UNITED STATES


SECURITIES AND EXCHANGE COMMISSION


WASHINGTON, D.C. 20549




FORM 10-Q





R
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934





For the quarterly period ended:

December 31, 2010  or





o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934




For the transition period from ______ to _______




Commission File Number:                   000-27250




AML COMMUNICATIONS, INC.


(Exact name of registrant as specified in its charter)


Delaware

77-0130894(State or Other jurisdiction ofincorporation or organization)

(IRS EmployerIdentification No.)







1000 Avenida AcasoCamarillo, California

93012(Address of principal executive offices)

(Zip Code)





(805) 388-1345(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 preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes R No o




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 (§232.405 of this chapter) during the preceding 12 months (or for such shorter period than the registrant was required to submit and post such files). Yes o No o




Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.




Large accelerated filer o
Accelerated filer oNon-accelerated filer o (Do not check if a smaller reporting company)
Smaller reporting company þ




Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No R




Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.




Common Stock Outstanding as of February 11, 2011: 10,739,309 shares


1





AML Communications, Inc.


Index to Form 10-Q December 31, 2010


Part I
Financial Information
3Item 1.
Financial Statements (Unaudited)
3Unaudited Consolidated Balance Sheet as of December 31, 2010 and Consolidated Balance Sheet as of March 31, 2010
3Unaudited Consolidated Statements of Income for the three and nine month periods ended December 31, 2010 and December 31, 2009
4Unaudited Consolidated Statements of Cash Flows for the nine month periods ended December 31, 2010 and December 31, 2009
5Notes to Unaudited Consolidated Financial Statements
6Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
19Item 3.
Quantitative and Qualitative Disclosures About Market Risk
26Item 4.
Controls and Procedures
26Part II
Other Information
27Item 1.
Legal Proceedings
27Item 1A.
Risk Factors
27Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
27Item 3.
Defaults Upon Senior Securities
27Item 5.
Other Information
27Item 6.
Exhibits
27SIGNATURES
28




2




PART I - FINANCIAL INFORMATION





Item 1.
Financial Statements


AML COMMUNICATIONS, INC. & SUBSIDIARY


CONSOLIDATED BALANCE SHEETS


(UNAUDITED)





As of December 31, 2010


As of March 31, 2010ASSETSCurrent Assets:Cash and cash equivalents

$
4,721,000


$
3,327,000Accounts receivable, net


3,103,000



3,148,000Inventories, net


3,566,000



3,498,000Note receivable


-



4,000Prepaid expenses


331,000



218,000Deferred tax asset - current


755,000



1,277,000Total current assets


12,476,000



11,472,000Property and equipment, at cost


7,809,000



7,417,000Less: Accumulated depreciation


(5,956,000
)


(5,534,000
)Property and equipment, net


1,853,000



1,883,000Deferred tax asset – Non current


2,931,000



2,931,000Intangible Assets:Technologies, net


1,437,000



1,583,000Patents, net


34,000



51,000Customer relationship, net


26,000



32,000Trademarks and brand names


200,000



202,000Total intangible assets


1,697,000



1,868,000Deposits


37,000



42,000Total Assets

$
18,994,000


$
18,196,000LIABILITIES AND STOCKHOLDERS’ EQUITYCurrent Liabilities:Line of credit

$
103,000


$
132,000Accounts payable


825,000



832,000Current portion of notes payable and capital lease obligation


92,000



110,000Accrued expenses:Accrued payroll and payroll related expenses


811,000



993,000Other accrued liabilities


325,000



273,000Total current liabilities


2,156,000



2,340,000Long term notes payable


570,000



581,000Capital lease obligations, net of current portion


45,000



97,000Line of credit, net of current portion


-



29,000Commitments and contingenciesStockholders’ Equity:Common stock, $0.01 par value: 15,000,000 shares authorized; 10,805,865and 10,680,915 shares issued and outstanding at December 31, 2010 and March 31, 2010, respectively. 66,556 shares held in treasury as of December 31, 2010


108,000



107,000Capital in excess of par value


14,476,000



14,203,000Retained earnings


1,703,000



866,000Treasury stock – 66,556 shares of treasury stock held


(64,000
)


(27,000
)Total stockholders equity


16,223,000



15,149,000Total liabilities and stockholders’ equity

$
18,994,000


$
18,196,000





The accompanying notes are an integral part of these unaudited consolidated financial statements.


3


AML COMMUNICATIONS, INC. & SUBSIDIARY


CONSOLIDATED STATEMENTS OF INCOME


(UNAUDITED)





Three Month Periods Ended


Nine Month Periods EndedDecember 31,


December 31,


December 31,


December 31,2010


2009


2010


2009Net sales

$
4,056,000


$
4,265,000


$
11,579,000


$
12,073,000Cost of goods sold


2,229,000



2,158,000



6,190,000



6,333,000Gross profit


1,827,000



2,107,000



5,389,000



5,740,000Operating expenses:Selling, general & administrative


808,000



867,000



2,424,000



2,414,000Research and development


578,000



515,000



1,652,000



1,617,000Total operating expenses


1,386,000



1,382,000



4,076,000



4,031,000Income from operations


441,000



725,000



1,313,000



1,709,000Other income (expense)Gain on sale of property & equipment


-



-



-



20,000Gain on settlement of debt


93,000



-



93,000



-Interest & other expense


(14,000
)


(20,000
)


(47,000
)


(60,000
)Total other income (expense)


79,000



(20,000
)


46,000



(40,000
)Income before provision for income taxes


520,000



705,000



1,359,000



1,669,000Provision for income taxes


187,000



282,000



522,000



667,000Net income

$
333,000


$
423,000


$
837,000


$
1,002,000Basic earnings per common share

$
0.03


$
0.04


$
0.08


$
0.09Basic weighted average number of shares of common stock outstanding


10,806,000



10,628,000



10,757,000



10,628,000Diluted earnings per common share

$
0.03


$
0.04


$
0.07


$
0.09Diluted weighted average number of shares of common stock outstanding


11,385,000



11,149,000



11,318,000



10,738,000





The accompanying notes are an integral part of these unaudited consolidated financial statements.


4


AML COMMUNICATIONS, INC. & SUBSIDIARY


CONSOLIDATED STATEMENTS OF CASH FLOWS


(UNAUDITED)





Nine Month Periods EndedDecember 31, 2010


December 31, 2009Cash Flows from Operating Activities:Net income

$
837,000


$
1,002,000Adjustments to reconcile net income to net cash provided by operating activities:Depreciation


421,000



478,000Provision for bad debts


(5,000
)


1,000Inventory reserves


53,000



25,000Stock-based compensation


117,000



117,000Warrants expense


37,000



-Amortization


171,000



171,000Gain on settlement of debt


(93,000
)


-Gain on sale of property & equipment


-



(20,000
)Changes in current assets and liabilities:Decrease (increase) in:Accounts receivable


54,000



(586,000
)Inventories


(121,000
)


(95,000
)Other assets


(108,000
)


(89,000
)Deferred tax asset


522,000



667,000Increase (decrease) in:Accounts payable


86,000



99,000Accrued expenses


(131,000
)


31,000Net cash provided by operating activities


1,840,000



1,801,000Cash Flows from Investing Activities:Purchases of property and equipment


(392,000
)


(130,000
)Cash Flows from Financing Activities:Acquisition of treasury stock


(37,000
)


(27,000
)Proceeds from exercise of stock options


120,000



12,000Payments on line of credit


(57,000
)


(252,000
)Payments on notes payable


(27,000
)


(6,000
)Principle payments on capital lease obligations


(53,000
)


(34,000
)Net cash used in financing activities


(54,000
)


(307,000
)Net increase in Cash and Cash Equivalents


1,394,000



1,364,000Cash and Cash Equivalents, beginning of period


3,327,000



1,581,000Cash and Cash Equivalents, end of period

$
4,721,000


$
2,945,000Supplemental disclosure of cash flow information:Cash paid during the period for:Interest

$
47,000


$
63,000Income Taxes

$
65,000


$
105,000Supplemental disclosure of non-cash flow investing and financing activity:

Debt incurred to acquire property and equipment


-


$
219,000




The accompanying notes are an integral part of these unaudited consolidated financial statements.





5





AML COMMUNICATIONS, INC.


NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS


December 31, 2010





AML Communications, Inc. is a producer and marketer of specialized amplifiers and integrated assemblies for the defense industry.  The Company currently conducts its operations through two reportable segments: (1) microwave amplifiers and integrated assemblies that are designed, manufactured, and marketed by the Company, and (2) the UltraSatNet, an Intelligent Satellite Utility Communication Solution for the monitoring and control of power grid distribution, that is designed, manufactured, and marketed through its wholly owned subsidiary, Mica-Tech, Inc.





1.             Basis of Presentation





The accompanying financial statements have been prepared in conformity with accounting principles generally accepted in the United States.  However, certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States have been omitted or condensed pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”).  In the opinion of management, all adjustments (consisting of normal recurring adjustments) necessary for a fair presentation have been included.  The results of operations and cash flows for the nine-month period presented are not necessarily indicative of the results of operations for a full year.  These financial statements should be read in conjunction with the Company’s audited financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended March 31, 2010.





Principles of Consolidation





The accompanying consolidated financial statements include the accounts of AML Communications, Inc. (“AML”), including its Santa Clara operation, and its wholly owned subsidiary, Mica-Tech. Inc. (“Mica-Tech”), (collectively, the “Company”, “we” or “us”).  All significant inter-company accounts and transactions have been eliminated in consolidation.





2.             Significant Accounting Policies





Our discussion and analysis of our financial conditions and results of operations are based upon our financial statements, which have been prepared in accordance with generally accepted accounting principles in the United States. The preparation of financial statements requires management to make estimates and disclosures on the date of the financial statements.  On an on-going basis, we evaluate our estimates, including, but not limited to, those related to revenue recognition.  We use authoritative pronouncements, historical experience, and other assumptions as the basis for making judgments.  Actual results could differ from those estimates.  We believe that the following significant accounting policies affect our more significant judgments and estimates in the preparation of our financial statements.





Revenue recognition.  We generate our revenue through the sale of products.  Our policy is to recognize revenue when the applicable revenue recognition criteria have been met, which generally include the following:





●
Persuasive evidence of an arrangement exists;


●
Delivery has occurred or services have been rendered;


●
Price is fixed or determinable; and


●
Collectibility is reasonably assured.





Revenue from the sale of products is generally recognized after both the goods are shipped to the customer and acceptance has been received, if required.  Our products are custom made for our customers, who primarily consist of original engineer manufacturers (OEMs), and we do not accept returns.  Our products are shipped complete and ready to be incorporated into higher level assemblies by our customers.  The terms of the customer arrangements generally pass title and risk of ownership to the customer at the time of shipment.




6





Recording revenue from the sale of products involves the use of estimates and management judgment.  We must make a determination at the time of sale whether the customer has the ability to make payments in accordance with arrangements.  While we do utilize past payment history, and, to the extent available for new customers, public credit information in making our assessment, the determination of whether collectibility is reasonably assured is ultimately a judgment decision that must be made by management.





Allowance for Doubtful Accounts.  We maintain an allowance for doubtful accounts receivable based on customer-specific allowances, as well as a general allowance.  Specific allowances are maintained for customers that are determined to have a high degree of collectibility risk based on such factors, among others, as: (i) the aging of the accounts receivable balance; (ii) the customer’s past payment experience; and (iii) a deterioration in the customer’s financial condition, evidenced by weak financial condition and/or continued poor operating results, reduced credit ratings, and/or a bankruptcy filing.  In addition to the specific allowance, we maintain a general allowance for all our accounts receivables which are not covered by a specific allowance.  The general allowance is established based on such factors, among others, as: (i) the total balance of the outstanding accounts receivable, including considerations of the aging categories of those accounts receivable; (ii) past history of uncollectible accounts receivable write-offs; and (iii) the overall creditworthiness of the customer base.  A considerable amount of judgment is required in assessing the realizability of accounts receivables.  Should any of the factors considered in determining the adequacy of the overall allowance change, an adjustment to the provision for doubtful accounts receivable may be necessary.




Inventories.  Inventories are stated at the lower of cost or market, cost being determined on the first-in, first-out method.  Inventories are written down if the estimated net realizable value is less than the recorded value.  We review the carrying cost of our inventories by product each quarter to determine the adequacy of our reserves for obsolescence.  In accounting for inventories, we must make estimates regarding the estimated net realizable value of our inventory.  This estimate is based, in part, on our forecasts of future sales and age of the inventory.





Property and Equipment.We capitalize expenditures that materially increase asset lives and charge ordinary repairs and maintenance to operations as incurred. When assets are sold or otherwise disposed of, the cost and related depreciation or amortization is removed from the accounts and any resulting gain or loss is included in other income (expense) in the accompanying statements of operations.





Intangible Assets.  We account for our intangible assets under the applicable guidelines of Financial Accounting Standards Board Accounting Standards Codification (FASB ASC) 350, “Intangibles – Goodwill and Other” (formerly SFAS 142 “Goodwill and other intangible assets”) and FASB ASC 360, “Property, Plant, and Equipment” (formerly SFAS 144 “accounting for the impairment or disposal of long lived assets”). Where intangible assets have finite lives, they are amortized over their useful life unless factors exist to indicate that the asset has been impaired. We evaluate if the assets are impaired annually or on an interim basis if an event occurs or circumstances change to suggest that the assets value has diminished. Under FASB ASC 360, when deemed necessary, the Company completes the evaluation of the recoverability of its long-lived assets by comparing the carrying amount of the assets against the estimated undiscounted future cash flows associated with them. If such evaluations indicate that the future undiscounted cash flows of long-lived assets are not sufficient to recover the carrying value of such assets, the assets are adjusted to their estimated fair values. Under FASB ASC 360 intangible assets with indefinite useful lives are required to be tested annually for impairment or whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If the assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount exceeds the fair value of the assets. During the nine months ended December 31, 2010, the Company recognized no impairment.


Existing Technology.The main technology of our Santa Clara operation is based on a patent issued in 1990.  It is a substrate deposition technology that is mature and with no replacement technology forecasted.





Recent Accounting Pronouncements





In June 2009, the FASB issued ASC 860 (previously SFAS No. 166, “Accounting for Transfers of Financial Assets”), which requires additional information regarding transfers of financial assets, including securitization transactions, and where companies have continuing exposure to the risks related to transferred financial assets. SFAS 166 eliminates the concept of a “qualifying special-purpose entity,” changes the requirements for derecognizing financial assets, and requires additional disclosures. SFAS 166 is effective for fiscal years beginning after November 15, 2009. There was no material impact upon the adoption of this standard on the Company’s consolidated financial statements.




7





In June 2009, the FASB issued ASC 810 (previously SFAS No. 167) for determining whether to consolidate a variable interest entity. These amended standards eliminate a mandatory quantitative approach to determine whether a variable interest gives the entity a controlling financial interest in a variable interest entity in favor of a qualitatively focused analysis, and require an ongoing reassessment of whether an entity is the primary beneficiary. This Statement is effective for reporting period that begin after November 15, 2009. There was no material impact upon the adoption of this standard on the Company’s consolidated financial statements.





In February 2010, the FASB amended guidance related to disclosure of subsequent events, which was effective upon issuance. These amendments prescribe that entities that are SEC filers are required to evaluate subsequent events through the date that the financial statements are issued. The adoption of these amendments did not have a material impact on the Company’s consolidated financial statements.




3.             Reclassifications





Certain comparative amounts have been reclassified to conform to the current period’s presentation.





4.             Earnings Per Share





Basic earnings per share is computed by dividing net income or loss by the weighted average number of shares outstanding for the year. “Diluted” earnings per share is computed by dividing net income or loss by the total of the weighted average number of shares outstanding, and the dilutive effect of outstanding stock options and warrants (applying the treasury stock method).





The Company had approximately 2,073,000 of granted stock options and warrants that were exercisable as ofDecember 31, 2010 and approximately 1,902,000 of granted stock options exercisable at December 31 2009.




The following is a reconciliation of the numerators and denominators of the basic and diluted earnings per share computations:





Three months ended December 31, 2010 (unaudited)

Net Income


Shares


Per ShareBasic earnings per shares:Net income available to common stockholders

$
333,000



10,806,000


$
0.03Effect of dilutive securities:Stock options and warrants






579,000Diluted earnings per share:

$
333,000



11,385,000


$
0.03Three months ended December 31, 2009 (unaudited)

Net Income


Shares


Per ShareBasic earnings per shares:Net income available to common stockholders

$
423,000



10,628,000


$
0.04Effect of dilutive securities:Stock options






521,000Diluted earnings per share:

$
423,000



11,149,000


$
0.04





Nine months ended December 31, 2010 (unaudited)

Net Income


Shares


Per ShareBasic earnings per shares:Net income available to common stockholders

$
837,000



10,757,000


$
0.08Effect of dilutive securities:Stock options and warrants






561,000Diluted earnings per share:

$
837,000



11,318,000


$
0.07Nine months ended December 31, 2009 (unaudited)

Net Income


Shares


Per ShareBasic earnings per shares:Net income available to common stockholders

$
1,002,000



10,628,000


$
0.09Effect of dilutive securities:Stock options






110,000Diluted earnings per share:

$
1,002,000



10,783,000


$
0.09





8





5.             Accounts Receivable





Accounts receivable as of December 31, 2010 and March 31, 2010 are as follows:




December 31, 2010


March 31, 2010Accounts receivable

$
3,195,000


$
3,246,000Allowance for bad debts


(92,000
)


(98,000
)$
3,103,000


$
3,148,000




6.             Inventories





Inventories include costs of material, labor and manufacturing overhead and are stated at the lower of cost (first-in, first-out) or market and consist of the following:





December 31, 2010


March 31, 2010Raw materials, net

$
2,845,000


$
2,576,000Work in process


483,000



678,000Finished goods


238,000



244,000$
3,566,000


$
3,498,000





7.             Property & equipment




Property and equipment are depreciated on the straight-line basis over the following estimated useful lives:





Machinery and equipment
3 to 5 yearsFurniture and fixtures
5 yearsLeasehold improvements
Shorter of life of lease or life of improvementBuilding
30 years




Depreciation expense was $421,000 and $478,000 for the nine months ended December 31, 2010 and December 31, 2009, respectively.





Property and equipment as of December 31, 2010 and March 31, 2010 consist of the following:





December 31, 2010


March 31, 2010Building

$
800,000


$
800,000Machinery and equipment


5,844,000



5,467,000Furniture and fixtures


219,000



209,000Leasehold improvements


701,000



696,000Leased assets


245,000



245,000Accumulated depreciation


(5,956,000
)


(5,534,000
)$
1,853,000


$
1,883,000





8.             Intangible Assets





At December 31, 2010, intangibles consisted of the following:




9





Intangibles (unaudited)

Gross Carrying Amount


Accumulated Amortization


NetAmortized intangibles:Patents

$
189,000


$
(155,000
)

$
34,000Technologies


2,504,000



(1,067,000
)


1,437,000Customer Lists


339,000



(339,000
)


—Customer Relationship


50,000



(24,000
)


26,000Trademarks and Brand Names


24,000



(5,000
)


19,000Unamortized intangibles:Trademarks


181,000



—



181,000$
3,287,000


$
(1,590,000
)

$
1,697,000




At March 31, 2010, intangibles consisted of the following:





Intangibles

Gross Carrying Amount


Accumulated Amortization


NetAmortized intangibles:Patents

$
189,000


$
(138,000
)

$
51,000Technologies


2,504,000



(921,000
)


1,583,000Customer Lists


339,000



(339,000
)


—Customer Relationship


50,000



(18,000
)


32,000Trademarks and Brand Names


24,000



(3,000
)


21,000Unamortized intangibles:Trademarks


181,000



—



181,000$
3,287,000


$
(1,419,000
)

$
1,868,000




Due to the acquisition of MPI in the quarter ended June 30, 2004 and the acquisition of Mica-Tech on April 11, 2007 (51%) and February 19, 2008 (100%), we recorded the intangible assets above.




For the intangible assets we acquired from the MPI acquisition, we assigned an 8-year life to Patents, a 12-year life to Existing Technology, and a 3-year life to Customer Lists. All items are subject to amortization. The value assigned to Trademarks, which have an indefinite life, are not amortized and is subject to an annual impairment testing.




For the intangible assets we acquired from the Mica-Tech acquisition, we have assigned a 15-year life to Existing Technology, a 6-year life to Customer Relationship, and a 15-year life to Trademarks and Brand Names. All items stated are subject to amortization. Backlog was amortized on fulfillment of orders.




Amortization expense from continuing operation for the nine months ended December 31, 2010 was $171,000.  We expect amortization expense for the next five years to be as follows:





Twelve month period ending December 31:2011

$
228,0002012

$
214,0002013

$
205,0002014

$
197,0002015

$
196,000





9.             Debt and lease commitments





Line of credit





The Company had a line of credit arrangement with Bridge Bank; however this financing agreement terminated on August 15, 2010. As of December 31, 2010, we had an outstanding balance of $0 under both the accounts receivable agreement and the equipment financing agreement. Interest expense for the nine months ended December 31, 2010 and December 31 was $3,000 and $12,000, respectively for the Bridge Bank line of credit we previously utilized.




10





On September 10, 2010, we signed an Accounts Receivable Loan Agreement with City National Bank, with a credit facility of $1.5 million. Of this $1.5 million, $1.0 million may be used for cash advances against accounts receivables and $0.5 million may be used for equipment advances. Our ability to borrow under this agreement varies based upon eligible accounts receivable and eligible equipment purchases. We are obligated to pay the bank a finance charge at a rate per year equal to the prime rate, which in no event shall be less than 3.50%, with respect to cash advances and equipment advances.  We must maintain certain financial requirements, including a minimum Asset Coverage Ratio of 1.50 to 1.00. We are also required to stay within 80% of our planned quarterly revenue. As of December 31, 2010, we had an outstanding balance of $66,000 under the equipment financing agreement with City National Bank. Interest expense for the nine months ended December 31, 2010 was $456 for the City National Bank line of credit.




As of December 31, 2010, Mica-Tech had a line of credit with Santa Barbara Bank and Trust and Wells Fargo. At December 31, 2010, the outstanding balance was $33,000 for the Santa Barbara Bank and Trust line and $4,000 for the Wells Fargo line. Our remaining borrowing capacity was $0 under the Santa Barbara Bank and Trust line and $0 under the Wells Fargo line as of December 31, 2010. Interest expense for the nine months ended December 31, 2010 and December 31, 2009 was $3,000 and $4,000, respectively for the above line of credit.





Notes Payable





On February 3, 2006, the Company purchased the building that houses its Santa Clara operation, which is located at 3350 Scott Blvd. 25 Santa Clara, California, for a purchase price of $800,000. The Company made a down payment of $160,000. The building is financed by a bank promissory note in the amount of $640,000 with 6.760% interest payable in 83 regular payments of $4,426, each which includes principal and interest and one irregular last payment of $556,594. The Company’s final payment is due February 10, 2013 and will be for all principal and interest not yet paid. The note payable is secured by the deed of trust on the building. As of December 31, 2010, the outstanding note amounted to $584,000, of which $570,000 is long-term and $14,000 is current. Interest expense for the nine months ended December 31, 2010 and December 31, 2009 was $30,000 and $31,000, respectively for the above note payable.




On December 20, 2006, Mica-Tech raised $200,000 from an outside investor in the form of short term note payable. The funds were used for working capital. Mica-Tech agreed to repay the loan in four consecutive monthly payments of $50,000 plus interest accrued at 7% per annum. The short term note payable is unsecured. In April 2007, Mica-Tech amended the terms of the note and revised the interest rate from 7% to 10% and the payment schedule from $50,000 a month to $25,000 a month until paid in full. Mica-Tech defaulted on its monthly payments from November 2007 to December 2009 due to a cash deficiency. The default was waived by the lender at no cost. In January 2010, Mica-Tech agreed to pay $25,000 toward the total amount owed and thereafter 12 equal monthly payments in the amount of $1,994. The amount remaining on the note at December 31, 2010 was $0 as we paid off the balance in December 2010. Interest expense for the nine months ended December 31, 2010 and December 31, 2009 was $725 and $2,800, respectively for the above note payable.




Mica-Tech was advanced working capital from its former president and a major shareholder, over a period of time which totaled $685,000 as of April 10, 2007.  The remaining amount due on this advance was $20,000 as of December 31, 2010, and is included in accounts payable on the balance sheet. No interest expense was incurred on the amount due to Mr. Ow.




Capital Lease Obligations




In June 2009, the Company entered into a non-cancelable capital lease agreement to acquire test equipment valued in the aggregate at approximately $245,000. The lease began in June 2009 and requires thirty-six equal monthly payments of $6,445, plus applicable sales tax.


Future minimum lease payments under the lease for the periodended December 31, 2010

$
114,000Less: approximate amount representing interest


(8,000
)Present value of minimum lease payments


106,000Less: current portion


(70,000
)Non current portion

$
36,000





11





The future aggregate payments arising from these loans (line of credit, note payable and capital lease obligation) are as follows:





AmountDuring the twelve month period ending December 31,2011

$
216,0002012


51,0002013


555,000$
822,000





Operating Lease Obligations




The lease for AML’s office space and manufacturing facility expires in April 2015. Total rent expense under these operating leases was approximately $157,000 and $155,000 during the nine months ended December 31, 2010 and December 31, 2009, respectively.




Total minimum lease payments under the above leases are as follows:




Operating LeasesTwelve month period ending December 31,2011

$
217,0002012


223,0002013


227,0002014


232,0002015


78,000$
977,000




10.           Equity Transactions




Stock Options





The Company recognized $117,000 or $0.01 per basic and diluted earnings per share in share-based compensation expense for the nine months periods ended December 31, 2010 and December 31, 2009. The fair value of our stock options was estimated using the Black-Scholes option pricing model.




In November 2005, the board established the 2005 Equity Incentive Plan ("2005 Plan") with 150,000 shares initially approved.  The number of shares available for grant and issuance increases on the first day of January of each year so that the total of all common stock available for grant and issuance under the 2005 Plan is the maximum amount allowable under Regulation 260.140.45 of Title 10 of the California Code of Regulations. The total of all Common Stock available for grant and issuance under the 2005 Plan was 1,688,195 shares as of December 31, 2010 and 2,087,900 as of December 31, 2009. Incentive stock option awards may be granted under the 2005 Plan only to employees (including officers and directors who are also employees) of the Company or of a parent or subsidiary of the Company.  All other awards (including nonqualified stock options, restricted stock or stock awards) under the 2005 Plan may be granted to employees, officers, directors, consultants, independent contractors and advisors of the Company or any parent or subsidiary of the Company, provided such consultants, contractors and advisors render bona fide services not in connection with the offer and sale of securities in a capital-raising transaction.





Pursuant to the 2005 Plan, during the nine months ended December 31, 2010, the Company granted 440,500 stock options to the Company’s employees and two external directors of AML, as follows:





On September 9, 2010, the Company granted a total of 175,500 stock options to nineteen employees and two external directors as follows: 85,000 stock options to three AML’s officers as employee compensation, 60,500 stock options to sixteen employees as employee compensation and 30,000 non qualified stock options to two external directors.





12





Of the first 85,000 stock options granted, 35,000 stock options have a term of five (5) years and 50,000 stock options have a term of ten (10) years, measured from the grant date and shall accordingly expire at the close of business on the expiration date, unless sooner terminated in accordance with the 2005 Plan.  All of the 85,000 stock options are vested at the rate of thirty three (33) percent per year over a three year period.





The second 60,500 stock options have a term of ten (10) years measured from the grant date and shall accordingly expire at the close of business on the expiration date, unless sooner terminated in accordance with the 2005 Plan.  These options are vested at the rate of twenty (20) percent per year over a five year period.





The last 30,000 non qualified stock options granted have a term of ten (10) years measured from the grant date and shall accordingly expire at the close of business on the expiration date, unless sooner terminated in accordance with the 2005 Plan.  The options are vested at the rate of twenty-five (25) percent per year over a four year period.





The option exercise price is $1.25 for all of the 175,500 stock options granted on September 9, 2010, which was the fair market value of our common stock at the time these options were granted.





On November 2, 2010, the Company granted a total of 5,000 stock options to a new employee as employee compensation. The options have a term of ten (10) years measured from the grant date and shall accordingly expire at the close of business on the expiration date, unless sooner terminated in accordance with the 2005 Plan.  These options are vested at the rate of twenty (20) percent per year over a five year period. The option exercise price is $1.36, which was the fair market value of our common stock at the time these options were granted.





On December 13, 2010, the Company granted a total of 260,000 stock options to AML’s officers as employee compensation.





Of the 260,000 stock options granted, 115,000 stock options have a term of five (5) years and 110,000 stock options have a term of ten (10) years, measured from the grant date and shall accordingly expire at the close of business on the expiration date, unless sooner terminated in accordance with the 2005 Plan.  All of the 225,000 stock options are vested at the rate of thirty three (33) percent per year over a three year period.





The remaining 35,000 stock options have a term of ten (10) years measured from the grant date and shall accordingly expire at the close of business on the expiration date, unless sooner terminated in accordance with the 2005 Plan.  These options are vested at the rate of twenty (20) percent per year over a five year period.





The option exercise price is $1.33 for all of the 260,000 stock options granted on December 13, 2010, which was the fair market value of our common stock at the time these options were granted.





During the nine months ended December 31, 2009, the Company granted 168,500 stock options to the Company’s employees and two external directors of AML, as follows:





On September 10, 2009, the Company granted a total of 168,500 stock options to nineteen employees and two external directors as follows: 85,000 stock options to three AML’s officers as employee compensation, 53,500 stock options to sixteen employees as employee compensation and 30,000 non qualified stock options to two external directors.





Of the first 85,000 stock options granted, 35,000 stock options have a term of five (5) years and 50,000 stock options have a term of ten (10) years, measured from the grant date and shall accordingly expire at the close of business on the expiration date, unless sooner terminated in accordance with the 2005 Plan.  All of the 85,000 stock options are vested at the rate of thirty three (33) percent per year over a three year period.





The second 53,500 stock options have a term of ten (10) years measured from the grant date and shall accordingly expire at the close of business on the expiration date, unless sooner terminated in accordance with the 2005 Plan.  These options are vested at the rate of twenty (20) percent per year over a five year period.





13





The last 30,000 non qualified stock options granted have a term of ten (10) years measured from the grant date and shall accordingly expire at the close of business on the expiration date, unless sooner terminated in accordance with the 2005 Plan.  The options are vested at the rate of twenty-five (25) percent per year over a four year period.





The option exercise price is $0.90 for all of the 168,500 stock options granted on September 10, 2009, which was the fair market value of our common stock at the time these options were granted.





The following is a summary of the stock option activity:





Options outstanding


Weighted Average Exercise Price


Aggregate Intrinsic ValueOutstanding, March 31, 2010


2,517,950


$
0.97


$
731,000Granted


440,500



1.30Forfeited


(44,750
)


1.72Exercised


(124,950
)


0.96Outstanding, December 31, 2010


2,788,750


$
1.01


$
951,000





The following is a summary of the status of options outstanding at December 31, 2010:





Range of

Exercise Prices

Total

Options

Outstanding


Weighted

Average

Remaining Life

(Years)


Total

Weighted

Average

Exercise Price


Options

Exercisable


Weighted

Average

Exercise Price$0.11 - $0.50


71,000



2.11


$
0.15



71,000


$
0.15$0.51 - $1.00


1,691,750



4.58


$
0.91



1,460,883


$
0.91$1.01 - $2.00


1,026,000



7.14


$
1.23



440,768


$
1.19$0.11 - $2.00


2,788,750



5.92


$
1.01



1,972,651


$
0.95





For options granted during the nine months ended December 31, 2010, the weighted-average fair value of such options was $0.74.





The assumptions used in calculating the fair value of options granted using the Black-Scholes option- pricing model are as follows:





Stock Options Granted on September 9, 2010:





35,000 stock options with a term of 5 years and three year vesting periods:





Risk-free interest rate
1.57%Expected life of the options
3.50 yearsExpected volatility
73.12%Expected dividend yield
0





50,000 stock options with a term of 10 years and three year vesting periods:





Risk-free interest rate
2.77%Expected life of the options
6.00 yearsExpected volatility
61.05%Expected dividend yield
0





60,500 stock options with a term of 10 years and five year vesting periods:




14





Risk-free interest rate
2.77%Expected life of the options
6.50 yearsExpected volatility
59.21%Expected dividend yield
0





30,000 stock options with a term of 10 years and four year vesting periods:





Risk-free interest rate
2.77%Expected life of the options
6.25 yearsExpected volatility
60.17%Expected dividend yield
0





Stock Options Granted on November 2, 2010:





5,000 stock options with a term of 10 years and five year vesting periods:





Risk-free interest rate
2.63%Expected life of the options
6.50 yearsExpected volatility
59.93%Expected dividend yield
0





Stock Options Granted on December 13, 2010:





115,000 stock options with a term of 5 years and three year vesting periods:





Risk-free interest rate
1.91%Expected life of the options
3.50 yearsExpected volatility
75.68%Expected dividend yield
0





110,000 stock options with a term of 10 years and three year vesting periods:





Risk-free interest rate
3.29%Expected life of the options
6.00 yearsExpected volatility
61.83%Expected dividend yield
0





35,000 stock options with a term of 10 years and five year vesting periods:





Risk-free interest rate
3.29%Expected life of the options
6.50 yearsExpected volatility
60.37%Expected dividend yield
0




Details of the Company's non-vested options are as follows:





Non-Vested Options


Weighted Average Exercise Price

Weighted Average Vesting PeriodNon-vested - March 31, 2010


580,334


0.98

2.06 YearsGranted


440,500


1.30Forfeited


(23,000
)

1.02Vested


(181,734
)

0.97Exercised


-



-Non-vested – December 31, 2010


816,099



1.15

2.02 Years





15





The total compensation cost relating to non-vested stock options that is not yet recognized is $151,000, which is expected to be recognized over a period of 2.12 years.





Warrants





In connection with the Financial Advisory Agreement (the “Agreement”) dated August 1, 2010 by and among the C. K. Cooper & Company (the “Holder”), the Company granted a warrant for the purchase of up to 50,000 shares of the Company’s common stock to the Holder on August 1, 2010 and another warrant for the purchase of up to 50,000 shares of the Company’s common stock on November 1, 2010. Under the terms of the Agreement, the Company and the Holder agreed to issue and award in advance for every three (3) months the Holder is engaged by the Company during the Term of the Agreement, not to exceed a maximum of 200,000, as non-refundable incentive compensation for the services performed by the Holder.  The warrant has a term of three (3) years from the grant date and is fully vested upon receipt. We recorded $37,000 warrants expense during the nine months ended December 31, 2010.





Following is a summary of the warrant activity:





Warrants outstanding


Weighted Average Exercise Price


Aggregate Intrinsic ValueOutstanding, March 31, 2010


-



-


$
-Granted


100,000



1.46Forfeited


-Exercised


-Outstanding, December 31, 2010


100,000



1.46


$
-





Following is a summary of the status of warrants outstanding at December 31, 2010:





Range of Exercise Prices

Total

Warrants

Outstanding
Weighted

Average

Remaining

Life

(Years)
Total

Weighted

Average

Exercise

Price
Warrants

Exercisable
Weighted

Average

Exercise Price$1.01 - $2.00
100,000
2.70
$1.46
100,000
$1.46




11.           Segments




The Company has two reportable segments consisting of (1) AML and (2) Mica-Tech. Our AML segment includes the Camarillo operations which manufactures and sells low noise, high power amplifiers and integrated assemblies with frequencies that range from 10MHz to 40GHz and the Santa Clara operations which manufactures and sells solid state microwave amplifiers operating in the frequency range from 1 to 40 GHz with output power from 0.5W to 300W. Our Mica-Tech segment designs, manufactures and markets an intelligent satellite communication system that provides a highly reliable and secure communications link between remote sites and control centers, utilizing Supervisory Control And Data Acquisition (SCADA) technology. The Company evaluates performance based on sales, gross profit margins, and operating profit before income taxes.




The following is information for the Company’s two reportable segments for the nine month periods ended December 31, 2010 and December 31, 2009.




16




Nine Month Periods Ended(In thousands)

December 31, 2010


December 31, 2009Revenue from unrelated entitiesAML

$
10,966


$
11,699Mica-Tech


613



374$
11,579


$
12,073Income from operationsAML

$
1,150


$
1,690Mica-Tech


163



19$
1,313


$
1,709Income tax expenseAML

$
459


$
662Mica-Tech


63



5$
522


$
667Net incomeAML

$
682


$
995Mica-Tech


155



7$
837


$
1,002Provision for depreciation and amortizationAML

$
540


$
583Mica-Tech


52



66$
592


$
649Capital expendituresAML

$
392


$
130Mica-Tech


-



-$
392


$
130
  December 31, 2010


March 31, 2010Total AssetsAML

$
17,607


$
16,913Mica-Tech


1,387



1,283$
18,994


$
18,196





12.           Major customers and vendors





Three customers provided an aggregate 40.6% and 33.1% of the Company’s total net revenue for the nine months ended December 31, 2010 and 2009, respectively.  Total accounts receivable due from these customers was approximately $975,000 and $1,300,000 as of December 31, 2010 and 2009, respectively.





The Company extends credit to its customers based upon its assessment of their credit worthiness and generally does not require collateral.  Credit losses have not been significant.





Three vendors accounted for an aggregate 22.8% and 23.2% of the Company’s total net purchases for the nine months ended December 31, 2010 and 2009, respectively.  Total accounts payable due to these vendors was $83,000 and $79,000 as of December 31, 2010 and 2009, respectively.





13.           Repurchase of the Company Shares





On May 13, 2009, the Company announced that its Board of Directors authorized the repurchase of up to one million shares of the Company’s common stock.  Purchases are being made in the open market as determined by AML management and in accordance with SEC requirements.  As of the close of business on December 31, 2010, the Company repurchased 66,556 shares of common stock at the weighted average price of $0.97 per share.




17




14.     Legal Proceedings





The Company may be subject, from time to time, to various legal proceedings relating to claims arising out of its operations in the ordinary course of its business. Other than the proceeding described below, the Company currently is not party to any legal proceedings, the adverse outcome of which, individually or in the aggregate, management believes would have a material adverse effect on the business, financial condition or results of operations of the Company.




The Company is party to a vendor dispute filed on February 25, 2010, alleging causes of action for breach of contract, among others. The vendor is claiming damages, including consequential damages, punitive damages, possession of personal property, and other items. Management contends that the claims against the Company are without merit. On May 3, 2010, the Company filed their Answer to the First Amended Complaint and in addition, filed a Cross-Complaint alleging causes of action for breach of contract, among others. The vendor filed a Demurrer and Motion to Strike, challenging the sufficiency of the claims in the Cross-Complaint.  On August 3, 2010, the Court overruled, in part, and sustained, in part, the Demurrer, finding that the breach of contract cause of action was sufficiently pled and granting the Company leave to amend certain claims in the Cross-Complaint.





On August 23, 2010, the Company filed its First Amended Cross-Complaint.  In response, the vendor filed a Demurrer and Motion to Strike, which were heard on November 3, 2010.  The Court overruled and sustained, in part, the Demurrer, finding that the breach of contract, fraud and negligent misrepresentation causes of action were sufficiently pled and denied the motion to strike as to the fraud claims.  The Court ordered the vendor to file its Answer to the First Amended Cross-Complaint by November 23, 2010, and a trial date was set for May 23, 2011.  On January 19, 2011, the parties entered into a settlement agreement, with the Company agreeing to pay $140,000 to the vendor in exchange for a dismissal of all claims.  On February 1, 2011, the entire case was dismissed with prejudice.




15.          Subsequent Events
 
 On February 13, 2011, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Anaren, Inc. (“Anaren”), pursuant to which a wholly-owned subsidiary of Anaren will, subject to the satisfaction or waiver of the conditions contained in the Merger Agreement, merge with and into the Company, and the Company will be the successor or surviving corporation of the merger and will become a wholly-owned subsidiary of Anaren. Under the terms of the transaction, which was approved by the companies’ boards of directors, Anaren will pay approximately $29 million in cash for the Company’s common stock on a fully-diluted basis.  At the effective time of the merger, each share of common stock of the Company issued and outstanding immediately prior to the effective time of the merger will be converted into the right to receive $2.15 in cash, and all outstanding options to acquire shares of Company common stock will vest and holders of such options will receive an amount of cash equal to the excess of $2.15 over the exercise price per share of their options.  The completion of the merger is subject to various customary closing conditions, including obtaining the approval of the Company’s stockholders.


18




Item 2.    Management’s Discussion and Analysis of Financial Condition and Results of Operations





Some of the statements made by us in this Quarterly Report on Form 10-Q are forward-looking in nature, including but not limited to, statements relating to our future revenue, product development, demand, acceptance and market share, gross margins, levels of research and development, our management's plans and objectives for our current and future operations, and other statements that are not historical facts.  Forward-looking statements include, but are not limited to, statements that are not historical facts, and statements including forms of the words "intend," "believe," "will," "may," "could," "expect," "anticipate," "plan," "possible," and similar terms. Actual results could differ materially from the results implied by the forward-looking statements due to a variety of factors, many of which are discussed throughout this Quarterly Report and particularly in the section titled “Additional Factors That May Affect Future Results” included in this section. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof.  We undertake no obligation to publicly release any revisions to these forward-looking statements that may reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events.  Factors that could cause actual results to differ materially from those expressed in any forward-looking statement made by us include, but are not limited to:





·  our ability to finance our activities and maintain our financial liquidity;


·  our ability to attract and retain qualified, knowledgeable employees;


·  the impact of general economic conditions on our business;


·  postponements, reductions, or cancellations in orders from new or existing customers;


·  the limited number of potential customers for our products;


·  the variability in gross margins on our products;


·  our ability to design and market new products successfully;


·  our failure to acquire new customers in the future;


·  deterioration of business and economic conditions in our markets;


·  intensely competitive industry conditions with increasing price competition; and


·  the rate of growth in the defense markets.





In this document, the words "we," "our," "ours," and "us" refer to AML Communications, Inc. and our wholly owned subsidiary, Mica-Tech, Inc.





Overview





Our business is comprised of two reportable segments, AML Communications, Inc. (“AML”) and Mica-Tech, Inc (“Mica-Tech”).  AML designs, manufactures, and markets specialized microwave amplifiers and integrated assemblies serving the Defense Market.  AML represented 96.9% of our 2010 net revenue.  Mica-Tech designs, manufactures, and markets an intelligent communication system to provide Supervisory Control and Data Acquisition (SCADA) of the electric power grid. Mica-Tech represented 3.1% of our 2010 net revenue.




AML includes our Camarillo operations, which produce low noise amplifiers and integrated sub assemblies with frequencies that range from 10 MHz to 40 GHz, and our Santa Clara operations, which produce microwave high power amplifiers with frequencies that range from 1 to 40 GHz with output power from 0.5W to 300 W.  In February 2001, we made a strategic decision to focus our resources on the defense markets.  As such, we moved rapidly to utilize our knowledge base in defense microwave related design and manufacturing to offer new products, as well as variations of existing products.  This strategy has driven an increase in revenues for defense related products from $3.7 million in fiscal 2003 to $15.8 million in fiscal 2010.




We consider the AML segment to be our core business since it has a much larger revenue base, and we have and expect to continue to invest in this business and opportunities that offer long term growth.  In line with its revenue and earnings contribution to the Company, we devote most of our management time and other resources to building the growth and profitability of this segment.




AML addresses the defense electronic warfare marketplace with components for UAVs drones; electronic surveillance, targeting and delivery systems; radar and electronic countermeasures. Such unconventional tactics also protect the lives of U.S. and allied service men and women, and this is widely regarded as a long term growth industry.




19




The increase in AML revenue and net income is primarily attributable to our successful track record in Defense Programs by designing and producing specialized micro-electronic components for an increasing range and number of mission-critical battlefield electronic warfare systems. These systems include the U.S. Air Force MALD (aerial decoy) program on which AML is a major supplier.




Catalog sales are a diversified and important sector of our business, and that revenue from this sector in fiscal year 2010 grew as we added to the number of products and increased our market penetration and number of customers in the U.S. and overseas. Catalog sales have proven an excellent source of new Defense Programs customers.




Our strategy for growth in fiscal 2011 includes both horizontal and vertical growth. Regarding horizontal growth, we have entered into a contract with C.K. Cooper to identify acquisitions in our industry. Our vertical planned growth includes capturing an increasing share of the U.S. and overseas defense micro-electronics component markets. We are in various phases of contracted development on a number of potentially large defense programs. Should these component design, development and prototype programs be selected for long-term AML mass production, it would likely have a materially positive impact on our sales and profitability. We also target growing catalog sales to drive custom catalog orders and new defense program contracts. We regularly analyze our manufacturing processes for opportunities to increase capacity or efficiency.




Our Mica-Tech segment designs and manufactures the UltraSatNet, an Intelligent Satellite Utility Communication Solution for the monitoring and control of power grid distribution. The operating software and hardware are designed in-house with support from outside consultants. Since completion of the acquisition of the remaining interest in Mica-Tech in February 2008, we moved this subsidiary into our Camarillo facility and took other steps to improve Mica-Tech’s financial structure while the Company pursues the electric grid utility SCADA market.




Results of Operations




Three Months Ended December 31, 2010 Compared to Three Months Ended December 31, 2009







Net sales.  Net sales for the three months ended December 31, 2010 were approximately $4.1 million, compared to approximately $4.3 million for the three months ended December 31, 2009, representing a decrease of $209,000 or 4.9%. A slight reduction in revenues is mainly due to $560,000 non-recurring delivery of products to an Italian company during the three months ended December 31, 2009.





Gross profit.  Gross profit for the three months ended December 31, 2010 was approximately $1.8 million, or 45.0% of net sales, compared to a gross profit for the three months ended December 31, 2009, of approximately $2.1 million, or 49.4% of net sales. Decrease in gross profit, as a percentage of net sales, is mainly due to increased material cost and increased investment in engineering activities during this period. Products we shipped during this period had material costs higher than our average material cost. Also we invested in increased engineering activity associated with initial production on a new program with yearly expectation of above a $1.0 million production level.





Selling, general, and administrative costs.  Selling, general and administrative costs for the three months ended December 31, 2010 were $808,000, or 19.9% of net sales, compared to $867,000, or 20.3% of net sales, for the three months ended December 31, 2009, representing a decrease of $59,000. Selling, general and administrative costs decreased mainly due to decreased commission expenses associated with decreased revenues. During the three months ended December 31, 2009, we recorded $70,000 of commission expenses connected to the products we shipped to the Italian company.




Research and development costs.  Research and development costs for the three months ended December 31, 2010 were $578,000, or 14.3% of net sales, compared to $515,000, or 12.1% of net sales, for the three months ended December 31, 2009, representing an increase of $63,000. We are committed to continuing our investment in R&D projects to address customer needs for short and long term program orders.




Other net expense.  We recorded a net other income of $79,000 for the three month period ended December 31, 2010. We recognized a gain on settlement of debt in the amount of $93,000 and incurred $14,000 in interest expense associated with notes payable and lines of credit. During the three month period ended December 31, 2009, we incurred $20,000 in interest expenses that were associated with notes payable and lines of credit.




20





Income before income tax.  Income before income tax was $520,000 for the three months ended December 31, 2010, compared to income before income tax of $705,000 for the three months ended December 31, 2009. The decrease in income before income tax, as compared to the same period of prior year, is mainly due to decreased revenues.




Income before income tax in the AML segment was $327,000 for the three months ended December 31, 2010, compared to $704,000 for the three months ended December 31, 2009. This decrease is mainly resulted from decreased sales in this segment.




Income before income tax in the Mica-Tech segment was $193,000 for the three months ended December 31, 2010, compared to income before income tax of $1,000 for the three months ended December 31, 2009.




Provision for income taxes. During the three months ended December 31, 2010, the Company utilized its deferred tax assets reserve to record income tax expenses of $187,000. The Company has no tax liability as of December 31, 2010 due to the deferred tax benefits accounted for in the prior years. The Company utilized its deferred tax assets reserve to record income tax expenses of $282,000 during the three months ended December 31, 2009.




Net income.Net income was $333,000 or $0.03 per share for the three months ended December 31, 2010, compared to net income of $423,000, or $0.04 per share for the three months ended December 31, 2009.




Net income from the AML segment was $209,000 for the three months ended December 31, 2010 and $422,000 for the three months ended December 31, 2009.




Net income from the Mica-Tech segment was $124,000 for the three months ended December 31, 2010, compared to net income of $1,000 for the three months ended December 31, 2009.




Nine Months Ended December 31, 2010 Compared to Nine Months Ended December 31, 2009




Net sales.Net sales for the nine months ended December 31, 2010 were approximately $11.6 million, as compared to net sales of $12.1 million for the nine months ended December 31, 2009, a decrease of $494,000 or 4.1%.  Reduction in revenues is mainly due to $896,000 delivery made to an Italian company during the nine months ended December 31, 2009.




Gross profit.  Gross profit for the nine months ended December 31, 2010 was approximately $5.4 million, or 46.5% of net sales, as compared to a gross profit of $5.7 million, or 47.5% of net sales for the nine months ended December 31, 2009. Gross profit, as a percentage of net sales, decreased due to increased material cost and increased investment in engineering activities during this period. Products we shipped during this period had material costs higher than our average material cost.




Selling, general and administrative costs.Selling, general, and administrative costs were $2.4 million, or 20.9% of net sales, for the nine months ended December 31, 2010, as compared to $2.4 million, or 20.0% of net sales, for the nine months ended December 31, 2009.  Change in Selling, general and administrative costs is insignificant, compared to the same period of the prior year.




Research and development costs.Research and development costs were $1.6 million or 14.3% of net sales, for the nine months ended December 31, 2010, as compared to $1.6 million or 13.4% of net sales, for the nine months ended December 31, 2009.  Change in research and development cost is insignificant. We are committed to continue our investment in R&D projects to address customer needs for short and long term program orders.




Other net income.We recorded a net other income of $46,000 for the nine months ended December 31, 2010 and a net other expense of $40,000 for the nine months ended December 31, 2009. During the nine months ended December 31, 2010, we recognized a gain on settlement of debt in the amount of $93,000 and incurred $47,000 in interest expenses that were associated with notes payable, capital lease and lines of credit. During the nine months ending December 31, 2009, we incurred $60,000 in interest expenses that were associated with notes payable and lines of credit and realized a gain on sale of fixed assets of $20,000.




21





Income before income tax.  Income before income tax was $1.4 million for the nine months ended December 31, 2010, compared to income before income tax of $1.7 million for the nine months ended December 31, 2009. The decrease in income before income tax, as compared to the same period of prior year, is mainly due to reduced revenues during the nine months ended December 31, 2010.




Income before income tax in the AML segment was $1.1 million for the nine months ended December 31, 2010, compared to $1.7 million for the nine months ended December 31, 2009. This decrease is mainly attributable to decreased sales in this segment.




Income before income tax in the Mica-Tech segment was $252,000 for the nine months ended December 31, 2010, compared to income before income tax of $12,000 for the nine months ended December 31, 2009. The increase is due to increased sales of hardware during the nine months ended December 31, 2010.




Provision for income taxes. During the nine months ended December 31, 2010, the Company utilized its deferred tax assets reserve to record income tax expenses of $522,000. The company has no tax liability at the end of the period due to the deferred tax benefits accounted for in the prior years. The company utilized its deferred tax assets reserve to record income tax expenses of $667,000 for the nine months ended December 31, 2009.




Net income.Net income was $837,000, or $0.08 per share, for the nine months ended December 31, 2010, compared to net income of $1,000,000, or $0.09 per share, for the nine months ended December 31, 2009.




Net income from the AML segment was $682,000 for the nine months ended December 31, 2010 and $995,000 for the nine months ended December 31, 2009.




Net income from the Mica-Tech segment was $155,000 for the nine months ended December 31, 2010 and $7,000 for the nine months ended December 31, 2009.




In 2011, we expect total operating expenses to increase as we continue to invest in infrastructure and new product development. We expect operating expenses generally will increase more slowly than increases in revenue.




Liquidity and Capital Resources




Historically, we have financed our operations primarily from internally generated funds and, to a lesser extent, loans from stockholders and capital lease obligations.




The Company had a line of credit arrangement with Bridge Bank; however this financing agreement terminated on August 15, 2010. As of December 31, 2010, we had an outstanding balance of $0 under both the accounts receivable agreement and the equipment financing agreement. Interest expense for the nine months ended December 31, 2010 and December 31 was $3,000 and $12,000, respectively for the Bridge Bank line of credit we previously utilized.




On September 10, 2010, we signed an Accounts Receivable Loan Agreement with City National Bank, with a credit facility of $1.5 million. Of this $1.5 million, $1.0 million may be used for cash advances against accounts receivables and $0.5 million may be used for equipment advances. Our ability to borrow under this agreement varies based upon eligible accounts receivable and eligible equipment purchases. We are obligated to pay the bank a finance charge at a rate per year equal to the prime rate, which in no event shall be less than 3.50%, with respect to cash advances and equipment advances.  We must maintain certain financial requirements, including a minimum Asset Coverage Ratio of 1.50 to 1.00. We are also required to stay within 80% of our planned quarterly revenue. As of December 31, 2010, we had an outstanding balance of $66,000 under the equipment financing agreement with City National Bank.




22




At December 31, 2010, we had $4.7 million in cash and cash equivalents.  For the nine months ended December 31, 2010 and December 31, 2009, our operating activities provided cash of approximately $1.8 million.  Net cash used in investing activities, primarily for the acquisition of production equipment, amounted to $392,000 for the nine months ended December 31, 2010 and $130,000 for the nine months ended December 31, 2009.  Net cash used in financing activities was $54,000 for the nine months ended December 31, 2010 and $307,000 for the nine months ended December 31, 2009.  We collected $120,000 from exercise of stock options and paid off $137,000 toward outstanding notes payable, capital lease obligation, and existing line of credit. We also spent $37,000 in acquisition of treasury stocks during the nine months ended December 31, 2010.





We anticipate capital expenditures of approximately $650,000 in our 2011 fiscal year. We believe that funds for these expenditures will be provided by our operating activities. However, we may choose to finance some of these expenditures through our financing agreement with City National Bank. At December 31, 2010, our remaining borrowing capacity under this agreement was $1,434,000.





We may attempt to procure additional sources of financing in the event that the capital available as of December 31, 2010 is insufficient for our operating needs and capital expenditures. These sources may include, but are not limited to, additional sales of our equity and debt securities.  There are, however, no assurances that we will be able to successfully obtain additional financing at terms acceptable to us.  Failure to obtain such financing could have a material adverse effect on our ability to operate as a going concern.




Successful completion of our development program and attaining profitable operations are dependent upon our maintaining a level of sales adequate to support our cost structure.  In addition, realization of a major portion of the assets in the accompanying balance sheet is dependent upon our ability to meet our financing requirements and the success of our plans to sell our products.  The financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or amounts and classifications of liabilities that might be necessary should we be unable to continue in existence.





Critical Accounting Policies





Our discussion and analysis of our financial conditions and results of operations are based upon our financial statements, which have been prepared in accordance with generally accepted accounting principles in the United States. The preparation of financial statements requires management to make estimates and disclosures on the date of the financial statements.  On an on-going basis, we evaluate our estimates, including, but not limited to, those related to revenue recognition.  We use authoritative pronouncements, historical experience, and other assumptions as the basis for making judgments.  Actual results could differ from those estimates.  We believe that the following critical accounting policies affect our more significant judgments and estimates in the preparation of our financial statements.





Revenue recognition.  We generate our revenue through the sale of products.  Our policy is to recognize revenue when the applicable revenue recognition criteria have been met, which generally include the following:





·
Persuasive evidence of an arrangement exists;


·
Delivery has occurred or services have been rendered;


·
Price is fixed or determinable; and


·
Collectibility is reasonably assured.





Revenue from the sale of products is generally recognized after both the goods are shipped to the customer and acceptance has been received, if required.  Our products are custom made for our customers, who primarily consist of original engineer manufacturers (OEMs), and we do not accept returns.  Our products are shipped complete and ready to be incorporated into higher level assemblies by our customers.  The terms of the customer arrangements generally pass title and risk of ownership to the customer at the time of shipment.





Recording revenue from the sale of products involves the use of estimates and management judgment.  We must make a determination at the time of sale whether the customer has the ability to make payments in accordance with arrangements.  While we do utilize past payment history, and, to the extent available for new customers, public credit information in making our assessment, the determination of whether collectibility is reasonably assured is ultimately a judgment decision that must be made by management.





Allowance for Doubtful Accounts.  We maintain an allowance for doubtful accounts receivable based on customer-specific allowances, as well as a general allowance.  Specific allowances are maintained for customers that are determined to have a high degree of collectibility risk based on such factors, among others, as: (i) the aging of the accounts receivable balance; (ii) the customer’s past payment experience; and (iii) a deterioration in the customer’s financial condition, evidenced by weak financial condition and/or continued poor operating results, reduced credit ratings, and/or a bankruptcy filing.  In addition to the specific allowance, we maintain a general allowance for all our accounts receivables which are not covered by a specific allowance.  The general allowance is established based on such factors, among others, as: (i) the total balance of the outstanding accounts receivable, including considerations of the aging categories of those accounts receivable; (ii) past history of uncollectible accounts receivable write-offs; and (iii) the overall creditworthiness of the customer base.  A considerable amount of judgment is required in assessing the realizability of accounts receivables.  Should any of the factors considered in determining the adequacy of the overall allowance change, an adjustment to the provision for doubtful accounts receivable may be necessary.




23





Inventories.  Inventories are stated at the lower of cost or market, cost being determined on the first-in, first-out method.  Inventories are written down if the estimated net realizable value is less than the recorded value.  We review the carrying cost of our inventories by product each quarter to determine the adequacy of our reserves for obsolescence.  In accounting for inventories, we must make estimates regarding the estimated net realizable value of our inventory.  This estimate is based, in part, on our forecasts of future sales and age of the inventory.





Property and Equipment.We capitalize expenditures that materially increase asset lives and charge ordinary repairs and maintenance to operations as incurred. When assets are sold or otherwise disposed of, the cost and related depreciation or amortization is removed from the accounts and any resulting gain or loss is included in other income (expense) in the accompanying statements of operations.





Intangible Assets.  We account for its intangible assets under the applicable guidelines of Financial Accounting Standards Board Accounting Standards Codification (FASB ASC) 350, “Intangibles – Goodwill and Other” (formerly SFAS 142 “Goodwill and other intangible assets”) and FASB ASC 360, “Property, Plant, and Equipment” (formerly SFAS 144 “accounting for the impairment or disposal of long lived assets”). Where intangible assets have finite lives, they are amortized over their useful life unless factors exist to indicate that the asset has been impaired. We evaluate if the assets are impaired annually or on an interim basis if an event occurs or circumstances change to suggest that the assets value has diminished. Under FASB ASC 360, when deemed necessary, the Company completes the evaluation of the recoverability of its long-lived assets by comparing the carrying amount of the assets against the estimated undiscounted future cash flows associated with them. If such evaluations indicate that the future undiscounted cash flows of long-lived assets are not sufficient to recover the carrying value of such assets, the assets are adjusted to their estimated fair values. Under FASB ASC 360 intangible assets with indefinite useful lives are required to be tested annually for impairment or whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If the assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount exceeds the fair value of the assets. During the nine months ended December 31, 2010, the Company recognized no impairment.




Existing Technology.The main technology of our Santa Clara operation is based on a patent issued in 1990.  It is a substrate deposition technology that is mature and with no replacement technology forecasted.





Additional Factors That May Affect Future Results




Future operating results may be impacted by a number of factors that could cause actual results to differ materially from those stated herein, which reflect management’s current expectations. These factors include, but are not limited to:




●
industry-specific factors (including the reliance upon growth of the defense microwave market, significant competition characterized by rapid technological change, new product development, product obsolescence, and significant price erosion over the life of a product);




●
our ability to timely develop and produce commercially viable products at competitive prices;




●
our ability to produce products which meet the quality standards of both existing and potential new customers;




●
our ability to accurately anticipate customer demand;




●
our ability to manage expense levels, in light of varying revenue streams;




●
the availability and cost of components;




●
the impact of worldwide economic and political conditions on our business; and




●
the ability to integrate potential future acquisitions into our existing operations.




24




We believe that, to the extent that foreign sales are recognized, we may face increased risks associated with political and economic instability, compliance with foreign regulatory rules governing export requirements, tariffs and other trade barriers, differences in intellectual property protections, longer accounts receivable cycles, currency fluctuations and general trade restrictions. If any of these risks materialize, they could have a material adverse effect on our business, results of operations, and financial condition.




We have evaluated the credit exposure associated with conducting business with foreign customers and have concluded that such risk is acceptable. Nevertheless, any significant change in the economy or deterioration in United States trade relations or the economic or political stability of foreign markets could have a material adverse effect on our business, results of operations, and financial condition.




Sales to foreign customers are invoiced in U.S. dollars. Accordingly, we currently do not engage in foreign currency hedging transactions. However, as we expand further into foreign markets, we may experience greater risk associated with general business, political and economic conditions in those markets. At such time, we may seek to lessen our exposure through currency hedging transactions. We cannot assure you that a currency hedging strategy would be successful in avoiding currency exchange related losses. In addition, should the relative value of the U.S. dollar in comparison to foreign currencies increase, the resulting increase in the price of our products to foreign customers could result in decreased sales which could have a material adverse impact on our business, results of operations, and financial condition.




We experience significant price competition and expect price competition in the sale of our products to remain intense. We cannot assure you that our competitors will not develop new technologies or enhancements to existing products or introduce new products that will offer superior price or performance features. We expect our competitors will offer new and existing products at prices necessary to gain or retain market share. Several of our competitors have substantial financial resources, which may enable them to withstand sustained price competition or a downturn in the pricing of their products in the future. Substantially all of our competitors have, and potential future competitors could have, substantially greater technical, marketing, distribution and other resources than we do and have, or could have, greater name recognition and market acceptance of their products and technologies.




The markets in which we compete are characterized by rapidly changing technology and continuous improvements in products and services. Our future success depends on our ability to enhance our current products and to develop and introduce, in a timely manner, new products that keep pace with technological developments that meet or exceed industry standards, which compete effectively on the basis of price, performance and quality, that adequately address OEM customer and end-user customer requirements, and that achieve market acceptance. We believe that to remain competitive in the future we will need to continue to develop new products, which will require the investment of significant financial resources in new product development. In the event our newly developed products are not timely developed or do not gain market acceptance, our business, results of operations and financial condition could be materially adversely affected.




Our quarterly and annual results have in the past been, and will continue to be, subject to significant fluctuations due to a number of factors, any of which could have a material adverse effect on our business, financial condition and results of operations. There can be no assurance that we will not experience such fluctuations in the future. We establish our expenditure levels for product development and other operating expenses based on expected revenues, and expenses are relatively fixed in the short term. As a result, variations in timing of revenues can cause significant variations in quarterly results of operations. There can be no assurances that we will be profitable on a quarter-to-quarter basis in the future. We believe that period-to-period comparisons of our financial results are not necessarily meaningful and should not be relied upon as an indication of future performance. Due to these factors, it is likely that in some future quarter or quarters our revenues or operating results will not meet the expectations of public stock market analysts or investors. In such event, the market price of our common stock would be materially adversely affected.




25





Item 3.   Quantitative and Qualitative Disclosures About Market Risk





Not Applicable.





Item 4.   Controls and Procedures





Disclosure Controls and Procedures




Our management, with the participation of our Chief Executive Officer (Principal Executive Officer) and Principal Financial Officer, has evaluated the effectiveness of the Company’s disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) as of the end of the period covered by this Report (December 31, 2010). Based on such evaluation, our Chief Executive Officer and Principal Financial Officer have concluded that, as of the end of such period, the Company’s disclosure controls and procedures are effective in recording, processing, summarizing and reporting, on a timely basis, information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act and are effective in ensuring that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the Company’s management, including the Company’s Chief Executive Officer and Principal Financial Officer, as appropriate to allow timely decisions regarding required disclosure.




Changes in Internal Control Over Financial Reporting




There have been no changes in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the quarter ended December 31, 2010 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.




26




PART II – OTHER INFORMATION




Item 1.    Legal Proceedings





The Company may be subject, from time to time, to various legal proceedings relating to claims arising out of its operations in the ordinary course of its business. Other than the proceeding described below, the Company currently is not party to any legal proceedings, the adverse outcome of which, individually or in the aggregate, management believes would have a material adverse effect on the business, financial condition or results of operations of the Company.




The Company is party to a vendor dispute filed on February 25, 2010, alleging causes of action for breach of contract, among others. The vendor is claiming damages, including consequential damages, punitive damages, possession of personal property, and other items. Management contends that the claims against the Company are without merit. On May 3, 2010, the Company filed their Answer to the First Amended Complaint and in addition, filed a Cross-Complaint alleging causes of action for breach of contract, among others. The vendor filed a Demurrer and Motion to Strike, challenging the sufficiency of the claims in the Cross-Complaint.  On August 3, 2010, the Court overruled, in part, and sustained, in part, the Demurrer, finding that the breach of contract cause of action was sufficiently pled and granting the Company leave to amend certain claims in the Cross-Complaint.





On August 23, 2010, the Company filed its First Amended Cross-Complaint.  In response, the vendor filed a Demurrer and Motion to Strike, which were heard on November 3, 2010.  The Court overruled and sustained, in part, the Demurrer, finding that the breach of contract, fraud and negligent misrepresentation causes of action were sufficiently pled and denied the motion to strike as to the fraud claims.  The Court ordered the vendor to file its Answer to the First Amended Cross-Complaint by November 23, 2010, and a trial date was set for May 23, 2011.  On January 19, 2011, the parties entered into a settlement agreement, with the Company agreeing to pay $140,000 to the vendor in exchange for a dismissal of all claims.  On February 1, 2011, the entire case was dismissed with prejudice.




Item 1A. Risk Factors




Not Applicable.




Item 2.    Unregistered Sales of Equity Securities and Use of Proceeds




On August 1, 2010, we issued a warrant to C. K. Cooper & Company for the purchase of up to 50,000 shares of our common stock at an exercise price of $1.46 per share.  The warrant was granted in exchange for services to be rendered by the holder valued at $22,000.  The warrant fully vested on August 1, 2010, and expires on August 1, 2013.  We issued another warrant to C. K. Cooper & Company on November 1, 2010 for the purchase of up to 50,000 shares of our common stock at an exercise price of $1.46. The warrant was granted in exchange for services to be rendered by the holder valued at $15,000.  The warrant fully vested on November 1, 2010, and expires on November 1, 2013.   This transaction was exempt from registration under the Securities Act of 1933 based on Section 4(2) of the Securities Act.





Item 3.    Defaults Upon Senior Securities




None.




Item 5.    Other Information




None.




Item 6.    Exhibits





The exhibits listed in the Exhibit Index are filed as part of this report.





27




SIGNATURES





Pursuant to the requirements 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.




AML Communications Inc./s/: Jacob InbarBy: Jacob Inbar, President and

Chief Executive Officer

(Principal Executive Officer)
Dated:  February 14, 2011




/s/: Heera LeeBy: Heera Lee, Principal Financial Officer
Dated:  February 14, 2011




28


EXHIBIT INDEX





Exhibit

Number

Description2.1

Agreement and Plan of Merger, dated February 13, 2011, among Anaren, Inc., Project Orange Acquisition Corp. and AML Communications, Inc.(1)3.1

Certificate of Incorporation(2)3.2

Bylaws(2)31.1

Certification by the Chief Executive Officer(3)31.2

Certification by the Principal Financial Officer(3)32.1

Certification pursuant to Section 906 of the Sarbanes Oxley Act(3)32.2

Certification pursuant to Section 906 of the Sarbanes Oxley Act(3)




(1)
Filed with the Securities and Exchange Commission as an exhibit to the Company’s Form 8-K dated February 14, 2011 and incorporated herein by reference.




(2)
Previously filed with the Securities and Exchange Commission as an exhibit to the Registration Statement on Form SB-2 (No. 33-99102-LA) and incorporated herein by reference.




(3)
Filed herewith




29