. The decrease can primarily be attributed a decrease in sales to one international customer. The Company has developed new products for this market and is hopeful that sales will increase in the future.

The Company’s international sales decreased $182,027 to $82,693 for the three months ended June 30, 2017 compared to $264,720 for the same period last year. The decrease can primarily be attributed to decreases in demand for the Company’s satellite and broadcast products.

MFC’s sales order backlog equaled $463,727 at June 30, 2017 compared to sales order backlog of $521,254 at June 30, 2016. 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. Approximately 54% of the total sales order backlog at June 30, 2017 is scheduled to ship by September 30, 2017.

Gross profit for the three months ended June 30, 2017 equaled $225,722, a decrease of $116,659 or 34.1%, when compared to gross profit of $342,381 for the three months ended June 30, 2016. The decrease in gross profit 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 32.1% for the three months ended June 30, 2017 compared to 36.9% for the three months ended June 30, 2016. The decrease in gross profit as a percentage of sales can primarily be attributed to higher direct material costs as a percentage of sales due to product sales mix.

Selling, general and administrative (SGA) expenses for the three months ended June 30, 2017 equaled $293,862, a decrease of $23,955 or 7.5%, when compared to SGA expenses of $317,817 for the three months ended June 30, 2016. The decrease can primarily be attributed to decreases in payroll and payroll related expenses. 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 or elect to use accrued vacation. The decrease in payroll costs was partially offset by an increase in advertising and promotional expenses. A proactive marketing effort is continuing in an effort to increase market share. As a percentage of sales, SGA expenses equaled 41.8% for the three months ended June 30, 2017 when compared to 34.2% for the three months ended June 30, 2016 primarily due to the lower sales volume this year providing a lower base to absorb expenses.

The Company recorded a loss from operations of $68,140 for the three months ended June 30, 2017 compared to income from operations of $24,564 for the three months ended June 30, 2016. The decrease in operating income can primarily be attributed to the lower sales volume this year when compared to the same period last year.

Other expense was $2,658 for the three months ended June 30, 2017 compared to expense of $2,145 for the three months ended June 30, 2016 primarily due to interest expense of $3,813 offset by miscellaneous non-operating income of $1,155 for the three months ended June 30, 2017 and interest expense of $4,333 offset by miscellaneous non-operating income of $2,188 for the three months ended June 30, 2016. Other income generally consists of interest income, sales of scrap material, the forfeiture of non-refundable deposits and other incidental items.

The benefit for income taxes equaled $0 for the three months ended June 30, 2017 and 2016. 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.

NINE MONTHS ENDED JUNE 30, 2017 vs. NINE MONTHS ENDED JUNE 30, 2016

The following table sets forth the Company’s net sales by major product group for the nine months ended June 30, 2017 and 2016.