UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended: September 30, 2016
OR
¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from ________ to ________
Commission File No. 000-55382
MICROPHASE CORPORATION
(Exact name of registrant as specified in its charter)
Connecticut | 06-0710848 | |
(State or other jurisdiction of incorporation) |
(IRS Employer Identification No.) |
100 Trap Falls Road Extension, Suite 400
Shelton, CT 06484
(Address of principal executive offices)
(203) 866-8000
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12 months, and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Sec. 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files. Yes x No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act:
Large accelerated filer | ¨ | Accelerated filer | ¨ |
Non-accelerated filer | ¨ | Smaller reporting company | x |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
As of November 11, 2016, there were 6,882,461 shares outstanding of the registrant’s common stock.
MICROPHASE CORPORATION
INDEX
Condensed Consolidated Balance Sheets
September 30, | June 30, | |||||||
2016 | 2016 | |||||||
(unaudited) | ||||||||
ASSETS | ||||||||
CURRENT ASSETS | ||||||||
Cash | $ | 16,389 | $ | 81,224 | ||||
Accounts receivable, net of allowance of $5,000 September 30, 2016 and June 30, 2016 | 367,019 | 1,092,482 | ||||||
Inventory | 753,059 | 872,014 | ||||||
Due from related parties | 33,295 | 33,295 | ||||||
Prepaid and other current assets | 3,262 | 63,742 | ||||||
TOTAL CURRENT ASSETS | 1,173,024 | 2,142,757 | ||||||
Property and equipment, net | 140,985 | 158,979 | ||||||
OTHER ASSETS | ||||||||
Cash – restricted | 100,000 | 100,000 | ||||||
Intangible assets | 2,625,292 | 2,629,170 | ||||||
Marketable securities | 385,667 | 200,000 | ||||||
Deferred offering costs | 400,000 | 260,000 | ||||||
Other assets-lease deposit | 43,479 | 43,479 | ||||||
TOTAL OTHER ASSETS | 3,554,438 | 3,232,649 | ||||||
TOTAL ASSETS | $ | 4,868,447 | $ | 5,534,385 | ||||
LIABILITIES AND STOCKHOLDERS’ DEFICIT | ||||||||
CURRENT LIABILITIES | ||||||||
Credit Facility – Revolving Loan | $ | 844,926 | $ | 1,474,129 | ||||
Accounts payable | 534,567 | 553,331 | ||||||
Accrued expenses | 1,187,217 | 1,134,729 | ||||||
Deferred Revenue & Customer Deposits | 73,200 | 117,800 | ||||||
Notes Payable – Related Parties, current portion | 212,490 | 137,150 | ||||||
Asset Acquisition Note Payable-current portion | 975,345 | 975,345 | ||||||
Equity Lines of Credit-current portion | 38,236 | 38,132 | ||||||
Other termed debts – current portion | 13,714 | 13,714 | ||||||
TOTAL CURRENT LIABILITIES | 3,879,695 | 4,444,330 | ||||||
Other termed debts, net of current portion | 324,009 | 26,975 | ||||||
Notes Payable – Related Parties, net of current portion | 186,639 | 257,857 | ||||||
Asset Acquisition Note Payable, net of current portion | 1,045,080 | 1,045,080 | ||||||
Equity Lines of Credit, net of current portion | 277,896 | 281,161 | ||||||
Deferred Lease Obligation | 95,441 | 81,189 | ||||||
COMMITMENTS AND CONTINGENCIES | ||||||||
STOCKHOLDERS’ DEFICIT | ||||||||
6% cumulative preferred stock, $100 par value, 200,000 shares authorized, 15,382 shares issued and outstanding on September 30, 2016 (unaudited) and June 30, 2016, respectively | 1,538,200 | 1,538,200 | ||||||
Common stock, no par value 7,800,000 shares authorized 6,299,123 and, 6,200,789 shares issued and outstanding at September 30, 2016 (unaudited) and June 30, 2016, respectively | 9,509,633 | 9,367,133 | ||||||
Additional Paid In Capital | 2,432,111 | 2,432,111 | ||||||
Accumulated Other Comprehensive Income | 185,667 | – | ||||||
Accumulated Deficit | (14,605,924 | ) | (13,939,651 | ) | ||||
TOTAL STOCKHOLDERS’ DEFICIT | (940,313 | ) | (602,207 | ) | ||||
TOTAL LIABILITIES AND STOCKHOLDERS’ DEFICIT | $ | 4,868,447 | $ | 5,534,385 |
The accompanying notes are an integral part of these condensed consolidated financial statements.
F-1 |
Condensed Consolidated Statements of Operations
For the Three Months Ended | ||||||||
September 30, | ||||||||
2016 | 2015 | |||||||
(unaudited) | (unaudited) | |||||||
Revenues | $ | 1,373,064 | $ | 2,451,855 | ||||
Cost of Sales | 979,882 | 1,415,183 | ||||||
Gross Profit | 393,182 | 1,036,672 | ||||||
Selling, General and Administrative Expenses (including non-cash stock related charges of $97,500 and $0 in Fiscal 2016 and 2015) | 738,850 | 703,000 | ||||||
Engineering and Research expenses | 207,660 | 206,314 | ||||||
Other Income (Loss) | – | 2,250 | ||||||
Interest (Expense and Credit costs) net | (111,895 | ) | (58,171 | ) | ||||
Net Income (Loss) before Income Taxes | (665,223 | ) | 71,437 | |||||
Income Taxes | (1,050 | ) | (1,050 | ) | ||||
Net Income (Loss) | $ | (666,273 | ) | $ | 70,387 | |||
Basic Net income (loss) per share: | $ | (0.107 | ) | $ | 0.015 | |||
Diluted Net income (loss) per share: | $ | (0.107 | ) | $ | 0.011 | |||
Weighted Average Number of Shares Outstanding: | ||||||||
Basic | 6,201,858 | 4,775,306 | ||||||
Diluted | 6,201,858 | 6,122,456 |
The accompanying notes are an integral part of these condensed consolidated financial statements.
F-2 |
Condensed Consolidated Statements of Comprehensive Income (Loss)
For The Three Months Ended | ||||||||
September 30, | ||||||||
2016 | 2015 | |||||||
(unaudited) | (unaudited) | |||||||
Net income (loss) | $ | (666,273 | ) | $ | 70,387 | |||
Other comprehensive income (loss): | ||||||||
Net unrealized gain (loss) on securities available-for-sale, net of income taxes | 185,667 | (37,067 | ) | |||||
Total comprehensive income (loss) | $ | (480,606 | ) | $ | 33,320 |
The accompanying notes are an integral part of these condensed consolidated financial statements.
F-3 |
Condensed Consolidated Statement of Changes in Stockholders’ Deficit
For the Three Months Ended September 30, 2016
(Unaudited)
Additional | Accumulated Other | |||||||||||||||||||||||||||||||
Preferred Stock | Common Stock | Paid In | Comprehensive | Accumulated | ||||||||||||||||||||||||||||
Shares | Amount | Shares | Amount | Capital | Income | Deficit | Amount | |||||||||||||||||||||||||
Balance, June 30, 2016 | 15,382 | $ | 1,538,200 | 6,200,789 | $ | 9,367,133 | $ | 2,432,111 | - | $ | (13,939,651 | ) | $ | (602,207 | ) | |||||||||||||||||
Issuance of common stock and options for services | 65,000 | 97,500 | - | 97,500 | ||||||||||||||||||||||||||||
Issuance of Common Stock and warrants in Private Placements, net of $5,000 costs | 33,334 | 45,000 | 45,000 | |||||||||||||||||||||||||||||
Unrealized gain on marketable securities | 185,667 | 185,667 | ||||||||||||||||||||||||||||||
Net Loss For the Three Months Ended September 30, 2016 | (666,273 | ) | (666,273 | ) | ||||||||||||||||||||||||||||
Balance, September 30, 2016 | 15,382 | $ | 1,538,200 | 6,299,123 | $ | 9,509,633 | $ | 2,432,111 | $ | 185,667 | $ | (14,605,924 | ) | $ | (940,313 | ) |
The accompanying notes are an integral part of these condensed consolidated financial statements.
F-4 |
Condensed Consolidated Statements of Cash Flows
For the Three Months Ended | ||||||||
September 30, | ||||||||
2016 | 2015 | |||||||
(unaudited) | (unaudited) | |||||||
Cash Flow Provided by (Used In) Operating Activities: | ||||||||
Net (Loss) Income From Operations | $ | (666,273 | ) | $ | 70,387 | |||
Adjustments to reconcile net (loss) income to net cash provided by (used in) operating activities: | ||||||||
Depreciation and amortization | 21,872 | 23,266 | ||||||
Non-cash charges relating to issuance of common stock for services | 97,500 | - | ||||||
Changes in assets and liabilities: | ||||||||
Accounts receivable | 725,463 | (224,429 | ) | |||||
Inventories | 118,955 | 12,755 | ||||||
Other current assets | 60,480 | (4,413 | ) | |||||
Deferred Rent | 14,252 | - | ||||||
Accounts payable | (158,763 | ) | (61,823 | ) | ||||
Accrued Expenses | 56,609 | 98,519 | ||||||
Customer deposits & deferred revenue | (44,600 | ) | - | |||||
Due to/from related parties mPhase & Edson Realty | - | (2,250 | ) | |||||
Net cash provided by (used in) operating activities | $ | 225,495 | $ | (87,988 | ) | |||
Cash Flow Used in Investing Activities: | ||||||||
Purchase of fixed assets | - | (35,919 | ) | |||||
Net Cash used in investing activities | $ | - | $ | (35,919 | ) | |||
Cash Flow Provided by (Used in) Financing Activities: | ||||||||
Proceeds from issuance of common stock | 45,000 | - | ||||||
(Payments) Proceeds from revolving credit facility (net) | (629,203 | ) | 212,060 | |||||
Payments of equity lines of credit | (3,161 | ) | (9,090 | ) | ||||
Payments of long-term debt | (871 | ) | (1,858 | ) | ||||
Proceeds from EDA loan | 300,000 | - | ||||||
Payments of capital lease obligations | - | (3,934 | ) | |||||
Payments of extended term arrangement | (2,095 | ) | (1,993 | ) | ||||
Net cash provided by (used in) financing activities | $ | (290,330 | ) | $ | 195,185 | |||
Net (decrease) increase in cash | $ | (64,835 | ) | $ | 71,278 | |||
CASH, beginning of period | $ | 81,224 | $ | 127,093 | ||||
CASH, end of period | $ | 16,389 | $ | 198,371 |
The accompanying notes are an integral part of these condensed consolidated financial statements.
F-5 |
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 — BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS
Microphase Corporation (the “Company”) is a design to manufacture original equipment manufacturer (OEM) industry leader delivering world-class radio frequency (RF) and microwave filters, diplexers, multiplexers, detectors, switch filters, integrated assemblies and detector logarithmic video amplifiers (DLVA) to the military, aerospace and telecommunications industries. Sales to military markets represent 100% of sales. The Company is headquartered in Shelton, Connecticut.
BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and pursuant to the regulations of the Securities Exchange Commission (the “SEC”). Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments considered necessary for a fair presentation have been included. Operating results for the three months ending September 30, 2016 are not necessarily indicative of the results that may be expected for a full fiscal year. The accompanying unaudited condensed consolidated financial statements include the accounts of the Company and its subsidiaries which include Microphase West LLC and Microphase Instruments, LLC, as of October 23, 2015. All intercompany accounts and transactions have been eliminated.
For further information, refer to the consolidated financial statements and footnotes thereto included in the Company’s Annual Report on Form 10-K for the year ended June 30, 2016. As of June 30, 2016, we had an accumulated deficit of $13,939,651 and a total stockholders’ deficit of $602,207. As of September 30, 2016, we had an accumulated deficit of $14,605,924 and a total stockholders’ deficit of $940,313. A significant amount of capital will be necessary to sustain, grow and advance our business and these conditions raise substantial doubt about our ability to continue as a going concern, as expressed in the report of our Independent Registered Public Accounting Firm for the year ended June 30, 2016.
The Company’s ability to continue as a going concern and its future success is dependent upon its ability to raise capital in the near term to: (1) satisfy its current obligations, (2) continue its research and development efforts, and (3) allow the successful wide scale development, deployment and marketing of its products.
PROPERTY AND EQUIPMENT — Are stated at cost. Provision for depreciation and amortization for financial reporting and income tax purposes is made by annual charges to operations principally under the following methods and estimated useful lives:
Method | Years | |||
Leasehold Improvements | Straight Line | 7 | ||
Property held under capital leases | Straight Line | 5 | ||
Furniture and fixtures | Straight Line | 7 | ||
Machinery and equipment | Straight Line | 5 | ||
Computer equipment | Straight Line | 3 | ||
Transportation equipment | Straight Line | 5 |
MAINTENANCE AND REPAIRS — Charged to expenses as incurred. Cost of major replacements and renewals are capitalized. Upon retirement or other disposition of equipment and improvements, the cost and related depreciation is removed from the accounts, and any gain or loss is recognized in income.
INVENTORIES — are stated at the lower of average cost or market under the first-in, first-out method. The Company regularly reviews inventory quantities on hand and records a provision for excess and obsolete inventory primarily based on our estimated forecast of product demand, anticipated end of product life and production requirements.
F-6 |
NOTE 1 — BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - ( continued )
OTHER LONG LIVED ASSETS — The Company reviews long-term assets for impairment whenever events or circumstances indicate that the carrying amount of those assets may not be recoverable. The Company assesses these assets for impairment based on their future cash flows. Management has determined that there was no impairment charge to be recorded for the three months ended September 30, 2016.
ACCOUNTS RECEIVABLE — Management records receivables at net realizable value and they generally do not bear interest. This value includes an allowance for estimated uncollectible accounts to reflect any loss anticipated on the accounts receivable balances which is charged to the provision for doubtful accounts. We calculate this allowance based on our history of write-offs, level of past due accounts and economic status of the customers. We consider a receivable delinquent if it is unpaid after 180 days after it is due.
ACCOUNTING ESTIMATES — Management uses estimates and assumptions in preparing financial statements in accordance with generally accepted accounting principles. Those estimates and assumptions affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities, and the reported revenues and expenses. Actual results could vary from the estimates that were assumed in preparing the financial statements.
COMPENSATED ABSENCES — Employees of the Company are entitled to vacation pay depending on length of service and current salary. Vacation days accrued in a given year are available in the following year. A limit of 5 days of unused vacation may be carried over to a subsequent year. The Company has provided for vacation liabilities in the accompanying financial statements.
RESEARCH AND DEVELOPMENT EXPENSES — The Company charges the cost of research and development to operations when incurred.
REVENUE RECOGNITION — The Company recognizes revenues when persuasive evidence of an arrangement exists, the product has been shipped, the price is fixed and collectability is reasonably assured. Revenue is recognized net of estimated sales returns and allowances.
GRANT INCOME — During the three months ended September 30, 2016 the Company was awarded and received the proceeds of a Small Business Express Matching Grant in an amount of $100,000 from the state of Connecticut in connection with the move of our California operation to Connecticut and with the development of the T & M products to be acquired in the Company’s Microphase Instruments, LLC, subsidiary. State grant funding requires a dollar for dollar match on behalf of the Company, which the Company’s obligation was considered funded in full prior to the Grant award. During the three months ended September 30, 2016 the Company recorded $26,800 as a reduction in Selling, General & Administrative expenses for qualified expenditures incurred in the period and at September 30, 2016 has included $73,200 in deferred revenue. Qualified expenditures for capital assets will be recognized as income over the life of the assets based upon the amortization or depreciation of any capitalized assets acquired with grant funds.
RECLASSIFICATIONS- Certain prior year amounts have been reclassified in our Condensed Consolidated Financial Statements to conform to current year classifications
F-7 |
NOTE 1 — BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - ( continued )
EARNINGS (LOSS) PER SHARE — Basic earnings (loss) per share (“EPS”) is determined by dividing the net earnings (loss) by the weighted-average number of shares of common shares outstanding during the period. Diluted EPS is determined by dividing net earnings (loss) by the weighted average number of common shares used in the basic EPS calculation plus the number of common shares that would be issued assuming conversion of all potentially dilutive securities (such as stock options, preferred stock and convertible securities) outstanding under the treasury stock method. As of September 30, 2016 we have outstanding (i) options to purchase 75,000 shares, (ii) 15,382 shares of preferred stock convertible into 1,025,467 shares, and (iii) $479,129 of debts to related parties convertible into 312,420 shares of our Common stock. In periods reporting a loss the inclusion of warrants and potential common shares to be issued in connection with convertible debt have an anti-dilutive effect on diluted loss per share and have been omitted in such computation.
RECENT ACCOUNTING PRONOUNCEMENTS— The Company is evaluating several pronouncements issued by the FASB which may result in the adoption by the Company of these standards in upcoming accounting periods as follows:
ADOPTION OF NEW ACCOUNTING STANDARDS —
On April 7, 2015, the FASB issued Accounting Standards Update 2015-03, Interest — Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs, which requires entities to present debt issuance costs related to a recognized debt liability as a direct deduction from the carrying amount of that debt liability. The guidance in Update 2015-03 (see below) does not address presentation or subsequent measurement of debt issuance costs related to line-of-credit arrangements. Given the absence of authoritative guidance within Update 2015-03 for debt issuance costs related to line-of-credit arrangements, the SEC staff would not object to an entity deferring and presenting debt issuance costs as an asset and subsequently amortizing the deferred debt issuance costs ratably over the term of the line-of-credit arrangement, regardless of whether there are any outstanding borrowings on the line-of-credit arrangement to be effective for Fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015; which for us is 1st interim period of fiscal 2017, or the current quarter ended September 30 2016. The adoption of this standard had no material effect on our financial position, results of operations and cash flows.
ASU 2014-12 — Compensation Stock-Compensation (Topic 718): Accounting for Share Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period (a consensus of the FASB Emerging Issues Task Force) to be effective for Annual periods beginning after December 15, 2015, and interim periods within annual periods beginning after December 15, 2015; which for us would be our 1st interim period of fiscal 2017, or the current quarter ended September 30 2016. The adoption of this standard had no material effect on our financial position, results of operations and cash flows.
ACCOUNTING STANDARDS ISSUED BUT NOT YET EFFECTIVE —
The Company is evaluating several pronouncements issued by the FASB which may result in the adoption by the Company of these standards in upcoming accounting periods as follows:
ASU 2014-09 — Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date-In May 2014, the FASB issued a comprehensive new revenue recognition standard that supersedes nearly all revenue recognition guidance under U.S. GAAP and supersedes some cost guidance for construction-type and production-type contracts. The guidance in this standard is principles-based, and accordingly, entities will be required to use more judgment and make more estimates than under prior guidance, including identifying contract performance obligations, estimating variable consideration to include in the contract price and allocating the transaction price to separate performance obligations.
F-8 |
NOTE 1 — BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - ( continued )
The guidance in this standard is applicable to all contracts with customers, regardless of industry-specific or transaction-specific fact patterns. Additionally, this standard provides guidance for transactions that were not previously addressed comprehensively (e.g., service revenue, contract modifications and licenses of intellectual property) and modifies guidance for multiple-element arrangements. The core principle of this standard is that entities 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 and services. To help financial statement users better understand the nature, amount, timing and potential uncertainty of the revenue that is recognized, this standard requires significantly more interim and annual disclosures. This standard allows for either “full retrospective” adoption (application to all periods presented) or “modified retrospective” adoption (application to only the most current period presented in the financial statements, as well as certain additional required footnote disclosures). On July 9, 2015, the FASB approved a one-year deferral of the effective date, while permitting entities to elect to adopt one year earlier on the original effective date. As a result, this standard is now effective for fiscal years, and interim reporting periods within those years, beginning after December 15, 2017, which for us is our fiscal 2019. We are currently evaluating the impact this standard, if any, will have on our financial position, results of operations and cash flows.
ASU 2015-11 — Inventory (Topic 330): Simplifying the Measurement of Inventory. For public business entities, the content that links to this paragraph shall be effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years, which for us is our first quarter of fiscal 2018. We are currently evaluating the impact this standard will have on our financial position, results of operations and cash flows.
ASU 2016-02 — In February 2016, the FASB issued a new lease standard that supersedes existing lease guidance under GAAP. This standard requires lessees to record most leases on their balance sheets but recognize expenses on their income statements in a manner similar to existing lease guidance under GAAP. Entities are required to use a modified retrospective approach for leases that exist or are entered into after the beginning of the earliest comparative period in the financial statements, with the option to use certain relief. Full retrospective application is prohibited. This standard is effective for fiscal years, and interim reporting periods within those years, beginning after December 15, 2018, which for us is our fiscal 2020. We are currently evaluating the impact this standard will have on our financial position, results of operations and cash flows.
ASU 2014-15 — Presentation of Financial Statements Going Concern (Subtopic 20540): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern to be effective for Annual periods ending after December 15, 2016, and interim periods within annual periods beginning after December 15, 2016; which for us would be our fiscal 2017 and although early adoption is permitted for this standard, the Company has not adopted nor determined its applicability.
ASU 2016-09 — In March 2016, the FASB issued an accounting standards update making final targeted amendments to the accounting for employee share-based payments. These amendments will require entities to recognize the income tax effects of awards when the awards vest or are settled, will change an employer’s accounting for an employee’s use of shares to satisfy the employer’s statutory income tax withholding obligation and will require entities to elect whether to account for forfeitures of share-based payments by either recognizing forfeitures of awards as they occur or estimating the number of awards expected to be forfeited as is currently required. The required method of adoption varies by amendment. This accounting standards update is effective for fiscal years, and interim reporting periods within those years, beginning after December 15, 2016, which for us is our first quarter of fiscal 2018. Early adoption is permitted in any annual or interim period, but all of the guidance is required to be adopted in the same period and any adjustments must be reflected as of the beginning of the fiscal year. We are currently evaluating the impact this accounting standards update will have on our financial position, results of operations and cash flows.
F-9 |
NOTE 1 — BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - ( continued )
ASU 2015-17 — Deferred Taxes (topic 740): For a particular tax-paying component of an entity and within a particular tax jurisdiction, all current deferred tax liabilities and assets shall be offset and presented as a single amount and all noncurrent deferred tax liabilities and assets, as well as any related valuation allowance, shall be offset and presented as a single noncurrent amount. However, an entity shall not offset deferred tax liabilities and assets attributable to different tax-paying components of the entity or to different tax jurisdictions. For public business entities, the amendments in this Update are effective for financial statements issued for annual periods beginning after December 15, 2016, and interim periods within those annual periods, which for us is our first quarter of fiscal 2018. Early adoption is permitted in any annual or interim period, but all of the guidance is required to be adopted in the same period and any adjustments must be reflected as of the beginning of the fiscal year. We are currently evaluating the impact this accounting standards update will have on our financial position, results of operations and cash flows.
ASU 2016-15 The FASB recently issued ASU 2016-15 to clarify whether the certain items should be categorized as operating, investing or financing in the statement of cash flows. For public business entities, the amendments in this Update are effective for financial statements issued for annual periods beginning after December 15, 2017, and interim periods within those fiscal years, which for us is our fiscal 2019. Early adoption is permitted in any annual or interim period, but all of the guidance is required to be adopted in the same period and any adjustments must be reflected as of the beginning of the fiscal year. We are currently evaluating the impact this accounting standards update will have on our financial position, results of operations and cash flows.
F-10 |
NOTE 2 — SUPPLEMENTAL CASH FLOW INFORMATION
For the three months ended | ||||||||
September 30, | ||||||||
2016 | 2015 | |||||||
(Unaudited) | (Unaudited) | |||||||
Statement of Operation Information: | ||||||||
Cash paid for income taxes | $ | 1,850 | $ | 1,850 | ||||
Interest Paid | $ | 72,417 | $ | 51,233 | ||||
Non Cash Investing and Financing Activities: | ||||||||
Assets acquired with debt financing | $ | - | $ | 300,000 | ||||
Accrued Deferred Offering Costs | $ | 140,000 | $ | - |
NOTE 3 — INVENTORIES
Inventories consist of the following:
September 30, | June 30, | |||||||
2016 | 2016 | |||||||
Amount | Amount | |||||||
(unaudited) | ||||||||
Raw materials | $ | 411,582 | $ | 423,670 | ||||
Work-in-process | 378,477 | 485,344 | ||||||
Reserve | (37,000 | ) | (37,000 | ) | ||||
Total | $ | 753,059 | $ | 872,014 |
In August 2016, Microphase West operations were transferred to the Shelton Connecticut plant. As of September 30, 2016 Microphase West inventory was combined with the Shelton Connecticut inventory. The inventory reserves were similarly combined to equal $37,000 for September 30, 2016.
F-11 |
NOTE 4 — PROPERTY AND EQUIPMENT:
Property and equipment was comprised of the following:
September 30, | June 30, | |||||||
2016 | 2016 | |||||||
Amount | Amount | |||||||
(unaudited) | ||||||||
Leasehold Improvements | $ | 40,288 | $ | 40,288 | ||||
Computers, machinery & equipment | 3,210,147 | 3,210,147 | ||||||
Furniture and fixtures | 122,350 | 122,350 | ||||||
Transportation equipment | 40,438 | 40,438 | ||||||
Property held under capital leases | 56,013 | 56,013 | ||||||
3,469,236 | 3,469,236 | |||||||
Less: accumulated depreciation and amortization | (3,328,251 | ) | (3,310,257 | ) | ||||
Total | $ | 140,985 | $ | 158,979 |
Depreciation expense was $17,994 and $19,389 during the three months ended September 30, 2016 and 2015, respectively.
NOTE 5 — ACCRUED EXPENSES:
Accrued expenses were comprised of the following:
September 30, | June 30, | |||||||
2016 | 2016 | |||||||
(unaudited) | ||||||||
Salaries, wages and other compensation, including $80,000 to related parties at September 30, 2016 and June 30, 2016 | $ | 354,497 | $ | 470,273 | ||||
Royalties | 150,386 | 146,449 | ||||||
Professional fees | 529,162 | 372,500 | ||||||
Commissions | 37,936 | 37,936 | ||||||
Interest | 35,358 | 47,144 | ||||||
Other miscellaneous accruals | 79,878 | 60,427 | ||||||
$ | 1,187,217 | $ | 1,134,729 |
401 (K) Employee Benefit Plan:
The Company sponsors a 401(K) plan for all eligible employees. Employee contributions are based on a percentage of compensation. Employer contributions for both matching and profit sharing are discretionary and determined annually by management.
Deferred Lease Obligation
At September 30, 2016 the Company has $95,441 of deferred lease obligation associated with the amendment in May of 2016 for its long term lease on the Shelton, Connecticut facility.
F-12 |
NOTE 6 — FAIR VALUE OF FINANCIAL INSTRUMENTS:
The fair value of a financial instrument is the amount at which the instrument could be exchanged in a current transaction between willing parties, other than in a forced or liquidation sale. Quoted market prices are used to establish fair value when they are available and other valuation techniques are utilized to estimate the fair value of financial instruments that do not have quoted market prices.
The Company has long term debt with fixed interest rates, the carrying amount of which may be different from fair value as of September 30, 2016 and June 30, 2016. The Company decided that it is not practical to estimate the fair value of these financial instruments on the basis that they are held-to-maturity debts which have no immediately available market information on the fair value and the cost of making assumptions and applying estimation methodologies to assess the fair value estimates exceeds the benefit. Information pertinent to estimating the fair value such as carrying amount, effective interest rate, maturity and repayment term are disclosed in Notes 7, 8, 9.
The Company has applied the fair value concepts to its available-for-sale securities. As such, the valuation techniques used to measure fair value is based on the source of the data used to develop the prices. The priority of these sources is defined as follows:
Level 1 — quoted prices in active markets.
Level 2 — other than quoted prices that are directly or indirectly observable.
Level 3 — unobservable inputs for the asset or liability.
Marketable securities, classified as available-for-sale securities, are measured at fair market value (Level 1) on a recurring basis. As of September 30, 2016 these amounted to $385,667.
NOTE 7 — REVOLVING CREDIT LINE
September 30, 2016 | June 30, 2016 | |||||||
(unaudited) | ||||||||
The Company entered into a revolving loan agreement with Gerber Finance, Inc. (Gerber) in February of 2012 for a maximum of $1,500,000, which was amended to $1,150,000 in November of 2013, and then to $1,400,000 in September 2015. Under this agreement, the Company can receive funds based on a borrowing base, which consists of various percentages of accounts receivable, inventories, a restricted cash account held by Gerber, and equipment. In connection with this agreement, the Company is subject to an annual facility fee (1.75%) on each anniversary, monthly collateral monitoring fees of $1,500 and other fees. As of September 30, 2016, this line has a limit of $1,400,000 and the interest is currently at the base rate of 7.25%. For the months of March through September 2016, we incurred an additional 2.5% interest charge on over-advance amounts that exceeded the collateral borrowing base and briefly (less than one week) a separate additional charge of 2.5% for exceeding the limit of $1,400,000 in June 2016. This excess utilization was eliminated in early July 2016. | $ | 844,926 | $ | 1,474,129 |
The interest expense for the three months ended September 30, 2016 and 2015, respectively, was $45,579 and $27,433, and the fees for the same period ended September 30, 2016 and 2015 were $10,625 and $9,710. The effective annualized interest rate for the three months ended September 30, 2016 was 18.15% and for same three months in 2015 was 9.65%.
There are financial covenants set forth in the Gerber agreement of February 3, 2012 and as amended on February 24, 2012. As of September 30, 2016 the Company was not in compliance with three financial covenants regarding minimum levels of net worth, net income and subordinated debt. The Company has not received a notice of default from Gerber regarding these covenants and has been in discussions with Gerber regarding resolving the noncompliance. The Company expects to meet the minimum level of net worth covenant upon completion of the Offering.
Approximate Value of collateral at balance sheet dates — | ||||||||
September 30, 2016 | June 30, 2016 | |||||||
(unaudited) | ||||||||
Inventories | $ | 753,059 | $ | 872,014 | ||||
Accounts Receivable | 367,019 | 1,092,482 | ||||||
Total | $ | 1,120,078 | $ | 1,964,496 |
F-13 |
NOTE 8 — EQUITY LINES OF CREDIT, OTHER TERMED DEBTS & ACQUISITION NOTES:
EQUITY LINES OF CREDIT:
The Company had previously guaranteed the payment under the terms of an assumption agreement, as amended, of an Equity Line of Credit with Wells Fargo Bank totaling up to $250,000, the proceeds of which the Company received from a concurrent loan from Edson Realty Inc. which was a related party-owned realty holding company at the time the credit line was funded on August 15, 2008. As of June 30, 2016, this first line of credit had $250,000 available, secured by residential real estate owned by a former COO of the Company, of which $218,290 was outstanding, with an interest rate of 3.35%. As of September 30, 2016, this line of credit has $250,000 available, of which $217,259 is outstanding, with an interest rate of 3.35%. The Company charged operations $1,839 and $1,940 for interest on this line of credit in the three months ended September 30, 2016 and 2015, respectively.
Effective June 30, 2014, the Company also has guaranteed to the CEO, under the terms of an assumption agreement, as amended, the repayment of a second Equity Line of Credit with Wells Fargo Bank. The Company received working capital loans from the CEO which were from funds drawn against this Equity Line of Credit. As of June 30, 2016 the second line of credit had $150,000 available, secured by the CEO’s principal residence, of which $101,003 was outstanding, with an interest rate of 3.0%. As of September 30, 2016, this line of credit has $150,000 available, of which $98,873 is outstanding, with an interest rate of 3.00%. The Company charged operations $757 and $910 for interest on this line of credit in the three months ended September 30, 2016 and 2015, respectively.
Other termed debts consist of: (i) Long-term Debt, (ii) Capital Leases, & (iii) Extended Payment Arrangements.
Long-term Debt: | ||||||||
September 30, 2016 | June 30, 2016 | |||||||
(unaudited) | ||||||||
Ford Credit Company: | ||||||||
Payable in monthly payments of $499, including interest at 4.90% through April, 2019 secured by transportation equipment. | $ | 14,952 | $ | 15,823 | ||||
Total | $ | 14,952 | $ | 15,823 | ||||
Less: current portion | (5,336 | ) | (5,336 | ) | ||||
Long-term portion | $ | 9,616 | $ | 10,487 |
The Company charged operations $127 and $533 in interest for these loans for the three months ended September 30, 2016 and 2015, respectively.
Extended Payment arrangements:
The Company is responsible for paying a former employee, disability benefits under a prior self-insured plan, through April, 2019. The plan requires monthly payments until the participant attains age 65. Interest has been imputed on this obligation at 5%.
September 30, 2016 | June 30, 2016 | |||||||
(unaudited) | ||||||||
Total of extended disability benefits | $ | 24,363 | $ | 26,721 | ||||
Less: amount representing interest | (1,592 | ) | (1,855 | ) | ||||
Present value of disability benefits | 22,771 | 24,866 | ||||||
Less: current portion | (8,378 | ) | (8,378 | ) | ||||
Long-term portion | $ | 14,393 | $ | 16,488 |
Interest expense charged to operations for the extended disability payments was $302 and $402 for the three months ended September 30, 2016 and 2015, respectively.
F-14 |
NOTE 8 — EQUITY LINES OF CREDIT, OTHER TERMED DEBTS & ACQUISITION NOTES: - ( continued )
Small Business Express Job Creation Incentive loan: | September 30, 2016 | June 30, 2016 | ||||||
(unaudited) | ||||||||
State of Connecticut Small Business Express Program loan, funded August 2016, initial amount of $300,000 at an interest rate of 3.0% for a term of 10 years. Principal and interest payments are deferred for the first year of the loan. | $ | 300,000 | $ | - | ||||
Total | $ | 300,000 | $ | - | ||||
Less: current portion | - | - | ||||||
Long-term portion | $ | 300,000 | $ | - |
Summary totals for Other termed debts consist of: (i) Long-term Debt & (ii) Extended Payment Arrangements.
September 30, 2016 | June 30, 2016 | |||||||
(unaudited) | ||||||||
Total minimum long term debt, capital lease & extended disability payments | $ | 337,723 | $ | 40,689 | ||||
Less: current portion | (13,714 | ) | (13,714 | ) | ||||
Long-term portion | $ | 324,009 | $ | 26,975 |
ACQUIRED INTANGIBLE ASSETS & ACQUISITION NOTES PAYABLE:
The Company acquired certain assets including specific inventory and fixed assets from a RF services provider, Microsemi Corp-RF Integrated Solutions (“Microsemi”); which had eliminated providing certain RF services similar to that of the Company for approximately 10 customers. The acquisition was pursuant to a contract, originally dated March 27, 2013, which provided for a $100,000 down payment and a note payable for $650,000, with payments through December, 2014 as amended. The total purchase price of $750,000 was allocated to tangible assets inventory and fixed assets associated with these specific RF services, and $155,277 intangible assets consisting of a customer list, non-compete clause and an exclusive license. The Contract also provided for 5% royalty on certain RF services we will provide to the specified 10 customers.
On August 8, 2014 the Company initially signed a strategic partnership agreement with Dynamac, Inc. to develop, manufacture and market a portfolio of low cost RF/Microwave and Millimeter-wave calibrated test probes and related universal test platforms.
On January 21, 2016, Microphase Instruments LLC, a subsidiary of Microphase Corporation (the “Company”) entered into a Purchase Agreement (the “Agreement”) with Dynamac, Inc. (the “Seller”), pursuant to which the Company agreed to acquire certain assets in a line of proprietary RF and microwave test and measurement products, as well as related intellectual property (the “Dynamac Assets”). On November 2, 2016, the Company entered into that certain First Amendment to Purchase Agreement with Dynamac (the “Dynamac Amendment”), pursuant to which, among other things, the Company agreed that Dynamac would retain ownership of the Dynamac assets until the Company has paid all amounts owed pursuant to the Dynamac agreement, with such amounts due within 10 days of the closing of the offering of the Company’s common stock as contemplated in the Registration Statement on Form S-1 filed with the SEC on July 28, 2016 (the “Offering”).
Asset allocation on Acquisition date
Microsemi
The Exclusive License associated with the Microsemi Inc. (“Microsemi”) asset acquisition was valued at $56,861, was ascribed a perpetual life and is subject to evaluation annually for impairment. Management has determined that there was no impairment charge to be recorded for the three months ended September 30, 2016 and 2015. Customer Lists and Non-Compete agreements associated with the Microsemi asset acquisition were ascribed useful lives of 7 and 5 years respectively. The consideration paid for this portion of business was allocated to the tangible and intangible assets acquired and liabilities assumed based on their estimated fair values at the acquisition date. We assigned $155,277 to identifiable intangible assets, which consist of a customer list, non-compete clause and an exclusive license. The acquired intangible assets will be amortized over their estimate lives, which range from 5 to 10 years, primarily using accelerated amortization methods based on the cash flow streams used to value those assets. The exclusive license has a contractual indefinite life and is reviewed annually for impairment. There was no excess of the purchase price over the estimated fair value of the net assets acquired and as such no goodwill was recorded. Amortization expense recorded for these intangible assets was $3,878 and $3,878 for the three months ended September 30, 2016 and 2015, respectively.
F-15 |
NOTE 8 — EQUITY LINES OF CREDIT, OTHER TERMED DEBTS & ACQUISITION NOTES: - ( continued )
Dynamac
The Dynamac License was recorded at cost. The Company deposited $50,000 and provided a $300,000 note payable toward the initial contract during fiscal 2015 which was subsequently revised by the Dynamac agreement of January 21, 2016.
The assets acquired in the Dynamac agreement of January 21, 2016 have been valued at the contract price in our initial measurement, resulting in intangible assets other than goodwill, primarily Intellectual Property consisting of two (2) patents with remaining lives of over 12 years each, a portfolio of product prototypes to be patented, trade secrets, know-how, confidential information and other intellectual property. We expect to incur additional costs to apply for eighteen (18) new patents, in addition to various trademarks and copyrights.
Our accounting for the allocation of the relative fair value of the intangible assets, other than goodwill, acquired in the Dynamac acquisition is still preliminary. The fair value estimates for the assets acquired were based on preliminary calculations, and our estimates and assumptions of the allocation of the relative fair value of these assets to possibly amortizable components, and if any, what period of amortization would be appropriate, are subject to change as we obtain additional information for our estimates during the measurement period (up to one year from the acquisition date). These assets will be subject to periodic evaluation and at a minimum will be reviewed annually for impairment. The Company assesses these assets for impairment based on their future cash flows.
Our Acquisitions have resulted in the following Asset allocation:
September 30, | June 30, | |||||||
2016 | 2016 | |||||||
(unaudited) | ||||||||
Intellectual Property | $ | 2,520,425 | $ | 2,520,425 | ||||
Customer List | 73,017 | 73,017 | ||||||
Non-Compete Clause | 25,399 | 25,399 | ||||||
Exclusive License | 56,861 | 56,861 | ||||||
Total | 2,675,702 | 2,675,702 | ||||||
Accumulated Amortization | (50,410 | ) | (46,532 | ) | ||||
Net Total | $ | 2,625,292 | $ | 2,629,170 |
Asset Acquisition Note Payable is comprised of the following:
September 30, | June 30, | |||||||
2016 | 2016 | |||||||
(unaudited) | ||||||||
Asset Acquisition Note Payable-current portion | ||||||||
- Dynamac agreement | $ | 975,345 | $ | 975,345 | ||||
Asset Acquisition Note Payable, net of current portion | ||||||||
- Dynamac agreement | 1,045,080 | 1,045,080 | ||||||
Total Asset acquisition note payable | $ | 2,020,425 | $ | 2,020,425 |
The acquisition of Microsemi on March 27, 2013, provided for a $100,000 down payment and a note payable for $650,000, with payments through December, 2014 and was paid in full during Fiscal 2015.
The Dynamac agreement, as revised, of January 21, 2016 was funded by the $50,000 original deposit paid in connection with the previous agreement, $350,000 paid at closing, $100,000 paid in February 2016, and a series of four $550,000 payments payable on the note semi-annually, due in August 2016 & 2017 and February 2017 & 2018. The Company imputed interest at 7%, its most favorable credit line rate, and as such is valued at $2,020,425. On November 2, 2016 the Agreement was extended whereby the initial payment is due November 22, 2016. See Note 13 – Subsequent Events.
F-16 |
NOTE 9 — RELATED PARTY TRANSACTIONS:
The Company had activities with related parties during the fiscal years 2016 and 2015. The Company sublet office space until March 31, 2015 and a vehicle in fiscal 2015 to mPhase. In fiscal 2016, the rent recorded was $0 for the office space and $9,000 for the vehicle. At September 30, 2016, there was no cost for the vehicle. At Sept 30, 2016 and June 30, 2016, mPhase owed the Company $33,295.
Notes Payable — Related Parties: | ||||||||
September 30, 2016 | June 30, 2016 | |||||||
(unaudited) | ||||||||
Former Employee: | ||||||||
Note payable to a Note Holder formerly employed by the Company, payable in monthly payments of $7,600 as revised in November 2015, with interest at 6% until paid in full. This Note Holder subordinated his debt to the revolving line discussed in Note 7, in February 2012, and converted $170,000 of his debt into 113,333 shares of common stock during the Fiscal year ended June 30, 2015. During FY 2016, the Company has sought to revise the payment schedule with the Note Holder, and to date the parties have not agreed to a revised repayment schedule and the note is in arrears. In May 2016, this lender initiated a Notice of Default and Demand for Payment, and in July 2016 the Note Holder initiated litigation to collect this debt in full. While the Company still seeks a mutually agreeable settlement, the Company believes this debt will be settled for an amount substantially the same as recorded in the financial statement. | $ | 154,732 | 152,434 | |||||
Stockholders: | ||||||||
Two notes previously payable to individuals with monthly payments of $2,715 and $2,750 as revised, including interest at 6% through September 2017. In January 2016, these two notes and loan amortization schedules were revised with monthly payments of $910 and $980 respectively, including interest at 3% through August 2019. The monthly payment amounts increase by $130 and $140 every 4 months, per the revised schedule. | $ | 119,656 | 118,762 | |||||
Other Related Parties: | ||||||||
Previously payable to this individual in monthly payments of $875 as revised, including interest at 6% through September 2017. In January 2016, this note and loan amortization schedule was revised with a monthly payment of $280, including interest at 3% through August 2019. The monthly payment amount increases by $40 every 4 months, per the revised schedule. | $ | 18,894 | 18,754 | |||||
Two notes previously payable to two individuals with identical monthly payments of $2,425 each as revised, including interest at 6% through April 2017. In January 2016, these two notes and loan amortization schedules were revised with monthly payments of $840 each, including interest at 3% through August 2019. The monthly payment amount increases by $120 every 4 months, per the revised schedule. | $ | 105,847 | 105,057 | |||||
Total | $ | 399,129 | $ | 395,007 | ||||
Less: current portion | (212,490 | ) | (137,150 | ) | ||||
Long-term portion | $ | 186,639 | $ | 257,857 |
The Company and the note holders (except for the former employee as discussed above) have agreed to revised repayment schedules for 42 months commencing December 2015. As of September 30, 2016, the Company was in arrears on four payments of the revised repayment schedules for each of the note holders.
The Company charged operations $4,122 and $6,938 for interest on these loans for the quarters ended September 30, 2016 and 2015, respectively.
F-17 |
THE COMPANY HAS MATERIAL DEBT SERVICE COMMITMENTS AT SEPTEMBER 30, 2016 AS DISCUSSED IN NOTES 8 & 9 SUMMARIZED AS FOLLOWS:
RELATED PARTY LOANS | OTHER TERMED DEBT | EQUITY LINES OF CREDIT | ACQUISITION NOTES | SMALL EXPRESS | TOTAL | |||||||||||||||||||
EFFECTIVE INTEREST RATE as of September 30, 2016 | 4.1 | % | 5.5 | % | 3.3 | % | 7 | % | 3 | % | ||||||||||||||
Fiscal Years: | ||||||||||||||||||||||||
2017 | $ | 141,272 | $ | 13,714 | $ | 38,236 | $ | 975,345 | $ | — | $ | 1,168,567 | ||||||||||||
2018 | 118,645 | 14,410 | 39,363 | 1,045,080 | 26,996 | 1,244,494 | ||||||||||||||||||
2019 | 104,112 | 9,599 | 238,533 | — | 30,308 | 382,552 | ||||||||||||||||||
2020 | 35,100 | — | — | — | 31,229 | 66,329 | ||||||||||||||||||
2021 | — | — | — | — | 32,179 | 32,179 | ||||||||||||||||||
thereafter | — | — | — | — | 179,288 | 179,288 | ||||||||||||||||||
Total | $ | 399,129 | $ | 37,723 | $ | 316,132 | $ | 2,020,425 | $ | 300,000 | $ | 3,073,409 |
F-18 |
NOTE 10 — STOCKHOLDERS’ EQUITY:
Microphase Corporation has authorized capital of 7,800,000 shares of common stock (“Common Stock”) with no par value and 200,000 shares of Series A Convertible Preferred Stock (“Preferred Stock”) with $100 par value per share, with 6% cumulative dividends.
On October 4, 2014, at a special meeting of the shareholders of the Company, the shareholders approved amendments to the Certificate of Incorporation of the Company to: (1) Increase its authorized common stock from 4,800,000 shares of common stock without par value up to 50,000,000 shares of common stock without par value; the Board of Directors has implemented such increase to 7,800,000 shares of Common Stock; (2) increase its authorized preferred stock from 200,000 shares, $100 par value per share up to 2,000,000 shares of 6% convertible preferred stock; such increase has yet to be implemented. Each outstanding and hereafter issued share of the Preferred Stock will: i) continue to be entitled to a cash dividend, payable quarterly on the last business day of each fiscal quarter of the Company, commencing with the fiscal quarter ended December 31, 2014, if and when declared by the Company’s board of directors (the “Board”) .. These dividends will be cumulative, will accrue if not declared by the Board, and must be paid before any dividends or other distributions are made to the common shareholders, be entitled, on liquidation of the Company, to receive $100 per share plus accrued dividends before any distributions are made to the common shareholders, be convertible at the option of the holder into Common Stock.
Common Stock
During the three months ended September 30, 2016 the Company issued 10,000 and 55,000, respectively, shares of its Common Stock to two Officers and Directors for services, valued at $97,500, which was charged to operations in the quarter ending September 30, 2016.
During the three months ended September 30, 2015, the Company issued no shares of its common stock.
During the three months ended September 30, 2016 the Company received net $45,000 pursuant to a stock purchase agreement where the Company will issue 33,334 shares of its Common Stock and a warrant to purchase up to 33,334 shares of stock for a period of five years at a price of $2.50 per share to an accredited investor in a private placement of its common stock pursuant to Section 4(a)(2) of the Securities Act of 1933, as amended, at $1.50 per share.
Preferred Stock
The Preferred Stock, with respect to dividends, liquidation payments, and liquidation rights, ranks senior to the common stock and of the Company. Holders of Preferred Stock are entitled to receive, when and as declared by the Board of Directors, dividends, at the annual rate of 6% of the stated par value, or $100 per share. Dividends are cumulative and accrue from the effective date of issuance of the Preferred Stock until declared.
F-19 |
NOTE 10 — STOCKHOLDERS’ EQUITY - ( continued )
As of September 30, 2016, 15,382 shares of Preferred Stock are outstanding and cumulative undeclared dividends on preferred stock are $267,051.
Reserved Shares
Stock Options
The Board approved the implementation of a stock option plan in January 2015, for which the Company will not seek ratification by the shareholders, reserving 250,000 shares of Common Stock for this plan; however, such plan has not yet been set forth in a formal document adopted by the board. During the year ended June 30, 2016 the Company granted options, as part of this plan, to an Officer and Director for services to purchase 75,000 shares of Common Stock, with an exercise price of $2.00, with a term of 7 years, and which rights vest over the next three years as follows; 25,000 shares were exercisable immediately and 25,000 shares vest each October 1 of 2016 and 2017. The total value of these options was estimated to be $106,200 using the Black Scholes method, based on an assumed volatility of 112.5% and an interest rate of .09%. $35,400 was charged to operations in the nine months ending March 31, 2016, deferring the balance of which $35,400 will be charged each October 1 of 2016 and 2017.
Series A Preferred Shares currently convertible
As of September 30, 2016, 15,382 preferred shares were outstanding and cumulative undeclared dividends on preferred stock were $267,051. The preferred shares are convertible into 1,025,467 shares of the Company’s common stock at $1.50, and the dividends, if declared, are convertible into 178,034 common shares stock also at $1.50, until such time the Company’s common stock begins trading.
Certain Debts currently convertible
As of September 30, 2016, $399,129 of loans from related parties and $80,000 of unpaid compensation are convertible into 266,086 and 53,334 shares of the Company’s common stock at $1.50, respectively, until such time the Company’s common stock begins trading.
F-20 |
NOTE 11 — MAJOR CUSTOMERS AND SEGMENTS:
The Company recorded sales of $796,996 and $1,428,581 with four and three customers for the three months ended September 30, 2016 and 2015 respectively. These customers represent 58% and 58% of sales for the three months ended September 30, 2016 and 2015. At September 30, 2016, those four customers owed the Company $122,598.
Sales to U.S. customers represented 87% and 86% of sales for the three months ended September 30, 2016 and 2015, respectively.
NOTE 12 — COMMITMENTS AND CONTINGENCIES:
The Company moved to Shelton, Connecticut on April 21, 2015, to a facility with 15,000 square feet with monthly rent of $15,000, for a 7-year term with annual escalations of 3%. In December 2015 the Company committed to rent additional space in connection with the acquisition of the Dynamac proprietary line. In June 2016 the monthly rent becomes $18,400 and in August 2016 $24,740. The total commitment on this lease for fiscal year 2017 is approximately $297,000.
Employment and Consultant Contracts:
The Company had previously entered into employment contracts with two long term officers through 2015 that provided for a stated salary of $250,000 per year, plus company benefits. These contracts were subject to other items and included a non-compete covenant. In Fiscal 2015 the Company entered into updated three year employment agreements with these two employees, one as an officer, currently the Company’s president and a director, and one as a strategic consultant upon his resignation as an officer and director. These updated contracts include base compensation of $225,000 per year plus company benefits, severance provisions and non-competition covenants for both individuals. As of September 30, 2016 and June 30, 2016, the Company owed $80,000 and $80,000 to these individuals, respectively.
In Fiscal 2015 the Company also entered into three year employment contracts with two new officers for at will employment with base compensation of $160,000 and $150,000 per year plus company benefits, respectively. Effective July 1, 2016 the Company revised these agreements with these two officers. These updated contracts include base compensation of $175,000 and $165,000 per year plus company benefits, severance provisions and non-competition covenants for both officers.
Effective July 1, 2016 the Company executed a modification to the consulting contract with the general manager through February 1, 2019. The updated contract includes base compensation of $192,000 per year with contract termination fees, comparable to the severance provisions for officers, and non-competition covenants.
The Company leases 5 vehicles under operating leases expiring in 2016 through 2018. As of September 30, 2016 the future minimum rental payments for fiscal 2017 are $27,221.
5 year Shelton Facility lease and Car lease schedules as of September 30, 2016:
Fiscal year | Shelton Facility Lease | Car leases | Total | |||||||||
2017 | $ | 298,358 | $ | 27,221 | $ | 325,579 | ||||||
2018 | 307,240 | 16,567 | 323,807 | |||||||||
2019 | 316,361 | 4,491 | 320,852 | |||||||||
2020 | 325,721 | 0 | 325,721 | |||||||||
2021 | 335,348 | 0 | 335,348 | |||||||||
Thereafter | 691,126 | 0 | 691,126 | |||||||||
Total | $ | 2,274,154 | $ | 48,279 | $ | 2,322,433 |
We are subject to legal proceedings and other claims arising out of the conduct of our business, including proceedings and claims relating to commercial and financial transactions; government contracts and sub-contracts; alleged lack of compliance with applicable laws and regulations; production partners; product liability; patent and trademark infringement; employment disputes; and environmental, safety and health matters. Some potential legal proceedings and claims could seek damages, fines or penalties in substantial amounts or remediation of environmental contamination. As a government sub-contractor, we are subject to audits, reviews and investigations to determine whether our operations are being conducted in accordance with applicable regulatory requirements. Under federal government procurement regulations, certain claims brought by the U.S. Government could result in our suspension or debarment from U.S. Government contracting for a period of time. On the basis of information presently available, we do not believe that there are any existing proceedings or potential claims that would have a material effect on our financial position or results of operations.
F-21 |
NOTE 13 — SUBSEQUENT EVENTS:
During September and October 2016, the Company commenced a private placement for 333,334 shares issuable to accredited investors in an interim private placement of our common stock pursuant to section 4(2) of the Securities Act of 1933, as amended. This pending private placement and issuance is expected to generate $450,000 of net proceeds to the Company after deducting $50,000 of placement fees upon completion. The terms also provide for 333,334 shares issuable upon exercise of warrants issued in connection with the private placement of 333,334 shares discussed above at an exercise price of $2.50 per share. Additionally, the Company entered into a one year agreement for investment banking services which calls for $60,000 of consulting fees to be paid in cash from the proceeds of this placement and $50,000 to be paid in common stock, at the per share value of the Offering, upon the completion of the Offering.
Through November 9, 2016 the Company has received $400,000 of these proceeds, of which $50,000 was received during the Quarter ended September 30, 2016.
Also in October 2016, the Company has offered to issue notes for bridge loans for a total of $700,000 from accredited investors that are expected to generate $630,000 in net proceeds to the Company after deducting $70,000 of placement fees upon completion. Additionally; the Company entered into a one year agreement for investment banking services which calls for $120,000 of consulting fees to be paid in cash from the proceeds of the bridge loans and $90,000 to be paid in common stock, at the per share value of the Offering, upon the completion of the Offering.
The terms of this bridge debt will be pursuant to note purchase agreements with purchasers that are accredited investors, for notes up to in the aggregate amount of $700,000, at an interest rate of 10% per annum (the “Notes”), from financing sources identified by and placed by Spartan Capital Securities, LLC (“Spartan”) in accordance with a certain Selling Agreement by and between the Company and Spartan. Each of the Notes will be repaid as follows: (i) in the event that the public offering of the Company’s securities that is contemplated pursuant to a registration statement on Form S-1 filed with the SEC on July 28, 2016 (the “Offering”) closes prior to the first anniversary of the issuance date of such Note, the amount that is equal to (A) the entire original principal amount of such Note multiplied by 1.25 plus (B) the interest, if any, accrued quarterly, every 90 days, beginning on the date that is 90 days from the issuance date of such Note on the entire outstanding principal amount, will be due and payable by no later than five days from the date of the Offering; or (ii) in the event that the Offering has not closed prior to the first anniversary of the issuance date of such Note, on such first anniversary of the issuance date of such Note, the amount that is equal to (A) the amount that is equal to the entire original principal amount of such Note multiplied by 1.25, plus (B) the interest accrued quarterly, every 90 days, beginning on the date that is 90 days from the issuance date of such Note on the entire outstanding principal amount will be due and payable. In the event that the Offering closes on a date that is sooner than 90 days from the issuance date of the Notes, no interest will accrue.
On November 2, 2016, we entered into that certain First Amendment to Purchase Agreement with Dynamac (the “Dynamac Amendment” and, the January Dynamac Agreement, as amended by the Dynamac Amendment, the “Dynamac Transaction”), pursuant to which, among other things, the Company agreed that Dynamac would retain ownership in the Dynamac Assets until the Company has delivered all amounts owed pursuant to the Dynamac Transaction, with such amounts due within 10 days of the closing of the Offering and the Company to pay such amounts from the proceeds thereof. In connection with this amendment the Company has agreed to issue 300,000 shares of our Common Stock and the August 22, 2016 payment has been extended to November 22, 2016.
F-22 |
ITEM 2. MANAGEMENT’S DISCUSSION OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS
This quarterly report on Form 10-Q and other reports filed by Microphase Corporation (the “Company”) from time to time with the SEC (collectively, the “Filings”) contain or may contain forward-looking statements and information that are based upon beliefs of, and information currently available to, the Company’s management as well as estimates and assumptions made by Company’s management. Readers are cautioned not to place undue reliance on these forward-looking statements, which are only predictions and speak only as of the date hereof. When used in the Filings, the words “anticipate,” “believe,” “estimate,” “expect,” “future,” “intend,” “plan,” or the negative of these terms and similar expressions as they relate to the Company or the Company’s management identify forward-looking statements. Such statements reflect the current view of the Company with respect to future events and are subject to risks, uncertainties, assumptions, and other factors, including the risks relating to the Company’s business, industry, and the Company’s operations and results of operations. Should one or more of these risks or uncertainties materialize, or should the underlying assumptions prove incorrect, actual results may differ significantly from those anticipated, believed, estimated, expected, intended, or planned.
Although the Company believes that the expectations reflected in the forward-looking statements are reasonable, the Company cannot guarantee future results, levels of activity, performance, or achievements. Except as required by applicable law, including the securities laws of the United States, the Company does not intend to update any of the forward-looking statements to conform these statements to actual results.
Our financial statements are prepared in accordance with accounting principles generally accepted in the United States (“GAAP”). These accounting principles require us to make certain estimates, judgments and assumptions. We believe that the estimates, judgments and assumptions upon which we rely are reasonable based upon information available to us at the time that these estimates, judgments and assumptions are made. These estimates, judgments and assumptions can affect the reported amounts of assets and liabilities as of the date of the financial statements as well as the reported amounts of revenues and expenses during the periods presented. Our financial statements would be affected to the extent there are material differences between these estimates and actual results. In many cases, the accounting treatment of a particular transaction is specifically dictated by GAAP and does not require management’s judgment in its application. There are also areas in which management’s judgment in selecting any available alternative would not produce a materially different result. The following discussion should be read in conjunction with our financial statements and notes thereto appearing elsewhere in this report.
RESULTS OF OPERATIONS OVERVIEW
Microphase Corporation designs and manufactures custom RF (radio frequency) and microwave products from DC to 40 GHz. Our products include components, subsystems and multi-function assemblies for the military and commercial markets. The Company has been in business for over 60 years and is one of the oldest and most established RF and microwave products companies in the industry.
The Company’s RF and microwave products enable the transmission, reception and processing of high frequency signals in defense electronics, homeland security systems and telecommunication networks. Our RF products are typically used in high frequency applications and include filters, switch filters, diplexers, multiplexers, detectors, detector logarithmic video amplifiers (DLVA) and multi-function assemblies. The end products in which the Company’s products are used include fighter planes, missiles, submarines, ships, drones, and IED jammers. Customers include Lockheed Martin, Raytheon, Saab, BAE Systems and the U. S. Government. Sales to the military markets comprised 100% of sales for 2016 and the first three months of fiscal 2017.
Many years of deficit spending have caused U.S. Government budgets to come under significant pressure in recent years. In particular, the Budget Control Act of 2011 resulted in automatic spending reductions known as sequestration, through budget caps for both defense and non-defense spending. According to usgovernmentspending.com spending on Military Defense has gone from $693.5 billion in the government fiscal year 2010 (ending September 30) to $705.6 billion in 2011, $677.9 billion in 2012, $633.4 billion in 2013, $603.5 in 2014, $597.5 in 2015 and $604.5 in 2016. This decrease has had a significant negative impact on Microphase’s customers, with a resultant negative impact on Microphase’s results during and prior to the past three fiscal years.
The Company has been selling the same products to the same customers for many years. While every product order is manufactured to each customer’s specifications, the overall product offering has not changed substantially. The Company believes it will need to introduce new products to the market in order to grow sales, in accordance with its strategy described in “Current Status and Management’s Plans.” The Company has been addressing its working capital needs by raising additional debt from insiders, by executing private placements of common stock, and through debt facility with Gerber Finance, Inc.
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Growth Strategy
While our core market historically has been the military electronics defense industry, we intend to leverage our high-frequency RF and microwave expertise to expand into high growth sectors of the wireless and RF microwave industries where we believe that we can command significant leadership. Our strategic plan for future growth is to develop and/or acquire proprietary technologies and solutions that will improve upon existing solutions and products in the areas of cost, size, weight, reliability and performance.
As a customer-driven global provider of RF/Microwave components, devices, and integrated assemblies, we plan to expand market penetration in emerging technology markets, including fifth generation (5G) wireless mobile communications, commercial drone systems, and the Internet of Things (“IoT”), which provides for advanced interconnection of devices, systems, and services within the existing Internet infrastructure and is expected to rely heavily on wireless links to enable automation in nearly all fields from residential to commercial, healthcare and industrial markets.
The Company is working to develop innovative solutions that we expect will drive our strategic roadmap for long-term growth and profitability. Discussions are underway for collaboration and joint development with certain potential strategic partners as we aggressively pursue access to niche products and solutions with first-to-market opportunities in these high growth market segments. This strategy could enable Microphase to broaden its customer base and reduce risk by spreading its revenue base across multiple market sectors. Acquisitions and/or joint ventures, if completed successfully, could increase our market share and the technology value of our product lines as well as broaden our product offerings and diversify our customer base. We believe that we are well positioned to capitalize on growth opportunities in the following three key market segments:
· | test and measurement; |
· | electronic filters; and |
· | high power amplifiers. |
ACQUISITIONS AND STRATEGIC INVESTMENTS
The Company is responding to the decrease in the defense budget by pursuing the acquisition of companies and product lines which are similar and/or related to the Company’s existing product lines and which may provide the Company with opportunities to expand beyond military markets. On March 27, 2013, the Company acquired the assets of a DLVA manufacturing business in Folsom, California from Microsemi Corp. pursuant to a purchase agreement (the “Microsemi Agreement”) for a purchase price comprised of $100,000 in cash plus a $650,000 note, which was paid in full prior to its maturity in December 2014 (the “Microsemi Transaction”). The assets acquired pursuant to the Microsemi Transaction were operated as a division and referred to as “Microphase West,” until such operations were moved to Shelton, Connecticut in July 2016.
On July 9, 2014, the Company executed a securities purchase agreement with AmpliTech Group Inc. of Bohemia, N.Y. to purchase, as amended, 8,666,666 AmpliTech common shares at $0.023 per share for a total purchase price of $200,000. The purchase price was made up of two installments of $100,000. AmpliTech designs, engineers and assembles amplifiers for micro-wave components primarily for communication systems. As of May 12, 2016, we owned 18.8% of the outstanding shares of Amplitech Common Stock. To date, this has been a passive investment. As of September 30, 2016, the value of these shares was $385,667.
On January 21, 2016, the Company entered the T&M industry by entering into a purchase agreement (as subsequently amended, the “Dynamac Agreement”) with Dynamac, Inc. (“Dynamac”), pursuant to which the Company agreed to acquire certain assets in a line of proprietary RF and microwave test and measurement products, as well as related intellectual property (“Dynamac Assets”). On November 2, 2016, the Company entered into that certain First Amendment to Purchase Agreement with Dynamac (the “Dynamac Amendment”), pursuant to which, among other things, the Company agreed that Dynamac would retain ownership of the Dynamac assets until the Company has paid all amounts owed pursuant to the Dynamac agreement, with such amounts due within 10 days of the closing of the Offering. The Company intends to pay all amounts owed to Dynamac pursuant to the Dynamac agreement from the proceeds thereof.
We believe the Dynamac Assets to be acquired pursuant to the Dynamac Transaction will enable us to grow sales revenue in accordance with our growth strategy.
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THREE MONTHS ENDED SEPTEMBER 30, 2016 VS. SEPTEMBER 30, 2015
Revenues. Total revenues for the three months ended September 30, 2016 were $1,373,064, down from $2,451,855 in the same period in 2015, a decrease of $1,078,791 or 44%. The revenue decrease was primarily due to a reduction in overall customer orders resulting in a reduced backlog, with a less efficient mix of products. In addition, the closure of the California plant in July 2016 and the transfer of inventory and work in process back to the East Coast plant in Shelton reduced shipments in the quarter. Additionally, there was a significant slow-down for the quarter on an important program, due to a critical vendor part not being available. The decrease to domestic customers was $913,391 in that period for 2016 and the decrease in shipments to foreign customers was $165,400.
Cost of Sales. Cost of sales decreased $471,301 for the three month period ended September 30, 2016 from $1,451,183 in 2015 to $979,882 in 2016, a decrease of 33%. The decrease in the cost of sales was primarily due to the decrease in revenues. The gross profit margin for that same period for 2015 was 42%, whereas the gross profit margin for the same 2016 period was 29%. The decrease in the gross profit margin was due to a less profitable product mix.
General and Administrative Expenses. Selling, general and administrative expenses were $738,850 for the 3 months ended September 30, 2016 compared to $703,000 for the same period in 2015, an increase of $35,850 or 5%. The increase resulted from stock-based compensation of $97,500 plus Microphase Instruments rental expense of $40,704 for their new Shelton work spaces adjacent to Microphase, less reduced SG&A costs resulting from the California plant closure, and $26,800 reduction of expenses from a grant received from the State of Connecticut.
Engineering and Research Expenses. Engineering and research for the three months ended September 30, 2016 were up to $207,660 from $206,314 in the same period in 2015, an increase of $1,346 or 0.7%. Engineering and research expenses were essentially flat year over year.
Non-operating Income (Loss). Non-operating income was $2,250 for the three months ended September 30, 2015 and $0 for the same period in 2016.
Interest (Expense and Credit costs) net. Interest expense and credit costs were $58,171 for the three months ended September 30, 2015 and $111,895 for the three months ended September 30, 2016, an increase of $53,734. The higher interest costs in 2016 were primarily the result of increased interest rates on over-advances from the Gerber Loan facility plus approximately $35,000 accrued interest on the Dynamac Loan repayment plan.
Net Income (Loss). The Company recorded a net loss of ($666,273) for the three months ended September 30, 2016, as compared to net income of $70,387 for the same period in 2015, a decrease of $736,660. The decrease was caused by the significant decline in revenues period over period, initial operational costs of $81,259 for Microphase Instruments in 2016 vs $0 in 2015, and the extra costs relative to the move of our California operations to Connecticut.
This represents basic (loss) per common share of $(0.107) in 2016 as compared to income per common share of $0.015 in 2015, based upon basic weighted average common shares outstanding during the three month periods ending September 30, 2016 and September 30, 2015 of 6,201,858 and 4,775,306, respectively. This represents diluted loss per common share of $(0.107) in 2016 as compared to diluted income per common share of $0.011 in 2015, based upon basic weighted average & diluted common shares outstanding during the same periods, of 6,201,858 and 6,122,456 respectively.
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LIQUIDITY AND CAPITAL RESOURCES
Through the three months ended September 30, 2016, the Company reported net loss of $666,273 and had cash of $16,389. At September 30, 2016, we had an accumulated deficit of $14,605,924. At September 30, 2016, the Company had a working capital deficit of $2,706,671 as compared to a working capital deficit of $2,301,573 as of June 30, 2016, an increase of $405,098 in the deficit.
This decrease is primarily due to the reduction in accounts receivable of $725,463, other current assets of $60,480 and inventory of $118,955. The working capital deficit was also increased by $140,000 additional expenditures in connection with our impending stock offering. We were able to reduce our credit line by $629,203 due to the dramatic reduction in accounts receivable.
Our financial condition raises substantial doubt that we will be able to continue as a “going concern”, and our Independent Registered Public Accounting Firm included an explanatory paragraph regarding this uncertainty in their report on our financial statements as of June 30, 2016 when we had an accumulated deficit of $13,939,651 and a working capital deficit of $2,301,573.
During the three months ended September 30, 2016, the cash from operating activities was $225,495, primarily because of the net loss of ($666,273) was offset by depreciation and amortization of $21,872, decreases in accounts receivable of $725,463, inventory of $118,955 and other current assets of $60,480, and an increase in accrued expenses of $56,609. The cash from operating activities was reduced primarily by a reduction of accounts payable of $158,763 and deferred revenue of $44,600.
During the three months ended September 30, 2015, the cash used in operating activities was ($87,988), primarily because of net income of $70,387, which was offset by an increase in accounts receivable of $224,429, a decrease in accounts payable of $61,823, and an increase in amounts due from related parties of $2,250. Cash provided by operating activities increased due to depreciation and amortization of $23,266, to a decrease in inventory of $12,755, and to an increase in accrued expenses of $98,519.
Cash (Used In) Investing Activities consisted of no activity during the three month period ended in September 30, 2016, as compared to the purchase of $35,919 of fixed assets during the same three month period in 2015.
During the three months ended September 30, 2016, the company received net $45,000 pursuant to a stock purchase agreement where the Company will issue 33,334 shares of common stock and warrants to purchase an additional 33,334 shares of common stock to an accredited investor in a private placement of its common stock pursuant to section 4(2) of the Securities Act of 1933, as amended. During the same 3 month period in 2015, the Company did not issue any shares of its common stock.
The Company entered into a revolving credit facility with Gerber Finance, Inc (“Gerber”) in 2012 with a maximum for this line, as amended, of $1,400,000. The outstanding balance as of September 30, 2016 was $844,926 and as of June 30, 2015 was $1,474,129. Under this agreement the Company receives funds based on a borrowing base which consists of various percentages of certain assets. The current interest rate is 7%, and there is an annual facility fee of 1.75%, plus monthly collateral monitoring fees of $1,500 and other fees. As of September 30, 2016 the Company was not in compliance with these financial covenants regarding minimum levels of net worth, net income and subordinated debt. The Company has not received a notice of default from Gerber regarding these covenants and has been in discussions with Gerber regarding resolving the noncompliance. The Company expects to meet the minimum level of net worth covenant upon completion of the Offering.
Cash (Used In) Financing activities totaled $290,330 during the three month period in 2016, primarily from the $629,203 pay down of the borrowings from our line from Gerber, reduced by debt service of $3,161 for our equity lines, reduced by $871 for long term debt, and reduced by $2,095 for payments for extended term arrangements. There was also an increase in financing activities from a note from the State of Connecticut for $300,000 and also the issuance of common stock for $45,000.
The terms and conditions of the purchase agreement with Dynamac require semi-annual payments due in August 2016 and 2017 and February 2017 and 2018 of $550,000, which the Company imputed interest at 7%, its most favorable credit line rate, and as such is valued at $2,020,425. The payment owed to Dynamac in August 2016 has a grace period until October 22, 2016. On November 2, 2016, we entered into that certain First Amendment to Purchase Agreement with Dynamac (the “Dynamac Amendment” and, the January Dynamac Agreement, as amended by the Dynamac Amendment, the “Dynamac Transaction”), pursuant to which, among other things, the Company agreed that Dynamac would retain ownership in the Dynamac Assets until the Company has delivered all amounts owed pursuant to the Dynamac Transaction, with such amounts due upon closing of the Offering and the Company to pay such amounts from the proceeds thereof.
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The amounts owed by the Company pursuant to the related party notes are four months in arrears.
THE COMPANY HAS MATERIAL DEBT SERVICE COMMITMENTS AT SEPTEMBER 30, 2016 AS DISCUSSED IN NOTES 8 & 9 SUMMARIZED AS FOLLOWS:
RELATED PARTY LOANS | OTHER TERMED DEBT | EQUITY LINES OF CREDIT | ACQUISITION NOTES | SMALL BUSINESS EXPRESS JOB CREATION INCENTIVE LOAN | TOTAL | |||||||||||||||||||
EFFECTIVE INTEREST RATE as of September 30, 2016 | 4.1 | % | 5.5 | % | 3.3 | % | 7 | % | 0 | % | ||||||||||||||
Fiscal Years: | ||||||||||||||||||||||||
2017 | $ | 141,272 | $ | 13,714 | $ | 38,236 | $ | 975,345 | $ | — | $ | 1,168,567 | ||||||||||||
2018 | 118,645 | 14,410 | 39,363 | 1,045,080 | 26,996 | 1,244,494 | ||||||||||||||||||
2019 | 104,112 | 9,599 | 238,533 | — | 30,308 | 382,552 | ||||||||||||||||||
2020 | 35,100 | — | — | — | 31,229 | 66,329 | ||||||||||||||||||
2021 | — | — | — | — | 32,179 | 32,179 | ||||||||||||||||||
future years | — | — | — | — | 179,288 | 179,288 | ||||||||||||||||||
Total | $ | 399,129 | $ | 37,723 | $ | 316,132 | $ | 2,020,425 | $ | 300,000 | $ | 3,073,409 |
During September and October 2016, the Company commenced a private placement for 333,334 shares issuable to accredited investors in an interim private placement of our common stock pursuant to section 4(2) of the Securities Act of 1933, as amended. This pending private placement and issuance is expected to generate $450,000 of net proceeds to the Company after deducting $50,000 of placement fees upon completion. The terms also provide for 333,334 shares issuable upon exercise of warrants issued in connection with the private placement of 333,334 shares discussed above at an exercise price of $2.50 per share. Additionally, the Company entered into a one year agreement for investment banking services which calls for $60,000 of consulting fees to be paid in cash from the proceeds of this placement and $50,000 to be paid in common stock, at the per share value of the Offering, upon the completion of the Offering.
Through November 9, 2016 the Company has received $400,000 of these proceeds, of which $50,000 was received during the Quarter ended September 30, 2016.
Also in October 2016, the Company has offered to issue notes for bridge loans for a total of $700,000 from accredited investors that are expected to generate $630,000 in net proceeds to the Company after deducting $70,000 of placement fees upon completion. Additionally; the Company entered into a one year agreement for investment banking services which calls for $120,000 of consulting fees to be paid in cash from the proceeds of the bridge loans and $90,000 to be paid in common stock, at the per share value of the Offering, upon the completion of the Offering.
The terms of this bridge debt will be pursuant to note purchase agreements with purchasers that are accredited investors, for notes (up to) in the aggregate amount of $700,000, at an interest rate of 10% per annum (the “Notes”), from financing sources identified by and placed by Spartan Capital Securities, LLC (“Spartan”) in accordance with a certain Selling Agreement by and between the Company and Spartan. Each of the Notes will be repaid as follows: (i) in the event that the public offering of the Company’s securities that is contemplated pursuant to a registration statement on Form S-1 filed with the SEC on July 28, 2016 (the “Offering”) closes prior to the first anniversary of the issuance date of such Note, the amount that is equal to (A) the entire original principal amount of such Note multiplied by 1.25 plus (B) the interest, if any, accrued quarterly, every 90 days, beginning on the date that is 90 days from the issuance date of such Note on the entire outstanding principal amount, will be due and payable by no later than five days from the date of the closing of the Offering; or (ii) in the event that the Offering has not closed prior to the first anniversary of the issuance date of such Note, on such first anniversary of the issuance date of such Note, the amount that is equal to (A) the amount that is equal to the entire original principal amount of such Note multiplied by 1.25, plus (B) the interest accrued quarterly, every 90 days, beginning on the date that is 90 days from the issuance date of such Note on the entire outstanding principal amount will be due and payable. In the event that the Offering closes on a date that is sooner than 90 days from the issuance date of the Notes, no interest will accrue.
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CURRENT STATUS AND MANAGEMENT’S PLAN OF OPERATIONS
The Company has been seeking to diversify its market focus beyond its core products. By utilizing our current capabilities together with positioning ourselves through targeted acquisitions, strategic alliances and product partnering we believe we can augment our current product offerings enabling us to continue to introduce a mix of new military and commercial products for the wireless telecom, autonomous auto, test & measurements, and medical instrumentation markets. This strategy should enable Microphase to broaden its customer base and reduce risk by spreading its revenue base across multiple market sectors. Targeted strategic acquisitions should increase our market share and the technology value of our product lines as well as broaden our product offering and diversify our customer base.
The Company plans on continuing financing operations through its debt facility with Gerber Financial, the issuance of debt to management, the settlement of debts for equity, and the sale of common and preferred securities though private placements, until such time it can complete its initial public offering, when and if declared effective, as described in its registration statement and impending amendment(s) on Form S-1, during the second quarter of fiscal 2017. The Company also continues to boost efforts to increase the sales of its traditional RF and DLVA business and anticipates the product growth plan to include the launch of its initial T&M products by the later portion of fiscal 2017 implementing the assets acquired from Dynamac in January 2016. Management has also taken steps in fiscal 2016 to contain operating expenses, including a reduction in the number of employees, primarily by consolidating all of its traditional design to manufacture RF and DLVA business into the Shelton, Connecticut location. The Company has expanded its facility in square footage and utility as such to house both our traditional RF and DLVA business, and enable the launch and delivery of its initial T&M products.
Management believes that these steps will permit the Company to maintain the continuation of our traditional operations, and should we become further capitalized, allow us to implement our product growth plan, which we believe will enable the Company to achieve and maintain a level of operations which generates sustainable profitability and to continue as a going concern. However there can be no assurance that this will be the case.
CRITICAL ACCOUNTING POLICIES, ESTIMATES AND ASSUMPTIONS
The SEC defines critical accounting policies as those that are, in management’s view, most important to the portrayal of our financial condition and results of operations and those that require significant judgments and estimates.
The discussion and analysis of our financial condition and results of operations is based upon our financial statements that have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets and liabilities. On an on-going basis, we evaluate our estimates including the allowance for doubtful accounts, the salability and recoverability of inventory, income taxes and contingencies. We base our estimates on historical experience and on other assumptions that we believe to be reasonable under the circumstances, the results of which form our basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
We cannot predict what future laws and regulations might be passed that could have a material effect on our results of operations. We assess the impact of significant changes in laws and regulations on a regular basis and update the assumptions and estimates used to prepare our financial statements when we deem it necessary.
Allowance for Doubtful Accounts
The Company provides an allowance for doubtful accounts equal to the estimated uncollectible amounts. The Company’s estimate is based on historical collection experience and a review of the current status of Accounts Receivable. It is reasonably possible that the Company’s estimate of the allowance for doubtful accounts will change in the future.
Depreciation and Amortization
Property and equipment are recorded at cost. Depreciation is provided over the estimated useful lives of the related assets using the straight-line method for financial statement purposes. The Company uses other depreciation methods (generally, accelerated depreciation methods) for tax purposes where appropriate. Amortization of leasehold improvements is computed using the straight-line method over the shorter of the remaining lease term or the estimated useful lives of the improvements.
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Income Taxes
The Company accounts for income taxes under the provisions of Financial Accounting Standards Board’s (“FASB”) Accounting Standards Codification (“ASC”) 740 “ Income Tax ”. ASC 740 requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred tax assets and liabilities are determined based on the differences between the financial statement carrying amounts and tax bases of certain assets and liabilities using enacted tax rates in effect in the years in which the differences are expected to reverse. The deferred tax assets and liabilities are classified according to the financial statement classification of the assets and liabilities generating the differences. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. The Company has adopted the provisions of FASB ASC 740-10-05 “Accounting for Uncertainty in Income Taxes”. The ASC clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements. The ASC prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. The ASC provides guidance on de-recognition, classification, interest and penalties, accounting in interim periods, disclosure and transition.
Inventory Obsolescence
Inventory quantities and related values are analyzed at the end of each fiscal quarter to determine those items that are slow moving or obsolete. An inventory reserve is recorded for those items determined to be slow moving with a corresponding charge to cost of goods sold. Inventory items that are determined obsolete are written off currently with a corresponding charge to cost of goods sold.
Revenue Recognition
Revenues and costs of revenues are recognized during the period in which the products are shipped. The Company applies the provisions of FASB Accounting Standards Codification (“ASC”) 605-10, Revenue Recognition in Financial Statements ASC 605-10, which provides guidance on the recognition, presentation, and disclosure of revenue in financial statements filed with the SEC. ASC 605-10 outlines the basic criteria that must be met to recognize revenue and provides guidance for disclosure related to revenue recognition policies. In general, the Company recognizes revenue for sale of products when (i) persuasive evidence of an arrangement exists, (ii) delivery has occurred, (iii) the fee is fixed or determinable, and (iv) the collectability is reasonably assured.
The Company’s sources of revenue are from the sale of various component amplifiers and filters. Revenue is recognized upon shipment of such products, FOB shipping point. The Company offers a 100% satisfaction guarantee against defects for 90 days after the sale of their product except for a few circumstances. There are no maintenance or service contracts related to any product sale.
OFF BALANCE SHEET TRANSACTIONS
As of November 11, 2016, we did not have any off-balance sheet arrangements.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is not exposed to changes in interest rates as the Company has no debt arrangements and no investments in certain held-to-maturity securities. Under our current policies, we do not use interest rate derivative instruments to manage exposure to interest rate changes. A hypothetical 100 basis point adverse move in interest rates along the entire interest rate yield curve would not materially affect the fair value of any financial instruments at September 30, 2016.
ITEM 4. CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures.
Under the supervision and with the participation of our management, including the Chief Executive Officer and Chief Financial Officer, we have evaluated the effectiveness of our disclosure controls and procedures as required by Exchange Act Rule 13a-15(b) as of the end of the period covered by this report. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that these disclosure controls and procedures are effective.
(b) Changes in Internal Control over Financial Reporting.
There were no changes in our internal control over financial reporting during the quarter ended September 30, 2016 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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We are currently not involved in any litigation that we believe could have a material adverse effect on our financial condition or results of operations. There is no action, suit, proceeding, inquiry or investigation before or by any court, public board, government agency, self-regulatory organization or body pending or, to the knowledge of the executive officers of our company or any of our subsidiaries, threatened against or affecting our company, our common stock, any of our subsidiaries or of our companies or our subsidiaries’ officers or directors in their capacities as such, in which an adverse decision could have a material adverse effect.
We believe there are no changes that constitute material changes from the risk factors previously disclosed in our Annual Report on Form 10-K for the Fiscal Year Ended June 30, 2016, filed with the SEC on October 3, 2016.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
During the three months ended September 30, 2016 the Company issued 65,000 shares of its Common Stock to two Officers and Directors for services, valued at $97,500, which was charged to operations in the quarter ending September 30, 2016.
During the three months ended September 30, 2016 the Company received net $45,000, net of fees, pursuant to a stock purchase agreement where the Company will issue 33,334 shares of common stock and a warrant to purchase 33,334 additional shares of common stock for five years at $2.50 per share to an accredited investor in a private placement of its common stock pursuant to Section 4(a)(2) of the Securities Act of 1933, as amended, at $1.50 per share.
The above issuances were made in reliance on an exemption from registration set forth in Section 4(a)(2) of the Securities Act of 1933, as amended, and/or Regulation D promulgated there under.
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ITEM 3. DEFAULTS UPON SENIOR SECURITIES ..
There has been no default in the payment of principal, interest sinking or purchase fund installment, or any other material default, with respect to indebtedness of the Company.
ITEM 4. MINE SAFETY DISCLOSURES.
Not applicable.
There is no other information required to be disclosed under this item which was not previously disclosed.
EXHIBITS | ||
4.1 | Form of Common Stock Purchase Warrant* | |
10.1 | Amendment to Purchase Agreement (incorporated herein by reference to the current report on Form 8-K filed with the SEC on November 8, 2016) | |
10.2 | Form of Subscription Agreement* | |
31.1 | Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes - Oxley Act of 2002.* | |
31.2 | Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes - Oxley Act of 2002.* | |
32.1 | Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes - Oxley Act of 2002.* | |
32.2 | Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes - Oxley Act of 2002.* | |
101.INS | XBRL Instance Document* | |
101.SCH | XBRL Taxonomy Extension Schema Document* | |
101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document* | |
101.DEF | XBRL Taxonomy Extension Definition Linkbase Document* | |
101.LAB | XBRL Taxonomy Extension Label Linkbase Document* | |
101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document* |
* | filed herewith. |
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Pursuant to the requirements of the Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant, has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
MICROPHASE CORPORATION | ||
Dated: November 14, 2016 | By: | /s/ Necdet Ergul |
Name: | Necdet Ergul | |
Title: | Chief Executive Officer (Principal Executive Officer) | |
By: | /s/ James Ashman | |
Name: | James Ashman | |
Title: | Chief Financial Officer | |
(Principal Financial Officer) | ||
(Principal Accounting Officer) |
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Exhibit 4.1
NEITHER THE ISSUANCE NOR SALE OF THE SECURITIES REPRESENTED BY THIS CERTIFICATE NOR THE SECURITIES INTO WHICH THESE SECURITIES ARE EXERCISABLE HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR APPLICABLE STATE SECURITIES LAWS. THE SECURITIES MAY NOT BE OFFERED FOR SALE, SOLD, TRANSFERRED OR ASSIGNED (I) IN THE ABSENCE OF (A) AN EFFECTIVE REGISTRATION STATEMENT FOR THE SECURITIES UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR (B) AN OPINION OF COUNSEL (WHICH COUNSEL SHALL BE SELECTED BY THE HOLDER AND REASONABLY APPROVED BY THE COMPANY), IN A GENERALLY ACCEPTABLE FORM, THAT REGISTRATION IS NOT REQUIRED UNDER SAID ACT OR (II) UNLESS SOLD PURSUANT TO RULE 144 OR RULE 144A UNDER SAID ACT. NOTWITHSTANDING THE FOREGOING, THE SECURITIES MAY BE PLEDGED IN CONNECTION WITH A BONA FIDE MARGIN ACCOUNT OR OTHER LOAN OR FINANCING ARRANGEMENT SECURED BY THE SECURITIES.
Right to Purchase [●] shares of Common Stock of Microphase Corporation (subject to adjustment as provided herein) |
COMMON STOCK PURCHASE WARRANT
No. 1 | Issue Date: ________, 2016 |
MICROPHASE CORPORATION, a corporation organized under the laws of the State of Connecticut (the “Company”), hereby certifies that, for value received, ______________, with an address at _______________________________________, or its assigns (the “Holder”), is entitled, subject to the terms set forth below, to purchase from the Company at any time after the Issue Date until 5:00 p.m., E.D.T. on the five (5) year anniversary of the Issue Date (the “Expiration Date”), up to [●] [NTD: 100% coverage] fully paid and non-assessable shares of Common Stock at a per share purchase price of $2.50. The aforedescribed purchase price per share, as adjusted from time to time as herein provided, is referred to herein as the “Purchase Price.” The number and character of such shares of Common Stock and the Purchase Price are subject to adjustment as provided herein. The Company may reduce the Purchase Price for some or all of the Warrants, temporarily or permanently, provided such reduction is made as to all outstanding Warrants for all Holders of such Warrants.
As used herein the following terms, unless the context otherwise requires, have the following respective meanings:
(a) The term “Common Stock” includes (i) the Company’s Common Stock, no par value per share and (ii) any other securities into which or for which any of the securities described in (i) may be converted or exchanged pursuant to a plan of recapitalization, reorganization, merger, sale of assets or otherwise.
(b) The term “Other Securities” refers to any stock (other than Common Stock) and other securities of the Company or any other person (corporate or otherwise) which the holder of the Warrant at any time shall be entitled to receive, or shall have received, on the exercise of the Warrant, in lieu of or in addition to Common Stock, or which at any time shall be issuable or shall have been issued in exchange for or in replacement of Common Stock or Other Securities pursuant to Section 4 hereof or otherwise.
(c) The term “Warrant Shares” shall mean the Common Stock issuable upon exercise of this Warrant.
1. Exercise of Warrant.
1.1. Number of Shares Issuable upon Exercise. From and after the Issue Date through and including the Expiration Date, the Holder shall be entitled to receive, upon exercise of this Warrant in whole in accordance with the terms of Section 1.2 hereof or upon exercise of this Warrant in part in accordance with Section 1.3 hereof, shares of Common Stock of the Company, subject to adjustment pursuant to Section 2 hereof.
1.2. Full Exercise. This Warrant may be exercised in full by the Holder hereof by delivery to the Company of an original or facsimile copy of the form of subscription attached as Exhibit A hereto (the “Subscription Form”) duly executed by such Holder and delivered within two (2) business days thereafter of payment, in cash, wire transfer or by certified or official bank check payable to the order of the Company, in the amount obtained by multiplying the number of shares of Common Stock for which this Warrant is then exercisable by the Purchase Price then in effect. The original Warrant is not required to be surrendered to the Company until it has been fully exercised.
1.3. Partial Exercise. This Warrant may be exercised in part (but not for a fractional share) by delivery of a Subscription Form in the manner and at the place provided in Section 1.2 hereof, except that the amount payable by the Holder on such partial exercise shall be the amount obtained by multiplying (a) the number of whole shares of Common Stock designated by the Holder in the Subscription Form by (b) the Purchase Price then in effect. On any such partial exercise, upon the written request of the Holder, provided the Holder has surrendered the original Warrant, the Company, at its expense, will forthwith issue and deliver to or upon the order of the Holder a new Warrant of like tenor, in the name of the Holder hereof or as such Holder (upon payment by such Holder of any applicable transfer taxes) may request, the whole number of shares of Common Stock for which such Warrant may still be exercised.
1.4. Fair Market Value. For purposes of this Warrant, the Fair Market Value of a share of Common Stock as of a particular date (the “Determination Date”) shall mean:
(A) If the Company’s Common Stock is traded on an exchange or on the NASDAQ Capital Market, NASDAQ Global Select Market, the New York Stock Exchange or the NYSE Euronext, the average of the closing sale prices of the Common Stock for the five (5) trading days immediately prior to (but not including) the Determination Date;
(B) If the Company’s Common Stock is not traded on an exchange or on the NASDAQ Global Market, NASDAQ Global Select Market, the NASDAQ Capital Market, the New York Stock Exchange or the NYSE Euronext, but is traded on the OTC Bulletin Board or in the over-the-counter market or Pink Sheets, the average of the closing bid and ask prices reported for the five (5) trading days immediately prior to (but not including) the Determination Date;
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(C) Except as provided in clause (D) below, if the Company’s Common Stock is not publicly traded, then as the Holder and the Company shall mutually agree, or in the absence of such an agreement after good faith efforts of the Company and the Holder to reach an agreement, by arbitration in accordance with the rules then standing of the American Arbitration Association, before a single arbitrator to be chosen from a panel of persons qualified by education and training to pass on the matter to be decided; or
(D) If the Determination Date is the date of a liquidation, dissolution or winding up, or any event deemed to be a liquidation, dissolution or winding up pursuant to the Company’s charter, then all amounts to be payable per share to holders of the Common Stock pursuant to the charter in the event of such liquidation, dissolution or winding up, plus all other amounts to be payable per share in respect of the Common Stock in liquidation under the charter, assuming for the purposes of this clause (d) that all of the shares of Common Stock then issuable upon exercise of all of the Warrants are outstanding at the Determination Date.
1.5. Company Acknowledgment. The Company will, at the time of the exercise of the Warrant, upon the request of the Holder hereof, acknowledge in writing its continuing obligation to afford to such Holder any rights to which such Holder shall continue to be entitled after such exercise in accordance with the provisions of this Warrant. If the Holder shall fail to make any such request, such failure shall not affect the continuing obligation of the Company to afford to such Holder any such rights.
1.6. Delivery of Stock Certificates, etc. on Exercise. The Company agrees that, provided the purchase price listed in the Subscription Form is received as specified in Section 2 hereof, the shares of Common Stock purchased upon exercise of this Warrant shall be deemed to be issued to the Holder hereof as the record owner of such shares as of the close of business on the date on which delivery of a Subscription Form shall have occurred and payment made for such shares as aforesaid. As soon as practicable after the exercise of this Warrant in full or in part and the payment is made, and in any event within five (5) business days thereafter (“Warrant Share Delivery Date”), the Company, at its expense (including the payment by it of any applicable issue taxes), will cause to be issued in the name of, and delivered to, the Holder hereof, or as such Holder (upon payment by such Holder of any applicable transfer taxes) may direct in compliance with applicable securities laws, a certificate or certificates for the number of duly and validly issued, fully paid and non-assessable shares of Common Stock (or Other Securities) to which such Holder shall be entitled on such exercise, plus, in lieu of any fractional share to which such Holder would otherwise be entitled, either (i) cash equal to such fraction multiplied by the then Fair Market Value of one full share of Common Stock, together with any other stock or other securities and property (including cash, where applicable) to which such Holder is entitled upon such exercise pursuant to Section 1 hereof or otherwise (ii) an extra share of Common Stock. The Company understands that a delay in the delivery of the Warrant Shares after the Warrant Share Delivery Date could result in economic loss to the Holder. If a warrant holder notifies the Company of such Holder’s election to exercise and the Company does not deliver the shares of Common Stock issuable upon such exercise, and the Holder has to buy shares of the Company’s Common Stock on the open market because of the Holder’s obligation to deliver shares of Common Stock, then the Company will pay such Holder the difference between the price paid on the open market and the value of such Common Stock on the date of exercise. The Company will also pay interest at the annual rate of 15% for each day that it is late in delivering shares of its Common Stock.
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2. Adjustment for Reorganization, Consolidation, Merger, etc.
2.1. Fundamental Transaction. If, at any time while this Warrant is outstanding, (A) the Company effects any merger or consolidation of the Company with or into another entity, (B) the Company effects any sale of all or substantially all of its assets in one or a series of related transactions, (C) any tender offer or exchange offer (whether by the Company or another entity) is completed pursuant to which holders of Common Stock are permitted to tender or exchange their shares for other securities, cash or property, (D) the Company consummates a stock purchase agreement or other business combination (including, without limitation, a reorganization, recapitalization, or spin-off) with one or more persons or entities whereby such other persons or entities acquire more than 50% of the outstanding shares of Common Stock (not including any shares of Common Stock held by such other persons or entities making or party to, or associated or affiliated with the other persons or entities making or party to, such stock purchase agreement or other business combination), (E) any “person” or “group” (as these terms are used for purposes of Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended (the “1934 Act”) is or shall become the “beneficial owner” (as defined in Rule 13d-3 under the 1934 Act), directly or indirectly, of 50% of the aggregate Common Stock of the Company, or (F) the Company effects any reclassification of the Common Stock or any compulsory share exchange pursuant to which the Common Stock is effectively converted into or exchanged for other securities, cash or property (in any such case, a “Fundamental Transaction”), then, upon any subsequent exercise of this Warrant, the Holder shall have the right to receive, for each Warrant Share that would have been issuable upon such exercise immediately prior to the occurrence of such Fundamental Transaction, at the option of the Holder, (a) upon exercise of this Warrant, the number of shares of Common Stock of the successor or acquiring corporation or of the Company, if it is the surviving corporation, and any additional consideration (the “Alternate Consideration”) receivable upon or as a result of such reorganization, reclassification, merger, consolidation or disposition of assets by a Holder of the number of shares of Common Stock for which this Warrant is exercisable immediately prior to such event or (b) if the Company is acquired in (1) a transaction where the consideration paid to the holders of the Common Stock consists solely of cash, (2) a “Rule 13e-3 transaction” as defined in Rule 13e-3 under the 1934 Act, or (3) a transaction involving a person or entity not traded on a national securities exchange, the Nasdaq Global Select Market, the Nasdaq Global Market or the Nasdaq Capital Market, cash equal to the Black-Scholes Value (as defined herein). For purposes of any such exercise, the determination of the Purchase Price shall be appropriately adjusted to apply to such Alternate Consideration based on the amount of Alternate Consideration issuable in respect of one share of Common Stock in such Fundamental Transaction, and the Company shall apportion the Purchase Price among the Alternate Consideration in a reasonable manner reflecting the relative value of any different components of the Alternate Consideration. If holders of Common Stock are given any choice as to the securities, cash or property to be received in a Fundamental Transaction, then the Holder shall be given the same choice as to the Alternate Consideration it receives upon any exercise of this Warrant following such Fundamental Transaction. To the extent necessary to effectuate the foregoing provisions, any successor to the Company or surviving entity in such Fundamental Transaction shall issue to the Holder a new warrant consistent with the foregoing provisions and evidencing the Holder’s right to exercise such warrant into Alternate Consideration. The terms of any agreement pursuant to which a Fundamental Transaction is effected include terms requiring any such successor or surviving entity to comply with the provisions of this Section 2.1 and insuring that this Warrant (or any such replacement security) will be similarly adjusted upon any subsequent transaction analogous to a Fundamental Transaction. “Black-Scholes Value” shall be determined in accordance with the Black-Scholes Option Pricing Model obtained from the “OV” function on Bloomberg L.P. using (i) a price per share of Common Stock equal to the Volume Weighted Average Price of the Common Stock for the trading day immediately preceding the date of consummation of the applicable Fundamental Transaction, (ii) a risk-free interest rate corresponding to the U.S. Treasury rate for a period equal to the remaining term of this Warrant as of the date of such request and (iii) an expected volatility equal to the 100 day volatility obtained from the HVT function on Bloomberg L.P. determined as of the trading day immediately following the public announcement of the applicable Fundamental Transaction.
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2.2. Continuation of Terms. Upon any reorganization, consolidation, merger or transfer (and any dissolution following any transfer) referred to in this Section 2 hereof, this Warrant shall continue in full force and effect and the terms hereof shall be applicable to the Other Securities and property receivable on the exercise of this Warrant after the consummation of such reorganization, consolidation or merger or the effective date of dissolution following any such transfer, as the case may be, and shall be binding upon the issuer of any Other Securities, including, in the case of any such transfer, the person acquiring all or substantially all of the properties or assets of the Company, whether or not such person shall have expressly assumed the terms of this Warrant as provided in Section 5 hereof.
3. Accredited Investor Status. This Warrant may only be exercised by a Holder that is an “accredited investor” as that term is defined in Rule 501 promulgated under the Securities Act of 1933, as amended.
4. Extraordinary Events Regarding Common Stock. In the event that the Company shall (a) issue additional shares of Common Stock as a dividend or other distribution on outstanding Common Stock, (b) subdivide its outstanding shares of Common Stock, or (c) combine its outstanding shares of the Common Stock into a smaller number of shares of Common Stock, then, in each such event, the Purchase Price shall, simultaneously with the happening of such event, be adjusted by multiplying the then Purchase Price by a fraction, the numerator of which shall be the number of shares of Common Stock outstanding immediately prior to such event and the denominator of which shall be the number of shares of Common Stock outstanding immediately after such event, and the product so obtained shall thereafter be the Purchase Price then in effect. The Purchase Price, as so adjusted, shall be readjusted in the same manner upon the happening of any successive event or events described in this Section 4. The number of shares of Common Stock that the Holder of this Warrant shall thereafter, on the exercise hereof, be entitled to receive shall be adjusted to a number determined by multiplying the number of shares of Common Stock that would otherwise (but for the provisions of this Section 4) be issuable on such exercise by a fraction of which (a) the numerator is the Purchase Price that would otherwise (but for the provisions of this Section 4) be in effect, and (b) the denominator is the Purchase Price in effect on the date of such exercise.
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5. Certificate as to Adjustments. In each case of any adjustment or readjustment in the shares of Common Stock (or Other Securities) issuable on the exercise of the Warrants or in the Purchase Price, the Company at its expense will promptly cause its Chief Financial Officer or other appropriate designee to compute such adjustment or readjustment in accordance with the terms of the Warrant and prepare a certificate setting forth such adjustment or readjustment and showing in detail the facts upon which such adjustment or readjustment is based, including a statement of (a) the consideration received or receivable by the Company for any additional shares of Common Stock (or Other Securities) issued or sold or deemed to have been issued or sold, (b) the number of shares of Common Stock (or Other Securities) outstanding or deemed to be outstanding, and (c) the Purchase Price and the number of shares of Common Stock to be received upon exercise of this Warrant, in effect immediately prior to such adjustment or readjustment and as adjusted or readjusted as provided in this Warrant. The Company will forthwith mail a copy of each such certificate to the Holder of the Warrant and any Warrant Agent (as defined herein) of the Company (appointed pursuant to Section 10 hereof). Holder will be entitled to the benefit of the adjustment regardless of the giving of such notice. The timely giving of such notice to Holder is a material obligation of the Company.
6. Reservation of Stock, etc. Issuable on Exercise of Warrant; Financial Statements. The Company will at all times reserve and keep available, solely for issuance and delivery on the exercise of the Warrants, all shares of Common Stock (or Other Securities) from time to time issuable on the exercise of the Warrant. This Warrant entitles the Holder hereof, upon written request, to receive copies of all financial and other information distributed or required to be distributed to the holders of the Company’s Common Stock.
7. Assignment; Exchange of Warrant. Subject to compliance with applicable securities laws, this Warrant, and the rights evidenced hereby, may be transferred by any registered holder hereof (a “Transferor”). On the surrender for exchange of this Warrant, with the Transferor’s endorsement in the form of Exhibit B attached hereto (the “Transferor Endorsement Form”) and together with an opinion of counsel reasonably satisfactory to the Company that the transfer of this Warrant will be in compliance with applicable securities laws, the Company will issue and deliver to or on the order of the Transferor thereof a new Warrant or Warrants of like tenor, in the name of the Transferor and/or the transferee(s) specified in such Transferor Endorsement Form (each a “Transferee”), calling in the aggregate on the face or faces thereof for the number of shares of Common Stock called for on the face or faces of the Warrant so surrendered by the Transferor.
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8. Replacement of Warrant. On receipt of evidence reasonably satisfactory to the Company of the loss, theft, destruction or mutilation of this Warrant and, in the case of any such loss, theft or destruction of this Warrant, on delivery of an indemnity agreement or security reasonably satisfactory in form and amount to the Company or, in the case of any such mutilation, on surrender and cancellation of this Warrant, the Company at its expense, twice only, will execute and deliver, in lieu thereof, a new Warrant of like tenor.
9. Maximum Exercise. The Holder shall not be entitled to exercise this Warrant on an exercise date, in connection with that number of shares of Common Stock which would be in excess of the sum of (i) the number of shares of Common Stock beneficially owned by the Holder and its Affiliates on an exercise date, and (ii) the number of shares of Common Stock issuable upon the exercise of this Warrant with respect to which the determination of this limitation is being made on an exercise date, which would result in beneficial ownership by the Holder and its Affiliates of more than 4.99% of the outstanding shares of Common Stock on such date. For the purposes of the immediately preceding sentence, beneficial ownership shall be determined in accordance with Section 13(d) of the 1934 Act and Rule 13d-3 thereunder. Subject to the foregoing, the Holder shall not be limited to aggregate exercises which would result in the issuance of more than 4.99% of the outstanding shares of Common Stock. The restriction described in this paragraph may be waived, in whole or in part, upon sixty-one (61) days’ prior notice from the Holder to the Company to increase such percentage.
10. Warrant Agent. The Company may, by written notice to the Holder, appoint an agent (a “Warrant Agent”) for the purpose of issuing Common Stock (or Other Securities) on the exercise of this Warrant pursuant to Section 1 hereof, exchanging this Warrant pursuant to Section 7 hereof, and replacing this Warrant pursuant to Section 8 hereof, or any of the foregoing, and thereafter any such issuance, exchange or replacement, as the case may be, shall be made at such office by such Warrant Agent.
11. Transfer on the Company’s Books. Until this Warrant is transferred on the books of the Company, the Company may treat the registered holder hereof as the absolute owner hereof for all purposes, notwithstanding any notice to the contrary.
12. Notices. All notices, demands, requests, consents, approvals, and other communications required or permitted hereunder shall be in writing and, unless otherwise specified herein, shall be (i) personally served, (ii) deposited in the mail, registered or certified, return receipt requested, postage prepaid, (iii) delivered by reputable air courier service with charges prepaid, or (iv) transmitted by hand delivery, telegram, or facsimile addressed as set forth below or to such other address as such party shall have specified most recently by written notice. Any notice or other communication required or permitted to be given hereunder shall be deemed effective (a) upon hand delivery or delivery by facsimile, with accurate confirmation generated by the transmitting facsimile machine, at the address or number designated below (if delivered on a business day during normal business hours where such notice is to be received), or the first business day following such delivery (if delivered other than on a business day during normal business hours where such notice is to be received), or (b) on the second business day following the date of mailing by express courier service, fully prepaid, addressed to such address, or upon actual receipt of such mailing, whichever shall first occur. The addresses for such communications shall be: (i) if to the Company, to Microphase Corporation, 100 Trap Falls Road Ext, Shelton, CT 06484 Attn: James Ashman, with a copy by fax only to (which shall not constitute notice) Lucosky Brookman LLP, 101 Wood Avenue South, 5th Floor, Iselin, NJ 08830, Attn: Joseph M. Lucosky, Esq., facsimile: (732) 395-4401, and (ii) if to the Holder, to the address and facsimile number listed on the first paragraph of this Warrant.
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13. Law Governing This Warrant. This Warrant shall be governed by and construed in accordance with the laws of the State of New York without regard to its principles of conflicts of laws or of any other State. Any action brought by either party hereto against the other concerning the transactions contemplated by this Warrant shall be brought only in the state courts of New York or in the federal courts located in the state and county of New York. The parties to this Warrant hereby irrevocably waive any objection to jurisdiction and venue of any action instituted hereunder and shall not assert any defense based on lack of jurisdiction or venue or based upon forum non conveniens. The Company and the Holder waive trial by jury. The prevailing party shall be entitled to recover from the other party its reasonable attorney’s fees and costs. In the event that any provision of this Warrant or any other agreement delivered in connection herewith is invalid or unenforceable under any applicable statute or rule of law, then such provision shall be deemed inoperative to the extent that it may conflict therewith and shall be deemed modified to conform to, such statute or rule of law. Any such provision which may prove invalid or unenforceable under any law shall not affect the validity or enforceability of any other provision of any agreement. Each party hereto hereby irrevocably waives personal service of process and consents to process being served in any suit, action or proceeding in connection with this Warrant or any other transaction document by mailing a copy thereof via registered or certified mail or overnight delivery (with evidence of delivery) to such party at the address in effect for notices to it under this Warrant and agrees that such service shall constitute good and sufficient service of process and notice thereof. Nothing contained herein shall be deemed to limit in any way any right to serve process in any other manner permitted by law.
[Signature Page Follows]
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IN WITNESS WHEREOF, the Company has executed this Warrant as of the date first written above.
MICROPHASE CORPORATION | |||
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By: | |||
Name: | Necdet Ergul | ||
Title: | Chief Executive Officer |
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Exhibit A
FORM OF EXERCISE
(to be signed only on exercise of Warrant)
TO: MICROPHASE CORPORATION
The undersigned, pursuant to the provisions set forth in the attached Warrant (No.____), hereby irrevocably elects to purchase (check applicable box):
___ ________ shares of the Common Stock covered by such Warrant; or
___ | . |
The undersigned herewith makes payment of the full purchase price for such shares at the price per share provided for in such Warrant, which is $___________. Such payment takes the form of (check applicable box or boxes):
___ $__________ in lawful money of the United States; and/or
The undersigned requests that the certificates for such shares be issued in the name of, and delivered to __________________________________________, whose address is ___________________________ __________________________________________________________________________________________________.
The undersigned represents and warrants that all offers and sales by the undersigned of the securities issuable upon exercise of the within Warrant shall be made pursuant to registration of the Common Stock under the Securities Act of 1933, as amended (the “Securities Act”), or pursuant to an exemption from registration under the Securities Act. The undersigned hereby represents an d warrants that the undersigned in an “accredited investor” as that term is defined in Rule 501 promulgated under the Securities Act.
Dated:___________________ | ||
(Signature must conform to name of holder as specified on the face of the Warrant) | ||
(Address) |
Exhibit B
FORM OF TRANSFEROR ENDORSEMENT
(To be signed only on transfer of Warrant)
For value received, the undersigned hereby sells, assigns, and transfers unto the person(s) named below under the heading “Transferees” the right represented by the within Warrant to purchase the percentage and number of shares of Common Stock of MICROPHASE CORPORATION to which the within Warrant relates specified under the headings “Percentage Transferred” and “Number Transferred,” respectively, opposite the name(s) of such person(s) and appoints each such person Attorney to transfer its respective right on the books of MICROPHASE CORPORATION, with full power of substitution in the premises.
Transferees | Percentage Transferred | Number Transferred | ||
Dated: __________________, _______ | ||
(Signature must conform to name of holder as specified on the face of the warrant) | ||
Signed in the presence of: | ||
(Name) | ||
(address) | ||
ACCEPTED AND AGREED: | ||
[TRANSFEREE] | ||
(address) | ||
(Name) |
Exhibit 10.2
SUBSCRIPTION AGREEMENT
THIS SUBSCRIPTION AGREEMENT (this “Agreement”), dated as of September [●], 2016, is by and between MICROPHASE CORPORATION, a corporation incorporated under the laws of the State of Connecticut and located at 100 Trap Falls Road Extension, Shelton, CT 06484 (the “Company”), and [●], a [●] in the State of [●] located at [●] (the “Subscriber”).
WHEREAS, the Company and Subscriber are executing and delivering this Agreement in reliance upon an exemption from securities registration afforded by the provisions of Section 4(2) and/or Regulation D (“Regulation D”) promulgated by the United States Securities and Exchange Commission (the “Commission”) under the Securities Act of 1933, as amended (the “Securities Act”);
WHEREAS, the parties hereto desire that, upon the terms and subject to the conditions contained herein and upon the date hereof (the “Funding Date”), the Company shall issue to the Subscriber (1) [●] Thousand ([●]) shares (the “Shares”) of the Company’s common stock, no par value per share (the “Common Stock”), and (2) a warrant to purchase [●] Thousand ([●]) shares of Common Stock (the “Warrant”) (the Shares, together with the Common Stock to be issued upon conversion of the Warrant shall hereinafter, together, be referred to as the “Conversion Shares” and the Shares and Warrant shall be referred to collectively herein as the “Securities”); and
WHEREAS, the Subscriber understands that the Company is proposing to enter into an underwriting agreement providing for the purchase by certain underwriters of shares of Common Stock and that such underwriters propose to reoffer such shares of Common Stock to the public (the “Offering”).
NOW, THEREFORE, in consideration of the mutual covenants and other agreements contained in this Agreement, the Company and Subscriber hereby agree as follows:
1. Purchase and Sale. Upon the terms and subject to the conditions set forth in this Agreement and in consideration of [●][NTD: $1.50 per share] Thousand United States Dollars (US$[●]) (the “Purchase Price”) delivered by the Subscriber to the Company on the Funding Date, the Company hereby agrees to issue the Shares and the Warrant to the Subscriber on the Funding Date. The Company agrees to issue and deliver the Securities to the Subscriber free of all liens, pledges, mortgages, security interests, charges, restrictions, adverse claims or other encumbrances of any kind or nature whatsoever (“Encumbrances”), and Subscriber hereby agrees to accept the Securities free of all Encumbrances.
2. Subscriber Representations and Warranties. Subscriber hereby represents and warrants to and agrees with the Company that:
(a) Standing of Subscriber. Subscriber has the legal capacity and power to enter into this Agreement;
(b) Authorization and Power. Subscriber has the requisite power and authority to enter into and perform this Agreement and to deliver the Purchase Price on the Funding Date and accept the Warrant. The execution, delivery and performance of this Agreement by the Subscriber, and the consummation by the Subscriber of the transactions contemplated hereby, have been duly authorized by all necessary action, and no further consent or authorization of Subscriber is required. This Agreement has been duly authorized, executed and delivered by the Subscriber and constitutes, or shall constitute, when executed and delivered, a valid and binding obligation of the Subscriber, enforceable against Subscriber in accordance with the terms hereof;
(c) Information on Subscriber. Subscriber is, and reasonably believes he will be at the time of the exercise of the Warrant, an “accredited investor,” as such term is defined in Regulation D promulgated by the Commission under the Securities Act, is experienced in investments and business matters, has made investments of a speculative nature and has purchased securities of United States publicly-owned companies in private placements in the past and, with its representatives, has such knowledge and experience in financial, tax and other business matters as to enable the Subscriber to utilize the information made available by the Company to evaluate the merits and risks of, and to make an informed investment decision with respect to, the proposed purchase, which the Subscriber hereby agrees represents a speculative investment. The Subscriber has the authority and is duly and legally qualified to purchase and own the Securities. The Subscriber is able to bear the risk of such investment for an indefinite period and to afford a complete loss thereof;
(d) Purchase of Securities. The Subscriber will purchase the Securities for its own account for investment and not with a view toward, or for resale in connection with, the public sale or any distribution thereof in violation of the Securities Act or any applicable state securities law, and has no direct or indirect arrangement or understandings with any other person or entity to distribute or regarding the distribution of such Securities;
(e) Compliance with Securities Act. The Subscriber understands and agrees that the Securities have not been registered under the Securities Act or any applicable state securities laws by reason of their issuance in a transaction that does not require registration under the Securities Act (based in part on the accuracy of the representations and warranties of Subscriber contained herein), and that such Securities must be held indefinitely unless a subsequent disposition is registered under the Securities Act or any applicable state securities laws or is exempt from such registration;
(f) Share Legend. The Conversion Shares shall bear the following or similar legend:
“THE ISSUANCE AND SALE OF THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR APPLICABLE STATE SECURITIES LAWS. THE SECURITIES MAY NOT BE OFFERED FOR SALE, SOLD, TRANSFERRED OR ASSIGNED (I) IN THE ABSENCE OF (A) AN EFFECTIVE REGISTRATION STATEMENT FOR THE SECURITIES UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR (B) AN OPINION OF COUNSEL (WHICH COUNSEL SHALL BE SELECTED BY THE HOLDER AND REASONABLY APPROVED BY THE COMPANY), IN A GENERALLY ACCEPTABLE FORM, THAT REGISTRATION IS NOT REQUIRED UNDER SAID ACT OR (II) UNLESS SOLD PURSUANT TO RULE 144 OR RULE 144A UNDER SAID ACT. NOTWITHSTANDING THE FOREGOING, THE SECURITIES MAY BE PLEDGED IN CONNECTION WITH A BONA FIDE MARGIN ACCOUNT OR OTHER LOAN OR FINANCING ARRANGEMENT SECURED BY THE SECURITIES.”
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(g) Warrant Legend. The Warrant shall bear the following or similar legend
“NEITHER THE ISSUANCE NOR SALE OF THE SECURITIES REPRESENTED BY THIS DOCUMENT NOR THE SECURITIES INTO WHICH THESE SECURITIES ARE EXERCISABLE HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR APPLICABLE STATE SECURITIES LAWS. THE SECURITIES MAY NOT BE OFFERED FOR SALE, SOLD, TRANSFERRED OR ASSIGNED (I) IN THE ABSENCE OF (A) AN EFFECTIVE REGISTRATION STATEMENT FOR THE SECURITIES UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR (B) AN OPINION OF COUNSEL (WHICH COUNSEL SHALL BE SELECTED BY THE HOLDER AND REASONABLY APPROVED BY THE COMPANY), IN A GENERALLY ACCEPTABLE FORM, THAT REGISTRATION IS NOT REQUIRED UNDER SAID ACT OR (II) UNLESS SOLD PURSUANT TO RULE 144 OR RULE 144A UNDER SAID ACT. NOTWITHSTANDING THE FOREGOING, THE SECURITIES MAY BE PLEDGED IN CONNECTION WITH A BONA FIDE MARGIN ACCOUNT OR OTHER LOAN OR FINANCING ARRANGEMENT SECURED BY THE SECURITIES.”
(h) Communication of Offer. Subscriber has a preexisting personal or business relationship with the Company or one or more of its directors, officers, advisors or control persons or the Company’s placement agent, and the offer to issue the Securities was directly communicated to Subscriber by the Company and/or its placement agent. At no time was Subscriber presented with or solicited by any leaflet, newspaper or magazine article, radio or television advertisement, or any other form of general advertising or solicited or invited to attend a promotional meeting otherwise than in connection and concurrently with such communicated offer;
(i) No Governmental Endorsement. Subscriber understands that no United States federal or state agency or any other governmental or state agency has passed on or made recommendations or endorsement of the Securities, or the suitability of the investment in the Securities, nor have such authorities passed upon or endorsed the merits of the offering of the Securities; and
(j) Receipt of Information. Subscriber believes it has received all the information it considers necessary or appropriate for deciding whether to invest and to accept the Securities. Subscriber further represents that through its representatives it has had an opportunity to ask questions and receive answers from the Company regarding the terms and conditions of the offering of the Securities and the business, properties and financial condition of the Company and to obtain additional information (to the extent the Company possessed such information or could acquire it without unreasonable effort or expense) necessary to verify the accuracy of any information furnished to it or to which it had access.
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3. Company Representations and Warranties. The Company represents and warrants to, and agrees with, Subscriber that:
(a) Due Incorporation. The Company is a corporation duly incorporated, validly existing and in good standing under the laws of the jurisdiction of its incorporation;
(b) Authority; Enforceability. The Warrant has been duly authorized, executed and delivered by the Company and is the valid and binding agreements of the Company, enforceable in accordance with its terms, except as may be limited by bankruptcy, insolvency, moratorium or other similar laws affecting the enforcement of creditors’ rights generally, or principles of equity. The Company has full corporate power and authority necessary to enter into and deliver the Warrant and to perform its obligations thereunder;
(c) Additional Issuances. All of the Conversion Shares to be issued pursuant to the terms hereof will be, duly authorized and validly issued, fully paid and non-assessable and are not (and will not be) subject to preemptive or similar rights affecting such securities;
(d) Consents. No consent, approval, authorization or order of any court, governmental agency or body having jurisdiction over the Company or of any other person is required for the execution by the Company of the Warrant and compliance and performance by the Company of its obligations hereunder and thereunder, including, without limitation, the issuance of the Securities;
(e) No Violation or Conflict. Neither the issuance of the Securities nor the performance of the Company’s obligations under the Warrant will:
(i) violate, conflict with, result in a breach of, or constitute a default (or an event which with the giving of notice or the lapse of time or both would be reasonably likely to constitute a default) under (a) the charter or bylaws of the Company or (b) any decree, judgment, order or determination applicable to the Company of any court, governmental agency or body having jurisdiction over the Company or over the properties or assets of the Company; or
(ii) result in the creation or imposition of any lien, charge or encumbrance upon the securities except in favor of Subscriber as described herein;
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(f) The Conversion Shares. Upon issuance, the Conversion Shares:
(i) shall be free and clear of any security interests, liens, claims or other Encumbrances, subject only to restrictions upon transfer under the Securities Act and any applicable state securities laws;
(ii) shall have been duly and validly issued, fully paid and non-assessable; and
(iii) will not subject the holders thereof to personal liability by reason of being such holders;
(g) No General Solicitation. Neither the Company, nor any of its affiliates, nor any person or entity acting on its or their behalf, has engaged in any form of general solicitation or general advertising (within the meaning of Regulation D under the Securities Act) in connection with the offer or sale of the Securities; and
(h) Investment Company. The Company is not an “investment company” within the meaning of the Investment Company Act of 1940, as amended.
4. Lock-up Agreement. Subscriber agrees that it will execute and deliver, concurrently with the execution and delivery hereof, the lock-up agreement in the form attached hereto as Exhibit A, and the Subscriber shall be bound by the terms of such lock-up agreement with respect to the Conversion Shares, including restrictions prohibiting the Subscriber from engaging in certain transactions with respect to the Conversion Shares for a period commencing on the date hereof and ending on the 180th day after the date of the prospectus relating to the Offering (such 180-day period, the “Lock-Up Period”), whether or not the Subscriber has executed such an agreement.
5. Registration Rights. The Company hereby grants the following registration rights to holders of the Conversion Shares.
(a) Registration Statement. The Company shall file with the Commission, as soon as practicable following the completion of the Offering, a registration statement on an appropriate form (the “Registration Statement”) covering the resale of the Conversion Shares and shall use its commercially reasonable best efforts to cause the Registration Statement to be declared effective as soon as practicable.
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(b) Registration Procedures. In connection with the Registration Statement, the Company will:
(i) prepare and file with the Commission such amendments and supplements to the Registration Statement and the prospectus used in connection therewith as may be necessary to keep such Registration Statement effective with respect to the Subscriber until such time as all of the Conversion Shares owned by the Subscriber may be resold without restriction under the Securities Act; and
(ii) immediately notify the Subscriber when the prospectus included in the Registration Statement is required to be delivered under the Securities Act, of the happening of any event of which the Company has knowledge as a result of which the prospectus contained in such Registration Statement, as then in effect, includes an untrue statement of a material fact or omits to state a material fact required to be stated therein or necessary to make the statements therein not misleading in light of the circumstances then existing. If the Company notifies the Subscriber to suspend the use of any prospectus until the requisite changes to such prospectus have been made, then the Subscriber shall suspend use of such prospectus. In such event, the Company will use its commercially reasonable efforts to update such prospectus as promptly as is practicable.
(c) Provision of Documents etc. In connection with the Registration Statement, the Subscriber will furnish to the Company in writing such information and representation letters with respect to itself and the proposed distribution by it as reasonably shall be necessary in order to assure compliance with federal and applicable state securities laws. The Company may require the Subscriber, upon five business days’ notice, to furnish to the Company a certified statement as to, among other things, the number of Conversion Shares and the number of other shares of the Company’s Common Stock beneficially owned by the Subscriber and the person that has voting and dispositive control over such shares. The Subscriber covenants and agrees that it will comply with the prospectus delivery requirements of the Securities Act, if applicable, in connection with sales of Conversion Shares pursuant to the Registration Statement.
(d) Expenses. All expenses incurred by the Company in complying with this section, including, without limitation, all registration and filing fees, printing expenses, fees and disbursements of counsel and independent public accountants for the Company, fees of transfer agents and registrars are called “Registration Expenses.” All underwriting discounts and selling commissions applicable to the sale of the Conversion Shares, including any fees and disbursements of any counsel to the Subscriber, are called “Selling Expenses.” The Company will pay all Registration Expenses in connection with the Registration Statement. Selling Expenses in connection with the Registration Statement shall be borne by the Subscriber.
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(e) Indemnification and Contribution.
(i) The Company will, to the extent permitted by law, indemnify and hold harmless the Subscriber, each officer of the Subscriber, if applicable, each director of the Subscriber, if applicable, and each other person, if any, who controls the Subscriber within the meaning of the Securities Act, against any losses, claims, damages or liabilities, joint or several, to which such Subscriber or such other person (a “controlling person”) may become subject under the Securities Act or otherwise, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) (“Claims”) arise out of or are based upon any untrue statement or alleged untrue statement of any material fact contained in the Registration Statement at the time of its effectiveness, any preliminary prospectus or final prospectus contained therein, or any amendment or supplement thereof, or arise out of or are based upon the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading in light of the circumstances when made, and will, subject to the limitations herein, reimburse the Subscriber and each controlling person for any legal or other expenses reasonably incurred by them in connection with investigating or defending any such Claim; provided, however, that the Company shall not be liable to the Subscriber to the extent that any Claim arises out of or is based upon an untrue statement or alleged untrue statement or omission or alleged omission made in conformity with information furnished by the Subscriber or any such controlling person in writing specifically for use in the Registration Statement or related prospectus, as amended or supplemented.
(ii) The Subscriber will, to the extent permitted by law, indemnify and hold harmless the Company, and each person, if any, who controls the Company within the meaning of the Securities Act, each underwriter, each officer of the Company who signs the Registration Statement and each director of the Company against all Claims to which the Company or such officer, director, underwriter or controlling person may become subject under the Securities Act or otherwise, insofar as such Claims arise out of or are based upon any untrue statement or alleged untrue statement of any material fact contained in the Registration Statement, any preliminary prospectus or final prospectus contained therein, or any amendment or supplement thereof, or the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, and will reimburse the Company and each such officer, director, underwriter and controlling person for any legal or other expenses reasonably incurred by them in connection with investigating or defending any such loss, claim, damage, liability or action, provided, however, that the Subscriber will be liable hereunder in any such case if and only to the extent that any such Claim arises out of or is based upon an untrue statement or alleged untrue statement or omission or alleged omission made in reliance upon and in conformity with information pertaining to the Subscriber, as such, furnished in writing to the Company by the Subscriber specifically for use in the Registration Statement or related prospectus, as amended or supplemented.
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(iii) Promptly after receipt by an indemnified party hereunder of notice of the commencement of any action, such indemnified party shall, if a claim in respect thereof is to be made against the indemnifying party hereunder, notify the indemnifying party in writing thereof, but the omission so to notify the indemnifying party shall not relieve it from any liability which it may have to such indemnified party other than under this section and shall only relieve it from any liability which it may have to such indemnified party under this section except and only if and to the extent the indemnifying party is materially prejudiced by such omission. In case any such action shall be brought against any indemnified party and it shall notify the indemnifying party of the commencement thereof, the indemnifying party shall be entitled to participate in and, to the extent it shall wish, to assume and undertake the defense thereof with counsel satisfactory to such indemnified party, and, after notice from the indemnifying party to such indemnified party of its election so to assume and undertake the defense thereof, the indemnifying party shall not be liable to such indemnified party under this section for any legal expenses subsequently incurred by such indemnified party in connection with the defense thereof other than reasonable costs of investigation and of liaison with counsel so selected; provided, however, that, if the defendants in any such action include both the indemnified party and the indemnifying party and the indemnified party shall have reasonably concluded that there may be reasonable defenses available to it which are different from or additional to those available to the indemnifying party or if the interests of the indemnified party reasonably may be deemed to conflict with the interests of the indemnifying party, the indemnified parties, as a group, shall have the right to select one separate counsel and to assume such legal defenses and otherwise to participate in the defense of such action, with the reasonable expenses and fees of such separate counsel and other expenses related to such participation to be reimbursed by the indemnifying party as incurred. The indemnifying party shall not be liable for any settlement of any such proceeding affected without its written consent, which consent shall not be unreasonably withheld.
(iv) In order to provide for just and equitable contribution in the event of joint liability under the Securities Act in any case in which either (i) the Subscriber, or any controlling person of a Subscriber, makes a claim for indemnification pursuant to this section but it is judicially determined (by the entry of a final judgment or decree by a court of competent jurisdiction and the expiration of time to appeal or the denial of the last right of appeal) that such indemnification may not be enforced in such case notwithstanding the fact that this section provides for indemnification in such case, or (ii) contribution under the Securities Act may be required on the part of the Subscriber or controlling person of the Subscriber in circumstances for which indemnification is not provided under this section, then, and in each such case, the Company and the Subscriber will contribute to the aggregate losses, claims, damages or liabilities to which they may be subject (after contribution from others) in a manner that reflects, as near as practicable, the economic effect of the foregoing provisions of this section. Notwithstanding the foregoing, no person or entity guilty of fraudulent misrepresentation (within the meaning of Section 10(f) of the Securities Act) will be entitled to contribution from any person or entity who was not guilty of such fraudulent misrepresentation.
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(f) Delivery of Unlegended Shares.
(i) Within three business days (such business day, the “Unlegended Shares Delivery Date”) after the business day on which the Company has received (i) a notice that Conversion Shares have been sold either pursuant to, and in compliance with, the Registration Statement or Rule 144 under the Securities Act and (ii) in the case of sales under Rule 144, customary representation letters of the Subscriber and Subscriber’s broker regarding compliance with the requirements of Rule 144, the Company at its expense, (A) shall deliver the Conversion Shares so sold without any restrictive legends relating to the Securities Act (the “Unlegended Shares”); and (B) shall cause the transmission of the certificates representing the Unlegended Shares together with a legended certificate representing the balance of the unsold Conversion Shares, if any, to the Subscriber at the address specified in the notice of sale, via express courier, by electronic transfer or otherwise on or before the Unlegended Shares Delivery Date. Transfer fees shall be the responsibility of the Subscriber.
(ii) In lieu of delivering physical certificates representing the Unlegended Shares, if the Company’s transfer agent is participating in the Depository Trust Company (“DTC”) Fast Automated Securities Transfer program, upon request of the Subscriber, so long as the certificates therefor do not bear a legend and the Subscriber is not obligated to return such certificate for the placement of a legend thereon, the Company shall use its best efforts to cause its transfer agent to electronically transmit the Unlegended Shares by crediting the account of Subscriber’s broker with DTC through its Deposit/Withdrawal at Custodian system. Such delivery must be made on or before the Unlegended Shares Delivery Date but is subject to the cooperation of the Subscriber’s broker (the so-called DTC participant).
(iii) The Subscriber agrees that the removal of the restrictive legend from certificates representing the Conversion Shares as set forth in this section is predicated upon the Company’s reliance that the Subscriber will sell any Conversion Shares pursuant to either the registration requirements of the Securities Act, including any applicable prospectus delivery requirements, or an exemption therefrom.
6. Broker’s Commission/Finder’s Fee. Each party hereto represents to the other that there are no parties entitled to receive fees, commissions, finder’s fees, due diligence fees or similar payments in connection with the consummation of the transactions contemplated hereby, except for Palladium Capital Advisors, LLC (“Palladium”), to whom the Company shall pay broker’s commissions in the form of: (i) cash, in the amount equal to 10% of the Purchase Price and (ii) stock, in the amount of 25,000 shares of Common Stock. Each party hereto agrees to indemnify the other against and hold the other harmless from any and all liabilities to any persons, other than Palladium, claiming brokerage commissions or similar fees on account of services purported to have been rendered on behalf of the indemnifying party in connection with this Agreement or the transactions contemplated hereby and arising out of the indemnifying party’s actions.
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7. Covenants Regarding Indemnification. Each party hereto agrees to indemnify, hold harmless, reimburse and defend the other party and the other party’s officers, directors, agents, counsel, affiliates, members, managers, control persons, and principal shareholders, as applicable, against any claim, cost, expense, liability, obligation, loss or damage (including reasonable legal fees) of any nature, incurred by or imposed upon the indemnified party or any such person which results, arises out of or is based upon (i) any breach of any representation or warranty by the indemnifying party in this Agreement or (ii) any breach or default in performance by the indemnifying party of any covenant or undertaking to be performed by the indemnifying party.
8. Miscellaneous.
(a) Notices. All notices, demands, requests, consents, approvals, and other communications required or permitted hereunder shall be in writing and, unless otherwise specified herein, shall be (i) personally served, (ii) deposited in the mail, registered or certified, return receipt requested, postage prepaid, (iii) delivered by reputable air courier service with charges prepaid, or (iv) transmitted by hand delivery or facsimile, addressed as set forth in the preamble paragraph hereto or to such other address as such party shall have specified most recently by written notice. Any notice or other communication required or permitted to be given hereunder shall be deemed effective (a) upon hand delivery at the address designated in the preamble paragraph hereto (if delivered on a business day during normal business hours where such notice is to be received), or the first business day following such delivery (if delivered other than on a business day during normal business hours where such notice is to be received) or (b) on the second business day following the date of mailing by express courier service, fully prepaid, addressed to such address, or upon actual receipt of such mailing, whichever shall first occur.
(b) Entire Agreement. This Agreement constitutes the entire agreement between the parties hereto with respect to the subject matter hereof and may be amended only by a writing executed by both parties hereto. Neither the Company nor Subscriber has relied on any representations not contained or referred to in this Agreement and the documents delivered herewith.
(c) Counterparts/Execution. This Agreement may be executed in any number of counterparts and by the different signatories hereto on separate counterparts, each of which, when so executed, shall be deemed an original, but all such counterparts shall constitute but one and the same instrument. This Agreement may be executed by facsimile transmission, PDF, electronic signature or other similar electronic means with the same force and effect as if such signature page were an original thereof.
(d) Law Governing this Agreement. This Agreement shall be governed by and construed in accordance with the laws of the State of New York without regard to principles of conflicts of laws. Any action brought by either party hereto against the other concerning the transactions contemplated by this Agreement shall be brought only in the state courts of the State of New York or in the federal courts located in the State of New York. The parties to this Agreement hereby irrevocably waive any objection to jurisdiction and venue of any action instituted hereunder and shall not assert any defense based on lack of jurisdiction or venue or based upon forum non conveniens. EACH PARTY HERETO HEREBY IRREVOCABLY WAIVES ANY RIGHT IT MAY HAVE, AND AGREES NOT TO REQUEST, A JURY TRIAL FOR THE ADJUDICATION OF ANY DISPUTE HEREUNDER OR IN CONNECTION HEREWITH OR ARISING OUT OF THIS AGREEMENT OR ANY TRANSACTION CONTEMPLATED HEREBY.
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(e) Severability. In the event that any provision of this Agreement or any other agreement delivered in connection herewith is invalid or unenforceable under any applicable statute or rule of law, then such provision shall be deemed inoperative to the extent that it may conflict therewith and shall be deemed modified to conform with such statute or rule of law. Any such provision which may prove invalid or unenforceable under any law shall not affect the validity or enforceability of any other provision of any agreement. Each party hereto hereby irrevocably waives personal service of process and consents to process being served in any suit, action or proceeding in connection with this Agreement by mailing a copy thereof via registered or certified mail or overnight delivery (with evidence of delivery) to such party at the address in effect for notices to it under this Agreement and agrees that such service shall constitute good and sufficient service of process and notice thereof. Nothing contained herein shall be deemed to limit in any way any right to serve process in any other manner permitted by law.
(f) Counsel; Ambiguities. Each party and its counsel have participated fully in the review and revision of this Agreement, the Warrant and any documents executed in connection therewith. The parties understand and agree that any rule of construction to the effect that ambiguities are to be resolved against the drafting party shall not apply in interpreting this Agreement, the Warrant and any documents executed in connection therewith. The language in this Agreement, the Warrant and any documents executed in connection therewith shall be interpreted as to its fair meaning and not strictly for or against any party.
(g) Captions. The captions of the various sections and paragraphs of this Agreement have been inserted only for the purposes of convenience; such captions are not a part of this Agreement and shall not be deemed in any manner to modify, explain, enlarge or restrict any of the provisions of this Agreement.
[signature page follows]
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MICROPHASE CORPORATION
Signature Page
The Subscriber hereby executes this Agreement. By executing this signature page, the Subscriber attests and swears, under the pains and penalties of perjury, that (initial all that apply) the Subscriber is:
(initials) |
a corporation, a business trust, or a partnership, not formed for the specific purpose of acquiring the Shares and the Warrant, with total assets in excess of $5,000,000. | |
(initials) |
a natural person whose net worth, or joint net worth with spouse, exceeds $1,000,000; net worth means the excess of: (a) the Subscriber’s total assets (excluding the estimated fair market value of the Subscriber’s primary residence) over (b) the Subscriber’s total liabilities (excluding indebtedness secured by my primary residence up to the fair market value of such residence, but including (i) any indebtedness secured by my primary residence in excess of the residence’s fair market value and (ii) any indebtedness (or increase in pre-existing indebtedness) secured by such residence incurred within 60 days of the purchase date of the Securities other than as a result of the acquisition of such residence). | |
(initials) |
a natural person who had an individual income in excess of $200,000 in each of the two most recent years, or joint income with his or her spouse in excess of $300,000 in each of those years, and has a reasonable expectation of reaching the same income level in the current year. | |
(initials) |
a trust with total assets in excess of $5,000,000, not formed for the specific purpose of acquiring the Securities. | |
(initials) |
an entity in which all of the equity owners fall within one of the categories set forth above. |
$ | ||
Aggregate purchase price for Shares and Warrant é
|
Subscriber’s name é | |
Number of Shares being purchased (together with a warrant to purchase shares equal to such number of Shares) | ||
|
Subscriber’s signature é | |
Warrant exercise price per shareé
|
Title of signatory, if Subscriber is an entity é | |
ACCEPTED AND AGREED:
|
||
MICROPHASE CORPORATION
|
Address of the Subscriber ê | |
By: ________________________ | ||
Name: Title: |
||
Email address: ___________________________ | ||
Date: ______________________ | ||
Fax number: ___________________________ | ||
Social Security/Tax ID no.: _________________ |
EXHIBIT A
LOCK-UP AGREEMENT
Exhibit 31.1
CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER
PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 302 OF
THE SARBANES-OXLEY ACT OF 2002
I, Necdet Ergul, certify that:
1. | I have reviewed this Form 10-Q of Microphase Corporation; |
2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
4. | The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13-a-15(f) and 15d-15(f)) for the registrant and have: |
a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
c) | Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
d) | Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
5. | The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): |
a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
Date: November 14, 2016 | By: | /s/ Necdet Ergul |
Necdet Ergul | ||
Principal Executive Officer | ||
Microphase Corporation |
Exhibit 31.2
CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER
PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 302 OF
THE SARBANES-OXLEY ACT OF 2002
I, James Ashman, certify that:
1. | I have reviewed this Form 10-Q of Microphase Corporation; |
2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
4. | The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13-a-15(f) and 15d-15(f)) for the registrant and have: |
a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
c) | Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
d) | Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
5. | The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): |
a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
Date: November 14, 2016 | By: | /s/ James Ashman |
James Ashman | ||
Principal Financial Officer | ||
Microphase Corporation |
Exhibit 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 906 OF
THE SARBANES-OXLEY ACT OF 2002
In connection with this Quarterly Report of Microphase Corporation (the “Company”), on Form 10-Q for the period ended September 30, 2016, as filed with the U.S. Securities and Exchange Commission on the date hereof, I, Necdet Ergul, Principal Executive Officer of the Company, certify to the best of my knowledge, pursuant to 18 U.S.C. Sec. 1350, as adopted pursuant to Sec. 906 of the Sarbanes-Oxley Act of 2002, that:
(1) | Such Quarterly Report on Form 10-Q for the period ended September 30, 2016, fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and |
(2) | The information contained in such Quarterly Report on Form 10-Q for the period ended September 30, 2016, fairly presents, in all material respects, the financial condition and results of operations of the Company. |
Date: November 14, 2016 | By: | /s/ Necdet Ergul |
Necdet Ergul | ||
Principal Executive Officer | ||
Microphase Corporation |
Exhibit 32.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 906 OF
THE SARBANES-OXLEY ACT OF 2002
In connection with this Quarterly Report of Microphase Corporation (the “Company”), on Form 10-Q for the period ended September 30, 2016, as filed with the U.S. Securities and Exchange Commission on the date hereof, I, James Ashman, Principal Financial Officer of the Company, certify to the best of my knowledge, pursuant to 18 U.S.C. Sec. 1350, as adopted pursuant to Sec. 906 of the Sarbanes-Oxley Act of 2002, that:
(1) | Such Quarterly Report on Form 10-Q for the period ended September 30, 2016, fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and |
(2) | The information contained in such Quarterly Report on Form 10-Q for the period ended September 30, 2016, fairly presents, in all material respects, the financial condition and results of operations of the Company. |
Date: November 14, 2016 | By: | /s/ James Ashman |
James Ashman | ||
Principal Financial Officer | ||
Microphase Corporation |
Document And Entity Information - shares |
3 Months Ended | |
---|---|---|
Sep. 30, 2016 |
Nov. 11, 2016 |
|
Document Information [Line Items] | ||
Entity Registrant Name | Microphase Corp | |
Entity Central Index Key | 0001574969 | |
Current Fiscal Year End Date | --06-30 | |
Entity Filer Category | Smaller Reporting Company | |
Entity Common Stock, Shares Outstanding | 6,882,461 | |
Document Type | 10-Q | |
Amendment Flag | false | |
Document Period End Date | Sep. 30, 2016 | |
Document Fiscal Period Focus | Q1 | |
Document Fiscal Year Focus | 2017 |
Condensed Consolidated Balance Sheets (Parenthetical) - USD ($) |
3 Months Ended | 12 Months Ended |
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Sep. 30, 2016 |
Jun. 30, 2016 |
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Allowance for Doubtful Accounts Receivable, Current | $ 5,000 | $ 5,000 |
Preferred Stock, Dividend Rate, Percentage | 6.00% | 6.00% |
Preferred Stock, Par or Stated Value Per Share | $ 100 | $ 100 |
Preferred Stock, Shares Authorized | 200,000 | 200,000 |
Preferred Stock, Shares Issued | 15,382 | 15,382 |
Preferred Stock, Shares Outstanding | 15,382 | 15,382 |
Common Stock, Par Value | $ 0 | $ 0 |
Common Stock, Shares Authorized | 7,800,000 | 7,800,000 |
Common Stock, Shares, Issued | 6,299,123 | 6,200,789 |
Common Stock, Shares, Outstanding | 6,299,123 | 6,200,789 |
Condensed Consolidated Statements of Operations - USD ($) |
3 Months Ended | |
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Sep. 30, 2016 |
Sep. 30, 2015 |
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Revenues | $ 1,373,064 | $ 2,451,855 |
Cost of Sales | 979,882 | 1,415,183 |
Gross Profit | 393,182 | 1,036,672 |
Selling, General and Administrative Expenses (including non-cash stock related charges of $97,500 and $0 in Fiscal 2016 and 2015) | 738,850 | 703,000 |
Engineering and Research expenses | 207,660 | 206,314 |
Other Income (Loss) | 0 | 2,250 |
Interest (Expense and Credit costs) net | (111,895) | (58,171) |
Net Income (Loss) before Income Taxes | (665,223) | 71,437 |
Income Taxes | (1,050) | (1,050) |
Net Income (Loss) | $ (666,273) | $ 70,387 |
Basic Net income (loss) per share: (in dollars per share) | $ (0.107) | $ 0.015 |
Diluted Net income (loss) per share: (in dollars per share) | $ (0.107) | $ 0.011 |
Weighted Average Number of Shares Outstanding: | ||
Basic (in shares) | 6,201,858 | 4,775,306 |
Diluted (in shares) | 6,201,858 | 6,122,456 |
Condensed Consolidated Statements of Operations (Parenthetical) - USD ($) |
3 Months Ended | |
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Sep. 30, 2016 |
Sep. 30, 2015 |
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Non-cash stock related charges | $ 97,500 | |
Selling, General and Administrative Expenses [Member] | ||
Non-cash stock related charges | $ 97,500 | $ 0 |
Condensed Consolidated Statements of Comprehensive Income (Loss) - USD ($) |
3 Months Ended | |
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Sep. 30, 2016 |
Sep. 30, 2015 |
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Net income (loss) | $ (666,273) | $ 70,387 |
Other comprehensive income (loss): | ||
Net unrealized gain (loss) on securities available-for-sale, net of income taxes | 185,667 | (37,067) |
Total comprehensive income (loss) | $ (480,606) | $ 33,320 |
Condensed Consolidated Statement of Changes in Stockholders' Deficit - 3 months ended Sep. 30, 2016 - USD ($) |
Total |
Preferred Stock [Member] |
Common Stock [Member] |
Additional Paid In Capital [Member] |
Other Comprehensive Loss [Member] |
Accumulated Deficit [Member] |
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Balance at Jun. 30, 2016 | $ (602,207) | $ 1,538,200 | $ 9,367,133 | $ 2,432,111 | $ 0 | $ (13,939,651) |
Balance (in shares) at Jun. 30, 2016 | 15,382 | 6,200,789 | ||||
Issuance of common stock and options for services | 97,500 | $ 97,500 | 0 | |||
Issuance of common stock and options for services (in shares) | 65,000 | |||||
Issuance of Common Stock and warrants in Private Placements, net of $5,000 costs | 45,000 | $ 45,000 | ||||
Issuance of Common Stock and warrants in Private Placements, net of $5,000 costs (in shares) | 33,334 | |||||
Unrealized gain on marketable securities | 185,667 | 185,667 | ||||
Net Loss For the Three Months Ended September 30, 2016 | (666,273) | (666,273) | ||||
Balance at Sep. 30, 2016 | $ (940,313) | $ 1,538,200 | $ 9,509,633 | $ 2,432,111 | $ 185,667 | $ (14,605,924) |
Balance (in shares) at Sep. 30, 2016 | 15,382 | 6,299,123 |
Condensed Consolidated Statement of Changes in Stockholders' Deficit (Parenthetical) |
3 Months Ended |
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Sep. 30, 2016
USD ($)
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Private Placement [Member] | |
Payments of Stock Issuance Costs | $ 5,000 |
BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES |
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Sep. 30, 2016 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Accounting Policies [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Significant Accounting Policies [Text Block] | NOTE 1 BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES NATURE OF OPERATIONS Microphase Corporation (the “Company”) is a design to manufacture original equipment manufacturer (OEM) industry leader delivering world-class radio frequency (RF) and microwave filters, diplexers, multiplexers, detectors, switch filters, integrated assemblies and detector logarithmic video amplifiers (DLVA) to the military, aerospace and telecommunications industries. Sales to military markets represent 100% of sales. The Company is headquartered in Shelton, Connecticut. BASIS OF PRESENTATION The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and pursuant to the regulations of the Securities Exchange Commission (the “SEC”). Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments considered necessary for a fair presentation have been included. Operating results for the three months ending September 30, 2016 are not necessarily indicative of the results that may be expected for a full fiscal year. The accompanying unaudited condensed consolidated financial statements include the accounts of the Company and its subsidiaries which include Microphase West LLC and Microphase Instruments, LLC, as of October 23, 2015. All intercompany accounts and transactions have been eliminated. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company’s Annual Report on Form 10-K for the year ended June 30, 2016. As of June 30, 2016, we had an accumulated deficit of $13,939,651 and a total stockholders’ deficit of $602,207. As of September 30, 2016, we had an accumulated deficit of $14,605,924 and a total stockholders’ deficit of $940,313. A significant amount of capital will be necessary to sustain, grow and advance our business and these conditions raise substantial doubt about our ability to continue as a going concern, as expressed in the report of our Independent Registered Public Accounting Firm for the year ended June 30, 2016. The Company’s ability to continue as a going concern and its future success is dependent upon its ability to raise capital in the near term to: (1) satisfy its current obligations, (2) continue its research and development efforts, and (3) allow the successful wide scale development, deployment and marketing of its products. PROPERTY AND EQUIPMENT Are stated at cost. Provision for depreciation and amortization for financial reporting and income tax purposes is made by annual charges to operations principally under the following methods and estimated useful lives:
MAINTENANCE AND REPAIRS Charged to expenses as incurred. Cost of major replacements and renewals are capitalized. Upon retirement or other disposition of equipment and improvements, the cost and related depreciation is removed from the accounts, and any gain or loss is recognized in income. INVENTORIES are stated at the lower of average cost or market under the first-in, first-out method. The Company regularly reviews inventory quantities on hand and records a provision for excess and obsolete inventory primarily based on our estimated forecast of product demand, anticipated end of product life and production requirements. OTHER LONG LIVED ASSETS The Company reviews long-term assets for impairment whenever events or circumstances indicate that the carrying amount of those assets may not be recoverable. The Company assesses these assets for impairment based on their future cash flows. Management has determined that there was no impairment charge to be recorded for the three months ended September 30, 2016. ACCOUNTS RECEIVABLE Management records receivables at net realizable value and they generally do not bear interest. This value includes an allowance for estimated uncollectible accounts to reflect any loss anticipated on the accounts receivable balances which is charged to the provision for doubtful accounts. We calculate this allowance based on our history of write-offs, level of past due accounts and economic status of the customers. We consider a receivable delinquent if it is unpaid after 180 days after it is due. ACCOUNTING ESTIMATES Management uses estimates and assumptions in preparing financial statements in accordance with generally accepted accounting principles. Those estimates and assumptions affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities, and the reported revenues and expenses. Actual results could vary from the estimates that were assumed in preparing the financial statements. COMPENSATED ABSENCES Employees of the Company are entitled to vacation pay depending on length of service and current salary. Vacation days accrued in a given year are available in the following year. A limit of 5 days of unused vacation may be carried over to a subsequent year. The Company has provided for vacation liabilities in the accompanying financial statements. RESEARCH AND DEVELOPMENT EXPENSES The Company charges the cost of research and development to operations when incurred. REVENUE RECOGNITION The Company recognizes revenues when persuasive evidence of an arrangement exists, the product has been shipped, the price is fixed and collectability is reasonably assured. Revenue is recognized net of estimated sales returns and allowances. GRANT INCOME During the three months ended September 30, 2016 the Company was awarded and received the proceeds of a Small Business Express Matching Grant in an amount of $100,000 from the state of Connecticut in connection with the move of our California operation to Connecticut and with the development of the T & M products to be acquired in the Company’s Microphase Instruments, LLC, subsidiary. State grant funding requires a dollar for dollar match on behalf of the Company, which the Company’s obligation was considered funded in full prior to the Grant award. During the three months ended September 30, 2016 the Company recorded $26,800 as a reduction in Selling, General & Administrative expenses for qualified expenditures incurred in the period and at September 30, 2016 has included $73,200 in deferred revenue. Qualified expenditures for capital assets will be recognized as income over the life of the assets based upon the amortization or depreciation of any capitalized assets acquired with grant funds. RECLASSIFICATIONS- Certain prior year amounts have been reclassified in our Condensed Consolidated Financial Statements to conform to current year classifications EARNINGS (LOSS) PER SHARE Basic earnings (loss) per share (“EPS”) is determined by dividing the net earnings (loss) by the weighted-average number of shares of common shares outstanding during the period. Diluted EPS is determined by dividing net earnings (loss) by the weighted average number of common shares used in the basic EPS calculation plus the number of common shares that would be issued assuming conversion of all potentially dilutive securities (such as stock options, preferred stock and convertible securities) outstanding under the treasury stock method. As of September 30, 2016 we have outstanding (i) options to purchase 75,000 shares, (ii) 15,382 shares of preferred stock convertible into 1,025,467 shares, and (iii) $479,129 of debts to related parties convertible into 312,420 shares of our Common stock. In periods reporting a loss the inclusion of warrants and potential common shares to be issued in connection with convertible debt have an anti-dilutive effect on diluted loss per share and have been omitted in such computation. RECENT ACCOUNTING PRONOUNCEMENTS The Company is evaluating several pronouncements issued by the FASB which may result in the adoption by the Company of these standards in upcoming accounting periods as follows: ADOPTION OF NEW ACCOUNTING STANDARDS On April 7, 2015, the FASB issued Accounting Standards Update 2015-03, Interest Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs, which requires entities to present debt issuance costs related to a recognized debt liability as a direct deduction from the carrying amount of that debt liability. The guidance in Update 2015-03 (see below) does not address presentation or subsequent measurement of debt issuance costs related to line-of-credit arrangements. Given the absence of authoritative guidance within Update 2015-03 for debt issuance costs related to line-of-credit arrangements, the SEC staff would not object to an entity deferring and presenting debt issuance costs as an asset and subsequently amortizing the deferred debt issuance costs ratably over the term of the line-of-credit arrangement, regardless of whether there are any outstanding borrowings on the line-of-credit arrangement to be effective for Fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015; which for us is 1st interim period of fiscal 2017, or the current quarter ended September 30 2016. The adoption of this standard had no material effect on our financial position, results of operations and cash flows. ASU 2014-12 Compensation Stock-Compensation (Topic 718): Accounting for Share Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period (a consensus of the FASB Emerging Issues Task Force) to be effective for Annual periods beginning after December 15, 2015, and interim periods within annual periods beginning after December 15, 2015; which for us would be our 1st interim period of fiscal 2017, or the current quarter ended September 30 2016. The adoption of this standard had no material effect on our financial position, results of operations and cash flows. ACCOUNTING STANDARDS ISSUED BUT NOT YET EFFECTIVE The Company is evaluating several pronouncements issued by the FASB which may result in the adoption by the Company of these standards in upcoming accounting periods as follows: ASU 2014-09 Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date-In May 2014, the FASB issued a comprehensive new revenue recognition standard that supersedes nearly all revenue recognition guidance under U.S. GAAP and supersedes some cost guidance for construction-type and production-type contracts. The guidance in this standard is principles-based, and accordingly, entities will be required to use more judgment and make more estimates than under prior guidance, including identifying contract performance obligations, estimating variable consideration to include in the contract price and allocating the transaction price to separate performance obligations. The guidance in this standard is applicable to all contracts with customers, regardless of industry-specific or transaction-specific fact patterns. Additionally, this standard provides guidance for transactions that were not previously addressed comprehensively (e.g., service revenue, contract modifications and licenses of intellectual property) and modifies guidance for multiple-element arrangements. The core principle of this standard is that entities 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 and services. To help financial statement users better understand the nature, amount, timing and potential uncertainty of the revenue that is recognized, this standard requires significantly more interim and annual disclosures. This standard allows for either “full retrospective” adoption (application to all periods presented) or “modified retrospective” adoption (application to only the most current period presented in the financial statements, as well as certain additional required footnote disclosures). On July 9, 2015, the FASB approved a one-year deferral of the effective date, while permitting entities to elect to adopt one year earlier on the original effective date. As a result, this standard is now effective for fiscal years, and interim reporting periods within those years, beginning after December 15, 2017, which for us is our fiscal 2019. We are currently evaluating the impact this standard, if any, will have on our financial position, results of operations and cash flows. ASU 2015-11 Inventory (Topic 330): Simplifying the Measurement of Inventory. For public business entities, the content that links to this paragraph shall be effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years, which for us is our first quarter of fiscal 2018. We are currently evaluating the impact this standard will have on our financial position, results of operations and cash flows. ASU 2016-02 In February 2016, the FASB issued a new lease standard that supersedes existing lease guidance under GAAP. This standard requires lessees to record most leases on their balance sheets but recognize expenses on their income statements in a manner similar to existing lease guidance under GAAP. Entities are required to use a modified retrospective approach for leases that exist or are entered into after the beginning of the earliest comparative period in the financial statements, with the option to use certain relief. Full retrospective application is prohibited. This standard is effective for fiscal years, and interim reporting periods within those years, beginning after December 15, 2018, which for us is our fiscal 2020. We are currently evaluating the impact this standard will have on our financial position, results of operations and cash flows. ASU 2014-15 Presentation of Financial Statements Going Concern (Subtopic 20540): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern to be effective for Annual periods ending after December 15, 2016, and interim periods within annual periods beginning after December 15, 2016; which for us would be our fiscal 2017 and although early adoption is permitted for this standard, the Company has not adopted nor determined its applicability. ASU 2016-09 In March 2016, the FASB issued an accounting standards update making final targeted amendments to the accounting for employee share-based payments. These amendments will require entities to recognize the income tax effects of awards when the awards vest or are settled, will change an employer’s accounting for an employee’s use of shares to satisfy the employer’s statutory income tax withholding obligation and will require entities to elect whether to account for forfeitures of share-based payments by either recognizing forfeitures of awards as they occur or estimating the number of awards expected to be forfeited as is currently required. The required method of adoption varies by amendment. This accounting standards update is effective for fiscal years, and interim reporting periods within those years, beginning after December 15, 2016, which for us is our first quarter of fiscal 2018. Early adoption is permitted in any annual or interim period, but all of the guidance is required to be adopted in the same period and any adjustments must be reflected as of the beginning of the fiscal year. We are currently evaluating the impact this accounting standards update will have on our financial position, results of operations and cash flows. ASU 2015-17 Deferred Taxes (topic 740): For a particular tax-paying component of an entity and within a particular tax jurisdiction, all current deferred tax liabilities and assets shall be offset and presented as a single amount and all noncurrent deferred tax liabilities and assets, as well as any related valuation allowance, shall be offset and presented as a single noncurrent amount. However, an entity shall not offset deferred tax liabilities and assets attributable to different tax-paying components of the entity or to different tax jurisdictions. For public business entities, the amendments in this Update are effective for financial statements issued for annual periods beginning after December 15, 2016, and interim periods within those annual periods, which for us is our first quarter of fiscal 2018. Early adoption is permitted in any annual or interim period, but all of the guidance is required to be adopted in the same period and any adjustments must be reflected as of the beginning of the fiscal year. We are currently evaluating the impact this accounting standards update will have on our financial position, results of operations and cash flows. ASU 2016-15 The FASB recently issued ASU 2016-15 to clarify whether the certain items should be categorized as operating, investing or financing in the statement of cash flows. For public business entities, the amendments in this Update are effective for financial statements issued for annual periods beginning after December 15, 2017, and interim periods within those fiscal years, which for us is our fiscal 2019. Early adoption is permitted in any annual or interim period, but all of the guidance is required to be adopted in the same period and any adjustments must be reflected as of the beginning of the fiscal year. We are currently evaluating the impact this accounting standards update will have on our financial position, results of operations and cash flows. |
SUPPLEMENTAL CASH FLOW INFORMATION |
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Supplemental Cash Flow Elements [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Cash Flow, Supplemental Disclosures [Text Block] | NOTE 2 SUPPLEMENTAL CASH FLOW INFORMATION
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INVENTORIES |
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Inventory Disclosure [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Inventory Disclosure [Text Block] | NOTE 3 INVENTORIES Inventories consist of the following:
In August 2016, Microphase West operations were transferred to the Shelton Connecticut plant. As of September 30, 2016 Microphase West inventory was combined with the Shelton Connecticut inventory. The inventory reserves were similarly combined to equal $37,000 for September 30, 2016. |
PROPERTY AND EQUIPMENT |
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Property, Plant and Equipment Disclosure [Text Block] | NOTE 4 PROPERTY AND EQUIPMENT: Property and equipment was comprised of the following:
Depreciation expense was $17,994 and $19,389 during the three months ended September 30, 2016 and 2015, respectively. |
ACCRUED EXPENSES |
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Accounts Payable and Accrued Liabilities Disclosure [Text Block] | NOTE 5 ACCRUED EXPENSES: Accrued expenses were comprised of the following:
401 (K) Employee Benefit Plan: The Company sponsors a 401(K) plan for all eligible employees. Employee contributions are based on a percentage of compensation. Employer contributions for both matching and profit sharing are discretionary and determined annually by management. Deferred Lease Obligation At September 30, 2016 the Company has $95,441 of deferred lease obligation associated with the amendment in May of 2016 for its long term lease on the Shelton, Connecticut facility. |
FAIR VALUE OF FINANCIAL INSTRUMENTS |
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Fair Value Disclosures [Abstract] | ||
Fair Value Disclosures [Text Block] | NOTE 6 FAIR VALUE OF FINANCIAL INSTRUMENTS: The fair value of a financial instrument is the amount at which the instrument could be exchanged in a current transaction between willing parties, other than in a forced or liquidation sale. Quoted market prices are used to establish fair value when they are available and other valuation techniques are utilized to estimate the fair value of financial instruments that do not have quoted market prices. The Company has long term debt with fixed interest rates, the carrying amount of which may be different from fair value as of September 30, 2016 and June 30, 2016. The Company decided that it is not practical to estimate the fair value of these financial instruments on the basis that they are held-to-maturity debts which have no immediately available market information on the fair value and the cost of making assumptions and applying estimation methodologies to assess the fair value estimates exceeds the benefit. Information pertinent to estimating the fair value such as carrying amount, effective interest rate, maturity and repayment term are disclosed in Notes 7, 8, 9. The Company has applied the fair value concepts to its available-for-sale securities. As such, the valuation techniques used to measure fair value is based on the source of the data used to develop the prices. The priority of these sources is defined as follows: Level 1 quoted prices in active markets. Level 2 other than quoted prices that are directly or indirectly observable. Level 3 unobservable inputs for the asset or liability. Marketable securities, classified as available-for-sale securities, are measured at fair market value (Level 1) on a recurring basis. As of September 30, 2016 these amounted to $385,667. |
REVOLVING CREDIT LINE |
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Short-term Debt [Text Block] | NOTE 7 REVOLVING CREDIT LINE
The interest expense for the three months ended September 30, 2016 and 2015, respectively, was $45,579 and $27,433, and the fees for the same period ended September 30, 2016 and 2015 were $10,625 and $9,710. The effective annualized interest rate for the three months ended September 30, 2016 was 18.15% and for same three months in 2015 was 9.65%. There are financial covenants set forth in the Gerber agreement of February 3, 2012 and as amended on February 24, 2012. As of September 30, 2016 the Company was not in compliance with three financial covenants regarding minimum levels of net worth, net income and subordinated debt. The Company has not received a notice of default from Gerber regarding these covenants and has been in discussions with Gerber regarding resolving the noncompliance. The Company expects to meet the minimum level of net worth covenant upon completion of the Offering.
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EQUITY LINES OF CREDIT, OTHER TERMED DEBTS & ACQUISITION NOTES |
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Equity Line Of Credit [Text Block] | NOTE 8 EQUITY LINES OF CREDIT, OTHER TERMED DEBTS & ACQUISITION NOTES: EQUITY LINES OF CREDIT: The Company had previously guaranteed the payment under the terms of an assumption agreement, as amended, of an Equity Line of Credit with Wells Fargo Bank totaling up to $250,000, the proceeds of which the Company received from a concurrent loan from Edson Realty Inc. which was a related party-owned realty holding company at the time the credit line was funded on August 15, 2008. As of June 30, 2016, this first line of credit had $250,000 available, secured by residential real estate owned by a former COO of the Company, of which $218,290 was outstanding, with an interest rate of 3.35%. As of September 30, 2016, this line of credit has $250,000 available, of which $217,259 is outstanding, with an interest rate of 3.35%. The Company charged operations $1,839 and $1,940 for interest on this line of credit in the three months ended September 30, 2016 and 2015, respectively. Effective June 30, 2014, the Company also has guaranteed to the CEO, under the terms of an assumption agreement, as amended, the repayment of a second Equity Line of Credit with Wells Fargo Bank. The Company received working capital loans from the CEO which were from funds drawn against this Equity Line of Credit. As of June 30, 2016 the second line of credit had $150,000 available, secured by the CEO’s principal residence, of which $101,003 was outstanding, with an interest rate of 3.0%. As of September 30, 2016, this line of credit has $150,000 available, of which $98,873 is outstanding, with an interest rate of 3.00%. The Company charged operations $757 and $910 for interest on this line of credit in the three months ended September 30, 2016 and 2015, respectively. Other termed debts consist of: (i) Long-term Debt, (ii) Capital Leases, & (iii) Extended Payment Arrangements.
The Company charged operations $127 and $533 in interest for these loans for the three months ended September 30, 2016 and 2015, respectively. Extended Payment arrangements: The Company is responsible for paying a former employee, disability benefits under a prior self-insured plan, through April, 2019. The plan requires monthly payments until the participant attains age 65. Interest has been imputed on this obligation at 5%.
Interest expense charged to operations for the extended disability payments was $302 and $402 for the three months ended September 30, 2016 and 2015, respectively.
Summary totals for Other termed debts consist of: (i) Long-term Debt & (ii) Extended Payment Arrangements.
ACQUIRED INTANGIBLE ASSETS & ACQUISITION NOTES PAYABLE: The Company acquired certain assets including specific inventory and fixed assets from a RF services provider, Microsemi Corp-RF Integrated Solutions (“Microsemi”); which had eliminated providing certain RF services similar to that of the Company for approximately 10 customers. The acquisition was pursuant to a contract, originally dated March 27, 2013, which provided for a $100,000 down payment and a note payable for $650,000, with payments through December, 2014 as amended. The total purchase price of $750,000 was allocated to tangible assets inventory and fixed assets associated with these specific RF services, and $155,277 intangible assets consisting of a customer list, non-compete clause and an exclusive license. The Contract also provided for 5% royalty on certain RF services we will provide to the specified 10 customers. On August 8, 2014 the Company initially signed a strategic partnership agreement with Dynamac, Inc. to develop, manufacture and market a portfolio of low cost RF/Microwave and Millimeter-wave calibrated test probes and related universal test platforms. On January 21, 2016, Microphase Instruments LLC, a subsidiary of Microphase Corporation (the “Company”) entered into a Purchase Agreement (the “Agreement”) with Dynamac, Inc. (the “Seller”), pursuant to which the Company agreed to acquire certain assets in a line of proprietary RF and microwave test and measurement products, as well as related intellectual property (the “Dynamac Assets”). On November 2, 2016, the Company entered into that certain First Amendment to Purchase Agreement with Dynamac (the “Dynamac Amendment”), pursuant to which, among other things, the Company agreed that Dynamac would retain ownership of the Dynamac assets until the Company has paid all amounts owed pursuant to the Dynamac agreement, with such amounts due within 10 days of the closing of the offering of the Company’s common stock as contemplated in the Registration Statement on Form S-1 filed with the SEC on July 28, 2016 (the “Offering”). Asset allocation on Acquisition date Microsemi The Exclusive License associated with the Microsemi Inc. (“Microsemi”) asset acquisition was valued at $56,861, was ascribed a perpetual life and is subject to evaluation annually for impairment. Management has determined that there was no impairment charge to be recorded for the three months ended September 30, 2016 and 2015. Customer Lists and Non-Compete agreements associated with the Microsemi asset acquisition were ascribed useful lives of 7 and 5 years respectively. The consideration paid for this portion of business was allocated to the tangible and intangible assets acquired and liabilities assumed based on their estimated fair values at the acquisition date. We assigned $155,277 to identifiable intangible assets, which consist of a customer list, non-compete clause and an exclusive license. The acquired intangible assets will be amortized over their estimate lives, which range from 5 to 10 years, primarily using accelerated amortization methods based on the cash flow streams used to value those assets. The exclusive license has a contractual indefinite life and is reviewed annually for impairment. There was no excess of the purchase price over the estimated fair value of the net assets acquired and as such no goodwill was recorded. Amortization expense recorded for these intangible assets was $3,878 and $3,878 for the three months ended September 30, 2016 and 2015, respectively. Dynamac The Dynamac License was recorded at cost. The Company deposited $50,000 and provided a $300,000 note payable toward the initial contract during fiscal 2015 which was subsequently revised by the Dynamac agreement of January 21, 2016. The assets acquired in the Dynamac agreement of January 21, 2016 have been valued at the contract price in our initial measurement, resulting in intangible assets other than goodwill, primarily Intellectual Property consisting of two (2) patents with remaining lives of over 12 years each, a portfolio of product prototypes to be patented, trade secrets, know-how, confidential information and other intellectual property. We expect to incur additional costs to apply for eighteen (18) new patents, in addition to various trademarks and copyrights. Our accounting for the allocation of the relative fair value of the intangible assets, other than goodwill, acquired in the Dynamac acquisition is still preliminary. The fair value estimates for the assets acquired were based on preliminary calculations, and our estimates and assumptions of the allocation of the relative fair value of these assets to possibly amortizable components, and if any, what period of amortization would be appropriate, are subject to change as we obtain additional information for our estimates during the measurement period (up to one year from the acquisition date). These assets will be subject to periodic evaluation and at a minimum will be reviewed annually for impairment. The Company assesses these assets for impairment based on their future cash flows. Our Acquisitions have resulted in the following Asset allocation:
Asset Acquisition Note Payable is comprised of the following:
The acquisition of Microsemi on March 27, 2013, provided for a $100,000 down payment and a note payable for $650,000, with payments through December, 2014 and was paid in full during Fiscal 2015. The Dynamac agreement, as revised, of January 21, 2016 was funded by the $50,000 original deposit paid in connection with the previous agreement, $350,000 paid at closing, $100,000 paid in February 2016, and a series of four $550,000 payments payable on the note semi-annually, due in August 2016 & 2017 and February 2017 & 2018. The Company imputed interest at 7%, its most favorable credit line rate, and as such is valued at $2,020,425. On November 2, 2016 the Agreement was extended whereby the initial payment is due November 22, 2016. See Note 13 Subsequent Events. |
RELATED PARTY TRANSACTIONS |
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Related Party Transactions [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Related Party Transactions Disclosure [Text Block] | NOTE 9 RELATED PARTY TRANSACTIONS: The Company had activities with related parties during the fiscal years 2016 and 2015. The Company sublet office space until March 31, 2015 and a vehicle in fiscal 2015 to mPhase. In fiscal 2016, the rent recorded was $0 for the office space and $9,000 for the vehicle. At September 30, 2016, there was no cost for the vehicle. At Sept 30, 2016 and June 30, 2016, mPhase owed the Company $33,295.
The Company and the note holders (except for the former employee as discussed above) have agreed to revised repayment schedules for 42 months commencing December 2015. As of September 30, 2016, the Company was in arrears on four payments of the revised repayment schedules for each of the note holders. The Company charged operations $4,122 and $6,938 for interest on these loans for the quarters ended September 30, 2016 and 2015, respectively.
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STOCKHOLDERS' EQUITY |
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Sep. 30, 2016 | ||
Equity [Abstract] | ||
Stockholders' Equity Note Disclosure [Text Block] | NOTE 10 STOCKHOLDERS’ EQUITY: Microphase Corporation has authorized capital of 7,800,000 shares of common stock (“Common Stock”) with no par value and 200,000 shares of Series A Convertible Preferred Stock (“Preferred Stock”) with $100 par value per share, with 6% cumulative dividends. On October 4, 2014, at a special meeting of the shareholders of the Company, the shareholders approved amendments to the Certificate of Incorporation of the Company to: (1) Increase its authorized common stock from 4,800,000 shares of common stock without par value up to 50,000,000 shares of common stock without par value; the Board of Directors has implemented such increase to 7,800,000 shares of Common Stock; (2) increase its authorized preferred stock from 200,000 shares, $100 par value per share up to 2,000,000 shares of 6% convertible preferred stock; such increase has yet to be implemented. Each outstanding and hereafter issued share of the Preferred Stock will: i) continue to be entitled to a cash dividend, payable quarterly on the last business day of each fiscal quarter of the Company, commencing with the fiscal quarter ended December 31, 2014, if and when declared by the Company’s board of directors (the “Board”) . These dividends will be cumulative, will accrue if not declared by the Board, and must be paid before any dividends or other distributions are made to the common shareholders, be entitled, on liquidation of the Company, to receive $100 per share plus accrued dividends before any distributions are made to the common shareholders, be convertible at the option of the holder into Common Stock. Common Stock During the three months ended September 30, 2016 the Company issued 10,000 and 55,000, respectively, shares of its Common Stock to two Officers and Directors for services, valued at $97,500, which was charged to operations in the quarter ending September 30, 2016. During the three months ended September 30, 2015, the Company issued no shares of its common stock. During the three months ended September 30, 2016 the Company received net $45,000 pursuant to a stock purchase agreement where the Company will issue 33,334 shares of its Common Stock and a warrant to purchase up to 33,334 shares of stock for a period of five years at a price of $2.50 per share to an accredited investor in a private placement of its common stock pursuant to Section 4(a)(2) of the Securities Act of 1933, as amended, at $1.50 per share. Preferred Stock The Preferred Stock, with respect to dividends, liquidation payments, and liquidation rights, ranks senior to the common stock and of the Company. Holders of Preferred Stock are entitled to receive, when and as declared by the Board of Directors, dividends, at the annual rate of 6% of the stated par value, or $100 per share. Dividends are cumulative and accrue from the effective date of issuance of the Preferred Stock until declared. As of September 30, 2016, 15,382 shares of Preferred Stock are outstanding and cumulative undeclared dividends on preferred stock are $267,051. Reserved Shares Stock Options The Board approved the implementation of a stock option plan in January 2015, for which the Company will not seek ratification by the shareholders, reserving 250,000 shares of Common Stock for this plan; however, such plan has not yet been set forth in a formal document adopted by the board. During the year ended June 30, 2016 the Company granted options, as part of this plan, to an Officer and Director for services to purchase 75,000 shares of Common Stock, with an exercise price of $2.00, with a term of 7 years, and which rights vest over the next three years as follows; 25,000 shares were exercisable immediately and 25,000 shares vest each October 1 of 2016 and 2017. The total value of these options was estimated to be $106,200 using the Black Scholes method, based on an assumed volatility of 112.5% and an interest rate of .09%. $35,400 was charged to operations in the nine months ending March 31, 2016, deferring the balance of which $35,400 will be charged each October 1 of 2016 and 2017. Series A Preferred Shares currently convertible As of September 30, 2016, 15,382 preferred shares were outstanding and cumulative undeclared dividends on preferred stock were $267,051. The preferred shares are convertible into 1,025,467 shares of the Company’s common stock at $1.50, and the dividends, if declared, are convertible into 178,034 common shares stock also at $1.50, until such time the Company’s common stock begins trading. Certain Debts currently convertible As of September 30, 2016, $399,129 of loans from related parties and $80,000 of unpaid compensation are convertible into 266,086 and 53,334 shares of the Company’s common stock at $1.50, respectively, until such time the Company’s common stock begins trading. |
MAJOR CUSTOMERS AND SEGMENTS |
3 Months Ended | |
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Sep. 30, 2016 | ||
Segment Reporting [Abstract] | ||
Segment Reporting Disclosure [Text Block] | NOTE 11 MAJOR CUSTOMERS AND SEGMENTS: The Company recorded sales of $796,996 and $1,428,581 with four and three customers for the three months ended September 30, 2016 and 2015 respectively. These customers represent 58% and 58% of sales for the three months ended September 30, 2016 and 2015. At September 30, 2016, those four customers owed the Company $122,598. Sales to U.S. customers represented 87% and 86% of sales for the three months ended September 30, 2016 and 2015, respectively. |
COMMITMENTS AND CONTINGENCIES |
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Commitments and Contingencies Disclosure [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Commitments and Contingencies Disclosure [Text Block] | NOTE 12 COMMITMENTS AND CONTINGENCIES: The Company moved to Shelton, Connecticut on April 21, 2015, to a facility with 15,000 square feet with monthly rent of $15,000, for a 7-year term with annual escalations of 3%. In December 2015 the Company committed to rent additional space in connection with the acquisition of the Dynamac proprietary line. In June 2016 the monthly rent becomes $18,400 and in August 2016 $24,740. The total commitment on this lease for fiscal year 2017 is approximately $297,000. Employment and Consultant Contracts: The Company had previously entered into employment contracts with two long term officers through 2015 that provided for a stated salary of $250,000 per year, plus company benefits. These contracts were subject to other items and included a non-compete covenant. In Fiscal 2015 the Company entered into updated three year employment agreements with these two employees, one as an officer, currently the Company’s president and a director, and one as a strategic consultant upon his resignation as an officer and director. These updated contracts include base compensation of $225,000 per year plus company benefits, severance provisions and non-competition covenants for both individuals. As of September 30, 2016 and June 30, 2016, the Company owed $80,000 and $80,000 to these individuals, respectively. In Fiscal 2015 the Company also entered into three year employment contracts with two new officers for at will employment with base compensation of $160,000 and $150,000 per year plus company benefits, respectively. Effective July 1, 2016 the Company revised these agreements with these two officers. These updated contracts include base compensation of $175,000 and $165,000 per year plus company benefits, severance provisions and non-competition covenants for both officers. Effective July 1, 2016 the Company executed a modification to the consulting contract with the general manager through February 1, 2019. The updated contract includes base compensation of $192,000 per year with contract termination fees, comparable to the severance provisions for officers, and non-competition covenants. The Company leases 5 vehicles under operating leases expiring in 2016 through 2018. As of September 30, 2016 the future minimum rental payments for fiscal 2017 are $27,221. 5 year Shelton Facility lease and Car lease schedules as of September 30, 2016:
We are subject to legal proceedings and other claims arising out of the conduct of our business, including proceedings and claims relating to commercial and financial transactions; government contracts and sub-contracts; alleged lack of compliance with applicable laws and regulations; production partners; product liability; patent and trademark infringement; employment disputes; and environmental, safety and health matters. Some potential legal proceedings and claims could seek damages, fines or penalties in substantial amounts or remediation of environmental contamination. As a government sub-contractor, we are subject to audits, reviews and investigations to determine whether our operations are being conducted in accordance with applicable regulatory requirements. Under federal government procurement regulations, certain claims brought by the U.S. Government could result in our suspension or debarment from U.S. Government contracting for a period of time. On the basis of information presently available, we do not believe that there are any existing proceedings or potential claims that would have a material effect on our financial position or results of operations. |
SUBSEQUENT EVENTS |
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Sep. 30, 2016 | ||
Subsequent Events [Abstract] | ||
Subsequent Events [Text Block] | NOTE 13 SUBSEQUENT EVENTS: During September and October 2016, the Company commenced a private placement for 333,334 shares issuable to accredited investors in an interim private placement of our common stock pursuant to section 4(2) of the Securities Act of 1933, as amended. This pending private placement and issuance is expected to generate $450,000 of net proceeds to the Company after deducting $50,000 of placement fees upon completion. The terms also provide for 333,334 shares issuable upon exercise of warrants issued in connection with the private placement of 333,334 shares discussed above at an exercise price of $2.50 per share. Additionally, the Company entered into a one year agreement for investment banking services which calls for $60,000 of consulting fees to be paid in cash from the proceeds of this placement and $50,000 to be paid in common stock, at the per share value of the Offering, upon the completion of the Offering. Through November 9, 2016 the Company has received $400,000 of these proceeds, of which $50,000 was received during the Quarter ended September 30, 2016. Also in October 2016, the Company has offered to issue notes for bridge loans for a total of $700,000 from accredited investors that are expected to generate $630,000 in net proceeds to the Company after deducting $70,000 of placement fees upon completion. Additionally; the Company entered into a one year agreement for investment banking services which calls for $120,000 of consulting fees to be paid in cash from the proceeds of the bridge loans and $90,000 to be paid in common stock, at the per share value of the Offering, upon the completion of the Offering. The terms of this bridge debt will be pursuant to note purchase agreements with purchasers that are accredited investors, for notes up to in the aggregate amount of $700,000, at an interest rate of 10% per annum (the “Notes”), from financing sources identified by and placed by Spartan Capital Securities, LLC (“Spartan”) in accordance with a certain Selling Agreement by and between the Company and Spartan. Each of the Notes will be repaid as follows: (i) in the event that the public offering of the Company’s securities that is contemplated pursuant to a registration statement on Form S-1 filed with the SEC on July 28, 2016 (the “Offering”) closes prior to the first anniversary of the issuance date of such Note, the amount that is equal to (A) the entire original principal amount of such Note multiplied by 1.25 plus (B) the interest, if any, accrued quarterly, every 90 days, beginning on the date that is 90 days from the issuance date of such Note on the entire outstanding principal amount, will be due and payable by no later than five days from the date of the Offering; or (ii) in the event that the Offering has not closed prior to the first anniversary of the issuance date of such Note, on such first anniversary of the issuance date of such Note, the amount that is equal to (A) the amount that is equal to the entire original principal amount of such Note multiplied by 1.25, plus (B) the interest accrued quarterly, every 90 days, beginning on the date that is 90 days from the issuance date of such Note on the entire outstanding principal amount will be due and payable. In the event that the Offering closes on a date that is sooner than 90 days from the issuance date of the Notes, no interest will accrue. On November 2, 2016, we entered into that certain First Amendment to Purchase Agreement with Dynamac (the “Dynamac Amendment” and, the January Dynamac Agreement, as amended by the Dynamac Amendment, the “Dynamac Transaction”), pursuant to which, among other things, the Company agreed that Dynamac would retain ownership in the Dynamac Assets until the Company has delivered all amounts owed pursuant to the Dynamac Transaction, with such amounts due within 10 days of the closing of the Offering and the Company to pay such amounts from the proceeds thereof. In connection with this amendment the Company has agreed to issue 300,000 shares of our Common Stock and the August 22, 2016 payment has been extended to November 22, 2016. |
BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Policies) |
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Accounting Policies [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Basis of Accounting, Policy [Policy Text Block] | BASIS OF PRESENTATION The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and pursuant to the regulations of the Securities Exchange Commission (the “SEC”). Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments considered necessary for a fair presentation have been included. Operating results for the three months ending September 30, 2016 are not necessarily indicative of the results that may be expected for a full fiscal year. The accompanying unaudited condensed consolidated financial statements include the accounts of the Company and its subsidiaries which include Microphase West LLC and Microphase Instruments, LLC, as of October 23, 2015. All intercompany accounts and transactions have been eliminated. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company’s Annual Report on Form 10-K for the year ended June 30, 2016. As of June 30, 2016, we had an accumulated deficit of $13,939,651 and a total stockholders’ deficit of $602,207. As of September 30, 2016, we had an accumulated deficit of $14,605,924 and a total stockholders’ deficit of $940,313. A significant amount of capital will be necessary to sustain, grow and advance our business and these conditions raise substantial doubt about our ability to continue as a going concern, as expressed in the report of our Independent Registered Public Accounting Firm for the year ended June 30, 2016. The Company’s ability to continue as a going concern and its future success is dependent upon its ability to raise capital in the near term to: (1) satisfy its current obligations, (2) continue its research and development efforts, and (3) allow the successful wide scale development, deployment and marketing of its products. |
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Property, Plant and Equipment, Policy [Policy Text Block] | PROPERTY AND EQUIPMENT Are stated at cost. Provision for depreciation and amortization for financial reporting and income tax purposes is made by annual charges to operations principally under the following methods and estimated useful lives:
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Maintenance Cost, Policy [Policy Text Block] | MAINTENANCE AND REPAIRS Charged to expenses as incurred. Cost of major replacements and renewals are capitalized. Upon retirement or other disposition of equipment and improvements, the cost and related depreciation is removed from the accounts, and any gain or loss is recognized in income. |
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Inventory, Policy [Policy Text Block] | INVENTORIES are stated at the lower of average cost or market under the first-in, first-out method. The Company regularly reviews inventory quantities on hand and records a provision for excess and obsolete inventory primarily based on our estimated forecast of product demand, anticipated end of product life and production requirements. |
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Impairment or Disposal of Long-Lived Assets, Policy [Policy Text Block] | OTHER LONG LIVED ASSETS The Company reviews long-term assets for impairment whenever events or circumstances indicate that the carrying amount of those assets may not be recoverable. The Company assesses these assets for impairment based on their future cash flows. Management has determined that there was no impairment charge to be recorded for the three months ended September 30, 2016. |
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Trade and Other Accounts Receivable, Policy [Policy Text Block] | ACCOUNTS RECEIVABLE Management records receivables at net realizable value and they generally do not bear interest. This value includes an allowance for estimated uncollectible accounts to reflect any loss anticipated on the accounts receivable balances which is charged to the provision for doubtful accounts. We calculate this allowance based on our history of write-offs, level of past due accounts and economic status of the customers. We consider a receivable delinquent if it is unpaid after 180 days after it is due. |
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Use of Estimates, Policy [Policy Text Block] | ACCOUNTING ESTIMATES Management uses estimates and assumptions in preparing financial statements in accordance with generally accepted accounting principles. Those estimates and assumptions affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities, and the reported revenues and expenses. Actual results could vary from the estimates that were assumed in preparing the financial statements. |
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Compensated Absences Policy [Policy Text Block] | COMPENSATED ABSENCES Employees of the Company are entitled to vacation pay depending on length of service and current salary. Vacation days accrued in a given year are available in the following year. A limit of 5 days of unused vacation may be carried over to a subsequent year. The Company has provided for vacation liabilities in the accompanying financial statements. |
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Research and Development Expense, Policy [Policy Text Block] | RESEARCH AND DEVELOPMENT EXPENSES The Company charges the cost of research and development to operations when incurred. |
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Revenue Recognition, Policy [Policy Text Block] | REVENUE RECOGNITION The Company recognizes revenues when persuasive evidence of an arrangement exists, the product has been shipped, the price is fixed and collectability is reasonably assured. Revenue is recognized net of estimated sales returns and allowances. |
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Grant Income [Policy Text Block] | GRANT INCOME During the three months ended September 30, 2016 the Company was awarded and received the proceeds of a Small Business Express Matching Grant in an amount of $100,000 from the state of Connecticut in connection with the move of our California operation to Connecticut and with the development of the T & M products to be acquired in the Company’s Microphase Instruments, LLC, subsidiary. State grant funding requires a dollar for dollar match on behalf of the Company, which the Company’s obligation was considered funded in full prior to the Grant award. During the three months ended September 30, 2016 the Company recorded $26,800 as a reduction in Selling, General & Administrative expenses for qualified expenditures incurred in the period and at September 30, 2016 has included $73,200 in deferred revenue. Qualified expenditures for capital assets will be recognized as income over the life of the assets based upon the amortization or depreciation of any capitalized assets acquired with grant funds. |
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Reclassification, Policy [Policy Text Block] | RECLASSIFICATIONS- Certain prior year amounts have been reclassified in our Condensed Consolidated Financial Statements to conform to current year classifications |
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Earnings Per Share, Policy [Policy Text Block] | EARNINGS (LOSS) PER SHARE Basic earnings (loss) per share (“EPS”) is determined by dividing the net earnings (loss) by the weighted-average number of shares of common shares outstanding during the period. Diluted EPS is determined by dividing net earnings (loss) by the weighted average number of common shares used in the basic EPS calculation plus the number of common shares that would be issued assuming conversion of all potentially dilutive securities (such as stock options, preferred stock and convertible securities) outstanding under the treasury stock method. As of September 30, 2016 we have outstanding (i) options to purchase 75,000 shares, (ii) 15,382 shares of preferred stock convertible into 1,025,467 shares, and (iii) $479,129 of debts to related parties convertible into 312,420 shares of our Common stock. In periods reporting a loss the inclusion of warrants and potential common shares to be issued in connection with convertible debt have an anti-dilutive effect on diluted loss per share and have been omitted in such computation. |
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New Accounting Pronouncements, Policy [Policy Text Block] | RECENT ACCOUNTING PRONOUNCEMENTS The Company is evaluating several pronouncements issued by the FASB which may result in the adoption by the Company of these standards in upcoming accounting periods as follows: ADOPTION OF NEW ACCOUNTING STANDARDS On April 7, 2015, the FASB issued Accounting Standards Update 2015-03, Interest Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs, which requires entities to present debt issuance costs related to a recognized debt liability as a direct deduction from the carrying amount of that debt liability. The guidance in Update 2015-03 (see below) does not address presentation or subsequent measurement of debt issuance costs related to line-of-credit arrangements. Given the absence of authoritative guidance within Update 2015-03 for debt issuance costs related to line-of-credit arrangements, the SEC staff would not object to an entity deferring and presenting debt issuance costs as an asset and subsequently amortizing the deferred debt issuance costs ratably over the term of the line-of-credit arrangement, regardless of whether there are any outstanding borrowings on the line-of-credit arrangement to be effective for Fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015; which for us is 1st interim period of fiscal 2017, or the current quarter ended September 30 2016. The adoption of this standard had no material effect on our financial position, results of operations and cash flows. ASU 2014-12 Compensation Stock-Compensation (Topic 718): Accounting for Share Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period (a consensus of the FASB Emerging Issues Task Force) to be effective for Annual periods beginning after December 15, 2015, and interim periods within annual periods beginning after December 15, 2015; which for us would be our 1st interim period of fiscal 2017, or the current quarter ended September 30 2016. The adoption of this standard had no material effect on our financial position, results of operations and cash flows. ACCOUNTING STANDARDS ISSUED BUT NOT YET EFFECTIVE The Company is evaluating several pronouncements issued by the FASB which may result in the adoption by the Company of these standards in upcoming accounting periods as follows: ASU 2014-09 Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date-In May 2014, the FASB issued a comprehensive new revenue recognition standard that supersedes nearly all revenue recognition guidance under U.S. GAAP and supersedes some cost guidance for construction-type and production-type contracts. The guidance in this standard is principles-based, and accordingly, entities will be required to use more judgment and make more estimates than under prior guidance, including identifying contract performance obligations, estimating variable consideration to include in the contract price and allocating the transaction price to separate performance obligations. The guidance in this standard is applicable to all contracts with customers, regardless of industry-specific or transaction-specific fact patterns. Additionally, this standard provides guidance for transactions that were not previously addressed comprehensively (e.g., service revenue, contract modifications and licenses of intellectual property) and modifies guidance for multiple-element arrangements. The core principle of this standard is that entities 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 and services. To help financial statement users better understand the nature, amount, timing and potential uncertainty of the revenue that is recognized, this standard requires significantly more interim and annual disclosures. This standard allows for either “full retrospective” adoption (application to all periods presented) or “modified retrospective” adoption (application to only the most current period presented in the financial statements, as well as certain additional required footnote disclosures). On July 9, 2015, the FASB approved a one-year deferral of the effective date, while permitting entities to elect to adopt one year earlier on the original effective date. As a result, this standard is now effective for fiscal years, and interim reporting periods within those years, beginning after December 15, 2017, which for us is our fiscal 2019. We are currently evaluating the impact this standard, if any, will have on our financial position, results of operations and cash flows. ASU 2015-11 Inventory (Topic 330): Simplifying the Measurement of Inventory. For public business entities, the content that links to this paragraph shall be effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years, which for us is our first quarter of fiscal 2018. We are currently evaluating the impact this standard will have on our financial position, results of operations and cash flows. ASU 2016-02 In February 2016, the FASB issued a new lease standard that supersedes existing lease guidance under GAAP. This standard requires lessees to record most leases on their balance sheets but recognize expenses on their income statements in a manner similar to existing lease guidance under GAAP. Entities are required to use a modified retrospective approach for leases that exist or are entered into after the beginning of the earliest comparative period in the financial statements, with the option to use certain relief. Full retrospective application is prohibited. This standard is effective for fiscal years, and interim reporting periods within those years, beginning after December 15, 2018, which for us is our fiscal 2020. We are currently evaluating the impact this standard will have on our financial position, results of operations and cash flows. ASU 2014-15 Presentation of Financial Statements Going Concern (Subtopic 20540): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern to be effective for Annual periods ending after December 15, 2016, and interim periods within annual periods beginning after December 15, 2016; which for us would be our fiscal 2017 and although early adoption is permitted for this standard, the Company has not adopted nor determined its applicability. ASU 2016-09 In March 2016, the FASB issued an accounting standards update making final targeted amendments to the accounting for employee share-based payments. These amendments will require entities to recognize the income tax effects of awards when the awards vest or are settled, will change an employer’s accounting for an employee’s use of shares to satisfy the employer’s statutory income tax withholding obligation and will require entities to elect whether to account for forfeitures of share-based payments by either recognizing forfeitures of awards as they occur or estimating the number of awards expected to be forfeited as is currently required. The required method of adoption varies by amendment. This accounting standards update is effective for fiscal years, and interim reporting periods within those years, beginning after December 15, 2016, which for us is our first quarter of fiscal 2018. Early adoption is permitted in any annual or interim period, but all of the guidance is required to be adopted in the same period and any adjustments must be reflected as of the beginning of the fiscal year. We are currently evaluating the impact this accounting standards update will have on our financial position, results of operations and cash flows. ASU 2015-17 Deferred Taxes (topic 740): For a particular tax-paying component of an entity and within a particular tax jurisdiction, all current deferred tax liabilities and assets shall be offset and presented as a single amount and all noncurrent deferred tax liabilities and assets, as well as any related valuation allowance, shall be offset and presented as a single noncurrent amount. However, an entity shall not offset deferred tax liabilities and assets attributable to different tax-paying components of the entity or to different tax jurisdictions. For public business entities, the amendments in this Update are effective for financial statements issued for annual periods beginning after December 15, 2016, and interim periods within those annual periods, which for us is our first quarter of fiscal 2018. Early adoption is permitted in any annual or interim period, but all of the guidance is required to be adopted in the same period and any adjustments must be reflected as of the beginning of the fiscal year. We are currently evaluating the impact this accounting standards update will have on our financial position, results of operations and cash flows. ASU 2016-15 The FASB recently issued ASU 2016-15 to clarify whether the certain items should be categorized as operating, investing or financing in the statement of cash flows. For public business entities, the amendments in this Update are effective for financial statements issued for annual periods beginning after December 15, 2017, and interim periods within those fiscal years, which for us is our fiscal 2019. Early adoption is permitted in any annual or interim period, but all of the guidance is required to be adopted in the same period and any adjustments must be reflected as of the beginning of the fiscal year. We are currently evaluating the impact this accounting standards update will have on our financial position, results of operations and cash flows. |
BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Tables) |
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Schedule of Business Acquisitions, by Acquisition [Table Text Block] | Are stated at cost. Provision for depreciation and amortization for financial reporting and income tax purposes is made by annual charges to operations principally under the following methods and estimated useful lives:
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SUPPLEMENTAL CASH FLOW INFORMATION (Tables) |
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Schedule of Cash Flow, Supplemental Disclosures [Table Text Block] |
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INVENTORIES (Tables) |
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Schedule of Inventory, Current [Table Text Block] | Inventories consist of the following:
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PROPERTY AND EQUIPMENT (Tables) |
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Property, Plant and Equipment [Table Text Block] | Property and equipment was comprised of the following:
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ACCRUED EXPENSES (Tables) |
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Schedule of Accrued Liabilities [Table Text Block] | Accrued expenses were comprised of the following:
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REVOLVING CREDIT LINE (Tables) |
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Schedule of Line of Credit Facilities [Table Text Block] |
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Schedule Of Line Of Credit Facility Financial Covenants [Table Text Block] | There are financial covenants set forth in the Gerber agreement of February 3, 2012 and as amended on February 24, 2012. As of September 30, 2016 the Company was not in compliance with three financial covenants regarding minimum levels of net worth, net income and subordinated debt. The Company has not received a notice of default from Gerber regarding these covenants and has been in discussions with Gerber regarding resolving the noncompliance. The Company expects to meet the minimum level of net worth covenant upon completion of the Offering.
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EQUITY LINES OF CREDIT, OTHER TERMED DEBTS & ACQUISITION NOTES (Tables) |
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Schedule of Long-term Debt Instruments [Table Text Block] |
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Schedule of Defined Benefit Plans Disclosures [Table Text Block] | The Company is responsible for paying a former employee, disability benefits under a prior self-insured plan, through April, 2019. The plan requires monthly payments until the participant attains age 65. Interest has been imputed on this obligation at 5%.
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Schedule of Debt [Table Text Block] |
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Finite-Lived and Indefinite-Lived Intangible Assets Acquired as Part of Business Combination [Table Text Block] | Our Acquisitions have resulted in the following Asset allocation:
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Schedule of Debt [Table Text Block] |
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Finite-Lived and Indefinite-Lived Intangible Assets Acquired as Part of Business Combination [Table Text Block] | Asset Acquisition Note Payable is comprised of the following:
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RELATED PARTY TRANSACTIONS (Tables) |
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Schedule of Related Party Transactions [Table Text Block] |
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Schedule of Maturities of Long-term Debt [Table Text Block] |
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COMMITMENTS AND CONTINGENCIES (Tables) |
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Operating Leases of Lessee Disclosure [Table Text Block] | 5 year Shelton Facility lease and Car lease schedules as of September 30, 2016:
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SUPPLEMENTAL CASH FLOW INFORMATION (Details) - USD ($) |
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Statement of Operation Information: | ||
Cash paid for income taxes | $ 1,850 | $ 1,850 |
Interest Paid | 72,417 | 51,233 |
Non Cash Investing and Financing Activities: | ||
Assets acquired with debt financing | 0 | 300,000 |
Accrued Deferred Offering Costs | $ 140,000 | $ 0 |
INVENTORIES (Details) - USD ($) |
Sep. 30, 2016 |
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Inventory [Line Items] | ||
Raw materials | $ 411,582 | $ 423,670 |
Work-in-process | 378,477 | 485,344 |
Reserve | (37,000) | (37,000) |
Total | $ 753,059 | $ 872,014 |
INVENTORIES (Details Textual) - USD ($) |
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Inventory [Line Items] | ||
Inventory Valuation Reserves | $ 37,000 | $ 37,000 |
PROPERTY AND EQUIPMENT (Details) - USD ($) |
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Property, Plant and Equipment [Line Items] | ||
Property, Plant and Equipment, Gross | $ 3,469,236 | $ 3,469,236 |
Less: accumulated depreciation and amortization | (3,328,251) | (3,310,257) |
Total | 140,985 | 158,979 |
Leasehold Improvements [Member] | ||
Property, Plant and Equipment [Line Items] | ||
Property, Plant and Equipment, Gross | 40,288 | 40,288 |
Computers, Machinery and Equipment [Member] | ||
Property, Plant and Equipment [Line Items] | ||
Property, Plant and Equipment, Gross | 3,210,147 | 3,210,147 |
Furniture and Fixtures [Member] | ||
Property, Plant and Equipment [Line Items] | ||
Property, Plant and Equipment, Gross | 122,350 | 122,350 |
Transportation Equipment [Member] | ||
Property, Plant and Equipment [Line Items] | ||
Property, Plant and Equipment, Gross | 40,438 | 40,438 |
Property held under capital leases [Member] | ||
Property, Plant and Equipment [Line Items] | ||
Property, Plant and Equipment, Gross | $ 56,013 | $ 56,013 |
PROPERTY AND EQUIPMENT (Details Textual) - USD ($) |
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Property, Plant and Equipment [Line Items] | ||
Depreciation | $ 17,994 | $ 19,389 |
ACCRUED EXPENSES (Details) - USD ($) |
Sep. 30, 2016 |
Jun. 30, 2016 |
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Accrued And Other Expenses [Line Items] | ||
Salaries, wages and other compensation, including $80,000 to related parties at September 30, 2016 and June 30, 2016 | $ 354,497 | $ 470,273 |
Royalties | 150,386 | 146,449 |
Professional fees | 529,162 | 372,500 |
Commissions | 37,936 | 37,936 |
Interest | 35,358 | 47,144 |
Other miscellaneous accruals | 79,878 | 60,427 |
Accrued Liabilities, Current | $ 1,187,217 | $ 1,134,729 |
ACCRUED EXPENSES (Details Textual) - USD ($) |
Sep. 30, 2016 |
Jun. 30, 2016 |
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Accrued And Other Expenses [Line Items] | ||
Capital Lease Obligations, Noncurrent | $ 95,441 | $ 81,189 |
Shelton Connecticut facility [Member] | ||
Accrued And Other Expenses [Line Items] | ||
Capital Lease Obligations, Noncurrent | $ 95,441 |
FAIR VALUE OF FINANCIAL INSTRUMENTS (Details Textual) |
Sep. 30, 2016
USD ($)
|
---|---|
Fair Value, Inputs, Level 1 [Member] | |
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items] | |
Available-for-sale Securities | $ 385,667 |
REVOLVING CREDIT LINE (Details) - USD ($) |
Sep. 30, 2016 |
Jun. 30, 2016 |
---|---|---|
Line of Credit Facility [Line Items] | ||
Credit Facility - Revolving Loan | $ 844,926 | $ 1,474,129 |
Revolving Credit Facility [Member] | ||
Line of Credit Facility [Line Items] | ||
Credit Facility - Revolving Loan | $ 844,926 | $ 1,474,129 |
REVOLVING CREDIT LINE (Details 1) - USD ($) |
3 Months Ended | |
---|---|---|
Sep. 30, 2016 |
Sep. 30, 2015 |
|
Line of Credit Facility [Line Items] | ||
Line Of Credit Facility, Collateral Fees, Amount | $ 1,120,078 | $ 1,964,496 |
Inventories [Member] | ||
Line of Credit Facility [Line Items] | ||
Line Of Credit Facility, Collateral Fees, Amount | 753,059 | 872,014 |
Accounts Receivable [Member] | ||
Line of Credit Facility [Line Items] | ||
Line Of Credit Facility, Collateral Fees, Amount | $ 367,019 | $ 1,092,482 |
REVOLVING CREDIT LINE (Details Textual) - USD ($) |
1 Months Ended | 3 Months Ended | 7 Months Ended | |||
---|---|---|---|---|---|---|
Sep. 30, 2015 |
Sep. 30, 2016 |
Sep. 30, 2015 |
Sep. 30, 2016 |
Nov. 30, 2013 |
Feb. 29, 2012 |
|
Line of Credit Facility [Line Items] | ||||||
Line of Credit Facility, Maximum Borrowing Capacity | $ 1,400,000 | $ 1,400,000 | ||||
Line of Credit Facility, Commitment Fee Percentage | 7.25% | |||||
Debt Instrument, Interest Rate, Increase (Decrease) | 2.50% | |||||
Gerber Finance, Inc [Member] | Revolving Credit Facility [Member] | ||||||
Line of Credit Facility [Line Items] | ||||||
Line of Credit Facility, Maximum Borrowing Capacity | $ 1,150,000 | $ 1,500,000 | ||||
Line of Credit Facility, Commitment Fee Percentage | 1.75% | |||||
Debt Instrument, Collateral Fee | $ 1,500 | |||||
Interest Expense | $ 45,579 | $ 27,433 | ||||
Debt Instrument, Interest Rate, Effective Percentage | 9.65% | 18.15% | 9.65% | 18.15% | ||
Line of Credit Facility, Commitment Fee Amount | $ 10,625 | $ 9,710 | ||||
Line of Credit Facility, Increase (Decrease), Net | $ 1,400,000 |
EQUITY LINES OF CREDIT, OTHER TERMED DEBTS & ACQUISITION NOTES (Details) - USD ($) |
Sep. 30, 2016 |
Jun. 30, 2016 |
---|---|---|
Debt Instrument [Line Items] | ||
Long-term portion | $ 3,073,409 | |
Ford Credit Company [Member] | ||
Debt Instrument [Line Items] | ||
Long-term portion | 14,952 | $ 15,823 |
Less: current portion | (5,336) | (5,336) |
Long-term portion | $ 9,616 | $ 10,487 |
EQUITY LINES OF CREDIT, OTHER TERMED DEBTS & ACQUISITION NOTES (Details 1) - USD ($) |
3 Months Ended | 12 Months Ended |
---|---|---|
Sep. 30, 2016 |
Jun. 30, 2016 |
|
Long-term Debt [Line Items] | ||
Total of extended disability benefits | $ 24,363 | $ 26,721 |
Less: amount representing interest | (1,592) | (1,855) |
Present value of disability benefits | 22,771 | 24,866 |
Less: current portion | (8,378) | (8,378) |
Long-term portion | $ 14,393 | $ 16,488 |
EQUITY LINES OF CREDIT, OTHER TERMED DEBTS & ACQUISITION NOTES (Details 2) - USD ($) |
Sep. 30, 2016 |
Jun. 30, 2016 |
---|---|---|
Long-term Debt | $ 3,073,409 | |
Small Business Express Program loan [Member] | ||
Long-term Debt | 300,000 | $ 0 |
Less: current portion | 0 | 0 |
Long-term portion | $ 300,000 | $ 0 |
EQUITY LINES OF CREDIT, OTHER TERMED DEBTS & ACQUISITION NOTES (Details 3) - USD ($) |
Sep. 30, 2016 |
Jun. 30, 2016 |
---|---|---|
Defined Benefit Plan Disclosure [Line Items] | ||
Total minimum long term debt, capital lease & extended disability payments | $ 337,723 | $ 40,689 |
Less: current portion | (13,714) | (13,714) |
Long-term portion | $ 324,009 | $ 26,975 |
EQUITY LINES OF CREDIT, OTHER TERMED DEBTS & ACQUISITION NOTES (Details 4) - USD ($) |
Sep. 30, 2016 |
Jun. 30, 2016 |
---|---|---|
Finite-Lived Intangible Assets, Gross | $ 2,675,702 | $ 2,675,702 |
Accumulated Amortization | (50,410) | (46,532) |
Net Total | 2,625,292 | 2,629,170 |
Intellectual Property [Member] | ||
Finite-Lived Intangible Assets, Gross | 2,520,425 | 2,520,425 |
Customer List [Member] | ||
Finite-Lived Intangible Assets, Gross | 73,017 | 73,017 |
Non-Compete Clause [Member] | ||
Finite-Lived Intangible Assets, Gross | 25,399 | 25,399 |
Exclusive License [Member] | ||
Finite-Lived Intangible Assets, Gross | $ 56,861 | $ 56,861 |
EQUITY LINES OF CREDIT, OTHER TERMED DEBTS & ACQUISITION NOTES (Details 5) - USD ($) |
Sep. 30, 2016 |
Jun. 30, 2016 |
---|---|---|
Asset Acquisition Note Payable, net of current portion | ||
Total Asset acquisition note payable | $ 2,020,425 | $ 2,020,425 |
Dynamac agreement [Member] | ||
Asset Acquisition Note Payable-current portion | ||
Business Combination, Recognized Identifiable Assets Acquired and Liabilities Assumed, Current Liabilities, Accounts Payable | 975,345 | 975,345 |
Asset Acquisition Note Payable, net of current portion | ||
Business Combination, Recognized Identifiable Assets Acquired and Liabilities Assumed, Financial Liabilities | $ 1,045,080 | $ 1,045,080 |
RELATED PARTY TRANSACTIONS (Details) - USD ($) |
Sep. 30, 2016 |
Jun. 30, 2016 |
---|---|---|
Related Party Transaction [Line Items] | ||
Total | $ 399,129 | $ 395,007 |
Less: current portion | (212,490) | (137,150) |
Notes Payable - Related Parties, net of current portion | 186,639 | 257,857 |
Former Employee [Member] | ||
Related Party Transaction [Line Items] | ||
Total | 154,732 | 152,434 |
Stockholders [Member] | ||
Related Party Transaction [Line Items] | ||
Total | 119,656 | 118,762 |
Other Related Parties 1 [Member] | ||
Related Party Transaction [Line Items] | ||
Total | 18,894 | 18,754 |
Other Related Parties 2 [Member] | ||
Related Party Transaction [Line Items] | ||
Total | $ 105,847 | $ 105,057 |
MAJOR CUSTOMERS AND SEGMENTS (Details Textual) - USD ($) |
3 Months Ended | |
---|---|---|
Sep. 30, 2016 |
Sep. 30, 2015 |
|
Revenue, Major Customer [Line Items] | ||
Revenues | $ 1,373,064 | $ 2,451,855 |
Customer Concentration Risk [Member] | ||
Revenue, Major Customer [Line Items] | ||
Accounts Receivable, Net | $ 122,598 | |
Sales Revenue, Net [Member] | Customer Concentration Risk [Member] | ||
Revenue, Major Customer [Line Items] | ||
Concentration Risk, Percentage | 58.00% | 58.00% |
US Customers [Member] | Sales Revenue, Net [Member] | ||
Revenue, Major Customer [Line Items] | ||
Concentration Risk, Percentage | 87.00% | 86.00% |
Three Customers | Sales Revenue, Net [Member] | ||
Revenue, Major Customer [Line Items] | ||
Revenues | $ 1,428,581 | |
Four Customers | Sales Revenue, Net [Member] | ||
Revenue, Major Customer [Line Items] | ||
Revenues | $ 796,996 |
COMMITMENTS AND CONTINGENCIES (Details) |
Sep. 30, 2016
USD ($)
|
---|---|
2017 | $ 325,579 |
2018 | 323,807 |
2019 | 320,852 |
2020 | 325,721 |
2021 | 335,348 |
Thereafter | 691,126 |
Total | 2,322,433 |
Shelton Facility Lease [Member] | |
2017 | 298,358 |
2018 | 307,240 |
2019 | 316,361 |
2020 | 325,721 |
2021 | 335,348 |
Thereafter | 691,126 |
Total | 2,274,154 |
Car leases [Member] | |
2017 | 27,221 |
2018 | 16,567 |
2019 | 4,491 |
2020 | 0 |
2021 | 0 |
Thereafter | 0 |
Total | $ 48,279 |
SUBSEQUENT EVENTS (Details Textual) - USD ($) |
1 Months Ended | 2 Months Ended | 3 Months Ended | ||
---|---|---|---|---|---|
Nov. 09, 2016 |
Oct. 31, 2016 |
Oct. 31, 2016 |
Sep. 30, 2016 |
Sep. 30, 2015 |
|
Debt Instrument, Interest Rate, Stated Percentage | 10.00% | ||||
Proceeds from Issuance of Common Stock | $ 45,000 | $ 0 | |||
Stock Issued During Period, Shares, New Issues | 300,000 | ||||
Debt Instrument, Description | (A) the entire original principal amount of such Note multiplied by 1.25 plus (B) the interest, if any, accrued quarterly, every 90 days, beginning on the date that is 90 days from the issuance date of such Note on the entire outstanding principal amount, will be due and payable by no later than five days from the date of the Offering; or (ii) in the event that the Offering has not closed prior to the first anniversary of the issuance date of such Note, on such first anniversary of the issuance date of such Note, the amount that is equal to (A) the amount that is equal to the entire original principal amount of such Note multiplied by 1.25, plus (B) the interest accrued quarterly, every 90 days, beginning on the date that is 90 days from the issuance date of such Note on the entire outstanding principal amount will be due and payable. In the event that the Offering closes on a date that is sooner than 90 days from the issuance date of the Notes, no interest will accrue. | ||||
Subsequent Event [Member] | |||||
Proceeds from Issuance of Common Stock | $ 400,000 | ||||
Subsequent Event [Member] | Bridge Loan [Member] | |||||
Debt Instrument, Face Amount | $ 700,000 | $ 700,000 | |||
Proceeds from Issuance of Debt | 630,000 | ||||
Payments of Debt Issuance Costs | 70,000 | ||||
Consulting Fees Payable | 120,000 | 120,000 | |||
Interim Private Placement Amount Payable In Common Stock | $ 90,000 | 90,000 | |||
Subsequent Event [Member] | Private Placement [Member] | |||||
Placement Fees Payable | $ 50,000 | ||||
Common Stock, Shares Subscribed but Unissued | 333,334 | 333,334 | |||
Class of Warrant or Right, Number of Securities Called by Warrants or Rights | 333,334 | 333,334 | |||
Class of Warrant or Right, Exercise Price of Warrants or Rights | $ 2.50 | $ 2.50 | |||
Consulting Fees Payable | $ 60,000 | $ 60,000 | |||
Interim Private Placement Amount Payable In Common Stock | 50,000 | 50,000 | |||
Common Stock, Share Subscribed but Unissued, Subscriptions Receivable | $ 450,000 | $ 450,000 |
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