UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.20549
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the fiscal year ended March 31, 20202021
Commission File No. 001-31990
TEL-INSTRUMENT ELECTRONICS CORP.
(Exact name of Registrant as specified in its charter)
New Jersey | 22-1441806 |
(State of incorporation) | (IRS Employer Identification Number) |
One Branca Road East Rutherford, NewJersey | 07073 |
(Address of principal executive offices) | (Zip Code) |
Registrant’sRegistrant’s telephone number, including area code:(201) 933-1600
Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||
N/A | N/A | N/A |
Securities registered pursuant to Section 12(g) of the Act:
Common Stock $.10 par value
(Title of class)
Indicate by checkmark if registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☒
Indicate by checkmark if registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☒
Indicate by checkmark 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 ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ☒
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer | ☐ | Accelerated filer | ☐ |
Non-accelerated filer | ☒ | Smaller reporting company | ☒ |
Emerging growth company | ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 7(a)(2)(B) of the Securities Act. ☐
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☐
Indicate by checkmark whether the registrant is a shell company (as defined in Rule 12b-2 of the Securities Act). Yes ☐ No ☒
The aggregate market value of the voting and non-voting common stock held by non-affiliates on September 30, 20192020 (the last business day of our most recently completed second fiscal quarter) was $5,383,295$6,339,010 based on the closing price of $3.08$3.60 on September 30, 2019.2020.
Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date:
3,255,887 shares of common stock, par value $0.10 per share, were outstanding as of June 26, 2020. 28, 2021.
TEL-INSTRUMENT ELECTRONICS CORP.
PART I. | Page | |
Item 1. | 5 | |
Item 1A. | 11 | |
Item 1B. | 11 | |
Item 2. | 11 | |
Item 3. | 12 | |
Item 4. | 13 | |
PART II. | ||
Item 5. | 14 | |
Item 6. | 15 | |
Item 7. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 15 |
Item 7A. | 24 | |
Item 8. | 24 | |
Item 9. | Changes in and Disagreements | 54 |
Item 9A. | 54 | |
Item 9B. | 54 | |
PART III. | ||
Item 10. | 55 | |
Item 11. | 58 | |
Item 12. | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters | 60 |
Item 13. | Certain Relationships and Related Transactions and Director Independence | 63 |
Item 14. | 64 | |
PART IV. | ||
Item 15. | 65 | |
67 | ||
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Included in this Annual Report on Form 10-K are “forward-looking” statements, within the meaning of Section 27A and Section 21E of the Securities Act of 1934, as amended (the “Exchange Act”), that involve substantial risks and uncertainties, as well as historical information. Although we believe that the expectations reflected in these forward-looking statements are reasonable, we cannot assure you that the expectations reflected in these forward-looking statements will prove to be correct. Our actual results could differ materially from those anticipated in forward-looking statements as a result of certain factors. Forward-looking statements include those that use forward-looking terminology, such as the words “potential”, continuing”, “anticipate,” “believe,” “estimate,” “expect,” “intend,” “may,” “project,” “plan,” “will,” “shall,” “should,” and similar expressions, including when used in the negative. Although we believe that the expectations reflected in these forward-looking statements are reasonable and achievable, these statements involve risks and uncertainties, and we cannot assure you that actual results will be consistent with these forward-looking statements. Important factors that could cause our actual results, performance or achievements to differ from these forward-looking statements include the following:
the availability and adequacy of our cash flow to meet our requirements;
the financial impact of the Aeroflex litigation;
our ability to manage general economic, business and geopolitical conditions, including the impacts of natural disasters, pandemics and outbreaks of contagious diseases and other adverse public health developments, such as the COVID-19 pandemic;
the deteriorationrecovery of market conditions, including our dependence on customers' capital budgets for sales of products and services, and adverse impacts on costs and the demand for our products as a result of factors such as the COVID-19 pandemic and the implementation of tariffs;
economic, competitive, demographic, business and other conditions in our local and regional markets;
changes in our business and growth strategy;
changes or developments in laws, regulations or taxes in the electronics/aerospace industry;
actions taken or not taken by third-parties, including our vendors, customers and competitors;
the availability of additional capital; and
other factors discussed elsewhere in this Annual Report.
All forward-looking statements attributable to us are expressly qualified in their entirety by these and other factors. We undertake no obligation to update or revise these forward-looking statements, whether to reflect events or circumstances after the date initially filed or published, to reflect the occurrence of unanticipated events or otherwise unless required by applicable law.
PART I
General
Tel-Instrument Electronics Corp. (“Tel”, “TIC” or the “Company”) has been in business since 1947 and is a leading designer and manufacturer of avionics test and measurement solutions for the global commercial air transport, general aviation, and government/military aerospace and defense markets. The Company designs, manufactures and sells instruments to test and measure, and also calibrates and repairs a wide range of airborne navigation and communication equipment.
The Company’s strategy over the years has been to invest heavily in research and development to design products significantly better than its competition. Our products provide the stimulus and signals necessary for certification, verification, fault finding and diagnosis of airborne military and commercial navigation and communication systems. Our products incorporate high levels of integration by combining more test functions into a single unit, and thereby reducing customer acquisition, training, and life-cycle support costs than legacy systems. The Company offers avionic test sets for:
■ | Identification Friend or Foe (IFF) transponders and interrogators. (95% of flight-line test market) |
■ | Tactical Air Navigation (TACAN) |
■ | Commercial Air Traffic Control |
■ | Navigation |
■ | Communication |
Tel’s instruments are used to test navigationTel-Instrument Electronics Corp. an industry leader in developing, producing, selling and communications equipment installed in aircraft, both on thesupporting field-tested, rugged avionic flight line (“ramp testers”)(ramp) and in the maintenance shop (“bench testers”),(bench) test sets for demanding military and commercial customers that range in list price from $10,000 to $90,000 per unit. Tel continues to develop new products$90,000. Founded in anticipation of customers’ needs,1947 and to maintain its strong market position. Its development of multi-function testers has made it easier for customers to perform ramp tests with less operator training, a fewer number of test sets, and lower product support costs.based in East Rutherford NJ, Tel-Instrument is an OTCQB listed public company trading under ticker symbol TIKK.
The Company has built a very solid position in the Mode 5 Identification Friend or Foe (“IFF”) flight lineIFF and TACAN test equipmentset market. The Company is successfully extending its dominant market and these products will be very competitiveposition in bothMode 5 test sets in the domestic and overseas markets.U.S. defense industry to international partners. We believe that we are well-positionedwell positioned as our CRAFT and TS-4530A flight-line test sets have been endorsed by the U.S. military. We are currently serving and delivering units to the international market. The T-47/M5 Mode 5 IFF test set has been a cost-effective upgrade option for our large installed base of Mode 4 test sets and we have shipped a growing number of units to various countries, and expect to receive additional orders for this product. All allied countries have a drop-dead date of July 1, 2020 for Mode 5 capability and our international business has grown as a result. We expect this business to remain strong for at least the next couple of years. We will continue to actively market our products to all of the major international customers. Our expectation is that we will continue to improve both our revenues and gross margins.
The commercial avionics industry is undergoing a great deal of change, and has been affected by the COVID-19 pandemic. We believe our new lightweight 4.5-pound SDR/OMNI hand-held products that we are planning to introduce towards the end of calendar year 2020 will generate increased market share at very attractive gross margin levels. However, the effect of the pandemic in the commercial segment will slow sales in the market. The introduction of this product has been delayed due to technology upgrades to meet the standards for the next generation of military applications. The upgraded and faster processor with improved video graphics processing capability will provide more opportunities to expand the applications for this new unit. The technology for the hand-held product will provide a platform for future products. This new technology provides us with the opportunity to expand out of our relatively narrow avionics test market niche and enter the much larger secure communications radio test market. We are actively working to secure partners to enter this growth market and we believe that our new hardware platform provides unmatched capabilities in a market leading form factor. TIC is also evaluating upcoming customer test set requirements and expects at least one large competitive solicitation will be issued in the next 12 months for a product in our technical area of expertise. We are also working closely with our other military customers on new potential market opportunities that will be needed to maintain our sales and profitability growth.
We continue to evaluate other attractive potential market opportunities.
Item 1.Business
General (continued)
Company Response to COVID-19
In late January 2020, the Company began to monitor the global effects of “COVID-19,” an infectious disease caused by Severe Acute Respiratory Syndrome Coronavirus 2 (SARS CoV-2) that was first detected in November 2019 in the city of Wuhan, China.
The subsequent spread of COVID-19 to the U.S. and many other parts of the world led the World Health Organization to characterize COVID-19 as a pandemic on March 11, 2020. Thereafter, most U.S. states imposed “stay-at-home” orders on their populations to stem the spread of COVID-19. Of specific interest to the Company, stay-at-home orders were imposed in the states of New Jersey and Kansas.
The stay-at-home orders generally required the closure of businesses that did not provide essential functions. Because the Company’s operations are as a supplier to the U.S. Military, and its manufacturing operations provide essential functions,Internationally, the Company has continued shipping, receiving and manufacturing activities. The Company advised all other employees that could perform their job functions remotely to do so. As such,been very successful in capturing the Company’s operations, for the most part, remained fully operational.
On March 27, 2020, President Trump signed the Coronavirus Aid, Relief and Economic Security (the “CARES Act”), which, among other things, outlines the provisionslion’s share of the Paycheck Protection Program (the “PPP”). The Company determined that it met the criteria to be eligible to obtain a loan under the PPP because, among other reasons, in light of the COVID-19 outbreak and the uncertainty of economic conditions related thereto, the loan was considered necessary to support the Company’s ongoing operations and retain all its employees. Under the PPP, the Company could obtain a U.S. Small Business Administration loan in an amount equal to the average of the Company’s monthly payroll costs (as defined under the PPP) for calendar 2019 multiplied by 2.5 (approximately 10 weeks of payroll costs). In addition, President Trump signed into law the Paycheck Protection Program and Health Care Enhancement Act on April 24, 2020, which increased funding provided by the CARES Act. On June 5, 2020 the Paycheck Protection Program Flexibility Act was signed into law and extended the program until December 31, 2020. On May 4, 2020, the Company secured a PPP loan in the amount of $772,577.
The CARES Act contains provisions for the forgiveness of all or a portion of a PPP loan, subject to the satisfaction of certain requirements. The amount eligible for forgiveness is, subject to certain limitations, the sum of the Company’s payroll costs, rent and utilities paid by the Company during the eight-week period beginning on the funding date of the PPP loan.
The COVID-19 outbreak and the uncertainty of economic conditions relating thereto may negatively impact the Company’s results of operations, cash flows and financial position; however, the overall financial impact cannot be reasonably estimated at this time. Based on the operational and financial plans that management has developed, the Company expects to be able to meet its obligations as they become due over the next twelve months.
Item 1.Business (continued)
General (continued)
Mode 5 Identification Friend or Foe (“IFF”) Products
T-47/M5 Dual Crypto Test Set
This new test set has been well-received in the market, especially in the international market. It is designed as a KIV 77/KIV78 Mode 5 upgrade for the approximately 2,000 AN/APM-480A and T-47 series Mode 4 IFF test sets that the Company has sold both domestically and internationally. This will be a cost-efficient upgrade to Mode 5 for our large installed customer base.
The T-47/M5 capabilities allow full testing, simulation and analysis of the following systems: Interrogator/Transponder Test set for Modes 1, 2, 3A, C, S, EHS, ADS-B TX and RX with 4 and Mode 5, TACAN, TCAS I, II and E-TCAS. The T-47/M5 utilizes the KIV-77, SIT 2010 or the KIV-78 Crypto applique (not included) for Mode 4 & Mode 5 testing and built in USB connection available for remote diagnostic testing and download of test results to a PC.
The T-47/M5 performs the following tests:
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We have already sold approximately $5 million of these test sets to Canada, Japan, Korea, Europe, and other international customers. We are also receiving interest from various U.S. customers. TIC believes this will be a key product supporting our future growth and profitability.
Tel has also received U.S. DOD AIMS certification for the T-47/M5 Test Set.
TS-4530A IFF Test Set
The TS-4530A test set provides simple to use GO/NO-GO operation. The TS-4530A, developed under a U.S. Army contract, now tests IFF Mode 5, ADS-B, EHS, and TCAS. The TS-4530A includes a large 8 line, color display and a new 3-button switch assembly that adds a 4-way directional toggle action for improved usability. The upper housing includes a built-in KIV-77 CCI appliqué enclosure.
Based on a new, highly integrated digital architecture; the TS-4530A performs the following tests:
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We have delivered over 3,500 kits and test sets. We are seeing continued demand from both the U.S. military and international customers, and we continue to explore all opportunities for this market. We have received an initial purchase order totaling $520,000 from our European Distributor, Muirhead Avionics (“Muirhead”) for Mode 5 test sets fromset business with TIC’s T-47/M5 test set being selected by many international customers including: Canada; the contract awarded by the German military. This is a seven-year procurement contract with anticipated orders of approximately $3.5 million in total. In fiscal year 2019, the Company received a $4.3 million order from the U.S. military which the Company completed in fiscal year 2020.U.K.; Japan; South Korea; and Australia. The Company continues to explore opportunities for this productbe in both the domestic and international markets.
Item 1.Business (continued)
General (continued)
forefront on Mode 5 Identification Friend or Foe (“IFF”) Products (continued)
T-4530i IFF Test Set
This new test is a software/hardware upgrade of the TS-4530A that we will be selling internationallyresearch and potentially to our U.S. Armydevelopment and U.S. Air Force customers. This unit also includes extended life Ni-MH batteries and significantly expanded manual Mode 5has demonstrated test capability using either the KIV-77 or European SIT-2010 crypto appliques as well as additional functionality with the addition of the TACAN test function. We are very optimistic about the prospects for this software upgrade for the international market. Penetrating the U.S. military market will entail securing customer buy-in and funding which can be an extended process. This upgraded unit will also require AIMS testing for which we are in the process of obtaining approval.
During fiscal year 2020, we shipped approximately $1.2 million of this product to the German military through our European distributor, Muirhead Avionics. We have recently received an additional order valued at $1.6 million from our European distributor for delivery to the German military. We expect to ship this order during calendar year 2020. We are currently pursuing other significant domestic and international opportunities which we hope to secure later this summer.
Communications/Navigation (“COMM/NAV) Radio Frequency (RF) Avionics Flight line Tester”) (“CRAFT”) (AN/USM-708 and AN/USM-719)
The AN/USM-708 multi-purpose test set was developed by the Company in conjunction with the U.S. Navy. The AN/USM-708 large 6.0 inch color LCD screen and surrounding soft-keys and keyboard provides easy and quick access to a multiple of test screens menus, and display options affording single man operation, instant results, and a host of pre-programmed and manually variable parameters to meet the most demanding requirements for testing of airborne avionic and communication equipment.
The AN/USM-708 has been and continues to be a key product for the Company as it represents a new generation technology product. The Company delivered approximately $40 million in orders, representing over 1,200 test sets, for the AN/USM-708 and AN/USM-719 (IFF only) test sets to the U.S. Military. The AN/USM-708 CRAFT unit combines advanced IFF (including Mode 5 encryption technology) navigation, communication, and sonobuoy test capabilities in a portable test set, which will utilize a flexible and expandable digital-signal-processing-based architecture. Both the AN/USM-708 and the AN/USM-719 have been certified by the AIMS Program Office.
Based on entirely new up-to-date technology and digital architecture, the AN/USM-708 is a leap forward in precision testing of the following systems:
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This program represented the culmination of a multi-year, multi-million dollar investment by the Company in Mode 5 technology and continues to provide a significant competitive advantage. Management believes that the CRAFT program also has potential for sales into the balance of the U.S. Military, NATO, and internationally, as the new Mode 5 IFF systems are installed in overseas aircraft platforms.
The contract for the AN/USM-708 and AN/USM-719 was a significant milestone for the Company because the development of this proprietary technology, which was funded by the Company, established Tel’s position as a leader in the industry. The CRAFT test set replaced seven obsolete U.S. Navy test sets that collectively cost approximately $300,000, making the CRAFT test set an excellent value to the government. This unit has been well-received by the end users. The core technology in the AN/USM-708 has been the foundation for additional military and commercial products. We believe that the CRAFT test set also has potential for sales into the balance of the U.S. Military, NATO, and internationally, as the new Mode 5 IFF systems are installed in overseas aircraft platforms.
The Joint Strike Fighter (“JSF”) program continues to generate CRAFT orders as this program ramps up production. The Company has already received orders from Lockheed Martin for the AN/USM-708 units, for the JSF Program, totaling approximately $6 million. Sikorsky has also indicated that it will be ordering CRAFT test sets for its new helicopters. The Company also believes it will receive orders from other customers for this product.
Item 1.Business (continued)
General (continued)
Intermediate Level TACAN Test Set (“ITATS”) ((AN/ARM-206) with the U.S. Navy))
The AN/ARM-206 is the industry’s first fully automated TACAN Test Set and is designed for depot and intermediate level support. The AN/ARM-206 meets all requirements for evaluating the performance and accuracy of airborne TACAN UUT’s. The AN/ARM-206 generates signals that accurately simulate TACAN beacon signals to both the normal X and Y surface-to-air modes, as well as signals of an interrogating or complementary aircraft in X or Y air-to-air modes, including inverse mode. An easy to use color touch screen interface allows for simple changes to parameters and testing signals providing unsurpassed versatility.
The AN/ARM-206 measures fixed or varying range and bearing performance, including search/track ability, transmitter power output, receiver sensitivity and coding and decoding parameters on all TACAN channels and air-to-air range and bearing performance. The AN/ARM-206 or ITATS is a bench test set combining advanced digital technology with state of the art automated testing capabilities. The ITATS product is a fully automated TACAN test set for use in U.S. Navy Intermediate Level repair locations. This product represents an important expansion to Tel’s current product line, and the automated testing capabilities will provide a significant labor savings benefit to our customers. We continue to market this unit to other domestic and international customers and have received interest in this test set from both the U.S. Air Force and various international customers.
TR-420 Ramp Test Set
The TR-420 (Multi-function including Mode 5) Ramp Test Set is the next generation of avionics support equipment. The TR-420 is a battery powered portable unit used to test the operation of Transponders and Interrogators including: IFF (with Mode 5) Mode S Transponders, EHS, and ADS-B. TACAN/DME, ADS-B Transmit/Receive and TCAS testing functionality are also offered as part of the standard test set capability. Tests of both Transponders and Interrogators can be performed by using the TR-420 hand held antenna to radiate to and from the unit-under-test (UUT) or by directly connecting to the UUT antenna port. The TR-420 employs a user interface with a large 5.7 in. color LCD screen and surrounding soft-keys. This allows for easy and quick access to a multiple of test screens, menus and display options.
Please visit www.telinstrument.com for a complete listing of all of the Company’s different military and commercial products.
New Products
The Company has also developed a Remote Client LabVIEW program for the CRAFT, TS-4530A, and T-47/M5 products and we have seen solid interest is this product. The Remote Client LabVIEW program will be used by TIC customers in both manufacturing and engineering environments. The software application allows for remote control of the unit with a print-out of all test results. It is expected that its primary application will be for Mode 5 and ADS-B certification testing. We believe that this product will be a source of recurring high margin profits in the years ahead. This software should also assist in the sale of Mode 5 test sets due to the added functionality provided.
Over the last year, the Company has upgraded its industry leading T-760 precision DME bench test set. The Company is the only manufacturer in the world that manufactures DME-P test equipment and it received orders in excess of $500k in the last 12 months for this updated test set.
The Company is also working on the next generation of Mode 5 Level 2B, software.which provides enhanced secure navigation data to military pilots. The U.S. Army has indicated that they plan to move to this new navigation technology in the next several years. This will add significant additional informationcould entail substantial software upgrade revenues for the thousands of TS-4530A test sets sold to the U.S. Army and U.S.A.F.
TIC is also actively working on completing the SDR/OMNI this year with the initial product being a communication and navigation test set for the U.S. military. The communications test capability was moved up in our development schedule based on the negative impact of the COVID-19 pandemic on commercial aviation. The U.S. military will need to upgrade thousands of existing Mode 5 designcommunication and could result in the sale of upgraded software to our Mode 5 customer base. If this Mode 5 Level 2B is implemented by the military, this has the potential to generate significant revenues to the Companynavigation test sets over the next several years.years to address the new frequency and waveform requirements for military radios and we believe the SDR/OMNI is well positioned to capture a large portion of this business.
Once the communications and navigation software are completed, TIC continuesplans to invest in new products and has invested significant dollars in its new lightweight hand-held design,introduce software APPS for the SDR/OMNI.
Item 1.Business (continued)
General (continued)
SDR-OMNI
The Company is finalizing its new handheld avionics flight-line Test Set, the “SDR-OMNI”. The world’s first “All-in-One” Avionics Test Set utilizes true software-designed radio technology that enables it to test all common avionics functions in one 4.5 pound test set, which is half the weight of competitive test sets. The SDR/OMNI has very wide frequency to accommodate new commercial and military waveforms. It utilizes the latest touch screen technology and has the capability to replace all TIC commercial test sets with one handheld product. The initial SDR-OMNI software releasetransponder testing market. This will provide test capability for TranspondersTransponder (Modes A, C, and S), ADS-B, and 978 MHz UAT capability for the large general aviation test market. This release is initially targeted at the civil aviation market requirement for ADS-B out test capability. This will allow us to compete with the IFR 4000 and 6000 test setstests for our military and commercial aviation and military customers. The next software release will incorporate Nav/Comm test functions which can be purchased as APP’s by our customers. The SDR-Omni product is a game changer in the commercial and military avionics test market as it will allow customers to replace multiple competitive test sets with one unit that is smaller and provides more capabilities at a fraction of the cost. It has also been designed to allow TIC to penetrate the secure communications test market which is considerably larger than our core avionics test market. The much larger growth potential is in the secure military and homeland security radio test market which is many times the size of our existing avionics test market.
This new technology could provide us with the opportunity to expand out of our relatively narrow avionics test market niche and enter the much larger secure military and homeland security radio test market which is many times the size of our existing avionics test market. The secure military test set market is very large, and we are anticipating aseveral large competitive DOD solicitationsolicitations to take place in the next twoseveral years. We are currently in discussions
TIC is also working with various companies about collaborating in these markets. We are actively working to line up partners to enterLockheed Martin (LMCO) on a new MADL test set. TIC was awarded this growth market and we believe that our new hardware platform provides unmatched capabilitiescontract after winning a competitive solicitation. MADL is a secure communications radio for the F-35. This operates in a market leading form factor.
Future Prospects
much higher frequency range than our other test sets and could represent a further diversification out of our core markets. The Companycontract has built a very solid position inbeen put on hold for at least the Mode 5 IFF and TACAN test set market. We believe thatnext four months due to LMCO funding issues, but we are well positioned as our CRAFT and TS-4530A flight-linehopeful that the contract will resume this fall. TIC has completed the majority of the development work on this new test sets have been endorsed byset. If the U.S. military and we have already delivered test sets into 18 international markets. The commercial avionics industryfunding issue is undergoing a great deal of change, and we believe our new hand-held products that we are planning to introduceresolved, this fiscal year, willcould generate increased market share at very attractive gross margin levels. We are also working closely with our military customers on new potential market opportunities that will be needed to maintain our sales and profitability.
Competition
The Company manufactures and sells commercial and military products as a single avionics business, and its designs and products cross both markets.
The general aviation market consists of some 1,000 avionics repair and maintenance service shops at private and commercial airports in the United States that purchase test equipment to assist in the repair of aircraft electronics. The commercial aviation market consists of approximately 80 domestic and foreign commercial airlines.
The civilian marketsubstantial recurring revenues for avionic test equipment is dominated by two designers and manufacturers, the Company and Aeroflex, Inc., a division of Viavi Solutions, Inc. (NASDAQ: VIAV) (“Aeroflex”),would position TIC for further development contracts with Aeroflex being substantially larger than Tel. This market is relatively narrow and highly competitive. Tel has been successful because of its high quality, new technology, user friendly products and competitive prices.
The military market is large and is dominated by large corporations with substantially greater resources than the Company, including Aeroflex. Tel competitively bids for government contracts on the basis of the engineering quality and innovation of its products, competitive price, and “small business set asides” (i.e., statutory provisions requiring the military to entertain bids only from statutorily defined small businesses), and on bids for sub-contracts from major government suppliers. There are a limited number of competitors who are qualified to bid for “small business set asides.” The military market consists of many independent purchasing agencies and offices. The process of awarding contracts is heavily regulated by the U.S. Department of Defense.
Over the last fifteen years, the Company has won several large, competitively bid contracts from the military and has become the primary supplier for the U.S. Military, as well as the NATO countries, of flight line IFF test equipment. The CRAFT AN/USM-708, CRAFT AN/USM-719,TS-4530A, TS-4530i and TR-47/M5 test sets, discussed previously, involve a new generation of technology, including the next generation of IFF testing, and is expected to enable the Company to continue to be a major supplier of avionics test equipment to the military for years to come. Tel believes its new technology will also allow it to increase sales to the commercial avionics market in the future and expand into the very large secure communication test market.LMCO.
Item 1.Business (continued)
General (continued)
Marketing and Distribution
Domestic commercial sales are made throughout the U.S. to commercial airlines and general aviation businesses directly or through distributors. No direct commercial customer accounted for more than 10% of commercial sales in fiscal years 2020 and 2019. The Company has one domestic distributor which receives discounts ranging between 16%-20% discount for stocking, selling, and, in some cases, providing product calibration and repairs. The loss of this distributor would not have a material adverse effect on the Company or its operations. Commercial sales represented 19% and 24% of total sales, respectively, for the fiscal years ended March 31, 2020 and 2019. Our commercial distributor represented approximately 20% and 24%, respectively, of commercial sales during fiscal years 2020 and 2019. This distributor also accounted for 4% and 6% of total sales for the years ended March 31, 2020 and 2019, respectively.
Marketing to the U.S. Government is made directly by employees of the Company or through independent sales representatives, who receive similar commissions to the commercial distributors. For the years ended March 31, 2020 and 2019, sales to the U.S. Government, including shipments through the government’s logistics centers, represented approximately 30% and 39%, respectively, of total sales. For the year ended March 31, 2020 one direct customer represented 10% of total sales and 12% of government sales. One international distributor represented 13% of total sales and 16% of government sales for the year ended March 31, 2020. No other government customer represented over 10% of government sales for fiscal years 2020 and 2019.
International sales are made throughout the world to government and commercial customers, directly through American export agents, or through the Company’s overseas distributors at a discount reflecting a 15% to 22% selling commission, under written or oral, year-to-year arrangements. The Company has an exclusive distribution agreement with Muirhead Avionics and Accessories, Ltd (“Muirhead”), based in the United Kingdom, to represent the Company in parts of Europe, and with Milspec Services in Australia and New Zealand. Tel also sells its products through exclusive distributors in Spain, Portugal, and the Far East and is exploring distribution in other areas. For the years ended March 31, 2020 and 2019, total international sales were 54% and 20%, respectively, of sales, reflecting the Company’s growth into the international market. Additionally, the Company has an agreement with M.P.G. Instruments s.r.l., based in Italy, wherein this distributor has the exclusive sales rights for DME/P ramp and bench test units. The Company continues to explore additional marketing opportunities in other parts of the world, including the Far East. One international distributor accounted for 13% of total sales for the fiscal years ended March 31, 2020. No international distributor accounted for more than 10% of total sales for the year ended March 31, 2019. The Company has no material assets overseas.
Tel also provides customers with calibration and repair services. Repairs and calibrations accounted for 10% and 14% of sales for the years ended March 31, 2020 and 2019, respectively.
Future domestic market growth, if any, will be affected in part by whether the U.S. Federal Aviation Administration (“FAA”) implements additional plans to upgrade the U.S. air traffic control system regulations and by continuing recent industry trends towards more sophisticated avionics systems, both of which would require the design and manufacture of new test equipment. The major development in the commercial marketplace is the ADS-B requirement for all aircraft after January 1, 2020. TIC’s new products will address this testing requirement. Military contracts are awarded and implemented by extensive government regulation. The Company believes its test equipment is recognized by its customers for its quality, durability, reliability, affordability, and by its advanced technology.
Backlog
Set forth below is Tel’s avionics backlog at March 31, 2020 and 2019:
Commercial | Government | Total | ||||||||||
March 31, 2020 | $ | 200,193 | $ | 3,824,984 | $ | 4,025,177 | ||||||
March 31, 2019 | $ | 544,496 | $ | 5,533,635 | $ | 6,078,131 | ||||||
Tel believes that most of its backlog at March 31, 2020 will be delivered during the next 12 months. The backlog is pursuant to purchase orders. Historically, the Company obtains orders which are required to be filled in less than 12 months, and therefore, backlog amounts at the end of the period do not reflect delivered or future orders. The backlog does not reflect the a Mode 5 test set order, received in June 2020, valued at $1.6 million from its European distributor, Muirhead Avionics, for delivery to the German military.
Item 1.Business (continued)
General (continued)
Suppliers
Tel obtains its purchased parts from a number of suppliers. These materials are standard in the industry, and the Company foresees no difficulty in obtaining purchased parts, as needed, at acceptable prices.
Patents and Environmental Laws
Tel has no patents or licenses which are material to its business, and there are no material costs incurred to comply with environmental laws.
Engineering, Research, and Development
In the fiscal years ended March 31, 2020 and 2019, Tel spent $2,239,811 and $2,312,043, respectively, on the engineering, research, and development of new and improved products. None of these amounts were sponsored by customers. Engineering, research, and development expenditures in fiscal year 2020 were made primarily for the development of the Company’s SDR/OMNI hand-held product line utilizing CRAFT and TS-4530A technology and the T47/M5 test set, the T-4530i, and the incorporation of other product enhancements in existing designs. The Company owns all of these designs with the exception of the AN/ARM-206 product. Tel’s management believes that continued significant expenditures for engineering, research, and development are necessary to enable Tel to expand its products, sales, and profits, and to remain competitive.
Personnel
At June 24, 2020, Tel had forty-five employees, comprised of twenty-two full-time employees in manufacturing, supply chain, and quality assurance, seven in administration and sales, including customer services and product support, and sixteen in engineering, research and development, none of whom belongs to a union. The Company also employs one part-time individual in administration. From time to time, the Company also employs independent contractors to support its manufacturing, engineering, and sales organizations. At June 24, 2020, the Company utilized one independent contractor in sales management. Tel has been successful in attracting skilled and experienced management, sales and engineering personnel, although the market for senior engineering talent is becoming very competitive. We have not experienced any work stoppages and we consider our relationship with our employees to be good.
Where You Can Find More Information
The public may read and copy any materials the Company files with the U.S. Securities and Exchange Commission (the “SEC”) at the SEC’s Public Reference Room at 100 F Street, NE, Washington, DC 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0030. The SEC maintains an Internet website (sec.gov) that contains reports, proxy and information statements and other information regarding issuers that file electronically with the SEC.
Item 1Business
General (continued)
Company Response to COVID-19
Fiscal year 2021 resulted in a sharp reduction in revenues and profitability for the year due mainly to the COVID-19 pandemic which negatively impacted commercial sales and severe supply chain and manufacturing staffing issues which hampered our ability to ship units.
The subsequent spread of COVID-19 to the U.S. and many other parts of the world led the World Health Organization to characterize COVID-19 as a pandemic on March 11, 2020. Thereafter, most U.S. states imposed “stay-at-home” orders on their populations to stem the spread of COVID-19. Of specific interest to the Company, stay-at-home orders were imposed in the states of New Jersey and Kansas.
The State stay-at-home orders generally required the closure of businesses that did not provide essential functions. Because the Company’s operations are as a supplier to the U.S. Military, and its manufacturing operations provide essential functions, the Company was able to continue shipping, receiving and manufacturing activities in the past year. This was extremely challenging due to manufacturing employee absences due to COVID-19 and/or quarantine requirements. The Company advised all other employees that could perform their job functions remotely to do so. As such, the Company’s operations, for the most part, remained operational, albeit at reduced staffing levels.
On May 4, 2020, the Company secured a Paycheck Protection Program (the “PPP”) loan, which, among other things is included in the Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”) in the amount of $772,577. TIC qualified for full loan forgiveness on the initial tranche on December 18, 2020. On January 6, 2021, updated PPP guidance outlining program changes to enhance its effectiveness and accessibility was released on in accordance with the Economic Aid to Hard-Hit Small Businesses, Non-Profits, and Venues Act. This was available to companies that recorded greater than a 25% sales reduction in any quarter compared to the prior year. The Company qualified for this second round of funding and on March 15, 2021, the company secured a Second Draw PPP loan in the amount of $772,577.
Second Draw PPP loans made to eligible borrowers qualify for full loan forgiveness if during the 8- to 24-week covered period following loan disbursement:
o | Employee and compensation levels are maintained in the same manner as required for the First Draw PPP loan |
o | The loan proceeds are spent on payroll costs and other eligible expenses; and |
o | At least 60% of the proceeds are spent on payroll costs |
A borrower can apply for forgiveness once all loan proceeds for which the borrower is requesting forgiveness have been used. Borrowers can apply for forgiveness any time up to the maturity date of the loan. If borrowers do not apply for forgiveness within 10 months after the last day of the covered period, then PPP loan payments are no longer deferred, and borrowers will begin making loan payments to their PPP lender. The Company plans to file for loan forgiveness of the second tranche of PPP funding during fiscal year ending March 31, 2022.
The COVID-19 outbreak and the uncertainty of economic conditions relating thereto negatively impacted the Company’s results of operations, cash flows and financial position in the past fiscal year but the Company expects improved results for FY 2022. Based on the operational and financial plans that management has developed, the Company expects to be able to meet its obligations as they become due over the next twelve months.
Mode 5 Identification Friend or Foe (“IFF”) Products
T-47/M5 Dual Crypto Test Set
This new test set has been well-received in the market, especially in the international market. It is designed as a KIV 77/KIV78 Mode 5 upgrade for the approximately 2,000 AN/APM-480A and T-47 series Mode 4 IFF test sets that the Company has sold both domestically and internationally. This will be a cost-efficient upgrade to Mode 5 for our large installed customer base. The T-47/M5 capabilities allow full testing, simulation and analysis of the following systems: Interrogator/Transponder Test set for Modes 1, 2, 3A, C, S, EHS, ADS-B TX and RX with 4 and Mode 5, TACAN, TCAS I, II and E-TCAS. The T-47/M5 utilizes the KIV-77, SIT 2010 or the KIV-78 Crypto applique (not included) for Mode 5 testing and built in USB connection available for remote diagnostic testing and download of test results to a PC.
Item 1.Business (continued)
General (continued)
The T-47/M5 performs the following tests:
● | Comprehensive Interrogator and Transponder test Modes 1, 2, 3A, C, S, EHS, Mode 4 and Mode 5 |
● | Multi Crypto Capable - Out of the Box - No Mods or added options needed |
● | Full TACAN testing of A/A, G/A, and A/A BCN on all 252 TACAN channels X and Y |
● | TCAS I, TCAS II and E-TCAS airborne systems intruder simulations |
● | Mode 5 testing with a built in powered bay for the KIV-77, SIT 2010 and KIV-78 Crypto Applique’ |
● | Full Testing of ADS-B in compliance with RTCA DO-260 A and B requirements |
● | Light Weight compact package in a MILSPEC Class 1 Container |
● | Long Lasting Battery |
● | Supports Remote Client testing utilizing USB connection to any laptop or desktop computer |
● | Large Full Color Display with User Friendly easy to navigate interface |
We have already sold approximately $8 million of these test sets to Canada, Japan, Korea, U.K., Europe, and other international customers. We are also receiving interest from various U.S. customers. TIC believes this will be a key product supporting our future growth and profitability. Tel has also received U.S. DOD AIMS certification for the T-47/M5 Test Set.
TS-4530A IFF Test Set
The TS-4530A test set provides simple to use GO/NO-GO operation. The TS-4530A, developed under a U.S. Army contract, now tests IFF Mode 5, ADS-B, EHS, and TCAS. The TS-4530A includes a large 8 line, color display and a new 3-button switch assembly that adds a 4-way directional toggle action for improved usability. The upper housing includes a built-in KIV-77 CCI appliqué enclosure.
Based on a new, highly integrated digital architecture; the TS-4530A performs the following tests:
● | Transponder: Modes 1, 2, 3/A, C, 4 Mode S, EHS (Enhanced Surveillance) and Mode 5 (Levels 1 & 2) |
● | ADS-B In and Out (transmit and receive) testing |
● | Built in GPS with integrated GPS antenna provides accurate Date, TOD and LAT/LONG for positioning |
● | Simple to use GO/NO-GO operation |
● | Selected Mode S BDS register information |
We have delivered over 3,500 TS-4530A kits and test sets. We are seeing continued demand from both the U.S. military and international customers, and we continue to explore all opportunities for this market.
Mode 5 Identification Friend or Foe (“IFF”) Products (continued)
T-4530i IFF Test Set
This new test is a software/hardware upgrade of the TS-4530A product. The lead customer for this test is the German military. This unit includes extended life Ni-MH batteries and significantly expanded manual Mode 5 test capability using a seven-year indefinite-delivery-indefinite quantity (“IDIQ”) contract to our European distributor, Muirhead Avionics (“Muirhead”) for T-4530i test sets. In total, TIC has delivered $3.4 million of these test sets to Germany with $1.4 million of these test sets delivered in fiscal year 2021. We expect additional volume orders for this product in fiscal year 2022.
Communications/Navigation (“COMM/NAV) Radio Frequency (RF) Avionics Flight line Tester”) (“CRAFT”) (AN/USM-708 and AN/USM-719)
The AN/USM-708 multi-purpose test set was developed by the Company in conjunction with the U.S. Navy. The AN/USM-708 large 6.0 inch color LCD screen and surrounding soft-keys and keyboard provides easy and quick access to a multiple of test screens menus, and display options affording single man operation, instant results, and a host of pre-programmed and manually variable parameters to meet the most demanding requirements for testing of airborne avionic and communication equipment.
Item 1.Business (continued)
General (continued)
The AN/USM-708 has been and continues to be a key product for the Company as it represents a new generation technology product. The Company delivered approximately $40 million in orders, representing over 1,200 test sets, for the AN/USM-708 and AN/USM-719 (IFF only) test sets to the U.S. Military. The AN/USM-708 CRAFT unit combines advanced IFF (including Mode 5 encryption technology) navigation, communication, and sonobuoy test capabilities in a portable test set, which will utilize a flexible and expandable digital-signal-processing-based architecture. Both the AN/USM-708 and the AN/USM-719 have been certified by the AIMS Program Office.
Based on entirely new up-to-date technology and digital architecture, the AN/USM-708 is a leap forward in precision testing of the following systems:
● | Transponder: Modes 1, 2, 3/A, C, 4 Mode S, EHS (Enhanced Surveillance) and Mode 5 |
● | Interrogator: Modes 1, 2, 3/A, C, 4, Mode S, Mode 5, TCAS & ETCAS, Shipboard Processor |
● | ADS-B (Automatic Dependent Surveillance Broadcast) TX & RX |
● | Navigation: VOR, ILS, LOC, GS, MB, TACAN |
● | Sonobuoy |
● | Link-4 |
● | VSWR |
This program represented the culmination of a multi-year, multi-million dollar investment by the Company in Mode 5 technology and continues to provide a significant competitive advantage. Management believes that the CRAFT program also has potential for sales into the balance of the U.S. Military, NATO, and internationally, as the new Mode 5 IFF systems are installed in overseas aircraft platforms.
The contract for the AN/USM-708 and AN/USM-719 was a significant milestone for the Company because the development of this proprietary technology, which was funded by the Company, established Tel’s position as a leader in the industry. The CRAFT test set replaced seven obsolete U.S. Navy test sets that collectively cost approximately $300,000, making the CRAFT test set an excellent value to the government. This unit has been well-received by the end users. The core technology in the AN/USM-708 has been the foundation for additional military and commercial products.
The joint Strike Fighter (“JSF”) program continues to generate CRAFT orders as this program ramps up production. The Company has already received orders from Lockheed Martin for the AN/USM-708 units, for the JSF Program, totaling approximate $8 million. Sikorsky has also indicated that it will be ordering CRAFT test sets for its new helicopters. The Company also believes it will receive orders from other customers for this product.
Please visit www.telinstrument.com for a complete listing of all of the Company’s different military and commercial products.
New Products
SDR-OMNI
TIC is also actively working on completing the SDR/OMNI this year with the initial product being a communication and navigation test set for the U.S. military. This new test set utilizes true software-designed radio technology that enables it to test all common avionics functions in one 4.5 pound test set, which is half the weight of competitive test sets. The SDR/OMNI has very wide frequency to accommodate new commercial and military waveforms. It utilizes the latest touch screen technology and has the capability to replace all TIC commercial test sets with one handheld product. The communications test capability was moved up in our development schedule based on the negative impact of the COVID-19 pandemic on commercial aviation. The U.S. military will need to upgrade thousands of existing communication and navigation test sets over the next several years to address the new frequency and waveform requirements for military radios and we believe the SDR/OMNI is well positioned to capture a large portion of this business.
Item 1.Business (continued)
General (continued)
Once the communications and navigation software are completed, TIC plans to introduce software APPS for the commercial transponder testing market. This will provide Transponder (Modes A, C, and S), ADS-B, and 978 MHz UAT capability for the large general aviation test market. This will allow us to compete with the IFR 4000 and 6000 test tests for our military and commercial aviation customers. The SDR-Omni product is a game changer in the commercial and military avionics test market as it will allow customers to replace multiple competitive test sets with one unit that is smaller and provides more capabilities at a fraction of the cost. This new technology could provide us with the opportunity to expand out of our relatively narrow avionics test market niche and enter the much larger secure military and homeland security radio test market which is many times the size of our existing avionics test market. The secure military test set market is very large, and we are anticipating several large competitive DOD solicitations to take place in the next several years.
MADL TEST SET
TIC is also working with Lockheed Martin (LMCO) on a new MADL test set. TIC was awarded this contract after winning a competitive solicitation. MADL is a secure communications radio for the F-35. This operates in a much higher frequency range than our other test sets and could represent a further diversification out of our core markets. The contract has been put on hold for at least the next four months due to LMCO funding issues but we are hopeful that the contract will resume this fall. TIC has completed the majority of the development work on this new test set. If the funding issue is resolved, this could generate substantial recurring revenues for the Company and would position TIC for further development contracts with LMCO.
Future Prospects
The Company has built a very solid position in the Mode 5 IFF and TACAN test set market. We believe that we are well positioned as our CRAFT and TS-4530A flight-line test sets have been endorsed by the U.S. military and we have already delivered test sets into 18 international markets. The commercial avionics industry is undergoing a great deal of change,
and we believe our new hand-held products that we are planning to introduce this fiscal year, will generate increased market share at very attractive gross margin levels. We are also working closely with our military customers on new potential market opportunities that will be needed to maintain our sales and profitability.
The Company manufactures and sells commercial and military products as a single avionics business, and its designs and products cross both markets.
Competition
The general aviation market consists of some 1,000 avionics repair and maintenance service shops at private and commercial airports in the United States that purchase test equipment to assist in the repair of aircraft electronics. The commercial aviation market consists of approximately 80 domestic and foreign commercial airlines.
The civilian market for avionic test equipment is dominated by two designers and manufacturers, the Company and Aeroflex, Inc., a division of Viavi Solutions, Inc. (NASDAQ: VIAV) (“Aeroflex”), with Aeroflex being substantially larger than Tel. This market is relatively narrow and highly competitive. Tel has been successful because of its high quality, new technology, user friendly products and competitive prices.
The military market is large and is dominated by large corporations with substantially greater resources than the Company, including Aeroflex. Tel competitively bids for government contracts based on the engineering quality and innovation of its products, competitive price, and “small business set asides” (i.e., statutory provisions requiring the military to entertain bids only from statutorily defined small businesses), and on bids for sub-contracts from major government suppliers. There are a limited number of competitors who are qualified to bid for “small business set asides.” The military market consists of many independent purchasing agencies and offices. The process of awarding contracts is heavily regulated by the U.S. Department of Defense.
Over the last fifteen years, the Company has won several large, competitively bid contracts from the military and has become the primary supplier for the U.S. Military, as well as the NATO countries, of flight line IFF test equipment. The CRAFT AN/USM-708, CRAFT AN/USM-719,TS-4530A, TS-4530i and TR-47/M5 test sets, discussed previously, involve a new generation of technology, including the next generation of IFF testing, and is expected to enable the Company to continue to be a major supplier of avionics test equipment to the military for years to come. Tel believes its new technology will also allow it to increase sales to the commercial avionics market in the future and expand into the very large secure communication test market.
Item 1.Business (continued)
General (continued)
Marketing and Distribution
Domestic commercial sales are made throughout the U.S. to commercial airlines and general aviation businesses directly or through distributors. There were two (2) direct commercial customers who accounted for more than 10% of commercial sales in fiscal year 2021 and zero in 2020. The Company has one domestic distributor which receives discounts ranging between 16%-20% discount for stocking, selling, and, in some cases, providing product calibration and repairs. The loss of this distributor would not have a material adverse effect on the Company or its operations. U.S. and international Commercial sales represented 15% and 19% of total sales, respectively, for the fiscal years ended March 31, 2021, and 2020. Our commercial distributor represented approximately 5% and 20%, respectively, of commercial sales during fiscal years 2021 and 2020.
Marketing to the U.S. Government is made directly by employees of the Company or through independent sales representatives, who receive similar commissions to the commercial distributors. For the years ended March 31, 2021, and 2020, sales to the U.S. Government, including shipments through the government’s logistics centers, represented approximately 38% and 30%, respectively, of total sales. For the year ended March 31, 2021, two (2) direct customers represented 10% and 33% of total sales and 12% and 39% of government sales, respectively. No international distributor represented 10% of total sales or 10% of government sales for the year ended March 31, 2021.
International sales are made throughout the world to government and commercial customers, directly through American export agents, or through the Company’s overseas distributors at a discount reflecting a 15% to 22% selling commission, under written or oral, year-to-year arrangements. The Company has an exclusive distribution agreement with Muirhead Avionics and Accessories, Ltd (“Muirhead”), based in the United Kingdom, to represent the Company in parts of Europe, and with Milspec Services in Australia and New Zealand. Tel also sells its products through exclusive distributors in Spain, Portugal, and the Far East and is exploring distribution in other areas. For the years ended March 31, 2021, and 2020, total international sales were 52% and 54%, respectively, of sales, the notable decrease is due partially to the Pandemic. Additionally, the Company has an agreement with M.P.G. Instruments s.r.l., based in Italy, wherein this distributor has the exclusive sales rights for DME/P ramp and bench test units. The Company continues to explore additional marketing opportunities in other parts of the world, including the Far East. One international distributor accounted for 13% of total sales for the fiscal years ended March 31, 2020.
The Company has no material assets overseas. Tel also provides customers with calibration and repair services. Repairs and calibrations accounted for 10% and 10% of sales for the years ended March 31, 2021, and 2020, respectively.
Future domestic market growth, if any, will be affected in part by whether the U.S. Federal Aviation Administration (“FAA”) implements additional plans to upgrade the U.S. air traffic control system regulations and by continuing recent industry trends towards more sophisticated avionics systems, both of which would require the design and manufacture of new test equipment. Currently, the T-47/M5 has been upgrade for continued support of NATO customers and we continue to develop the Mode 5L2B Flight Line Test. This technology will be supported in our T-47/M5 and T-4530i product lines. Military contracts are awarded and implemented by extensive government regulation. The Company believes its test equipment is recognized by its customers for its quality, durability, reliability, affordability, and by its advanced technology.
Backlog
Set forth below is Tel’s avionics backlog on March 31, 2021, and 2020:
Commercial | Government | Total | ||||||||||
March 31, 2021 | $ | 291,687 | $ | 7,310,096 | $ | 7,601,783 | ||||||
March 31, 2020 | $ | 200,193 | $ | 3,824,984 | $ | 4,025,177 | ||||||
Tel believes that most of its backlog on March 31, 2021, will be delivered during the next 12 months. The backlog is pursuant to purchase orders. Historically, the Company obtains orders which are required to be filled in less than 12 months, and therefore, backlog amounts at the end of the period do not reflect delivered or future orders.
Item 1.Business (continued)
General (continued)
Suppliers
TIC obtains its purchased parts from a number of suppliers. In fiscal year 2021, our supply chain had significant issues with deliveries being delayed with negatively impacted TIC’s revenues and profitability. The situation appears to be improving this calendar year and the Company is optimistic that it will be able to obtain purchased parts, as needed, at acceptable prices.
Patents and Environmental Laws
Tel has no patents or licenses which are material to its business, and there are no material costs incurred to comply with environmental laws.
Engineering, Research, and Development
In the fiscal years ended March 31, 2021, and 2020, Tel incurred expenses of $2,295,901 and $2,239,811, respectively, on the engineering, research, and development of new and improved products. Engineering, research, and development expenditures in fiscal year 2021 were made primarily for the development of the Company’s SDR/OMNI hand-held product line utilizing CRAFT and TS-4530A technology, the MADL test set for LMCO, and T-4530i, and the incorporation of other product enhancements in existing designs. The Company owns all of these designs with the exception of the AN/ARM-206 product. Tel’s management believes that continued significant expenditures for engineering, research, and development are necessary to enable Tel to expand its products, sales, and profits, and to remain competitive.
Personnel
As of June 28, 2021, Tel had 47 employees, comprised of 23 full-time employees in manufacturing, supply chain, and quality assurance, eight in administration and sales, including customer services and product support, and sixteen in engineering, research and development, none of whom belongs to a union. The Company also employs one part-time individual in manufacturing. From time to time, the Company also employs independent contractors to support its manufacturing, engineering, and sales organizations. As of June 28, 2021, the Company utilized three independent contractors in sales management and two Manufacturing temporary employees from an Employment agency. Tel has been successful in attracting skilled and experienced management, sales and engineering personnel, although the market for senior engineering talent is becoming very competitive. We have not experienced any work stoppages and we consider our relationship with our employees to be good.
Where You Can Find More Information
The public may read and copy any materials the Company files with the U.S. Securities and Exchange Commission (the “SEC”) at the SEC’s Public Reference Room at 100 F Street, NE, Washington, DC 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0030. The SEC maintains an Internet website (sec.gov) that contains reports, proxy and information statements and other information regarding issuers that file electronically with the SEC.
We are a smaller reporting company as defined in Rule 12b-2 of the Exchange Act and are not required to provide the information required under this item.
Item 1B. Unresolved Staff Comments
Not Applicable.
The Company leases its general office and manufacturing facility in East Rutherford, NJ (approximately 27,000 square feet). In June 2016,April 2021, the Company extended the lease term for another fiveeight years until JulyAugust 31, 2021.2029, at an initial monthly rate of $21,236.67. Under terms of the lease, the Company is also responsible for its proportionate share of the additional rent to include all real estate taxes, insurance, snow removal, landscaping and other building charges. The Company is also responsible for the utility costs for the premises.
Item 2.Properties(continued)
The Company also leases a small office in Lawrence, Kansas under an operating lease agreement. In June 2019,March 2021, the Company extended the lease term which was set to expire June 30, 2020. On March 31, 2020, the Company negotiated a new lease for additional space, which expires March 31, 2021.2022.
We believe that our facilities are adequate for our needs for the foreseeable future. Tel is unaware of any environmental problems in connection with its location and because of the nature of its manufacturing activities, does not anticipate any such problems.
On March 24, 2009, Aeroflex Wichita, Inc. (“Aeroflex”) filed a petition against the Company and two of its employees in the District Court located in Sedgwick County, Kansas, Case No. 09 CV 1141 (the “Aeroflex Action”), alleging that the Company and its two employees misappropriated Aeroflex’s proprietary technology in connection with the Company winning a substantial contract from the U.S. Army, to develop new Mode-5 radar test sets and kits to upgrade the existing TS-4530 radar test sets to Mode 5 (the “Award”). Aeroflex’s petition, seeking injunctive relief and damages, alleges that in connection with the Award, the Company and its named employees misappropriated Aeroflex’s trade secrets; tortiously interfered with Aeroflex’s business relationship; conspired to harm Aeroflex and tortiously interfered with Aeroflex’s contract.
The central basis of all the claims in the Aeroflex Action is that the Company misappropriated and used Aeroflex proprietary technology and confidential information in winning the Award. In February 2009, subsequent to the Company winning the Award, Aeroflex filed a protest of the Award with the Government Accounting Office (“GAO”). In its protest, Aeroflex alleged, inter alia, that the Company used Aeroflex’s proprietary technology in order to win the Award, the same material allegations as were later alleged in the Aeroflex Action. On or about March 17, 2009, the U.S. Army Contracts Attorney and the U.S. Army Contracting Officer each filed a statement with the GAO, expressly rejecting Aeroflex’s allegations that the Company used or infringed on Aeroflex’s proprietary technology in winning the Award and concluding that the Company had used only its own proprietary technology. On April 6, 2009, Aeroflex withdrew its protest.
In December 2009, the Kansas District Court dismissed the Aeroflex Action on jurisdiction grounds. Aeroflex appealed this decision. In May 2012, the Kansas Supreme Court reversed the decision and remanded the Aeroflex Action to the Kansas District Court for further proceedings. The case then entered an extended discovery period in the District Court.
On May 23, 2016, the Company filed a motion for summary judgment based on Aeroflex’s lack of jurisdictional standing to bring the case. The motion asserts that Aeroflex does not own the intellectual property at issue since it is a bare licensee of Northrop Grumman. Northrop Grumman has declined to join this suit as plaintiff. The motion asserted Aeroflex lacks standing to sue alone. Also, the motion raises the fact that Aeroflex allowed the license to expire, Aeroflex’s claims are either moot or Aeroflex lacks standing to sue for damages alleged to have accrued after the license ended in 2011. The motion for summary judgment was denied.
The Aeroflex trial on remand in the Kansas District Court began in March 2017. After a nine-week trial, the jury rendered its verdict. The jury found no misappropriation of Aeroflex trade secrets, but it did rule that the Company tortiously interfered with a prospective business opportunity and awarded damages of $1.3 million for lost profits. The jury also ruled that Tel tortiously interfered with Aeroflex’s non-disclosure agreements with two former Aeroflex employees and awarded damages of $1.5 million for lost profits, resulting in total damages against the Company of $2.8 million. The jury also found that the former Aeroflex employees breached their non-disclosure agreements with Aeroflex and awarded damages against these two individuals totaling $525,000. The jury also decided that punitive damages should be allowed against the Company.
Following the verdict, the Company filed a motion for judgment as a matter of law. In the motion, the Company renewed its motion for judgment on Aeroflex’s tortious interference with prospective business opportunity claim arguing that such claim is barred by the statute of limitations. Alternatively, the motion asserts there is insufficient evidence supporting the lost profit award on that claim. Additionally, the motion for judgment addresses inconsistency between the awards against the former Aeroflex employees for breach of the non-disclosure agreements and the award against the Company for interfering with those agreements. Alternatively, the motion asserts there is insufficient evidence supporting the lost profit award on that claim.
During July 2017, the Court heard the Company’s motion for judgment as well as conducting a hearing as to the amount of a punitive damages award. Kansas statutes limit punitive damages to a maximum of $5 million.
Item 3. Legal Proceedings (continued)
Aeroflex submitted a motion to the Court requesting that the judge award punitive damages at the maximum $5 million amount. In October 2017, the Court denied the Company’s motions and awarded Aeroflex an additional $2.1 million of punitive damages, which brings the total Tel damages awarded in this case to approximately $4.9 million.
The Journal Entry of Judgment including judgment against the Company in the amount of $1.3 million for tortious interference with prospective business advantage, of $1.5 million for tortious interference with existing contracts, and $2.1 million in punitive damages was entered on November 22, 2017. Pursuant to K.S.A. 16-204(d) “any judgment rendered by a court of this state on or after July 1, 1986, shall bear interest on and after the day on which judgment is rendered at the rate provided by subsection (e). The Kansas Secretary of State publishes the interest rate amount. The amount published forwhich is modified annually based on market interest rates. For the year starting July 1, 2017 through June 30, 2018 is 5.75%2020, the interest rate was 4.25% and 6.5%cumulative interest as of fiscal year ended March 31, 2021, was $989,023. For the year starting July 1, 2018 through June 30, 2019. The current2021, the interest rate beginning July 1, 2019 is 7.0%.% has not been published to date. Interest on the $4,900,000 judgment started to accrue on November 22, 2017, the date the judgment was entered. As of March 31, 2020,2021, the outstanding amount of the judgement and accrued interest is $5,657,549.$5,889,023.
The Company filed post-trial motions to avoid damage duplication and inconsistency, and to secure judgment as a matter of law or a new trial. The trial court denied those motions. The Company appealed the verdict and the post-trial rulings to the Court of Appeals of the State of Kansas, Case No. 18-119,563. The Company posted a $2 million supersedeas bond. The Plaintiff filed a cross-appeal. The appeal and cross-appeal are fully briefed. The appellate court has not set a date to hear the appeal.
The Company is very optimistic about the prospects of its appeal for a judgment as a matter of law. The Company was hoping for a decision from the court this calendar year, but this timing will likely be delayed due to the three month COVID-19 related shutdown of the Kansas court system. As such, the appeal process is expected to take at least another six months to a year to complete.
The Company has the ability to settle this case at its sole discretion by withdrawing the appeal and paying the judgment plus interest amount. The Company made an offercurrently has sufficient cash on hand and borrowing capability to settlepay off this case in February 2020 for $2.5 million which was rejected byliability if we lose the other party. The Company plans to make another settlement offer. appeal.
Other than the matters outlined above, 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 any court, public board, government agency, self-regulatory organization or body pending or, to the knowledge of executive officers of our Company, threatened against or affecting our Company, or our common stock in which an adverse decision could have a material effect.
Item 4. Mine Safety Disclosures
Not applicable.
PART II
Item 5. Market for Registrant’sRegistrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
a) Market Information
The common stock, $0.10 par value per share, of the registrant (“Common Stock”) is traded on the OTCQB under the symbol “TIKK”. The Company had previously traded on the NYSE American LLC until March 11, 2019. On March 11, 2019, trading on NYSE American in the common stock of Tel-Instrument Electronics Corp. -- ticker symbol TIK -- was suspended. NYSE Regulation had previously announced on December 20, 2018 that it had commenced delisting procedures with respect to the Company for failure to meet the $4.0 million minimum net worth requirements pursuant to Section 1009 of the NYSE American Company Guide. This mandates that a company’s stockholders’ equity be $4.0 million or higher if such company has reported net losses in three of its last four fiscal years (the “Stockholders’ Equity Requirement”). The Company requested a review of this determination by a Committee of the Board of Directors of NYSE American (the “Committee”) and the Company’s appeal was heard at a meeting on Monday, February 11, 2019. The Committee affirmed NYSE Regulation’s delisting determination. The following table sets forth the high and low per share sale prices for our Common Stock for the periods indicated as reported for fiscal years 20202021 and 20192020 by the NYSE – American through March 11, 2019 under the symbol “TIK” and for the OTC after March 11, 2019 under the symbol “TIKK”.OTC.
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Ended March 31, |
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2020 |
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2021 | ||||||||||||||||
First Quarter |
| $ | 4.00 |
| $ | 3.25 |
| $ | 3.95 | $ | 2.56 | |||||
Second Quarter |
| 3.60 |
| 2.25 |
| 4.80 | 3.13 | |||||||||
Third Quarter |
| 3.82 |
| 2.75 |
| 5.95 | 2.76 | |||||||||
Fourth Quarter |
| 4.50 |
| 3.15 |
| 3.85 | 2.85 | |||||||||
2019 |
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2020 | ||||||||||||||||
First Quarter |
| $ | 3.50 |
| $ | 2.20 |
| $ | 4.00 | $ | 3.25 | |||||
Second Quarter |
| 3.75 |
| 2.31 |
| 3.60 | 2.25 | |||||||||
Third Quarter |
| 3.87 |
| 2.35 |
| 3.82 | 2.75 | |||||||||
Fourth Quarter |
| 6.00 |
| 2.60 |
| 4.50 | 3.15 | |||||||||
b) Holders
The Company has approximately 149 holders of its Common Stock as of June 26, 2020.28, 2021. This figure does not take into account those shareholders whose certificates are held in the name of broker-dealers or other nominees.
c) Dividends
We have not declared or paid any dividends on our Common Stock and intend to retain any future earnings to fund development and growth of our business. Therefore, we do not anticipate paying dividends on our common stock for the foreseeable future. There are no restrictions on our present ability to pay dividends to stockholders of our common stock, other than those prescribed by law.
d) Securities Authorized for Issuance under Equity Compensation Plans
The following table provides information as of March 31, 20202021, regarding compensation plans under which equity securities of the Company are authorized for issuance. See “Equity Compensation Plan Information” under Item 12 below.
Plan category |
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Equity Compensation Plans approved by shareholders |
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| 118,500 |
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| $ | 3.98 |
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| 166,500 |
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Equity Compensation Plans not approved by shareholders |
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Total |
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| 118,500 |
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| $ | 3.98 |
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| 166,500 |
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Plan category | Number of securities to be issued upon exercise of outstanding options | Weighted average exercise price of outstanding options | Number of options remaining available for future issuance under Equity Compensation Plans | |||||||||
Equity Compensation Plans approved by shareholders | 98,500 | $ | 3.19 | 151,500 | ||||||||
Total | 98,500 | $ | 3.19 | 151,500 | ||||||||
Item 5.Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Rule 10B-18 Transactions
During the year ended March 31, 2020,2021, there were no repurchases of the Company’s Common Stock by the Company.
Recent Sales of Unregistered Securities
During the year ended March 31, 2020,2021, we have not issued any securities that were not registered under the Securities Act and not previously disclosed in the Company’s Quarterly Reports on Form 10-Q or Current Reports on Form 8-K.
Item 6.Selected Financial Data
The Company is a smaller reporting company as defined in Item 10 (f) of Regulation S-K and therefore is not required to provide the information under this item. it
Item 7. Management’Management’ss Discussion and Analysis of Financial Condition and Results of Operations (continued)
Forward Looking Statements
A number of the statements made by the Company in this report may be regarded as “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1965.
Forward-looking statements include, among others, statements concerning the Company’s outlook, pricing trends and forces within the industry, the completion dates of projects, expected sales growth, cost reduction strategies and their results, long-term goals of the Company and other statements of expectations, beliefs, future plans and strategies, anticipated events or trends and similar expressions concerning matters that are not historical facts.
All predictions as to future results contain a measure of uncertainty and accordingly, actual results could differ materially. Among the factors that could cause a difference are changes in the general economy; changes in demand for the Company’s products or in the costs and availability of its raw materials; the actions of competitors; the success of our customers, technological change; changes in employee relations; government regulations; litigation, including its inherent uncertainty; difficulties in plant operations and materials transportation; environmental matters; and other unforeseen circumstances, including the current COVID-19 pandemic. A number of these factors are discussed in the Company’s filings with the SEC.
General
Management’s discussion and analysis of results of operations and financial condition is intended to assist the reader in the understanding and assessment of significant changes and trends related to the results of operations and financial position of the Company together with its subsidiary. This discussion and analysis should be read in conjunction with the consolidated financial statements and accompanying financial notes, and with the Critical Accounting Policies noted below. The Company’s fiscal year begins on April 1 and ends on March 31. Unless otherwise noted, all references in this document to a particular year shall mean the Company’s fiscal year ending on March 31.
Overview
Fiscal year 2021 was extremely challenging for the Company. The COVID-19 pandemic materially impacted commercial sales and supply chain disruptions prevented us from shipping product on schedule. This led to substantially reduced revenues and profitability. The Company reported a 30% increase26.6% decline in sales to $15,774,943$11,582,520 for the year ended March 31, 20202021, as compared to $12,116,050$15,774,943 for the previous year. Commercial sales decreased by 42.6% to $1,723,983 for the year ended March 31, 2021, as compared to $3,004,580 for the year ended March 31, 2020. The commercial airline industry has been devastated by the COVID pandemic and this led to a sharp reduction in commercial test set orders. Avionics government sales decreased by 22.6% to $9,858,537 for the year ended March 31, 2021, as compared to $12,737,362 for the year ended March 31, 2020. This decrease in sales is mainly the result of supply chain disruption due to the pandemic, the slowdown of purchased components significantly disrupted the TIC manufacturing of finished goods. Gross Margin decreased by $2.6 million in fiscal 2021 as compared to 2020 and the gross margin percentage declined by 6 percentage points to 41.3%. This was due to adverse manufacturing variances due to the lower volume and discounted sales prices to Germany and the U.K. to secure future business. Total operating expenses for the year declined by approximately $150,000due primarily to lower bonus amounts. This expense reduction was achieved despite one-time professional fees of $300,000 related to M&A discussions and a GAO government protest that was filed in the fourth quarter. Net income before taxes was $2,087,210$573,030 for fiscal year 20202021 as compared to $203,038$2,087,210 in fiscal year 2019. This increase2020. The Company’s cash balance on March 31, 2021, was $5.5 million, including the $2 million of restricted cash to support the appeal bond. The Company’s backlog on March 31, 2021, was $7.6 million, which is $3.6 million higher than the mainly the resultyear-ago period.
Item 7.Management’s Discussion and Analysis of our CRAFT products, especially for Lockheed Martin for the Joint Strike Fighter (“JSF”) program,Financial Condition and the T-4530i and the TS-4530A. In August 2018, we also reported that the German government had notified our U.K. distributorResults of its intent to award a multi-year, multi-million dollar contract. In February 2019, the Company received an initial purchase order totaling $520,000 from its European Distributor, Muirhead Avionics (“Muirhead”) for Mode 5 test sets from the contract awarded by the German military. In August 2019, we reported the receipt of a follow-on purchase order totaling approximately $1.5 million from Muirhead for Mode 5 test sets from the contract awarded by the German military, and in June 2020 another order for approximately $1.6 million. This order is part of a seven-year procurement. The Company has already received orders of approximately $3.6 million. Operations (continued)
Overview (continued)
The Company continues to pursue opportunities in the domestic and international market for our Mode 5 test sets with good success.results. We continue to emphasizereceive volume orders from South Korea, Australia, Canada, the importance of capturing the majority share of the large Identification Friend or Foe (“IFF”) international market. The Company is also in discussions with other major international customers that have evaluatedU.K. and Germany for our Mode 5 test sets and wesets. We also are excited about the opportunities overseas, as evidenced by the order from Germany, but no guarantees can be made about these opportunities. We continue to receivereceiving volume orders from Japan, South Korea, Canada, Australia, New Zealand, United Kingdomthe U.S. Government and other countries. In January 2020, we also reported the receipt of a $1.87 million T-47/M5Lockheed Martin for our AN/USM-708 and 719 (“CRAFT”) Mode 5 test set ordersets. We have also been awarded a large contract from the U.S. military for the United Kingdom. These test sets will be sold through our European distributor, Muirhead Avionics, to Leonardo MW Ltd., which is handling the Mode 5 upgrade effortT-47NH product and are seeing solid demand for the United Kingdom Ministry of Defense. Manyour other countries have expressed significant interest in our Modenon-Mode 5 test sets.
The units for Lockheed Martin will be used for the Joint Strike Fighter (“JSF”) program, and we believe this program will generate significant CRAFT orders as this program ramps up limited rate production. The Company had already received orders from Lockheed Martin for the AN/USM-708 units, for the JSF Program, totaling over $6 million. Sikorsky has also indicated that it will be ordering CRAFT test sets for its new helicopters. The Company also received orders from other customers for this product.
The Company has built a solid position in the Mode 5 IFF flight line test equipment market, and our products are very competitive in the overseas markets. We believe that we are well-positioned as our CRAFT and TS-4530A flight-line test sets have been endorsed by the U.S. military and we have already delivered test sets into 18 international markets.
Item 7.Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)
Overview (continued)
The new T-47/M5 Mode 5 IFF test set is expected to be a cost-effective upgrade option for our large installed base of Mode 4 test sets and we have seen substantial interest and orders for this test set from a number of countries. All allied countries have a drop-dead date of July 1, 2020, which was extended from January 1, 2020, for Mode 5 capability so we expect this international business will begin to accelerate this year and it should remain strong for at least the next three years, based on our current projections. Our expectation is that we will continue to improve both our revenues and gross margins, but the timing of these new orders is largely out of our hands. Nonetheless, we are encouraged by the increasing activity we are seeing for bothmilitary products. After a sharp drop in FY 2021, the Company is also seeing the beginning of a rebound in commercial test set business with orders in the first two months exceeding demand for all of FY2021. Tel Instrument is also working on the next generation of Mode 5 called Mode 5 Level 2B. This could potentially lead to substantial software upgrades in the future for our commercialdomestic and military products.international Mode 5 customers. The Navy is also considering a mid-life update of our CRAFT product line which could entail funded engineering starting next fiscal year. This is an important product for the Company, and this should ensure an additional 10 years of product life.
The commercial avionics industryCompany is undergoing a great deal of change and we believe our new lightweight, hand-held product (the “SDR/OMNI”) that we are planning to introduce in the near term will generate increased market sharealso actively looking at very attractive gross margin levels. The technology for the hand-held product will provide a platform for future products. We are also working closely with our other military customers on new potential market opportunities that will be needed to maintain our sales and profitability growth.
This new technology could provide us with the opportunity to expandexpanding out of our relatively narrowits current core avionics market area. TIC is working with Lockheed Martin (LMCO) on a new MADL test market niche and enter the much largerset. TIC was awarded this contract after winning a $956,000 competitive solicitation. MADL is a secure communications radio for the F-35. This operates in a much higher frequency range than our other test market. We believesets. The contract has been put on hold for at least the next four months due to LMCO funding issues, but we are hopeful that the contract will resume this fall. TIC has completed the majority of the development work on this new test set. If the funding issue is resolved, this could generate substantial recurring revenues for the Company and would position TIC for further development contracts with LMCO.
The main focus area for the Company is moving into the secure communications testing with our new hardware platform provides unmatched capabilities in a market leading form factor.DSR/OMNI test set. The world’s first “All-in-One” Avionics Test Set utilizes true software-designed radio technology that enables it to test all common avionics functions in one 4.5 pound test set. The SDR/OMNI has very wide frequency to accommodate new commercial and military waveforms in an industry leading 4.5-pound package. This is half the weight of competitive test sets. It utilizes the latest touch screen technology and has the capability to replace all TIC commercial test sets and military flight-line test sets with one handheld product. The initial product will beWith the COVID pandemic, the Company focused all of its engineering efforts on developing a commercial avionics air traffic controlsecure communications and navigation test set which addsfor the U.S. military. The communications test capability was moved up in our development schedule based on the negative impact of the COVID-19 pandemic on commercial aviation. The U.S. military will need to upgrade thousands of existing communication and navigation test sets over the next several years to address the new frequency and waveform requirements for military radios and we believe the SDR/OMNI is well positioned to capture a large portion of this business.
Once the communications and navigation software are completed, TIC plans to introduce software APPS for the commercial transponder testing market. This will provide Transponder (Modes A, C, and S), ADS-B, and 978 MHz UAT test capability for the large general aviation test market that is subject to the January 1, 2020 requirement for ADS-B out capability.market. This will allow us to compete with the Aeroflex IFR 4000 and 6000 test settests for our military and commercial aviation customers. The SDR-Omni product is a game changer in the commercial and military avionics test market as it will allow customers to replace the TIC TR-220 product. This release is initially targeted at the civil aviation marketmultiple competitive test sets with one unit that is subject to the January 1, 2020 requirement for ADS-B out capability. Future software releases will incorporate Nav/Comm test functions which can be purchased as APP’s (applications) by our customers. We continue to evaluate other attractive potential market opportunities.
Assmaller and provides more capabilities at a resultfraction of the potentialcost. This new military applications for our new 4.5 pound SDR/OMNI hand-held test set, we are currently implementing a hardware CPU change to further improve high speed processing capabilities. This change will movetechnology could provide us with the initial product introduction for the commercial avionics market towards the end of this calendar year, but will better position the Company for high dollar military contracts which will be critical to our long-term growth in revenues and profitability. The goal of this new test set isopportunity to expand out of our relatively narrow avionics test market niche and enter the much larger secure communicationsmilitary and homeland security radio test market which is many times the size of our existing avionics test market. The secure military test set market is very large, and we are anticipating several large competitive DOD solicitations to take place in the next several years.
The Aeroflex litigation (see Note 21 to the consolidated financial statements) did not result in a favorable outcome for the Company, despite our belief that we committed no wrong doing.wrongdoing.
The jury found no misappropriation of Aeroflex trade secrets, but it did rule that the Company tortiously interfered with a prospective business opportunity and awarded damages. The jury also ruled that Tel tortiously interfered with Aeroflex’s non-disclosure agreements with two former Aeroflex employees. The jury also found that the former Aeroflex employees breached their non-disclosure agreements with Aeroflex. The Court conducted further hearings on the Company’s post-trial motions which sought to reduce the damages award of $2.8 million, as well as the punitive damages claim. The Court denied the Company’s motions and awarded Aeroflex an additional $2.1 million of punitive damages. The Company has filed motions in January 2018 for the Court to reconsider the amountnumber of damages on the grounds that they are duplicative and not legally supportable. The Court heard these motions, and such motions were denied. The Company has filed for the appeal. The Company has posted a $2 million bond for the appeal. This $2 million bond amount will remain in place during the appeal process (See Note 6).
Item 7.Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)
Overview (continued)
As reflected in the accompanying consolidated balance sheet as of March 31, 2020,2021, the Company has recorded estimated damages to date of $5.7$5.9 million, including interest, as a result of a jury verdict associated with the Aeroflex litigation. The Company has filed for an appeal (see Notes 6 and 21). As of March 31, 2020,2021, the Company has cash balances of $5.1$5.5 million, including $2 million of restricted cash as well as $1.4 million in accounts receivable.$690,000 of borrowing capacity. We expect to continue to have sufficient cash and borrowing capacity to fully cover the Aeroflex damages amount.
The Company is very optimistic about the prospects of its appeal for a judgment as a matter of law. The Company was hoping for a decision from the court this calendar year, but this timing will likely be delayed due to the three month COVID-19 related shutdown of the Kansas court system. As such, the appeal process is expected to take at least another six months year to complete unless a settlement can be reached. The Company has the ability to settle this case at its sole discretion by withdrawing the appeal and paying the judgment plus interest amount.
The Company believes it has sufficient financing in place to fund its plans for the next twelve months due its increased revenues and profitability and its current projections (see liquidity section below).
Item 7.Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)
Overview (continued)
On March 21, 2016, the Company entered into a line of credit agreement with Bank of America, which expired March 31, 2017. In March 2017, the Company extended until March 31, 2018.America. The line is collateralized by substantially all of the assets of the Company. The line provided a revolving credit facility with borrowing capacity of up to $1,000,000. There were no covenants or borrowing base calculations associated with this line of credit. On August 29, 2018, the Company entered a Loan Modification Agreement (the “Agreement”) with the bank to extend the Agreement until May 31, 2019, which included a debt service ratio covenant“covenant”. In June 2019, Bank of America agreed to extend the Company’s line of credit until March 31, 2020, including monthly principal payments of $10,000, and eliminating the covenant for the debt service ratio. The Company’s interest rates were 4.74% and 6.25% atIn March 31, 2020 and 2019, respectively. During the year ended March 31, 2020, the Company repaid $120,000 against this line of credit. As of March 31, 2020 and 2019, the outstanding balances were $680,000 and $800,000, respectively. As of March 31, 2020 the remaining availability under this line is $10,000.
In March 2020, Bank of America agreed to extend theextended its line of credit fromuntil January 31, 2021. Then extended to March 31, 20202021, and then subsequently to January 31,June 30, 2021. The new agreement includes availability up to $690,000. Monthly payments will be interest only.
AtThe Company’s interest rates were 3.86% and 4.74% on March 31, 2021, and 2020, respectively. During the year ended March 31, 2021, the Company repaid $680,000 against this line of credit. As of March 31, 2021, and 2020, the outstanding balances were $0 and $680,000, respectively. As of March 31, 2021, the remaining availability under this line is $690,000. On March 31, 2021, Bank of America extended the maturity date of our line of credit from March 31, 2021, to June 30, 2021, to allow time for a full underwriting for the annual renewal period. As of March 31, 2021, the line of credit draw remains at zero, with $690K available (see Note 10 to the consolidated financial statements).
On March 31, 2021, the Company’s backlog of orders was approximately $4.0$7.6 million as compared to $6.1$4.0 million aton March 31, 2019.2020. Historically, the Company obtains orders which are required to be filled in less than 12 months, and therefore, these anticipated orders are not reflected in the backlog.
The Company believes it has sufficient financing in place to fund its planscash on hand and expected cash flow from operations for the next twelve months due to the increase in business and the opportunities that exist for the next few years.
Results of Operations 20202021 Compared to 20120209
Sales
For the year ended March 31, 20202021, sales increased $3,658,893 (30.2%decreased $4,192,423 (26.6%) to $15,774,943$11,582,520 as compared to $12,116,050$15,774,943 for the year ended March 31, 2019.
Avionics government2020. Commercial sales increased $3,530,984 (38.2%decreased $1,280,597 (42.6%) to $12,770,363$1,723,983 for the year ended March 31, 20202021, as compared to $9,239,379 for the year ended March 31, 2019. This increase is the mainly the result of increased international business for our Mode 5 test sets, including our T-47/M5, which has received AIMS (Air Traffic Control Radar Beacon System, Identification Friend or Foe, Mark XII/Mark XIIA, Systems) approval, increased shipments of our CRAFT products, especially for Lockheed Martin for the Joint Strike Fighter (“JSF”) program, and the T-4530i and the TS-4530A.
Commercial sales increased $127,909 (4.4%) to $3,004,580 for the year ended March 31, 2020 as compared2020. The COVID-19 pandemic devastated the commercial airline industry and new orders declined by almost two thirds in the last fiscal year. Avionics government sales decreased $2,878,825 (22.6%) to $2,876,671$9,858,537 for the year ended March 31, 2019. The commercial business2021, as compared to $12,737,362 for the year ended March 31, 2020. This decrease in sales is steady and changes are mainly the result of Supply chain disruption due to the timingPandemic, the slowdown of orders and parts availability. purchased components significantly disrupted the TIC manufacturing of finished goods.
Gross Margin
Gross margin increased $1,992,681 (36.8%decreased $2,627,402 (35.5%) to $4,782,499 for the year ended March 31, 2021, as compared to $7,409,901 for the year ended March 31, 2020, as compared to $5,417,220 for the year ended March 31, 2019, primarily as a result of the increasedecrease in volume. The gross margin percentage for the year ended March 31, 20202021, was 47.0%41.3%, as compared to 44.7%47.0% for the year ended March 31, 2019.2020. The higherlower gross margin percentage is primarily attributable to an improved product mixadditional discounts offered to international customers to secure sales orders as well as the reduction innegative manufacturing overhead as well as manufacturing efficiencies.
Operating Expenses
Selling, general and administrative expenses increased $262,027 (11.8%) to $2,477,548 for the year ended March 31, 2020 as compared to $2,215,521 for the year ended March 31, 2019. This increase is primarily attributed to the increase in accrued profit sharing expense, outside commissions, consulting fees, and slightly higher payroll and payroll related expenses offset partially by lower professional fees and exchange listing fees.
Litigation expenses decreased $94,670 to $140,050 for the year ended March 31, 2020 as compared to $234,720 for the year ended March 31, 2019. This decrease reflects decreased activityvariances related to the litigation (see Notes 6 and 21 to the consolidated financial statements). With respect to the Aeroflex litigation, the Company has appealed the $4.9 million judgement and has set aside $2 million in cash to support an appeal bond. The appeal submissions are now complete. We continue to believe that the trial judge erred in his legal ruling on standing and other issues during the trial and that we have strong grounds for the award to be vacated or reduced. Our attorneys estimate that it will take over a year from now for this appeal to work its way through the Kansas court system. Management does not expect a significant increase in legal fees related to this litigation in the fiscal year.reduced volume levels.
Item 7. Management’Management’ss Discussion and Analysis of Financial Condition and Results of Operations (continued)
Results of Operations 2020 Compared to 2019 (continued)Operating Expenses
Operating Expenses (continued)Selling, general and administrative expenses, along with litigation expense, decreased $24,404 (7.8%) to $2,413,194 for the year ended March 31, 2021, as compared to $2,617,598 for the year ended March 31, 2020. This decrease is primarily attributed to the decrease in accrued profit sharing expense, outside commissions, consulting fees, litigation fees and travel expense, with some offset for an increase in legal fees.
Engineering, research and development expenses decreased $72,232 (3.1%increased $56,090 (2.5%) to $2,295,901 for the year ended March 31, 2021, as compared to $2,239,811 for the year ended March 31, 2020 as compared2020. The increase is primarily due to $2,312,043 for the year ended March 31, 2019. The Company continuesincrease in engineering staff to invest insupport the development of the Company’s hand-held product line utilizing CRAFTSDR/OMNI and TS-4530A technology. The Company also completed T47-M5the Lockheed Martin MADL test set for which the Company also obtained AIMS PO approval, the enhanced remote client, and the incorporation of other product enhancements in existing designs.projects.
IncomeIncome from Operations
As a result of the above, the Company recorded income from operations in the amount of $2,552,492$73,404 for the fiscal year ended March 31, 20202021, as compared to income from operations of $654,936$2,552,492 for the year ended March 31, 2019.2020.
Other ExpenseIncome(Expense)
For the year ended March 31, 2020,2021, total other expenseincome was $465,282$499,626 as compared to otheran expense of $451,898$465,282 for the year ended March 31, 2019,2020. This was primarily the result of the higher loss on the change in fair value of the common stock warrants and higher interest related to the judgement$722,577 SBA PPP loan forgiveness, offset by lower interest for the line of credit and the letter of credit.judgment.
Income (Loss) before Income Taxes
As a result of the above, the Company recorded income before taxes of $2,087,210$573,030 for the year ended March 31, 20202021, as compared to income before taxes of $203,038$2,087,210 for the fiscal year ended March 31, 2019.2020.
Income Taxes
For the year ended March 31, 2021, the Company reported a tax benefit of $27,027, as a result of the Company’s taxable loss for the year as the forgiveness of the PPP loan is not a taxable event.
For the year ended March 31, 2020, the Company’s Federal and State provision requirements were offset by the reversal of a portion of the valuation allowance no longer deemed necessary. The Company recorded a net tax benefit of $2,649,280 which represents a reduction in our valuation allowance on tax attributes that are expected to be utilized based on management’s assessment and evaluation of historical and projected income.
For the year ended March 31, 2019, the increase in the Company’s deferred tax asset was offset, by a corresponding increase in the Company’s valuation allowance.
Net Income
As a result of the above, the Company recorded net income of $600,057 for the year ended March 31, 2021, as compared to net income of $4,736,490 for the year ended March 31, 2020 as compared to net income of $203,038 for the year ended March 31, 2019.2020.
Liquidity and Capital Resources
AtOn March 31, 2020,2021, the Company had positive working capital of $1,776,176, which is negatively impacted by $5,657,549 in accrued legal damages,$3,159,731, as compared to negative working capital of $152,993 at$1,776,176 on March 31, 2019.2020. This change is primarily the result of the improvement in operating income,being awarded two PPP draws totaling $1,445,154, which has improved the Company’s cash position while also reducing its outstanding liabilities. The Company has $5.5 million of cash on hand at year-end including $2 million of restricted cash supporting the appeal bond.
On March 31, 2021, Bank of America further extended the maturity date of our line of credit from March 31, 2021, to June 30, 2021, to allow time for a full underwriting for the annual renewal period.
As discussed in Note 21 to the Notes toof the Consolidated Financial Statements, the Company has recorded total damages of $5,657,549,$5,889,023, including accrued interest, as a result of the jury verdict associated with the Aeroflex litigation as well as the Court’s decision on punitive damages. The jury found no misappropriation of Aeroflex trade secrets but it did rule that the Company tortiously interfered with a prospective business opportunity and awarded damages. The jury also ruled that Tel tortiously interfered with Aeroflex’s non-disclosure agreements with two former Aeroflex employees. The jury also found that the former Aeroflex employees breached their non-disclosure agreements with Aeroflex. The Court conducted further hearings on the Company’s post-trial motions which sought to reduce the damages award of $2.8 million, as well as the punitive damages claim. The Court denied the Company’s motions and awarded Aeroflex an additional $2.1 million of punitive damages, which brings the total Tel damages awarded in this case to approximately $4.9 million. The court also awarded Aeroflex $59,000 for fees associated with the filing of documents. The Company has also recorded accrued interest of $757,118$989,023 as of March 31, 2020. The Company filed motions in January 2018 for the Court to reconsider the amount of damages on the grounds that they are duplicative and not legally supportable. A hearing on this motion was held. The Judge rejected all of our arguments and declined to order a new trial. We filed the appeal document the week of May 28, 2018. The Company has posted a $2,000,000 bond. This $2 million bond amount will remain in place during the appeal process (See Note 6).2021.
Item 7. Management’Management’ss Discussion and Analysis of Financial Condition and Results of Operations (continued)
Liquidity and Capital Resources (continued)
The Company filed post-trial motions to avoid damage duplication and inconsistency, and to secure judgment as a matter of law or a new trial. The trial court denied those motions. The Company appealed the verdict and the post-trial rulings to the Court of Appeals of the State of Kansas, Case No. 18-119,563. The Plaintiff filed a cross-appeal. The appeal and cross-appeal are fully briefed. The appellate court has not set a date to hear the appeal.
The Company is very optimistic about the prospects of its appeal for a judgment as a matter of law. The Company was hoping for a decision from the court this calendar year, but this timing will likely behas been delayed due to the three month COVID-19 related shutdown of the Kansas court system. As such, the appeal process is expected to take at least another yearsix to complete unless a settlement can be reached.
twelve months to complete. The Company has the ability to settle this case at its sole discretion by withdrawing the appeal and paying the judgment plus interest amount.
On March 21, 2016, the Company entered into a line of credit agreement with Bank of America, which expired March 31, 2017. In March 2017, the Company extended until March 31, 2018. The line is collateralized by substantially all of the assets of the Company. The line provided a revolving credit facility with borrowing capacity of up to $1,000,000. There were no covenants or borrowing base calculations associated with this line of credit. On August 29, 2018, the Company entered a Loan Modification Agreement (the “Agreement”) with the bank to extend the Agreement until May 31, 2019, which included a debt service ratio covenant. In June 2019, Bank of America agreed to extend the Company’s line of credit until March 31, 2020, including monthly principal payments of $10,000, and eliminating the covenant for the debt service ratio. The Company’s interest rates were 4.74% and 6.25% at March 31, 2020 and 2019, respectively. During the year ended March 31, 2020 the Company repaid $120,000 against this line of credit. As of March 31, 2020 and 2019, the outstanding balances were $680,000 and $800,000, respectively. As of March 31, 2020 the remaining availability under this line is $10,000.
In March 2020, Bank of America agreed to extend the line of credit from March 31, 2020 to January 31, 2021. The new agreement includes availability up to $690,000. Monthly payments will be interest only (see Note 10 to the consolidated financial statements).
On March 27, 2020, President Trump signed the Coronavirus Aid, Relief and Economic Security (the “CARES Act”), which, among other things, outlines the provisions of the Paycheck Protection Program (the “PPP”). The Company determined that it met the criteria to be eligible to obtain a loan under the PPP because, among other reasons, in light of the COVID-19 outbreak and the uncertainty of economic conditions related thereto, the loan was considered necessary to support the Company’s ongoing operations and retain all its employees. In addition, President Trump signed into law the Paycheck Protection Program and Health Care Enhancement Act on April 24, 2020, which increased funding provided by the CARES Act. On May 4, 2020, the Company issued a promissory note (the “Note”) to Bank of America in the principal aggregate amount of $772,577 (the “PPP Loan”) pursuant to the Paycheck Protection Program (“PPP”) under the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”). The amount was deposited in our bank on May 4, 2020. On June 5, 2020, the Paycheck Protection Program Flexibility Act was signed into law and extended the program until December 31, 2020.
UnderTIC qualified for full loan forgiveness on the termsinitial tranche on December 18, 2020. On January 6, 2021, updated PPP guidance outlining program changes to enhance its effectiveness and accessibility was released on in accordance with the Economic Aid to Hard-Hit Small Businesses, Non-Profits, and Venues Act. This was available to companies that recorded greater than a 25% sales reduction in any quarter compared to the prior year. The Company qualified for this second round of funding and on March 15, 2021, the CARES Act,company secured a Second Draw PPP loan recipientsin the amount of $772,577. Second Draw PPP loans made to eligible borrowers qualify for full loan forgiveness if during the 8- to 24-week covered period following loan disbursement:
o | Employee and compensation levels are maintained in the same manner as required for the First Draw PPP loan |
o | The loan proceeds are spent on payroll costs and other eligible expenses; and |
o | At least 60% of the proceeds are spent on payroll costs |
A borrower can apply for and be granted forgiveness foronce all or a portion of loan granted under the program. Such forgiveness will be determined, subject to limitations, based on the use of loan proceeds for paymentwhich the borrower is requesting forgiveness have been used. Borrowers can apply for forgiveness any time up to the maturity date of payroll coststhe loan. If borrowers do not apply for forgiveness within 10 months after the last day of the covered period, then PPP loan payments are no longer deferred, and anyborrowers will begin making loan payments of mortgage interest, rent, and utilities. No assurance is provided that theto their PPP lender. The Company will obtainplans to file for loan forgiveness of the second tranche of PPP Loan in whole or in part. The PPP Loan has a two-year term and bears interest at a rate of 0.98% per annum. Monthly principal and interest payments are deferred for six months after the date of disbursement. The PPP Loan may be prepaid at any time prior to maturity with no prepayment penalties. funding during fiscal year ending March 31, 2022.
Based on the June 5, 2020 the Paycheck Protection Program Flexibility Act, certain changes will need to be made to the original Note, based on the new law.
Moving forward,foregoing, we believe that our expected cash flows from operations, as a resultline of the increasecredit in business,place and current cash balances which amounted to $5.1 million, including the $2 million is restricted cash will be sufficient to operate in the normal course of business for next 12 months from the issuance date of these financial statements, including any payments for settlement of the litigation, which we were not able to do in the prior year.
Item 7.Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)
Liquidity and Capital Resources (continued)Aeroflex litigation.
The Company continues to monitor the impact of the COVID-19 outbreak on its supply chain, manufacturing and distribution operations, customers and employees, as well as the U.S. economy in general. However, due to the uncertainty as to when governmental restrictions on business will be fully lifted, the impact thereof, and the duration and widespread nature of the COVID-19 outbreak, the Company cannot currently predict the long-term impact on its operations and financial results. The uncertainties associated with the COVID-19 outbreak include potential adverse effects on the overall economy, the Company’s supply chain, transportation services, employees and customers. The COVID-19 outbreak could adversely affect the Company’s revenues, earnings, liquidity and cash flows and may require significant actions in response, including expense reductions. Conditions surrounding COVID-19 change rapidly, and additional impacts of which the Company is not currently aware may arise. Based on past performance and current expectations, the Company believes that its anticipated cash flow from operations and the proceeds from the PPP loan arewill be sufficient to fund the Company’s requirements for working capital, capital expenditures and debt service for at least the next 12 months.
During the year ended March 31, 2020,2021, the Company’s cash balance increased by $2,544,012$361,586 to $5,134,739,$5,496,325, including restricted cash to support the appeal bond. The Company’s principal sources and uses of funds were as follows:
Cash (used in) provided by (used in) operating activities. For the year ended March 31, 2020,2021, the Company provided $2,921,030used $255,616 in cash for operations as compared to using $478,493providing $2,921,030 in cash for operations for the year ended March 31, 2019.2020. This increasedecrease in cash provided by operations is primarily attributed to the improvementdecline in operating incomerevenue as a result of the global pandemic. In addition, $680,000 of cash was used to fully pay off the line of credit and the decrease in accounts receivable, partially offset by a lower decrease in accounts payable.$80,000 of dividends were also paid.
Item 7.Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)
Liquidity and Capital Resources (continued)
Cash used in investing activities. For the year ended March 31, 2020,2021, the Company used $133,682$67,902 of its cash for investing activities, as compared to $121,790$133,682 for the year ended March 31, 20192020, as result of higherless purchases of equipment.equipment during the current year.
Cash provided (used in) provided by financing activities. For the year ended March 31, 2020,2021, the Company used $243,336provided $685,105 in cash for financing activities as compared to $882,332$243,336 in cash providedused by financing activities for the year ended March 31, 2019. The Company paid2020. This predominantly was a result of the warrant liability intwo PPP loans the amount of $116,500 in the current fiscal year. During the fiscal year ended March 31, 2019, the Company received net proceeds the from the issuance of preferred stock in the amount of $968,256 as well proceeds from short-swing profits from an investor of $123,075, which did not occur in the current fiscal year.company received.
Currently, the Company has no material future capital expenditure requirements.
There was no significant impact on the Company’s operations as a result of inflation for the year ended March 31, 2020.2021.
Critical Accounting Policies
In preparing the consolidated financial statements and accounting for the underlying transactions and balances, the Company applies its accounting policies as disclosed in Note 2 of our Notes to Consolidated Financial Statements. The Company’s accounting policies that require a higher degree of judgment and complexity used in the preparation of these consolidated financial statements include:
Revenue recognition – The Company accounts for revenue recognition in accordance with ASC 606. The core principle of Topic 606 is to recognize revenues when promised goods or services are transferred to customers in an amount that reflects the consideration that is expected to be received for those goods or services. The ASUASC 606 defines a five-step process to achieve the core principalprinciple and, in doing so, it is possible more judgement and estimates may be required within the revenue recognition process than are currently in use.
The Company generates revenue from designing, manufacturing and selling avionic tests and measurement solutions for the global commercial air transport, general aviation, and government/military aerospace and defense markets. The Company also offers calibration and repair services for a wide range of airborne navigation and communication equipment.
Item 7.Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)
Critical Accounting Policies (continued)
Under Financial Accounting Standards Board (“FASB”) Topic 606, Revenue from Contacts with Customers (“ASC 606”), the Company recognizes revenue when the customer obtains control of promised goods or services, in an amount that reflects the consideration which is expected to be received in exchange for those goods or services. The Company recognizes revenue following the five-step model prescribed under ASC 606: (i) identify contract(s) with a customer; (ii) identify the performance obligation(s) in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligation(s) in the contract; and (v) recognize revenue when (or as) the Company satisfies a performance obligation. The Company only applies the five-step model to contracts when it is probable that the entity will collect the consideration it is entitled to in exchange for the goods or services it transfers to the customer. At contract inception, once the contract is determined to be within the scope of ASC 606, the Company assesses the goods or services promised within each contract and determines those that are performance obligations and assesses whether each promised good or service is distinct. The Company then recognizes as revenue the amount of the transaction price that is allocated to the respective performance obligation when (or as) the performance obligation is satisfied.
Nature of goods and services
The following is a description of the products and services from which the Company generates revenue, as well as the nature, timing of satisfaction of performance obligations, and significant payment terms for each.
Test Units/Sets
The Company develops, and manufactures unit sets to test navigation and communication equipment, such as ramp testers and bench testers for radios installed in aircraft. The Company recognizes revenue when the customer obtains control of the Company’s product based on the contractual shipping terms of the contract, which is usually at the time of shipment. Revenue on products areis presented gross because the Company is primarily responsible for fulfilling the promise to provide the product, is responsible to ensure that the product is produced in accordance with the related supply agreement and bears the risk of loss while the inventory is in-transit. Revenue is measured as the amount of consideration the Company expects to receive in exchange for transferring products to the customer.
Item 7.Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)
Critical Accounting Policies (continued)
If the contract contains a single performance obligation, the entire transaction price is allocated to the single performance obligation. Contracts that contain multiple performance obligations require an allocation of the transaction price based on the estimated relative standalone selling prices of the promised products or services underlying each performance obligation. The Company determines stand-alone selling prices based on the price at which the performance obligation is sold separately. If the stand-alone selling price is not observable through past transactions, the Company estimates the standalone selling price taking into account available information such as market conditions and internally approved pricing guidelines related to the performance obligations.
When determining the transaction price of a contract, an adjustment is made if payment from the customer occurs either significantly before or significantly after performance, resulting in a significant financing component. Applying the practical expedient in paragraph 606-10-32-18, the Company does not assess whether a significant financing component exists if the period between when the Company performs its obligations under the contract and when the customer pays is one year or less. None of the Company’s contracts contained a significant financing component as of March 31, 2020.2021.
Replacement Parts
The Company offers replacement parts for test equipment, ramp testers, and bench testers. Similar to the sale of test units, the control of the product transfers at a point of time and therefore, revenue is recognized at the point in time when the obligation to the customer has been fulfilled.
Item 7.Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)
Critical Accounting Policies (continued)
Nature of goods and services (continued)
Extended Warranties
The extended warranties sold by the Company provide a level of assurance beyond the coverage for defects that existed at the time of a sale or against certain types of covered damage with coverage terms generally ranging from 5 to 7 years. Amounts received for warranties are recorded as deferred revenue and recognized as revenue ratably over the respective term of the agreements. As of March 31, 2020,2021, approximately $413,554$408,219 is expected to be recognized from remaining performance obligations for extended warranties as compared to $361,791 at$413,554 on March 31, 2019.2020. For the year ended March 31, 2020,2021, the Company recognized revenue of $85,311$86,588 from amounts that were included in Deferred Revenue as compared to $50,353$85,311 for the year ended March 31, 2019.2020.
The following table provides a summary of the changes in deferred revenues related to extended warranties for the year ended March 31, 2020:2021:
Deferred revenues related to extended warranties at April 1, 2019 | $ | 361,791 | ||
Additional extended warranties | 137,074 | |||
Revenue recognized for the year ended March 31, 2020 | (85,311 | ) | ||
Deferred revenues related to extended warranties at March 31, 2020 | $ | 413,554 |
Deferred revenues related to extended warranties on April 1, 2020 | $ | 413,554 | ||
Additional extended warranties | 81,253 | |||
Revenue recognized for the year ended March 31, 2021 | (86,588 | ) | ||
Deferred revenues related to extended warranties on March 31, 2021 | $ | 408,219 |
Other Deferred Revenues
The Company sometimes receives payments in advance of shipment. These amounts are classified as other deferred revenues. For the period ended March 31, 2020,2021, the Company has other deferred revenues of $58,746.$74,920 and $58,746 for period ending March 31, 2020.
Repair and Calibration Services
The Company offers repair and calibration services for units that are returned for annual calibrations and/or for repairs after the warranty period has expired. The Company repairs and calibrates a wide range of airborne navigation and communication equipment. Revenue is recognized at the time the repaired or calibrated unit is shipped back to the customer, as it is at this time that the work is completed.
Other
The majority of the Company’s revenues are from contracts with the U.S. government, airlines, aircraft manufacturers, such as Boeing and Lockheed Martin, domestic distributors, international distributors for sales to military and commercial customers, and other commercial customers. The contracts with the U.S. government typically are subject to the Federal Acquisition Regulation (“FAR”) which provides guidance on the types of costs that are allowable in establishing prices for goods and services provided under U.S. government contracts.
Item 7.Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)
Critical Accounting Policies (continued)
Payment terms and conditions vary by contract, although terms generally include a requirement of payment within a range from 30 to 60 days, or in certain cases, up-front deposits. In circumstances where the timing of revenue recognition differs from the timing of invoicing, the Company has determined that the Company's contracts generally do not include a significant financing component. Payments received prior to the delivery of units or services performed are recorded as deferred revenues. Taxes collected from customers, which are subsequently remitted to governmental authorities, are excluded from sales. The Company applied the practical expedient to account for shipping and handling activities as fulfillment cost rather than as a separate performance obligation. Shipping and handling costs charged to customers are classified as sales, and the shipping and handling costs incurred are included in cost of sales.
Other
All sales are denominated in U.S. dollars.
The Company excludes from revenues all taxes assessed by a governmental authority that are imposed on the sale of its products and collected from customers.
The Company chose to apply the available practical expedient as commission eligible sales orders are fulfilled within less than one year and commissions are generally paid by the Company within 30 days of the related sales order fulfillment. Accordingly, management has determined that no change in accounting for costs to obtain a contract
will be required for the Company to conform to ASC 606.
Item 7.Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)
Critical Accounting Policies (continued)
Disaggregation of revenue
In the following tables, revenue is disaggregated by revenue category.
For the Year Ended March 31, 2021 | ||||||||
Commercial | Government | |||||||
Sales Distribution | ||||||||
Test Units | $ | 325,195 | $ | 9,858,537 | ||||
| $ | 325,195 | $ | 9,858,537 | |||||
The remainder of our revenues for the year ended March 31, 2021, are derived from repairs and calibration of $1,169,399, replacement parts of $142,801, and extended warranties of $86,588.
For the Year Ended March 31, 2020 | ||||||||
Commercial | Government | |||||||
Sales Distribution | ||||||||
Test Units | $ | 918,720 | $ | 12,737,362 | ||||
| $ | 918,720 | $ | 12,737,362 | |||||
The remainder of our revenues for the year ended March 31, 2020, are derived from repairs and calibration of $1,525,288 replacement parts of $460,103 and extended warranties of $85,311, and other revenues of $48,159.
For the Year Ended March 31, 2019 | ||||||||
Commercial | Government | |||||||
Sales Distribution | ||||||||
Test Units | $ | 845,103 | $ | 9,239,379 | ||||
| $ | 845,103 | $ | 9,239,379 | |||||
The remainder of our revenues for the year ended March 31, 2019 are derived from repairs and calibration of $1,686,643, replacement parts of $294,572, and extended warranties of $50,353. We do not disaggregate these revenue streams as they are not deemed an important element related to how management operates the business between segments.
In the following table, revenue is disaggregated by geography.
For the Year Ended March 31, 2020 | For the Year Ended March 31, 2019 | For the Year Ended March 31, 2021 | For the Year Ended March 31, 2020 | |||||||||||||
Geography | ||||||||||||||||
United States | $ | 7,205,596 | $ | 9,677,822 | $ | 5,511,516 | $ | 7,205,596 | ||||||||
International | 8,569,347 | 2,438,228 | 6,071,004 | 8,569,347 | ||||||||||||
Total | $ | 15,774,943 | $ | 12,116,050 | $ | 11,582,520 | $ | 15,774,943 | ||||||||
Item 7.Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)
Critical Accounting Policies (continued)
Inventory reserves – inventory reserves or write-downs are estimated for excess, slow-moving and obsolete inventory as well as inventory whose carrying value is in excess of net realizable value. These estimates are based on current assessments about future demands, market conditions and related management initiatives. If market conditions and actual demands are less favorable than those projected by management, additional inventory write-downs may be required. While such write-downs have historically been within our expectation and the provision established, the Company cannot guarantee that it will continue to receive positive results.
Warranty reserves – warranty reserves are based upon historical rates and specific items that are identifiable and can be estimated at time of sale. While warranty costs have historically been within the Company’s expectations and the provisions established, future warranty costs could be in excess of the Company’s warranty reserves. A significant increase in these costs could adversely affect the Company’s operating results for the period and the periods these additional costs materialize. Warranty reserves are adjusted from time to time when actual warranty claim experience differs from estimates. For the year ended March 31, 20202021, warranty costs were $51,858$64,092 as compared to $58,082$51,858 for the year ended March 31, 20192020 and are included in Cost of Sales in the accompanying consolidated statement of operations. See Note 7 for warranty reserves.
Item 7.Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)
Critical Accounting Policies (continued)
Accounts receivable – the Company performs ongoing credit evaluations of its customers and adjusts credit limits based on customer payment and current credit worthiness, as determined by review of their current credit information. The Company continuously monitors credits and payments from its customers and maintains provision for estimated credit losses based on its historical experience and any specific customer issues that have been identified. While such credit losses have historically been within our expectation and the provision established, the Company cannot guarantee that it will continue to receive positive results. For the years ended March 31, 2021, and 2020 approximately 38% and 2019 approximately 30% and 39%, respectively, of the Company’s sales were to the U.S. Government.
Income taxes -deferred tax assets arise from a variety of sources, the most significant being: a) tax losses that can be carried forward to be utilized against profits in future years; b) expenses recognized in the books but disallowed in the tax return until the associated cash flow occurs; and c) valuation changes of assets which need to be tax effected for book purposes but are deductible only when the valuation change is realized. Deferred tax assets and liabilities are determined based on differences between financial reporting and tax bases of assets and liabilities and are measured using enacted tax rates and laws that are expected to be in effect when such differences are expected to reverse. The measurement of deferred tax assets is reduced, if necessary, by a valuation allowance for any tax benefit which is not more likely than not to be realized. In assessing the need for a valuation allowance, future taxable income is estimated, considering the realization of tax loss carryforwards. Valuation allowances related to deferred tax assets can also be affected by changes to tax laws, changes to statutory tax rates and future taxable income levels. In the event it was determined that the Company would not be able to realize all or a portion of its deferred tax assets in the future, the Company would reduce such amounts through a charge to income in the period in which that determination is made. Conversely, if it were determined that it would be able to realize the deferred tax assets in the future in excess of the net carrying amounts, TelTIC would decrease the recorded valuation allowance through an increase to income in the period in which that determination is made. In its evaluation of a valuation allowance, the Company takes into account existing contracts and backlog, and the probability that options under these contract awards will be exercised as well as sales of existing products. The Company prepares profit projections based on the revenue and expenses forecast to determine that such
revenues will produce sufficient taxable income to realize the deferred tax assets. The Company determined they will be able to realize the majority of its deferred tax assets as a result of its current projections aton March 31, 2020.2021.
Off Balance Sheet Arrangements
The Company is not party to any off-balance sheet arrangements that may affect its financial position or its results of operations.
Recently Adopted Authoritative Pronouncements
In February 2016, the FASB established Topic 842, Leases, by issuing Accounting Standards Update (ASU) No. 2016-02, which requires lessees to recognize leases on-balance sheet and disclose key information about leasing arrangements. The new standard establishes a right-of-use model (ROU) that requires a lessee to recognize a ROU asset and lease liability on the balance sheet for all leases with a term longer than 12 months. Leases will be classified as finance or operating, with classification affecting the pattern and classification of expense recognition in the income statement. The new standard was effective for the Company on April 1, 2019. A modified retrospective transition approach is required, applying the new standard to all leases existing at the date of initial application. An entity may choose to use either (1) its effective date or (2) the beginning of the earliest comparative period presented in the financial statements as its date of initial application. If an entity chooses the second option, the transition requirements for existing leases also apply to leases entered into between the date of initial application and the effective date. The Company adopted the new standard on April 1, 2019 and uses the effective date as the date of initial application. On adoption, the Company recognized additional operating lease liabilities of $508,551 with corresponding ROU assets of the same amount based on the present value of the remaining minimum rental payments under current leasing standards for existing operating leases. .The new standard provides a number of optional practical expedients in transition. The Company elects the ‘package of practical expedients’, which permits the Company not to reassess under the new standard prior conclusions about lease identification, lease classification and initial direct costs. This standard did have a material effect on the Company’s consolidated financial statements – see Note 13 to the consolidated financial statements.
In November 2016, the FASB issued ASU 2016-18 Statement of Cash Flows (Topic 230): Restricted Cash. ASU 2016-18 requires entities to show the changes in the total of cash, cash equivalents, restricted cash and restricted cash equivalents in the statement of cash flows. As a result, entities will no longer present transfers between cash and cash equivalents and restricted cash and restricted cash equivalents in the statement of cash flows. The ASU requires changes in the Company’s restricted cash to be classified as either operating activities, investing activities or financing activities in the Consolidated Statement of Cash Flows, depending on the nature of the activities that gave rise to the restriction. The new standard is effective for our annual reporting period ended March 31, 2020 and was adopted on a retrospective approach. The adoption of this standard did not have a significant impact on our financial position and results of operations.
Item 7.Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)
New Accounting Pronouncements
In June 2016, the FASB issued ASU No. 2016-13 Financial Instruments -Credit Losses (Topic 326), Measurement of Credit Losses on Financial Statements. The amendment in this update replaces the incurred loss impairment methodology in current GAAP with a methodology that reflects expected credit losses on instruments within its scope, including trade receivables. This update is intended to provide financial statement users with more decision-useful information about the expected credit losses. The effective date of the new standard has been deferred to April 1, 2021.2023. We do not expect the adoption of this standard to have a significant impact on our financial position and results of operations.
Item 7.Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)
Critical Accounting Policies (continued)
In December 2019, the FASB issued ASU No. 2019-12, Income Taxes - simplifying the accounting for income taxes (Topic 740), which is meant to simplify the accounting for income taxes by removing certain exceptions to the general principles in Topic 740, Income Taxes. The amendment also improves consistent application and simplify GAAP for other areas of areas.
Topic 740 by clarifying and amending existing guidance. This ASU is effective April 1, 2021, and we do not expect the adoption of this standard to have a significant impact on our financial position and results of operations.
No other recently issued accounting pronouncements had or are expected to have a material impact on the Company’s consolidated financial statements.
Item 7A.Quantitative and Qualitative Disclosures about Market Risk
We do not hold any derivative instruments and do not engage in any hedging activities.
Item 8. Financial Statements and Supplementary Data
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and
Stockholders of Tel-Instrument Electronics Corp.
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheetsheets of Tel-Instrument Electronics Corp. (the “Company”) as of March 31, 2021, and 2020, and the related consolidated statements of operations, changes in stockholders’ equity (deficit), and cash flows for each of the year thenyears in the two-year period ended March 31, 2021, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of March 31, 2021, and 2020, and the results of its operations and its cash flows for each of the year thenyears in the two-year period ended March 31, 2021, in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audit.audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our auditaudits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the auditaudits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audit,audits, we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our auditaudits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our auditaudits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audit providesaudits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
Going concern – Assessing the Company’s ability to continue as a going concern
Description of the Matter
The disclosure related to the Company’s liquidity and its ability to continue as a going concern for the twelve months from the issuance of these consolidated financial statements are described in Note 1 of the consolidated financial statements. The evaluation of the Company’s ability to continue as a going concern is a critical audit matter due to the estimation and execution uncertainty regarding the Company’s future cash flows and the risk of bias in management’s judgement and assumptions in estimating these cash flows.
How We Addressed the Matter in Our Audit
We reviewed the design and underlying factors relating to the preparation of forecasted information and considerations of the Company’s obligations; we tested the reasonableness of the forecasted revenue, operating expenses, and uses and sources of cash used in management’s assessment of whether the Company has sufficient liquidity to fund operations for at least one year from the financial statement issuance date. This testing included inquiries with management, comparison of prior period forecasts to actual results, consideration of positive and negative evidence impacting management’s forecasts, the Company’s financing arrangements in place as of the report date, market and industry factors and consideration of the Company’s relationships with its financing partners.
Income taxes – Estimates surrounding the valuation allowance
Description of the Matter
As described in Note 8 of the consolidated financial statements, the measurement of deferred tax assets is reduced, if necessary, by a valuation allowance for any tax benefit which is not more likely than not to be realized. In assessing the need for a valuation allowance, future taxable income is estimated, considering the realization of tax loss carryforwards. Valuation allowances related to deferred tax assets can also be affected by changes to tax laws, changes to statutory tax rates and future taxable income levels. In its evaluation of a valuation allowance, the Company takes into account existing contracts and backlog and the probability that options under these contract awards will be exercised as well as sales of existing projects. We determined that the Company’s estimates surrounding the valuation allowance is a critical audit matter due to the amount of estimation required and the risk of bias in management’s judgement and assumptions in preparing this estimate.
How We Addressed the Matter in Our Audit
We evaluated the key assumptions utilized in the calculation of the valuation allowance, reviewed management’s tax provision, obtained and reviewed the Company’s tax returns, and assessed the reasonableness of forecasted taxable income used in management’s analysis. This testing additionally included inquiries with management, review for uncertain tax positions, and recalculation of the deferred tax asset and valuation allowance.
/s/ Friedman LLP | |
We have served as the Company’s auditor since 2019. | |
Marlton, New Jersey | |
June 29, | |
Report of Independent Registered Public Accounting Firm
Shareholders and Board of Directors
Tel-Instrument Electronics Corp.
East Rutherford, New Jersey
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheet of Tel-Instrument Electronics Corp. (the “Company”) and subsidiaries as of March 31, 2019, the related consolidated statements of operations, stockholders’ deficit, and cash flows for the year ended March 31, 2019, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company and subsidiaries at March 31, 2019, and the results of its operations and its cash flows for the year ended March 31, 2019, in conformity with accounting principles generally accepted in the United States of America.
Going Concern Uncertainty
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the consolidated financial statements, a verdict was rendered against the Company pursuant to an ongoing lawsuit for amounts that raise substantial doubt about its ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 1. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audit we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audit included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audit provides a reasonable basis for our opinion.
/s/ BDO USA, LLP
We have served as the Company’s auditor since 2003.
Woodbridge, New Jersey
July 1, 2019
TEL-INSTRUMENT ELECTRONICS CORP.
ASSETS | March 31, 2020 | March 31, 2019 | March 31, 2021 | March 31,2020 | ||||||||||||
Current assets: | ||||||||||||||||
Cash | $ | 3,126,195 | $ | 585,856 | $ | 3,485,275 | $ | 3,126,195 | ||||||||
Accounts receivable, net of allowance for doubtful accounts of $7,500 and $7,500, respectively | 1,411,644 | 2,196,099 | 1,933,321 | 1,411,644 | ||||||||||||
Inventories, net | 3,092,679 | 2,932,632 | 3,437,989 | 3,092,679 | ||||||||||||
Restricted cash to support appeal bond | 2,008,544 | 2,004,871 | 2,011,050 | 2,008,544 | ||||||||||||
Prepaid expenses and other current assets | 382,428 | 275,230 | 263,067 | 447,195 | ||||||||||||
Total current assets | 10,021,490 | 7,994,688 | 11,130,702 | 10,086,257 | ||||||||||||
Equipment and leasehold improvements, net | 263,750 | 236,370 | 200,769 | 263,750 | ||||||||||||
Operating lease right-of-use assets | 306,740 | - | 1,922,805 | 306,740 | ||||||||||||
Deferred tax asset, net | 2,712,780 | 63,500 | 2,675,040 | 2,648,013 | ||||||||||||
Other assets | 35,109 | 35,109 | 35,110 | 35,109 | ||||||||||||
Total assets | $ | 13,339,869 | $ | 8,329,667 | $ | 15,964,426 | $ | 13,339,869 | ||||||||
LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT) | ||||||||||||||||
LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||||||||||
Current liabilities: | ||||||||||||||||
Line of credit | $ | 680,000 | $ | 800,000 | $ | - | $ | 680,000 | ||||||||
Finance lease obligations – current portion | 49 | 6,885 | - | 49 | ||||||||||||
Operating lease liabilities – current portion | 214,793 | - | 201,883 | 214,793 | ||||||||||||
Accounts payable | 739,810 | 1,058,304 | 906,149 | 739,810 | ||||||||||||
Deferred revenues – current portion | 145,168 | 97,122 | 150,709 | 145,168 | ||||||||||||
Accrued expenses - vacation pay, payroll and payroll withholdings | 512,732 | 394,296 | 457,232 | 512,732 | ||||||||||||
Accrued legal damages | 5,657,549 | 5,312,085 | 5,889,023 | 5,657,549 | ||||||||||||
Accrued expenses - related parties | - | 3,017 | ||||||||||||||
Accrued expenses – other | 295,213 | 432,472 | 365,975 | 295,213 | ||||||||||||
Warrant liability | - | 43,500 | ||||||||||||||
Total current liabilities | 8,245,314 | 8,147,681 | 7,970,971 | 8,245,314 | ||||||||||||
Operating lease liabilities – long-term | 91,947 | - | 1,720,921 | 91,947 | ||||||||||||
Long Term Debt-PPP | 722,577 | - | ||||||||||||||
Deferred revenues – long-term | 327,132 | 264,669 | 332,428 | 327,132 | ||||||||||||
Total liabilities | 8,664,393 | 8,412,350 | 10,746,897 | 8,664,393 | ||||||||||||
Commitments and contingencies | ||||||||||||||||
Stockholders’ equity (deficit) | ||||||||||||||||
Stockholders’ equity | ||||||||||||||||
Preferred stock, 1,000,000 shares authorized, par value $0.10 per share | ||||||||||||||||
Preferred stock, 500,000 shares 8% Cumulative Series A Convertible Preferred issued and outstanding, par value $0.10 per share | 3,515,998 | 3,275,998 | 3,695,998 | 3,515,998 | ||||||||||||
Preferred stock, 166,667 shares 8% Cumulative Series B Convertible Preferred issued and outstanding, par value $0.10 per share | 1,087,367 | 1,007,367 | 1,147,367 | 1,087,367 | ||||||||||||
Common stock, 7,000,000 shares authorized, par value $.10 per share, 3,255,887 and 3,255,887 shares issued and outstanding, respectively | 325,586 | 325,586 | 325,586 | 325,586 | ||||||||||||
Additional paid-in capital | 7,616,624 | 7,914,955 | 7,318,620 | 7,616,624 | ||||||||||||
Accumulated deficit | (7,870,099 | ) | (12,606,589 | ) | (7,270,042 | ) | (7,870,099 | ) | ||||||||
Total stockholders’ equity (deficit) | 4,675,476 | (82,683 | ) | |||||||||||||
Total stockholders’ equity | 5,217,529 | 4,675,476 | ||||||||||||||
Total liabilities and stockholders’ equity (deficit) | $ | 13,339,869 | $ | 8,329,667 | ||||||||||||
Total liabilities and stockholders’ equity | $ | 15,964,426 | $ | 13,339,869 | ||||||||||||
The accompanying notes are an integral part of the consolidated financial statements.
TEL-INSTRUMENT ELECTRONICS CORP.
Consolidated Statements of Operations
For the years ended March 31, | For the years ended March 31, | |||||||||||||||
2020 | 2019 | 2021 | 2020 | |||||||||||||
Net sales | $ | 15,774,943 | $ | 12,116,050 | $ | 11,582,520 | $ | 15,774,943 | ||||||||
Cost of sales | 8,365,042 | 6,698,830 | 6,800,021 | 8,365,042 | ||||||||||||
Gross margin | 7,409,901 | 5,417,220 | 4,782,499 | 7,409,901 | ||||||||||||
Operating expenses: | ||||||||||||||||
Selling, general and administrative | 2,477,548 | 2,215,521 | 2,165,190 | 2,477,548 | ||||||||||||
Litigation expenses | 140,050 | 234,720 | 248,004 | 140,050 | ||||||||||||
Engineering, research and development | 2,239,811 | 2,312,043 | 2,295,901 | 2,239,811 | ||||||||||||
Total operating expenses | 4,857,409 | 4,762,284 | 4,709,095 | 4,857,409 | ||||||||||||
Income from operations | 2,552,492 | 654,936 | 73,404 | 2,552,492 | ||||||||||||
Other income (expense): | ||||||||||||||||
Interest income | 5,819 | 4,005 | 7,483 | 5,819 | ||||||||||||
Change in fair value of common stock warrants | (73,000 | ) | (43,500 | ) | - | (73,000 | ) | |||||||||
Forgiveness of PPP Loan | 722,577 | - | ||||||||||||||
Interest expense | (55,557 | ) | (100,750 | ) | (29,779 | ) | (55,557 | ) | ||||||||
Interest expense – judgment | (342,544 | ) | (310,663 | ) | (231,474 | ) | (342,544 | ) | ||||||||
Interest expense - related parties | - | (990 | ) | |||||||||||||
Other Income | 30,819 | - | ||||||||||||||
Total other (expense) income | (465,282 | ) | (451,898 | ) | 499,626 | (465,282 | ) | |||||||||
Income before income taxes | 2,087,210 | 203,038 | 573,030 | 2,087,210 | ||||||||||||
Benefit for income taxes | (2,649,280 | ) | - | (27,027 | ) | (2,649,280 | ) | |||||||||
Net income | 4,736,490 | 203,038 | 600,057 | 4,736,490 | ||||||||||||
Deemed dividend related to beneficial conversion feature of Series B Convertible Preferred Stock | - | (420,000 | ) | |||||||||||||
Preferred dividends | (320,000 | ) | (312,807 | ) | (320,000 | ) | (320,000 | ) | ||||||||
Net income (loss) attributable to common shareholders | $ | 4,416,490 | $ | (529,769 | ) | |||||||||||
Net income attributable to common shareholders | $ | 280,057 | $ | 4,416,490 | ||||||||||||
Basic income (loss) per common share | $ | 1.36 | $ | (0.16 | ) | |||||||||||
Diluted income (loss) per common share | $ | 0.95 | $ | (0.16 | ) | |||||||||||
Basic income per common share | $ | 0.09 | $ | 1.36 | ||||||||||||
Diluted income per common share | $ | 0.12 | $ | 0.95 | ||||||||||||
Weighted average number of shares outstanding | ||||||||||||||||
Basic | 3,255,887 | 3,255,887 | 3,255,887 | 3,255,887 | ||||||||||||
Diluted | 4,960,665 | 3,255,887 | 5,073,165 | 4,960,665 | ||||||||||||
The accompanying notes are an integral part of the consolidated financial statements.
TEL-INSTRUMENT ELECTRONICS CORP.
Consolidated Statements of Changes in Stockholders’ Equity (Deficit)
Series A Convertible Preferred Stock |
Series B Convertible Preferred Stock |
Common Stock | Additional | Series A Convertible Preferred Stock | Series B Convertible Preferred Stock | Common Stock | Additional | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
# of Shares Issued | Amount | # of Shares Issued | Amount | # of Shares Issued |
Amount | Paid-In Capital | Accumulated Deficit | Total | # of Shares Issued | Amount | # of Shares Issued | Amount | # of Shares Issued | Amount | Paid-In Capital | Accumulated Deficit | Total | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
Balances at April 1, 2018 | 500,000 | $ | 3,035,998 | - | $ | - | 3,255,887 | $ | 325,586 | $ | 8,046,975 | $ | (12,809,627 | ) | $ | (1,401,068 | ) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
Issuance of Series B Convertible Preferred Stock | - | - | 166,667 | 968,257 | - | - | - | - | 968,257 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Proceeds from short-swing profits from an investor, net | - | - | - | - | - | - | 123,074 | - | 123,074 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Balances on April 1, 2019 | 500,000 | $ | 3,275,998 | 166,667 | $ | 1,007,367 | 3,255,887 | $ | 325,586 | $ | 7,914,955 | $ | (12,606,589 | ) | $ | (82,683 | ) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
Stock Based Compensation | - | - | - | - | - | - | 21,669 | - | 21,669 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
8% Dividends on Preferred Stock | - | 240,000 | - | 39,110 | - | - | (279,110 | ) | - | - | - | 240,000 | - | 80,000 | - | - | (320,000 | ) | - | - | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Stock-based compensation | - | - | - | - | - | - | 24,016 | 24,016 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Net income | - | - | - | - | - | - | - | 203,038 | 203,038 | - | - | - | - | - | - | - | 4,736,490 | 4,736,490 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Balances at March 31, 2019 | 500,000 | 3,275,998 | 166,667 | 1,007,367 | 3,255,887 | 325,586 | 7,914,955 | (12,606,589 | ) | (82,683 | ) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Balances on March 31, 2020 | 500,000 | 3,515,998 | 166,667 | 1,087,367 | 3,255,887 | 325,586 | 7,616,624 | (7,870,099 | ) | 4,675,476 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Stock-based compensation | - | - | - | - | - | - | 21,669 | - | 21,669 | - | - | - | - | - | - | 21,996 | - | 21,996 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
8% Dividends on Preferred Stock | - | 240,000 | - | 80,000 | - | - | (320,000 | ) | - | - | - | 240,000 | - | 80,000 | - | - | (320,000 | ) | - | - | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Dividend Payments | (60,000 | ) | (20,000 | ) | (80,000 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Net income | - | - | - | - | - | - | - | 4,736,490 | 4,736,490 | - | - | - | - | - | - | - | 600,057 | 600,057 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Balances at March 31, 2020 | 500,000 | $ | 3,515,998 | 166,667 | $ | 1,087,367 | 3,255,887 | $ | 325,586 | $ | 7,616,624 | $ | (7,870,099 | ) | $ | 4,675,476 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Balances on March 31, 2021 | 500,000 | $ | 3,695,998 | 166,667 | $ | 1,147,367 | 3,255,887 | $ | 325,586 | $ | 7,318,620 | $ | (7,270,042 | ) | $ | 5,217,529 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
The accompanying notes are an integral part of the consolidated financial statements.
TEL-INSTRUMENT ELECTRONICS CORP.
Consolidated Statements of Cash Flows
For the years ended March 31, | For the years ended March 31, | ||||||||||||||||
2020 | 2019 | 2021 | 2020 | ||||||||||||||
Cash flows from operating activities: | |||||||||||||||||
Net income | $ | 4,736,490 | $ | 203,038 | $ | 600,057 | $ | 4,736,490 | |||||||||
Adjustments to reconcile net income to net cash provided by (used in) operating activities: | |||||||||||||||||
Adjustments to reconcile net income to net cash (used in) provided by operating activities: | |||||||||||||||||
Deferred income taxes | (2,649,280 | ) | - | (27,027 | ) | (2,649,280 | ) | ||||||||||
Depreciation and amortization | 104,652 | 60,954 | 125,120 | 104,652 | |||||||||||||
Amortization of right-of-use assets | 201,811 | - | 214,793 | 201,811 | |||||||||||||
Forgiveness of PPP Loan | (722,577 | ) | - | ||||||||||||||
Change in fair value of common stock warrant | 73,000 | 43,500 | - | 73,000 | |||||||||||||
Provision for inventory obsolescence | 52,000 | 78,000 | 25,000 | 52,000 | |||||||||||||
Non-cash stock-based compensation | 21,669 | 24,016 | 21,996 | 21,669 | |||||||||||||
Changes in assets and liabilities: | |||||||||||||||||
Decrease (increase) in accounts receivable | 784,455 | (1,101,050 | ) | ||||||||||||||
(Increase) decrease in inventories | (210,397 | ) | 1,264,531 | ||||||||||||||
Increase in prepaid expenses and other assets | (107,198 | ) | (127,484 | ) | |||||||||||||
Decrease in accounts payable | (318,494 | ) | (1,249,509 | ) | |||||||||||||
(Increase) decrease in accounts receivable | (521,677 | ) | 784,455 | ||||||||||||||
Increase in inventories | (370,310 | ) | (210,397 | ) | |||||||||||||
Decrease (increase) in prepaid expenses and other assets | 189,889 | (107,198 | ) | ||||||||||||||
Increase (decrease) in accounts payable | 166,338 | (318,494 | ) | ||||||||||||||
Increase in accrued legal damages | 345,464 | 252,095 | 231,474 | 345,464 | |||||||||||||
Increase (decrease) in deferred revenues | 110,509 | (35,936 | ) | ||||||||||||||
Increase (decrease) in accrued payroll, vacation pay & withholdings | 118,436 | (53,567 | ) | ||||||||||||||
Increase in deferred revenues | 10,839 | 110,509 | |||||||||||||||
(Decrease) increase in accrued payroll, vacation pay & withholdings | (55,500 | ) | 118,436 | ||||||||||||||
Decrease in operating lease liabilities | (201,811 | ) | - | (214,793 | ) | (201,811 | ) | ||||||||||
(Decrease) increase in accrued expenses – related party and other | (140,276 | ) | 162,919 | ||||||||||||||
Net cash provided by (used in) operating activities | 2,921,030 | (478,493 | ) | ||||||||||||||
Increase (decrease) in accrued expenses – related party and other | 70,762 | (140,276 | ) | ||||||||||||||
Net cash (used in) provided by operating activities | (255,616 | ) | 2,921,030 | ||||||||||||||
Cash flows from investing activities: | |||||||||||||||||
Acquisition of equipment | (133,682 | ) | (121,790 | ) | (67,902 | ) | (133,682 | ) | |||||||||
Net cash used in investing activities | (133,682 | ) | (121,790 | ) | (67,902 | ) | (133,682 | ) | |||||||||
Cash flows from financing activities: | |||||||||||||||||
Payment of warrant liability | - | (116,500 | ) | ||||||||||||||
Payment of dividends | (80,000 | ) | - | ||||||||||||||
Proceeds from PPP loans | 1,445,154 | - | |||||||||||||||
Repayment of line of credit | (120,000 | ) | (200,000 | ) | (680,000 | ) | (120,000 | ) | |||||||||
Payment of warrant liability | (116,500 | ) | - | ||||||||||||||
Proceeds from short-swing profits from an investor, net of expenses | - | 123,075 | |||||||||||||||
Proceeds from issuance of convertible preferred stock | - | 1,000,000 | |||||||||||||||
Expenses associated with convertible preferred stock | - | (31,744 | ) | ||||||||||||||
Repayment of long-term debt | - | (2,124 | ) | ||||||||||||||
Repayment of capitalized lease obligations | (6,836 | ) | (6,875 | ) | (50 | ) | (6,836 | ) | |||||||||
Net cash (used in) provided by financing activities | (243,336 | ) | 882,332 | ||||||||||||||
Net cash provided by (used in) financing activities | 685,104 | (243,336 | ) | ||||||||||||||
Net increase in cash and restricted cash | 2,544,012 | 282,049 | 361,586 | 2,544,012 | |||||||||||||
Cash and restricted cash at beginning of year | 2,590,727 | 2,308,678 | 5,134,739 | 2,590,727 | |||||||||||||
Cash and restricted cash at end of year | $ | 5,134,739 | $ | 2,590,727 | $ | 5,496,325 | $ | 5,134,739 | |||||||||
End of year | |||||||||||||||||
Cash | $ | 3,126,195 | $ | 585,856 | $ | 3,485,275 | $ | 3,126,195 | |||||||||
Restricted cash | 2,008,544 | 2,004,871 | 2,011,050 | 2,008,544 | |||||||||||||
| $ | 5,134,739 | $ | 2,590,727 | $ | 5,496,325 | $ | 5,134,739 | ||||||||||
Beginning of year | |||||||||||||||||
Cash | $ | 585,856 | $ | 307,812 | $ | 3,126,195 | $ | 585,856 | |||||||||
Restricted cash | 2,004,871 | 2,000,866 | 2,008,544 | 2,004,871 | |||||||||||||
| $ | 2,590,727 | $ | 2,308,678 | $ | 5,134,739 | $ | 2,590,727 | ||||||||||
Supplemental cash flow information: | |||||||||||||||||
Taxes paid | $ | - | $ | - | $ | - | $ | - | |||||||||
Interest paid | $ | 47,494 | $ | 82,483 | $ | 19,497 | $ | 47,494 | |||||||||
TEL-INSTRUMENT ELECTRONICS CORP.
Consolidated Statements of Cash Flow (continued)
Supplemental disclosure of non-cash financing activities:
a) | Upon adoption of ASC 842, Leases, on April 1, 2019, the Company recorded $508,551 of right-of-use assets and related operating leases liabilities . Additional ROU asset and liability was recorded after adoption. The Company recorded $1,830,858 of right-of-use assets and related operating leases liabilities for the year ended March 31, 2021. |
b) | The Company’s PPP loan was forgiven by the SBA in the amount of $722,577. |
Upon adoption of ASC 842, Leases, on April 1, 2019 the Company recorded $508,551 of right-of-use assets and related operating leases liabilities.
The accompanying notes are an integral part of the consolidated financial statements.
TEL-INSTRUMENT ELECTRONICS CORP.
Notes To Consolidated Financial Statements
1.Business, Organization, and Liquidity
Business and Organization
Tel-Instrument Electronics Corp. (“Tel”, “TIC”, or the “Company”) has been in business since 1947. The Company is a leading designer and manufacturer of avionics test and measurement instruments for the global, commercial air transport, general aviation, and government/military defense markets. Tel provides instruments to test, measure, calibrate, and repair a wide range of airborne navigation and communication equipment. The Company sells its equipment in both domestic and international markets. Tel continues to develop new products in anticipation of customers’ needs and to maintain its strong market position. Its development of multi-function testers has made it easier for customers to perform ramp tests with less operator training, fewer test sets, and lower product support costs. The Company has become a major manufacturer and supplier of Identification Friend or Foe (“IFF”) flight line test equipment over the last few years.two decades.
Liquidity and PPP Loans
As shown on the balance sheet as ofOn March 31, 2019,2021, the Company had positive working capital of $3,159,731, as compared to working capital of $1,776,176 on March 31, 2020. This included $5.5 million of cash including the $2 million supersedes appeal bond. The Company also has current borrowing capacity of $690,000. As discussed in Note 21 of the Consolidated Financial Statements, the Company has recorded accrued legaltotal damages to date of $5.3 million,$5,889,023, including accrued interest, as a result of the jury verdict associated with the Aeroflex litigation. The Company’s linelitigation as well as the Court’s decision on punitive damages.
With a $7.6 million backlog on March 31, 2021,the Company expects that in fiscal year 2022, revenue and profitability will improve. This improvement should be apparent starting in the first quarter of credit agreement was expiring on Maythe current fiscal year.
On March 31, 2019. During June 2019,2021, Bank of America agreed to extendextended the Company’s linematurity date of credit until March 31, 2020 (see Note 22). We had no commitment from any party to provide additional working capital and there was no assurance that any funding would be available as required, or if available, that its terms will be favorable or acceptable to the Company. These factors raised substantial doubt about the Company’s ability to continue as a going concern within one year of the date that the financial statements were issued last year.
The second half of fiscal year 2019 showed a strong turnaround in our business. The Company had net income of $1,140,521 for the second half of the fiscal year ended March 31, 2019. For the year ended March 31, 2020, the Company had income before taxes of $2,087,210.
This increase is the mainly the result of increased international business for our Mode 5 test sets, including our T-47/M5, which has received AIMS (Air Traffic Control Radar Beacon System, Identification Friend or Foe, Mark XII/Mark XIIA, Systems) approval, increased shipments of our CRAFT products, especially for Lockheed Martin for the Joint Strike Fighter (“JSF”) program, and the T-4530i and the TS-4530A.
As a result, at March 31, 2020, the Company had a cash balances of $5,134,739, including $2,008,544 in restricted cash to support the appeal bond. The Company also had working capital of $1,776,176 at March 31, 2020, which was negatively impacted by $5,657,549 in accrued legal damages.
In March 2020, Bank of America agreed to extend the line of credit from March 31, 2021, to June 30, 2021, to allow time for a full underwriting for the annual renewal period. As of March 31, 2021, the Line of Credit draw remains at zero, with $690,000 available.
On March 27, 2020, former President Trump signed the Coronavirus Aid, Relief and Economic Security (the “CARES Act”), which, among other things, outlines the provisions of the Paycheck Protection Program (the “PPP”). The Company determined that it met the criteria to January 31, 2021. Monthly payments will be interest only (see Note 10eligible to obtain a loan under the consolidated financial statements).PPP because, among other reasons, in light of the COVID-19 outbreak and the uncertainty of economic conditions related thereto, the loan was considered necessary to support the Company’s ongoing operations and retain all its employees. In addition, former President Trump signed into law the Paycheck Protection Program and Health Care Enhancement Act on April 24, 2020, which increased funding provided by the CARES Act. On May 4, 2020, the Company receivedissued a promissory note (the “Note”) to Bank of America in the principal aggregate amount of $772,577 (the “PPP Loan”) pursuant to the Paycheck Protection Program Loan(“PPP”) under the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”). The amount was deposited in our bank on May 4, 2020. On June 5, 2020, the Paycheck Protection Program Flexibility Act was signed into law and extended the program until December 31, 2020.
TIC qualified for full loan forgiveness on the initial tranche on December 18, 2020. On January 6, 2021, updated PPP guidance outlining program changes to enhance its effectiveness and accessibility was released on in accordance with the Economic Aid to Hard-Hit Small Businesses, Non-Profits, and Venues Act. This was available to companies that recorded greater than a 25% sales reduction in any quarter compared to the prior year. The Company qualified for this second round of funding and on March 15, 2021, the company secured a Second Draw PPP loan in the amount of $772,577 (see Note 22$772,577. A borrower can apply for forgiveness once all loan proceeds for which the borrower is requesting forgiveness have been used. Borrowers can apply for forgiveness any time up to the consolidated financial statements).maturity date of the loan. If borrowers do not apply for forgiveness within 10 months after the last day of the covered period, then PPP loan payments are no longer deferred, and borrowers will begin making loan payments to their PPP lender. The Company plans to file for loan forgiveness of the second tranche of PPP funding during fiscal year ending March 31, 2022.
The Company is very optimistic aboutBased on the prospects of its appeal for a judgment as a matter of law. The Company was hoping for a decision from the court this calendar year, but this timing will likely be delayed due to the three month COVID-19 related shutdown of the Kansas court system. As such, the appeal process is expected to take at least another year to complete unless a settlement can be reached.
The Company has the ability to settle this case at its sole discretion by withdrawing the appeal and paying the judgment plus interest amount.
Moving forward, the Company believesforegoing, we believe that our expected cash flows from operations and current cash balances will be sufficient to operate in the normal course of business for next 12 months from the issuance date of these financial statements, including any payments for settlement of the Aeroflex litigation.
TEL-INSTRUMENT ELECTRONICS CORP.
Notes To Consolidated Financial Statements
1.Business, Organization, and Liquidity
Impact of the COVID-19 CoronavirusCoronavirus
In December 2019, a novel strain of coronavirus, which causes the disease known as COVID-19, was reported to have surfaced in Wuhan, China. Since then, COVID-19 coronavirus has spread globally. In March 2020, the World Health Organization declared the COVID-19 outbreak a pandemic and the U.S. government imposed travel restrictions on travel between the United States, Europe and certain other countries. The impact of this pandemic has been, and will likely continue to be, extensive in many aspects of society, which has resulted, and will likely continue to result, in significant disruptions to the global economy as well as businesses and capital markets around the world.
In response to public health directives and orders and to help minimize the risk of the virus to employees, the Company has taken precautionary measures, including implementing work-from-home policies for certain employees. The impact of the virus, including work-from-home policies, may negatively impact productivity, disrupt the Company's business, and delay certain projects, the magnitude of which will depend, in part, on the length and severity of the restrictions and other limitations on the Company's ability to conduct its business in the ordinary course. Other impacts to the Company's business may include temporary closures of its suppliers and disruptions or restrictions on its employees' ability to travel. Any prolonged material disruption to the Company's employees or suppliers could adversely impact the Company's financial condition and results of operations, including its ability to obtain financing.
2.Summary of Significant Accounting Policies
Principles of Consolidation:
The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States and include the Company and its wholly-owned subsidiaries. All significant inter-company accounts and transactions have been eliminated.
Revenue Recognition:
The Company accounts for revenue recognition in accordance with ASC 606.The core principle of Topic 606 is to recognize revenues when promised goods or services are transferred to customers in an amount that reflects the consideration that is expected to be received for those goods or services. The ASU defines a five-step process to achieve the core principal and, in doing so, it is possible more judgement and estimates may be required within the revenue recognition process than are currently in use.
The Company generates revenue from designing, manufacturing and selling avionic tests and measurement solutions for the global commercial air transport, general aviation, and government/military aerospace and defense markets. The Company also offers calibration and repair services for a wide range of airborne navigation and communication equipment.
Under Financial Accounting Standards Board (“FASB”) Topic 606, Revenue from Contacts with Customers (“ASC 606”), the Company recognizes revenue when the customer obtains control of promised goods or services, in an amount that reflects the consideration which is expected to be received in exchange for those goods or services. The Company recognizes revenue following the five-step model prescribed under ASC 606: (i) identify contract(s) with a customer; (ii) identify the performance obligation(s) in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligation(s) in the contract; and (v) recognize revenue when (or as) the Company satisfies a performance obligation. The Company only applies the five-step model to contracts when it is probable that the entity will collect the consideration it is entitled to in exchange for the goods orand services it transfers to the customer. At contract inception, once the contract is determined to be within the scope of ASC 606, the Company assesses the goods or services promised within each contract and determines those that are performance obligations and assesses whether each promised good or service is distinct. The Company then recognizes as revenue the amount of the transaction price that is allocated to the respective performance obligation when (or as) the performance obligation is satisfied.
TEL-INSTRUMENT ELECTRONICS CORP.Topic 606 is to recognize revenues when promised goods or services are transferred to customers in an amount that reflects the consideration that is expected to be received for those goods or services. The ASC 606 defines a five-step process to achieve the core principle and, in doing so, it is possible more judgement and estimates may be required within the revenue recognition process than are currently in use.
Notes To Consolidated Financial Statements
2. SummaryThe Company generates revenue from designing, manufacturing and selling avionic tests and measurement solutions for the global commercial air transport, general aviation, and government/military aerospace and defense markets. The Company also offers calibration and repair services for a wide range of Significant Accounting Policies (continued)
Revenue Recognition (continued):airborne navigation and communication equipment.
Nature of goods and services
The following is a description of the products and services from which the Company generates revenue, as well as the nature, timing of satisfaction of performance obligations, and significant payment terms for each.
TEL-INSTRUMENT ELECTRONICS CORP.
Notes To Consolidated Financial Statements
2.Summary of Significant Accounting Policies (continued)
Revenue Recognition (continued):
Test Units/Sets
The Company develops, and manufactures unit sets to test navigation and communication equipment, such as ramp testers and bench testers for radios installed in aircraft. The Company recognizes revenue when the customer obtains control of the Company’s product based on the contractual shipping terms of the contract, usually at time of shipment. Revenue on products areis presented gross because the Company is primarily responsible for fulfilling the promise to provide the product, is responsible to ensure that the product is produced in accordance with the related supply agreement and bears the risk of loss while the inventory is in-transit. Revenue is measured as the amount of consideration the Company expects to receive in exchange for transferring products to the customer.
If the contract contains a single performance obligation, the entire transaction price is allocated to the single performance obligation. Contracts that contain multiple performance obligations require an allocation of the transaction price based on the estimated relative standalone selling prices of the promised products or services underlying each performance obligation. The Company determines stand-alone selling prices based on the price at which the performance obligation is sold separately. If the stand-alone selling price is not observable through past transactions, the Company estimates the standalone selling price taking into account available information such as market conditions and internally approved pricing guidelines related to the performance obligations.
When determining the transaction price of a contract, an adjustment is made if payment from the customer occurs either significantly before or significantly after performance, resulting in a significant financing component. Applying the practical expedient in paragraph 606-10-32-18, the Company does not assess whether a significant financing component exists if the period between when the Company performs its obligations under the contract and when the customer pays is one year or less. None of the Company’s contracts contained a significant financing component as of March 31, 2020.2021.
Replacement Parts
The Company offers replacement parts for test equipment, ramp testers, and bench testers. Similar to the sale of test units, the control of the product transfers at a point of time and therefore, revenue is recognized at the point in time when the obligation to the customer has been fulfilled.
Extended Warranties
The extended warranties sold by the Company provide a level of assurance beyond the coverage for defects that existed at the time of a sale or against certain types of covered damage with coverage terms generally ranging from 5 to 7 years. Amounts received for warranties are recorded as deferred revenue and recognized as revenue ratably over the respective term of the agreements. As of March 31, 2020,2021, approximately $413,554$408,219 is expected to be recognized from remaining performance obligations for extended warranties as compared to $361,791 at$413,554 on March 31, 2019.2020. For the year ended March 31, 2020,2021, the Company recognized revenue of $85,311$86,588 from amounts that were included in Deferred Revenue as compared to $50,353$85,311 for the year ended March 31, 2019.2020.
The following table provides a summary of the changes in deferred revenues related to extended warranties for the year ended March 31, 2020:2021:
Deferred revenues related to extended warranties at April 1, 2019 | $ | 361,791 | ||
Additional extended warranties | 137,074 | |||
Revenue recognized for the year ended March 31, 2020 | (85,311 | ) | ||
Deferred revenues related to extended warranties at March 31, 2020 | $ | 413,554 |
Deferred revenues related to extended warranties on April 1, 2020 | $ | 413,554 | ||
Additional extended warranties | 81,253 | |||
Revenue recognized for the year ended March 31, 2021 | (86,588 | ) | ||
Deferred revenues related to extended warranties on March 31, 2021 | $ | 408,219 |
Other Deferred Revenues
The Company sometimes receives payments in advance of shipment. These amounts are classified as other deferred revenues. For the period ended March 31, 2020,2021, the Company has other deferred revenues of $58,746.$74,920 and $58,746 for the prior period ended March 31, 2020.
TEL-INSTRUMENT ELECTRONICS CORP.
Notes To Consolidated Financial Statements
2.Summary of Significant Accounting Policies (continued)
Revenue Recognition (continued):
Nature of goods and services (continued)
Repair and Calibration Services
The Company offers repair and calibration services for units that are returned for annual calibrations and/or for repairs after the warranty period has expired. The Company repairs and calibrates a wide range of airborne navigation and communication equipment. Revenue is recognized at the time the repaired or calibrated unit is shipped back to the customer, as it is at this time that the work is completed.
Other
The majority of the Company’s revenues are from contracts with the U.S. government, airlines, aircraft manufacturers, such as Boeing and Lockheed Martin, domestic distributors, international distributors for sales to military and commercial customers, and other commercial customers. The contracts with the U.S. government typically are subject to the Federal Acquisition Regulation (“FAR”) which provides guidance on the types of costs that are allowable in establishing prices for goods and services provided under U.S. government contracts.
Payment terms and conditions vary by contract, although terms generally include a requirement of payment within a range from 30 to 60 days, or in certain cases, up-front deposits. In circumstances where the timing of revenue recognition differs from the timing of invoicing, the Company has determined that the Company's contracts generally do not include a significant financing component. Payments received prior to the delivery of units or services performed are recorded as deferred revenues. Taxes collected from customers, which are subsequently remitted to governmental authorities, are excluded from sales. The Company applied the practical expedient to account for shipping and handling activities as fulfillment cost rather than as a separate performance obligation. Shipping and handling costs charged to customers are classified as sales, and the shipping and handling costs incurred are included in cost of sales.
All sales are denominated in U.S. dollars.
The Company excludes from revenues all taxes assessed by a governmental authority that are imposed on the sale of its products and collected from customers.
The Company chose to apply the available practical expedient as commission eligible sales orders are fulfilled within less than one year and commissions are generally paid by the Company within 30 days of the related sales order fulfillment. Accordingly, management has determined that no change in accounting for costs to obtain a contract will be required for the Company to conform to ASC 606.
Disaggregation of revenue
In the following tables, revenue is disaggregated by revenue category.
For the Year Ended March 31, 2021 | ||||||||
Commercial | Government | |||||||
Sales Distribution | ||||||||
Test Units | $ | 325,195 | $ | 9,858,537 | ||||
| $ | 325,195 | $ | 9,858,537 | |||||
The remainder of our revenues for the year ended March 31, 2021, are derived from repairs and calibration of $1,169,399, replacement parts of $142,801, and extended warranties of $86,588.
For the Year Ended March 31, 2020 | ||||||||
Commercial | Government | |||||||
Sales Distribution | ||||||||
Test Units | $ | 918,720 | $ | 12,737,362 | ||||
| $ | 918,720 | $ | 12,737,362 | |||||
The remainder of our revenues for the year ended March 31, 2020, are derived from repairs and calibration of $1,525,288, replacement parts of $460,103, extended warranties of $85,311 and other revenues of $48,159.
TEL-INSTRUMENT ELECTRONICS CORP.
Notes To Consolidated Financial Statements
2.Summary of Significant Accounting Policies (continued)
Revenue Recognition (continued):
Disaggregation of revenue (continued)
For the Year Ended March 31, 2019 | ||||||||
Commercial | Government | |||||||
Sales Distribution | ||||||||
Test Units | $ | 845,103 | $ | 9,239,379 | ||||
| $ | 845,103 | $ | 9,239,379 | |||||
The remainder of our revenues for the year ended March 31, 2019 are derived from repairs and calibration of $1,686,643, replacement parts of $294,572, and extended warranties of $50,353. We do not disaggregate these revenue streams as they are not deemed an important element related to how management operates the business between segments.
In the following table, revenue is disaggregated by geography.
For the Year Ended March 31, 2020 | For the Year Ended March 31, 2019 | For the Year Ended March 31, 2021 | For the Year Ended March 31, 2020 | |||||||||||||
Geography | ||||||||||||||||
United States | $ | 7,205,596 | $ | 9,677,822 | $ | 5,511,516 | $ | 7,205,596 | ||||||||
International | 8,569,347 | 2,438,228 | 6,071,004 | 8,569,347 | ||||||||||||
Total | $ | 15,774,943 | $ | 12,116,050 | $ | 11,582,520 | $ | 15,774,943 | ||||||||
Fair Value of Financial Instruments:
The Company estimates that the fair value of all financial instruments aton March 31, 20202021, and March 31, 2019,2020, as defined in Financial Accounting Standards Board (“FASB”) ASC 825 “Financial Instruments”, does not differ materially, except for the items discussed below, from the aggregate carrying values of its financial instruments recorded in the accompanying consolidated balance sheets. The estimated fair value amounts have been determined by the Company using available market information and appropriate valuation methodologies. Considerable judgment is required in interpreting market data to develop the estimates of fair value.
The carrying amounts reported in the consolidated balance sheets as of March 31, 20202021, and March 31, 20192020, for cash, accounts receivable, restricted cash used for the appeal bond, and accounts payable approximate the fair value because of the immediate or short-term maturity of these financial instruments. Each reporting period we evaluate market conditions including available interest rates, credit spreads relative to our credit rating and liquidity in estimating the fair value of our debt. After considering such market conditions, we estimate that the fair value of debt approximates its carrying value.
Cash: Cash primarily consists of deposits held at major banks.
Concentrations of Credit Risk:
Cash held in banks: The Company maintains cash balances at a financial institution that is insured by the Federal Deposit Insurance Corporation (“FDIC”) up to federally insured limits. At times balances may exceed FDIC insured limits. The Company has not experienced any losses in such accounts.
Accounts Receivable: The Company’s avionics customer base is primarily comprised of airlines, distributors, and the U.S. Government. As of March 31, 2020,2021, the Company believes it has no significant credit risk related to its concentration within its accounts receivable.
TEL-INSTRUMENT ELECTRONICS CORP.
Notes To Consolidated Financial Statements (Continued)
2. Summary of Significant Accounting Policies (continued)
Inventories:
Inventories are stated at the lower of cost or net realizable value. Cost is determined on a first-in, first-out basis. Inventories are written down if the estimated net realizable value is less than the recorded value. The Company reviews the carrying cost of inventories by product to determine the adequacy of reserves for obsolescence. In accounting for inventories, the Company must make estimates regarding the estimated realizable value of inventory. The estimate is based, in part, on the Company’s forecasts of future sales and age of inventory. If actual conditions are less favorable than those we have projected, we may need to increase our reserves for excess and obsolete inventories. Any increases in our reserves will adversely impact our results of operations. The establishment of a reserve for excess and obsolete inventory establishes a new cost basis in the inventory. Such reserves are not reduced until the product is sold. If we are able to sell such inventory any related reserves would be reversed in the period of sale. In accordance with industry practice, service parts inventory is included in current assets, although service parts are carried for established requirements during the serviceable lives of the products and, therefore, not all parts are expected to be sold within one year.
Equipment and Leasehold Improvements:
Office and manufacturing equipment are stated at cost, net of accumulated depreciation. Depreciation and amortization are provided on a straight-line basis over periods ranging from 3 to 5 years.
Leasehold improvements are amortized over the term of the lease or the useful life of the asset, whichever is shorter.
TEL-INSTRUMENT ELECTRONICS CORP.
Notes To Consolidated Financial Statements
2.Summary of Significant Accounting Policies (continued)
Equipment and Leasehold Improvements:
Maintenance, repairs, and renewals that do not materially add to the value of the equipment nor appreciably prolong its life are charged to expense as incurred.
When assets are retired or otherwise disposed of, the cost and related accumulated depreciation are removed from the accounts and the resulting gain or loss is included in the Statement of Operations.
Engineering, Research and Development Costs:
Engineering, research and development costs are expensed as incurred.
Deferred Revenues:
Amounts billed in advance of the period in which the service is rendered, or product delivered are recorded as deferred revenue. AtOn March 31, 20202021, and 2019,2020, deferred revenues totaled $472,300$483,139 and $361,791,$472,300, respectively. See above for additional information regarding our revenue recognition policies.
Net Income (Loss) per Common Share Attributable to Common Shareholders:
Net income (loss) per share attributable to common stockholders has been computed according to Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC 260”), “Earnings per Share,” which requires a dual presentation of basic and diluted income (loss) per share (“EPS”). Basic EPS attributable to common stockholders represents net income (loss) less preferred dividends divided by the weighted average number of common shares outstanding during a reporting period. Diluted EPS attributable to common stockholders reflects the potential dilution that could occur if securities, including preferred stock, warrants and options, were converted into common stock. The dilutive effect of outstanding warrants and options is reflected in earnings per share by use of the treasury stock method. The dilutive effect of preferred stock is reflected in earnings per share by use of the if-converted method. In applying the treasury stock method for stock-based compensation arrangements, the assumed proceeds are computed as the sum of the amount the employee must pay upon exercise and the amounts of average unrecognized compensation.
TEL-INSTRUMENT ELECTRONICS CORP.
Notes To Consolidated Financial Statements (Continued)
2. Summary of Significant Accounting Policies (continued)
Income Taxes
The Company accounts for income taxes using the asset and liability method described in FASB ASC 740, “Income Taxes”. Deferred tax assets arise from a variety of sources, the most significant being: a) tax losses that can be carried forward to be utilized against profits in future years; b) expenses recognized for financial reporting purposes but disallowed in the tax return until the associated cash flow occurs; and c) valuation changes of assets which need to be tax effected for book purposes but are deductible only when the valuation change is realized.
Deferred tax assets and liabilities are determined based on differences between financial reporting and tax bases of assets and liabilities and are measured using enacted tax rates and laws that are expected to be in effect when such differences are expected to reverse. The measurement of deferred tax assets is reduced, if necessary, by a valuation allowance for any tax benefit which is not more likely than not to be realized. In assessing the need for a valuation allowance, future taxable income is estimated, considering the realization of tax loss carryforwards. Valuation allowances related to deferred tax assets can also be affected by changes to tax laws, changes to statutory tax rates and future taxable income levels. In the event it was determined that the Company would not be able to realize all or a portion of our deferred tax assets in the future, we would reduce such amounts through a charge to income in the period in which that determination is made. Conversely, if we were to determine that we would be able to realize our deferred tax assets in the future in excess of the net carrying amounts, we would decrease the recorded valuation allowance through an increase to income in the period in which that determination is made. In its evaluation of a valuation allowance the Company takes into account existing contracts and backlog, and the probability that options under these contract awards will be exercised as well as sales of existing products. The Company prepares profit projections based on the revenue and expenses forecast to determine that such revenues will produce sufficient taxable income to realize the deferred tax assets.
TEL-INSTRUMENT ELECTRONICS CORP.
Notes To Consolidated Financial Statements
2.Summary of Significant Accounting Policies (continued)
Income Taxes (continued):
The Company accounts for uncertainties in income taxes under ASC 740-10-50 which 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. ASC 740-10 requires that the Company determine whether the benefits of its tax positions are more-likely-than-not of being sustained upon audit based on the technical merits of the tax position. The Company recognizes the impact of an uncertain income tax position taken on its income tax return at the largest amount that is more-likely-than-not to be sustained upon audit by the relevant taxing authority. The implementation of ASC 740-10 had no impact on the Company’s results of operations or financial position.
Despite the Company’s belief that its tax return positions are consistent with applicable tax laws, one or more positions may be challenged by taxing authorities. Settlement of any challenge can result in no change, a complete disallowance, or some partial adjustment reached through negotiations or litigation. Interest and penalties related to income tax matters, if applicable, will be recognized as income tax expense.
During the years ended March 31, 20202021, and 20192020 the Company did not incur any expense related to interest or penalties for income tax matters, and no such amounts were accrued as of March 31, 20202021, and 2019.2020. The Company’s tax years remain open for examination by the tax authorities primarily beginning 20152018 through present.
Stock-based Compensation:
The Company accounts for stock-based compensation in accordance with FASB ASC 718 which requires the measurement of stock-based compensation based on the fair value of the award on the date of grant. The Company recognizes compensation cost on awards on a straight-line basis over the vesting period, typically four years. The Company estimates the fair value of each option granted using the Black-Scholes option-pricing model. Additional information and disclosure are provided in Note 17 below.
Long-Lived Assets:
The Company assesses the recoverability of the carrying value of its long-lived assets whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future, undiscounted cash flows expected to be generated by an asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell. No impairment losses have been recognized for the years ended March 31, 2021, and 2020, and 2019, respectively.
TEL-INSTRUMENT ELECTRONICS CORP.
Notes To Consolidated Financial Statements (Continued)
2. Summary of Significant Accounting Policies (continued)
Use of Estimates:
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires that management make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The most significant estimates include income taxes, warranty claims, inventory and accounts receivable valuations.
Accounts Receivable:
The Company performs ongoing credit evaluations of its customers and adjusts credit limits based on customer payment and current credit worthiness, as determined by review of their current credit information. The Company continuously monitors credit limits for and payments from its customers and maintains provision for estimated credit losses based on its historical experience and any specific customer issues that have been identified. While such credit losses have historically been within the Company’s expectation and the provision established, the Company cannot guarantee that this will continue.
TEL-INSTRUMENT ELECTRONICS CORP.
Notes To Consolidated Financial Statements
2.Summary of Significant Accounting Policies (continued)
Warranty Reserves:
Warranty reserves are based upon historical rates and specific items that are identifiable and can be estimated at time of sale. While warranty costs have historically been within the Company’s expectations and the provisions established, future warranty costs could be in excess of the Company’s warranty reserves. A significant increase in these costs could adversely affect the Company’s operating results for the period and the periods these additional costs materialize. Warranty reserves are adjusted from time to time when actual warranty claim experience differs from estimates. For the year ended March 31, 20202021, warranty reserve costs were $51,858$64,092 as compared to $58,082$51,858 for the year ended March 31, 20192020 and are included in Cost of Sales in the accompanying consolidated statement of operations. See Note 7 for warranty reserves.
Risks and Uncertainties:
The Company’s operations are subject to a number of risks, including but not limited to changes in the general economy, demand for the Company’s products, the success of its customers, research and development results, reliance on the government and commercial markets, litigation, and the renewal of its line of credit. The Company has major contracts with the U.S. Government, which like all government contracts are subject to termination.
New Accounting Pronouncements
Recently Adopted Authoritative Pronouncements:
In February 2016, the FASB established Topic 842, Leases, by issuing Accounting Standards Update (ASU) No. 2016-02, which requires lessees to recognize leases on-balance sheet and disclose key information about leasing arrangements. Topic 842 was subsequently amended by ASU No. 2018-01, Land Easement Practical Expedient for Transition to Topic 842; ASU No. 2018-10, Codification Improvements to Topic 842, Leases; and ASU No. 2018-11, Targeted Improvements. The new standard establishes a right-of-use model (ROU) that requires a lessee to recognize a ROU asset and lease liability on the balance sheet for all leases with a term longer than 12 months. Leases will be classified as finance or operating, with classification affecting the pattern and classification of expense recognition in the income statement. The new standard was effective on April 1, 2019. A modified retrospective transition approach is required, applying the new standard to all leases existing at the date of initial application. An entity may choose to use either (1) its effective date or (2) the beginning of the earliest comparative period presented in the financial statements as its date of initial application. If an entity chooses the second option, the transition requirements for existing leases also apply to leases entered into between the date of initial application and the effective date. The entity must also recast its comparative period financial statements and provide the disclosures required by the new standard for the comparative periods. The Company adopted the new standard on April 1, 2019 and uses the effective date as the date of initial application. Consequently, financial information will not be updated and the disclosures required under the new standard will not be provided for dates and periods before April 1, 2019. The new standard provides a number of optional practical expedients in transition. The Company elects the ‘package of practical expedients’, which permits the Company not to reassess under the new standard prior conclusions about lease identification, lease classification and initial direct costs.
TEL-INSTRUMENT ELECTRONICS CORP.
Notes To Consolidated Financial Statements (Continued)
2. Summary of Significant Accounting Policies (continued)
New Accounting Pronouncements (continued)
Recently Adopted Authoritative Pronouncements (continued):
At the inception of an arrangement, the Company determines whether the arrangement is or contains a lease based on the circumstances present. Leases with a term greater than one year are recognized on the balance sheet as right-of-use assets, lease liabilities, and, if applicable, long-term lease liabilities. Lease liabilities and the corresponding right-of-use assets are recorded based on the present values of lease payments over the lease terms. The interest rate implicit in lease contracts is typically not readily determinable. As such, the Company utilizes the appropriate incremental borrowing rates, which are the rates that would be incurred to borrow on a collateralized basis, over similar terms, amounts equal to the lease payments in a similar economic environment. At adoption, the Company recognized additional operating lease liabilities of $508,551 with corresponding ROU assets of the same amount based on the present value of the remaining minimum rental payments under current leasing standards for existing operating leases. The Company's leases generally do not provide an implicit rate, and therefore the Company uses its incremental borrowing rate as the discount rate when measuring operating lease liabilities. The incremental borrowing rate represents an estimate of the interest rate the Company would incur at lease commencement to borrow an amount equal to the lease payments on a collateralized basis over the term of a lease. The Company used incremental borrowing rates as of April 1, 2019 for operating leases that commenced prior to that date. The Company estimated its incremental borrowing rate based on its credit quality, line of credit agreement and by comparing interest rates available in the market for similar borrowings. The Company uses 6.25%. ASU 2016-02 did not have an impact on our consolidated statements of income for the year ended March 31, 2020, but had a significant impact on our consolidated balance sheet as of March 31, 2020.
In November 2016, the FASB issued ASU 2016-18 Statement of Cash Flows (Topic 230): Restricted Cash. ASU 2016-18 requires entities to show the changes in the total of cash, cash equivalents, restricted cash and restricted cash equivalents in the statement of cash flows. As a result, entities will no longer present transfers between cash and cash equivalents and restricted cash and restricted cash equivalents in the statement of cash flows. The ASU requires changes in the Company’s restricted cash to be classified as either operating activities, investing activities or financing activities in the Consolidated Statement of Cash Flows, depending on the nature of the activities that gave rise to the restriction. The new standard is effective for our annual reporting period ended March 31, 2020 and was adopted on a retrospective approach. The adoption of this standard did not have a significant impact on our financial position and results of operations.
New Accounting Pronouncements
In June 2016, the FASB issued ASU No. 2016-13 Financial Instruments -Credit Losses (Topic 326), Measurement of Credit Losses on Financial Statements. The amendment in this update replaces the incurred loss impairment methodology in current GAAP with a methodology that reflects expected credit losses on instruments within its scope, including trade receivables. This update is intended to provide financial statement users with more decision-useful information about the expected credit losses. The effective date of new standard has been deferred to April 1, 2021.2023. We do not expect the adoption of this standard to have a significant impact on our financial position and results of operations.
In December 2019, the FASB issued ASU No. 2019-12, Income Taxes - simplifying the accounting for income taxes (Topic 740), which is meant to simplify the accounting for income taxes by removing certain exceptions to the general principles in Topic 740, Income Taxes. The amendment also improves consistent application and simplify GAAP for other areas of Topic 740 by clarifying and amending existing guidance. This ASU is effective April 1, 2021, and we do not expect the adoption of this standard to have a significant impact on our financial position and results of operations.
No other recently issued accounting pronouncements had or are expected to have a material impact on the Company’s consolidated financial statements.
TEL-INSTRUMENT ELECTRONICS CORP.
Notes To Consolidated Financial Statements (Continued)
3.Accounts Receivable
The following table sets forth the components of accounts receivable:
March 31, | March 31, | |||||||||||||||
2020 | 2019 | 2021 | 2020 | |||||||||||||
Government | $ | 1,095,131 | $ | 1,951,729 | $ | 1,700,907 | $ | 1,095,131 | ||||||||
Commercial | 324,013 | 251,870 | 239,914 | 324,013 | ||||||||||||
Less: Allowance for doubtful accounts | (7,500 | ) | (7,500 | ) | (7,500 | ) | (7,500 | ) | ||||||||
| $ | 1,411,644 | $ | 2,196,099 | $ | 1,933,321 | $ | 1,411,644 | |||||||||
TEL-INSTRUMENT ELECTRONICS CORP.
Notes To Consolidated Financial Statements (Continued)
4.Inventories
Inventories consist of:
March 31, | March 31, | |||||||||||||||
2020 | 2019 | 2021 | 2020 | |||||||||||||
Purchased parts | $ | 3,011,072 | $ | 2,709,235 | $ | 2,912,599 | $ | 3,011,072 | ||||||||
Work-in-process | 597,166 | 721,397 | 1,020,402 | 597,166 | ||||||||||||
Finished goods | 34,441 | - | 79,988 | 34,441 | ||||||||||||
Less: Allowance for obsolete inventory | (550,000 | ) | (498,000 | ) | (575,000 | ) | (550,000 | ) | ||||||||
| $ | 3,092,679 | $ | 2,932,632 | $ | 3,437,989 | $ | 3,092,679 | |||||||||
Work-in-process inventory includes $516,431$1,003,514 and $673,437$516,431 for government contracts aton March 31, 20202021, and 2019,2020, respectively.
5.Equipment and Leasehold Improvements
Equipment and leasehold improvements consist of the following:
March 31, | March 31, | |||||||||||||||
2020 | 2019 | 2021 | 2020 | |||||||||||||
Leasehold improvements | $ | 118,992 | $ | 95,858 | $ | 127,655 | $ | 118,992 | ||||||||
Machinery and equipment | 1,879,397 | 1,773,349 | 1,924,902 | 1,879,397 | ||||||||||||
Automobiles | 23,712 | 23,712 | 23,712 | 23,712 | ||||||||||||
Sales equipment | 595,475 | 595,475 | 595,475 | 595,475 | ||||||||||||
Assets under finance leases | 637,189 | 637,189 | 637,189 | 637,189 | ||||||||||||
Less: Accumulated depreciation & amortization | (2,991,015 | ) | (2,889,213 | ) | (3,108,164 | ) | (2,991,015 | ) | ||||||||
| $ | 263,750 | $ | 236,370 | $ | 200,769 | $ | 263,750 | |||||||||
Depreciation and amortization expense related to the assets above for the years ended March 31, 20202021, was $125,120 and 2019 was $104,652 and $60,954 respectively (see Note 12 for additional information on finance leases).
6.Restricted Cash to Support Appeal Bond
In January 2018, the Company transferred $2,000,000 to a restricted cash account to secure a letter of credit which was used for collateral for the appeal bond (See Note 21 to the consolidated financial statements)21).
77.. Accrued Expenses
Accrued vacation pay, payroll and payroll withholdings consist of the following:
March 31, | ||||||||
2020 | 2019 | |||||||
Accrued vacation pay | $ | 336,039 | $ | 325,647 | ||||
Accrued profit sharing | 110,894 | - | ||||||
Accrued compensation and payroll withholdings | 65,799 | 68,649 | ||||||
| $ | 512,732 | $ | 394,296 | |||||
Accrued vacation pay, payroll and payroll withholdings includes $135,105 and $76,214 at March 31, 2020 and 2019, respectively, which is due to officers.
March 31, | ||||||||
2021 | 2020 | |||||||
Accrued vacation pay | $ | 403,759 | $ | 336,039 | ||||
Accrued profit sharing | - | 110,894 | ||||||
Accrued compensation and payroll withholdings | 53,473 | 65,799 | ||||||
| $ | 457,232 | $ | 512,732 | |||||
TEL-INSTRUMENT ELECTRONICS CORP.
Notes To Consolidated Financial Statements (Continued)
77.. Accrued Expenses (continued)
Accrued vacation pay, payroll and payroll withholdings include $55,474 and $135,105 on March 31, 2021, and 2020, respectively, which is due to officers.
Accrued expenses - other consist of the following:
March 31, | March 31, | |||||||||||||||
2020 | 2019 | 2021 | 2020 | |||||||||||||
Accrued commissions | $ | 32,181 | $ | 46,853 | $ | 14,918 | $ | 32,181 | ||||||||
Accrued legal costs | 47,772 | 30,000 | 10,519 | 47,772 | ||||||||||||
Accrued consulting fees | 5,050 | 164,059 | - | 5,050 | ||||||||||||
Warranty reserve | 118,734 | 118,014 | 90,752 | 118,734 | ||||||||||||
Accrued purchase | 218,032 | 71,530 | ||||||||||||||
Other | 91,476 | 73,546 | 31,754 | 19,946 | ||||||||||||
| $ | 295,213 | $ | 432,472 | $ | 365,975 | $ | 295,213 | |||||||||
The following table provides a summary of the changes in warranty reserves for the years ended March 31, 20202021, and 2019:2020:
March 31, | ||||||||
2020 | 2019 | |||||||
Warranty reserve, at beginning of period | $ | 118,014 | $ | 111,983 | ||||
Warranty expense | 51,858 | 58,082 | ||||||
Warranty deductions | (51,138 | ) | (52,051 | ) | ||||
Warranty reserve, at end of period | $ | 118,734 | $ | 118,014 | ||||
Accrued expenses – related parties consists of the following:
March 31, | ||||||||
2020 | 2019 | |||||||
Interest and other expenses due to the Company’s President/CEO | - | 3,017 | ||||||
| $ | - | $ | 3,017 | |||||
March 31, | ||||||||
2021 | 2020 | |||||||
Warranty reserve, at beginning of period | $ | 118,734 | $ | 118,014 | ||||
Warranty expense | 64,092 | 51,858 | ||||||
Warranty deductions | (92,074 | ) | (51,138 | ) | ||||
Warranty reserve, at end of period | $ | 90,752 | $ | 118,734 | ||||
88.. Income Taxes
On December 22, 2017, the U.S. Government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the “TCJA”). The TJCA made broad changes to the U.S. tax code, including, but not limited to, (1) reducing the U.S. federal corporate tax rate from 35% to 21%; (2) eliminating the corporate alternative minimum tax; (3) creating a new limitation on deductible interest expense; (4) creating the base erosion and anti-abuse tax, a new minimum tax; (5) limitation on the deductibility of certain executive compensation; (6) enhancing the option to claim accelerated depreciation deductions on qualified property, and (7) changing the rules related to uses and limitations of NOLs in tax years beginning after December 31, 2017.
Income tax benefit:
Fiscal Year Ended | ||||||||
March 31, | March 31, | |||||||
2021 | 2020 | |||||||
Current: | ||||||||
Federal | $ | - | $ | - | ||||
State and local | - | - | ||||||
Total current tax provision | - | - | ||||||
Deferred: | ||||||||
Federal | (26,788 | ) | - | |||||
State and local | (239 | ) | (409 | ) | ||||
Release of valuation allowance | - | (2,648,871 | ) | |||||
Total deferred tax benefit | (27,027 | ) | (2,649,280 | ) | ||||
Total benefit | $ | (27,027 | ) | $ | (2,649,280 | ) | ||
TEL-INSTRUMENT ELECTRONICS CORP.
Notes To Consolidated Financial Statements (Continued)
88.. Income Taxes (continued)
Income tax benefit:
Fiscal Year Ended | ||||||||
March 31, | March 31, | |||||||
2020 | 2019 | |||||||
Current: | ||||||||
Federal | $ | - | $ | - | ||||
State and local | - | - | ||||||
Total current tax provision | - | - | ||||||
Deferred: | ||||||||
Federal | - | - | ||||||
State and local | (409 | ) | - | |||||
Release of valuation allowance | (2,648,871 | ) | - | |||||
Total deferred tax benefit | (2,649,280 | ) | - | |||||
Total benefit | $ | (2,649,280 | ) | $ | -0- | |||
The approximate values of the components of the Company’s deferred taxes aton March 31, 20202021, and 20192020 are as follows:
March 31, | March 31, | March 31, | March 31, | |||||||||||||
2020 | 2019 | 2021 | 2020 | |||||||||||||
Deferred tax assets (liabilities): | ||||||||||||||||
Net operating loss carryforwards | $ | 845,898 | $ | 1,345,245 | $ | 849,387 | $ | 845,898 | ||||||||
Tax credits | 329,032 | 329,032 | 329,032 | 329,032 | ||||||||||||
Charitable contributions | 126 | 116 | 716 | 126 | ||||||||||||
Legal damages | 1,194,268 | 1,117,904 | 1,243,370 | 1,194,268 | ||||||||||||
Allowance for doubtful accounts | 1,575 | 1,576 | 1,576 | 1,575 | ||||||||||||
Reserve for inventory obsolescence | 115,517 | 104,626 | 120,815 | 115,517 | ||||||||||||
Inventory capitalization | 48,750 | 70,633 | ||||||||||||||
Inventory capitalization (Net of section481A) | - | 48,750 | ||||||||||||||
Vacation accrual | 76,879 | 68,416 | 87,579 | 76,878 | ||||||||||||
Warranty reserve | 24,938 | 24,794 | 19,068 | 24,938 | ||||||||||||
Deferred revenues | 99,197 | 76,009 | 101,514 | 99,197 | ||||||||||||
Stock options | 15,683 | 15,687 | 15,689 | 15,683 | ||||||||||||
AMT credit | 64,766 | 63,500 | - | - | ||||||||||||
Gain on Sale of Asset | 345 | - | ||||||||||||||
Depreciation | (3,849 | ) | 5,070 | 5,949 | (3,849 | ) | ||||||||||
Deferred tax asset | 2,812,780 | 3,222,608 | 2,775,040 | 2,748,013 | ||||||||||||
Less valuation allowance | (100,000 | ) | (3,159,108 | ) | (100,000 | ) | (100,000 | ) | ||||||||
Deferred tax asset, net | $ | 2,712,780 | $ | 63,500 | $ | 2,675,040 | $ | 2,648,013 | ||||||||
The recognized deferred tax asset is based upon the expected utilization of its benefit from future taxable income. The Company has federal net operating loss (“NOL”) carryforwards of approximately $4,028,000$4,044,698 as of March 31, 2020.2021. These carryforward losses are available to offset future taxable income and begin to expire in the year 2027. New Jersey State NOL carryforwards approximate $2,735,000$2,752,043 as of March 31, 2020.2021. New Jersey State NOL carryforwards expire in 20 years, and certain of these amounts begin to expire in 2030.
The foregoing amounts are management’s estimates, and the actual results could differ from those estimates. Future profitability in this competitive industry depends on continually obtaining and fulfilling new profitable sales agreements and modifying products. The inability to obtain new profitable contracts or the failure of the Company’s engineering development efforts could reduce estimates of future profitability, which could affect the Company’s ability to realize the deferred tax assets.
A reconciliation of the income tax benefit provision at the statutory Federal tax rate of 21% for the years ended March 31, 2021, and 2020, respectively, to the income tax benefit provision recognized in the financial statements is as follows:
March 31, | March 31, | |||||||
2021 | 2020 | |||||||
Income tax provision – statutory rate | $ | 120,704 | $ | 438,314 | ||||
Income tax expenses – state and local, net of federal benefit | (14 | ) | 67 | |||||
Permanent items | 4,864 | 5,865 | ||||||
PPP Loan Forgiveness | (151,741 | ) | - | |||||
Change in value of warrants – permanent difference | - | 15,330 | ||||||
True-up of prior year’s deferred taxes | - | (36,164 | ) | |||||
Valuation allowance | - | (3,059,107 | ) | |||||
Other | (840 | ) | (13,585 | ) | ||||
Income tax benefit | $ | (27,027 | ) | $ | (2,649,280 | ) | ||
TEL-INSTRUMENT ELECTRONICS CORP.
Notes To Consolidated Financial Statements (Continued)
89.. Income Taxes (continued)
A reconciliation of the income tax (benefit) provision at the statutory Federal tax rate of 21% for the years ended March 31, 2020 and 2019, respectively, to the income tax (benefit) provision recognized in the financial statements is as follows:
March 31, | March 31, | |||||||
2020 | 2019 | |||||||
Income tax provision – statutory rate | $ | 438,314 | $ | 42,638 | ||||
Income tax expenses – state and local, net of federal benefit | 67 | 1,027 | ||||||
Permanent items | 5,865 | 32,031 | ||||||
Change in value of warrants – permanent difference | 15,330 | 9,135 | ||||||
True-up of prior year’s deferred taxes | (36,164 | ) | 15,386 | |||||
Valuation allowance | (3,059,107 | ) | (118,625 | ) | ||||
Rate changes | - | 3,102 | ||||||
Other | (13,585 | ) | 15,306 | |||||
Income tax provision (benefit) | $ | (2,649,280 | ) | $ | -0- | |||
9. Related Parties
Subordinated Notes
On February 22, 2010, the Company borrowed $250,000 in exchange for issuing subordinated notes to two executive officers and directors in the amount of $125,000 (individually, the “Subordinated Note” and collectively, the “Subordinated Notes”). The notes became due April 1, 2011 with an interest rate of 1% per month, payable on a monthly basis within 14 days of the end of each month. The holders of Subordinated Notes agreed that the Company’s failure to pay the monthly interest amounts pursuant to the terms of the February 22, 2010 Subordinated Notes will not constitute an event of default on such notes. Upon payment in full of the loan to BCA in November 2014, the Company was able to commence to pay down the principal balance of the Subordinated Notes. During fiscal year 2012, the Company’s Chairman, at the time, passed away. His surviving spouse has retained this Subordinated Note and continues to acknowledge the terms. The remaining principal balances on the notes were fully paid during the year ended March 31, 2017. The Company continues to accrue interest. Total interest expense was $990 for the year ended March 31, 2019. All interest was repaid as of March 31, 2019. Accrued interest at March 31, 2020 and 2019 was $-0- and $-0-, respectively.
Services
The Company has obtained marketing and sales services from a brother-in-law of the Company’s CEO with the related fees and commissions amounting to $145,376$121,769 and $161,026$145,376 for the years ended March 31, 2021, and 2020, and 2019, respectively. AtOn March 31, 2020, $15,6502021, $7,700 was due this individual, which is included in accounts payable in the accompanying consolidated balance sheet.
1010.. Line of Credit
On March 21, 2016, the Company entered into a line of credit agreement with Bank of America, which expired March 31, 2017. In March 2017, the Company extended until March 31, 2018. The line provided a revolving credit facility with borrowing capacity of up to $1,000,000. There were no covenants or borrowing base calculations associated with this line of credit. On August 29, 2018, the Company entered a Loan Modification Agreement (the “Agreement”) with the bank. The Company had been working with the bank and had paid $100,000 to the bank to lower the outstanding balance to $900,000 at the signing of the Agreement. The Agreement had the following provisions:
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TEL-INSTRUMENT ELECTRONICS CORP.
Notes To Consolidated Financial Statements (Continued)
10. Line of Credit (continued)
During June 2019, Bank of America agreed to extend the Company’s line of credit until March 31, 2020. The new Loan Modification Agreement (the “Amended Loan Modification Agreement”) with the bank contains the following provisions:
1) | The Company to make an additional principal payment of $10,000 at closing. |
2) | Borrowing base calculation tied to accounts receivable. |
3) | The Amended Loan Modification Agreement expires March 31, 2020. |
4) | Interest on any outstanding balances is payable monthly at an annual interest rate equal to the LIBOR (London Interbank Offered Rates) Daily Floating plus 3.75 percentage points. |
5) | The line is collateralized by substantially all of the assets of the Company. |
6) | The Company will make principal payments of $10,000 per month until March 31, 2020. |
7) | The covenant for the debt service ratio is deleted. |
In March 2020, Bank of America extended the line of credit from March 31, 2020, to January 31, 2021. The new agreement includes open availability up to $690,000. Monthly payments are interest only.
During the year ended March 31, 20202021, the Company repaid $120,000$680,000 against this line of credit. As of March 31, 20202021, and March 31, 2019,2020, the outstanding balances were $680,000$0 and $800,000,$690,000, respectively. As of March 31, 2020 the remaining availability under this line is $10,000. The interest rate aton March 31, 20202021, was 4.74%3.86%.
On March 31, 2021, Bank of America further extended the maturity date of our line of credit from March 31, 2021, to June 30, 2021, to allow time for a full underwriting for the annual renewal period.
111.1. Commitments
The Company sponsors a 401k Plan in which employee contributions on a pre-tax basis are supplemented by matching contributions by the Company. The Company charged to operations $34,047$59,177 and $23,047$34,047 as its matching contribution to the Company’s 401k Plan for the years ended March 31, 20202021, and 2019,2020, respectively.
112.2. Finance and CapitalCapital Lease Obligations
The Company has entered into lease commitments for equipment that meet the requirements for capitalization. The equipment has been capitalized and shown in equipment and leasehold improvements in the accompanying consolidated balance sheets. The related obligations are also recorded in the accompanying consolidated balance sheets and are based upon the present value of the future minimum lease payments with an interest rate of 9%. The net book value of equipment acquired under capitalized lease obligations amounted to $0 and $4,802 and $10,041 aton March 31, 20202021, and 2019,2020, respectively. There were no new capital lease obligations during the years ended March 31, 20202021, and 2019.2020. As of March 31, 20202021, and 2019,2020, accumulated amortization under capital leases was $632,387$637,189 and $627,148,$632,387, respectively.
At March 31, 2020 the remaining balance was $49. The Company included capital lease obligations as of March 31, 2019 under the finance lease obligations caption in the consolidated balance sheet.
TEL-INSTRUMENT ELECTRONICS CORP.
Notes To Consolidated Financial Statements (Continued)
113.3. Operating Lease Liability
The Company leases its general office and manufacturing facility in East Rutherford, NJ with monthly payments of $18,467 under an operating lease agreement which expired July 31, 2016. The lease is for a five year period, beginning August 1, 2011, with a five year option in a one-story facility. In June 2016, the Company extended the lease term for another five years until August 2021. Under terms of the lease, the Company is also responsible for its proportionate share of the additional rent to include all real estate taxes, insurance, snow removal, landscaping and other building charges. The Company is also responsible for the utility costs for the premises. TheDuring April 2021, the Company extended the lease hasterm for another eight years until August 31, 2029. Under the extended lease all terms remain the same, with the exception of the monthly payment of $18,467 escalating to $23,083 commencing September 1, 2021. As a renewal option for five years.result, the Company recorded $1,830,858 of right-of-use assets and related operating leases liabilities during the year ended March 31, 2021.
The Company leases a small office in Lawrence, Kansas under an operating lease agreement which expired JuneMarch 30, 2020.2021, and was renewed for an additional 12 months, expiring on March 31, 2022.
The Company also has an operating lease for office equipment with monthly payments of $523 which expiresexpired in May 2021.
2021 and has been renewed for an additional 48 months. The expired monthly lease payment of $523 will stay in effect until new backordered units are delivered. The Company's leases generally do not provide an implicit rate, and therefore the Company uses its incremental borrowing rate as the discount rate when measuring operating lease liabilities. The incremental borrowing rate represents an estimate of the interest rate the Company would incur at lease commencement to borrow an amount equal to the lease payments on a collateralized basis over the term of a lease. The Company used incremental borrowing rates as of April 1, 2019, for operating leases that commenced prior to that date. The Company estimated its incremental borrowing rate based on its credit quality, line of credit agreement and by comparing interest rates available in the market for similar borrowings. The Company used a discount rate of 3.9% and 6.25% aton March 31, 2020.2021, and 2020, respectively.
The following table reconciles the undiscounted future minimum lease payments (displayed by year and in the aggregate) under non-cancelable operating leases with terms of more than one year to the total lease liabilities recognized on the consolidated balance sheet as of March 31, 2020:2021:
2021 | $ | 227,880 | ||||||
2022 | 93,381 | $ | 242,038 | |||||
2023 | 254,840 | |||||||
2024 | 254,840 | |||||||
2025 | 254,840 | |||||||
2026 | 267,767 | |||||||
Thereafter | 946,415 | |||||||
Total undiscounted future minimum lease payments | 321,261 | 2,220,740 | ||||||
Less: Difference between undiscounted lease payments and discounted lease liabilities | (14,521 | ) | (297,936 | ) | ||||
Present value of net minimum lease payments | 306,740 | 1,922,804 | ||||||
Less current portion | (214,793 | ) | (201,883 | ) | ||||
Operating lease liabilities – long-term | $ | 91,947 | $ | 1,720,921 | ||||
Total rent expense for the years ended March 31, 2021, and 2020 were $364,582 and 2019$358,328, respectively
14.Significant Customer Concentrations
Domestic commercial sales are made throughout the U.S. to commercial airlines and general aviation businesses directly or through distributors. There were $358,328two (2) direct commercial customers who represented 15% and $352,529,20% of commercial sales in fiscal year 2021 and zero in 2020. The Company has one domestic distributor which receives discounts ranging between 16%-20% discount for stocking, selling, and, in some cases, providing product calibration and repairs. The loss of this distributor would not have a material adverse effect on the Company or its operations. Commercial sales represented 15% and 19% of total sales, respectively, for the fiscal years ended March 31, 2021, and 2020. Our commercial distributor represented approximately 5% and 20%, respectively, of commercial sales during fiscal years 2021 and 2020. This distributor also accounted for 1% and 4% of total sales for the years ended March 31, 2021, and 2020, respectively.
Disclosures related to periods prior to adoption of ASU 2016-02
The Company adopted ASU 2016-02 using a modified retrospective adoption method at April 1, 2019 as noted in Note 2 “Recently Adopted Authoritative Pronouncements”. As required, the following disclosure is provided for periods prior to adoption. Minimum operating lease commitments as of March 31, 2019 that have initial or remaining lease terms in excess of one year are as follows:
Years Ended March 31, |
| Amount |
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2020 |
| $ | 327,434 |
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2021 |
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| 312,431 |
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2022 |
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| 128,610 |
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| $ | 768,475 |
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TEL-INSTRUMENT ELECTRONICS CORP.
Notes To Consolidated Financial Statements (Continued)
114.4. Significant Customer Concentrations(continued)
Marketing to the U.S. Government is made directly by employees of the Company or through independent sales representatives, who receive similar commissions to the commercial distributors. For the years ended March 31, 20202021, and 2019,2020, sales to the U.S. Government, including shipments through the government’s logistics centers, represented approximately 30%38% and 39%30%, respectively, of nettotal sales. For the year ended March 31, 2020 one2021, two (2) direct customercustomers represented 10% and 33% of total sales and 12% and 39% of government sales, respectively. No international distributor represented 10% of total sales and 12% of government sales. One international distributor represented 13% of total sales and 15%or 10% of government sales for the year ended March 31, 2020. One U.S. distributor represented 20% of commercial sales for the year ended March 31, 2020. This U.S. Distributor accounted for 20% and 24% of commercial sales for the years ended March 31, 2020 and 2019, respectively. For the year ended March 31, 2019 one direct customer accounted for 12% of total sales and 16% of government sales for the year ended March 31, 2019. No other customer accounted for more than 10% of commercial or government net sales for the year ended March 31, 2019.2021.
Net sales to foreign customers, which, for the most part, are international distributors were $8,569,347$6,071,004 and $2,438,228$8,569,347 for the years ended March 31, 20202021, and 2019,2020, respectively. All other sales were to customers located in the U.S. The following table presents net sales by U.S. and foreign countries:
2020 | 2019 | 2021 | 2020 | |||||||||||||
United States | $ | 7,205,596 | $ | 9,677,822 | $ | 5,511,516 | $ | 7,205,596 | ||||||||
Foreign countries | 8,569,347 | 2,438,228 | 6,071,004 | 8,569,347 | ||||||||||||
Total Avionics Sales | $ | 15,774,943 | $ | 12,116,050 | $ | 11,582,520 | $ | 15,774,943 | ||||||||
Net sales related to any single foreign country did not comprise more than 10% of consolidated net sales. The Company had no assets outside the United States.
Receivables from the U.S. Government represented approximately 27%5.2% and 3%27%, respectively, of total receivables aton March 31, 2021, and 2020, respectively. As of March 31, 2021, three individual customers represented in total 81% of the Company’s outstanding accounts receivable, ranging between 38% and 2019, respectively.19% of the Company’s outstanding accounts receivable on March 31, 2021. As of March 31, 2020, two individual customers represented in total 24% of the Company’s outstanding accounts receivable, ranging between 11% and 13% of the Company’s outstanding accounts receivable at March 31, 2020. As of March 31, 2019, three individual customers represented in total 72% of the Company’s outstanding accounts receivable, ranging between 14% and 37% of the Company’s outstanding accounts receivable. No other customers represented more than 10% of outstanding accounts receivable for the years ended March 31, 20202021, and 2019.2020.
115.5. Series A 8% Convertible Preferred Stock
On November 14, 2017, the Company entered into definitive subscription agreements with an accredited investor, pursuant to which the investor purchased an aggregate of 500,000 shares of the Company’s Series A Preferred Stock (the “Series A Preferred”) for an aggregate of $3 million. The Company used such proceeds for the payment of any Court judgment and/or settlement related to the Aeroflex Wichita, Inc. litigation, working capital purposes, and for payment of fees and expenses associated with this transaction. The Closing occurred following the satisfaction of customary closing conditions. The securities issued pursuant to the Subscription Agreements were not registered under the Securities Act of 1933, as amended (the “Securities Act”), but qualified for exemption under Section 4(a)(2) of the Securities Act. The securities were exempt from registration under Section 4(a)(2) of the Securities Act because the issuance of such securities by the Company did not involve a “public offering,” as defined in Section 4(a)(2) of the Securities Act, due to the insubstantial number of persons involved in the transaction, size of the offering, manner of the offering and number of securities offered. The Company did not undertake an offering in which it sold a high number of securities to a high number of investors. In addition, these shareholders had the necessary investment intent as required by Section 4(a)(2) of the Securities Act since they agreed to, and received, share certificates bearing a legend stating that such securities are restricted pursuant to Rule 144 of the Securities Act. This restriction ensures that these securities would not be immediately redistributed into the market and therefore not be part of a “public offering.” Based on an analysis of the above factors, the Company has met the requirements to qualify for exemption under Section 4(a)(2) of the Securities Act.
TEL-INSTRUMENT ELECTRONICS CORP.
Notes To Consolidated Financial Statements (Continued)
15. Series A 8% Convertible Preferred Stock (continued)
The shares of Series A Preferred have a stated value of $6.00 per share (the “Series A Stated Value”) and are convertible into Common Stock at a price of $3.00 per share. The holders of shares of the Series A Preferred shall be entitled to receive dividends out of any assets legally available, to the extent permitted by New Jersey law, at an annual rate equal to 8% of the Series A Stated Value of such shares of Series A Preferred, calculated on the basis of a 360 day year, consisting of twelve 30-day months, and shall accrue from the date of issuance of such shares of Series A Preferred, payable quarterly in cash. Any unpaid dividends shall accrue at the same rate. To the extent not paid on the last day of March, June, September and December of each calendar year, all dividends on any share of Series A Preferred shall accumulate whether or not declared by the Board and shall remain accumulated dividends until paid. As of March 31, 20202021 the Company recognized $570,667$750,667 as deemed dividends and are included in the carrying value of the Series A Convertible Preferred Stock. The Holders will vote together with the holders of the Company’s Common Stock on an as-converted basis on each matter submitted to a vote of holders of Common Stock (whether at a meeting of shareholders or by written consent). Effective beginning on the third anniversary of the Original Issue Date, and upon 30 days’ written notice to the Holders of Series A Preferred, the Company may, in its sole discretion, redeem the Series A Preferred at the aggregate Series A Stated Value plus any accrued and accumulated but unpaid dividends. During the year ended March 31, 2021 the Company paid dividends of $20,000.
TEL-INSTRUMENT ELECTRONICS CORP.
The Company has also evaluated its convertible preferred stock in accordance with the provisions of ASC 815, Derivatives and Hedging, including consideration of embedded derivatives requiring bifurcation. The issuance of the convertible preferred stock could generate a beneficial conversion feature (“BCF”), which arises when a debt or equity security is issued with an embedded conversion option that is beneficial to the investor or in the money at inception because the conversion option has an effective strike price that is less than the market price of the underlying stock at the commitment date. The Series A Convertible Preferred Stock, and the associated dividends, did not generate a BCF upon issuance as the fair value of the Company's common stock was greater than the conversion price.Notes To Consolidated Financial Statements (Continued)
116.6. Series B 8% Convertible Preferred Stock
On October 5, 2018, the Company entered into definitive subscription agreement with an accredited investor, pursuant to which the investor purchased an aggregate of 166,667 shares of the Company’s Series B Preferred Stock (the “Series B Preferred”) for an aggregate of $1 million. The Company used such proceeds for working capital to finance its operations based on the current and expected increase in business, and for payment of fees and expenses associated with this transaction. The Closing occurred following the satisfaction of customary closing conditions. The securities issued pursuant to this subscription agreement were not registered under the Securities Act of 1933, as amended (the “Securities Act”), but qualified for exemption under Section 4(a)(2) of the Securities Act. The securities were exempt from registration under Section 4(a)(2) of the Securities Act because the issuance of such securities by the Company did not involve a “public offering,” as defined in Section 4(a)(2) of the Securities Act, due to the insubstantial number of persons involved in the transaction, size of the offering, manner of the offering and number of securities offered. The Company did not undertake an offering in which it sold a high number of securities to a high number of investors. In addition, this individual had the necessary investment intent as required by Section 4(a)(2) of the Securities Act since he agreed to receive share certificates bearing a legend stating that such securities are restricted pursuant to Rule 144 of the Securities Act. This restriction ensures that these securities would not be immediately redistributed into the market and therefore not be part of a “public offering.” Based on an analysis of the above factors, the Company has met the requirements to qualify for exemption under Section 4(a)(2) of the Securities Act.
The shares of Series B Preferred have a stated value of $6.00 per share (the “Series B Stated Value”) and are convertible into Common Stock at a price of $2.00 per share. The holder of shares of the Series B Preferred shall be entitled to receive dividends out of any assets legally available, to the extent permitted by New Jersey law, at an annual rate equal to 8% of the Series B Stated Value of such shares of Series B Preferred, calculated on the basis of a 360 day year, consisting of twelve 30-day months, and shall accrue from the date of issuance of such shares of Series B Preferred, payable quarterly in cash. Any unpaid dividends shall accrue at the same rate. To the extent not paid on the last day of March, June, September and December of each calendar year, all dividends on any share of Series B Preferred shall accumulate whether or not declared by the Board and shall remain accumulated dividends until paid. As of March 31, 2020,2021, the Company recognized $119,110$179,111 as deemed dividends and are included in the carrying value of the Series B Convertible Preferred Stock. The Holders will vote together with the holders of the Company’s Common Stock on an as-converted basis on each matter submitted to a vote of holders of Common Stock (whether at a meeting of shareholders or by written consent). Effective beginning on the third anniversary of the Original Issue Date, and upon 30 days’ written notice to the Holders of Series B Preferred, the Company may, in its sole discretion, redeem the Series B Preferred at the aggregate Series B Stated Value plus any accrued and accumulated but unpaid dividends.
TEL-INSTRUMENT ELECTRONICS CORP.
Notes To Consolidated Financial Statements (Continued)
16. Series B 8% Convertible Preferred Stock (continued)
The Company has also evaluated its convertible preferred stock in accordance with the provisions of ASC 815, Derivatives and Hedging, including consideration of embedded derivatives requiring bifurcation. The issuance of the convertible preferred stock could generate a beneficial conversion feature (“BCF”), which arises when a debt or equity security is issued with an embedded conversion option that is beneficial to the investor or in the money at inception because the conversion option has an effective strike price that is less than the market price of the underlying stock at the commitment date. The Company recognized the BCF by allocating the intrinsic value of the conversion option, which is the number of shares of common stock available upon conversion multiplied by the difference between the effective conversion price per share and the fair value of common stock per share on the commitment date, to additional paid-in capital, resulting in a discount on the convertible preferred stock. As the convertible preferred stock may be converted immediately, the Company recognized a BCF of $420,000 as a deemed dividend in the statements of operations for During the year ended March 31, 2019. The deemed dividend had no impact on2021, the Company’s stockholders’ deficit. The associated dividend for the Series B preferred stock generated a BCF in the amountCompany paid dividends of $14,667 for the period ended March 31, 2019.$60,000.
117.7. Stock Option Plans
In December 2016, the Board adopted the 2016 Stock Option Plan (the “2016 Plan”) which reserved for issuance options to purchase up to 250,000 shares of its Common Stock. The stockholders approved the Plan at the January 2017 annual meeting. Shareholders had previously adopted the 2006 Stock Option Plan, under which substantially all of the options have been granted. Therefore, the Board approved the 2016 Plan, and the terms are substantially the same as under the 2006 Employees Stock Option. The 2016 Plan reserves for issuance options to purchase up to 250,000 shares of its common stock. All employees, directors and consultants are eligible to receive stock option grants under this plan. The 2016 Plan, which has a term of ten years from the date of adoption, is administered by the Board or by a committee appointed by the Board. The selection of participants, allotment of shares, and other conditions related to the grant of options, to the extent not set forth in the Plan, are determined by the Board. Options granted under the Plan are exercisable up to a period of five years from the date of grant at an exercise price which is not less than the fair market value of the common stock at the date of grant, except to a shareholder owning 10% or more of the outstanding common stock of the Company, as to which the exercise price must be not less than 110% of the fair market value of the common stock at the date of grant. Options, for the most part, are exercisable on a cumulative basis, 20% at or after each of the first, second, and third anniversary of the grant and 40% after the fourth year anniversary.
TEL-INSTRUMENT ELECTRONICS CORP.
Notes To Consolidated Financial Statements (Continued)
117.7. Stock Option Plans (continued)
The fair value of each option awarded is estimated on the date of grant using the Black-Scholes option valuation model that uses the assumptions noted in the following table. Expected volatilities are based on historical volatility of Common Stock. The expected life of the options granted represents the period of time from date of grant to expiration (5 years). The risk-free interest rate is based on the U.S. Treasury yield in effect at the time of grant. There were no stock options granted for the year ended March 31, 2019. The per share weighted-average fair value of stock options granted for the yearyears ended March 31, 2021, and 2020 waswere $1.03 and $1.05, respectively, on the date of grant using the Black Scholes option-pricing model with the following assumptions:
|
| Dividend |
|
| Risk-free |
|
|
|
|
|
|
| ||
|
| Yield |
|
| Interest rate |
|
| Volatility |
|
| Life | |||
2020 |
|
| 0.0 | % |
|
| 2.28 | % |
|
| 33.15 | % |
| 5 years |
Dividend | Risk-free | |||||||||||||
Yield | Interest rate | Volatility | Life | |||||||||||
2021 | 0.0 | % | 0.5 | % | 37.32 | % | 5 years | |||||||
2020 | 0.0 | % | 2.28 | % | 33.15 | % | 5 years | |||||||
A summary of the status of the Company’s stock option plans for the fiscal years ended March 31, 20202021, and 20192020 and changes during the years are presented below (in number of options):
Number of Options | Average Exercise Price | Average Remaining Contractual Term | Aggregate Intrinsic Value | Number of Options | Average Exercise Price | Average Remaining Contractual Term | Aggregate Intrinsic Value | |||||||||||||||||||
Outstanding options at April 1, 2018 | 72,500 | $ | 5.26 | |||||||||||||||||||||||
Outstanding options on April 1, 2019 | 42,500 | $ | 5.40 | |||||||||||||||||||||||
Options granted | - | $ | - | 76,000 | $ | 3.19 | ||||||||||||||||||||
Options exercised | - | $ | - | - | $ | - | ||||||||||||||||||||
Options canceled/forfeited | (30,000 | ) | $ | 5.07 | - | $ | - | |||||||||||||||||||
Outstanding options at March 31, 2019 | 42,500 | $ | 5.40 | 1.6 years | $ | -0- | ||||||||||||||||||||
Outstanding options on March 31, 2020 | 118,500 | $ | 3.98 | 2.8 years | $ | 13,295 | ||||||||||||||||||||
Options granted | 76,000 | $ | 3.19 | 15,000 | $ | 3.11 | ||||||||||||||||||||
Options exercised | - | $ | - | - | $ | - | ||||||||||||||||||||
Options canceled/forfeited | - | $ | - | (35,000 | ) | $ | 5.85 | |||||||||||||||||||
Outstanding options at March 31, 2020 | 118,500 | $ | 3.98 | 2.8 years | $ | 13,295 | ||||||||||||||||||||
Outstanding options on March 31, 2021 | 98,500 | $ | 3.19 | 3.3 years | $ | 30,835 | ||||||||||||||||||||
Vested Options: | ||||||||||||||||||||||||||
March 31, 2021: | 19,700 | $ | 3.22 | 2.8 years | $ | 5,567 | ||||||||||||||||||||
March 31, 2020: | 38,000 | $ | 5.65 | 0.3 years | $ | 2,734- | 38,000 | $ | 5.65 | 0.3 years | $ | 2,734 | ||||||||||||||
March 31, 2019: | 22,500 | $ | 5.68 | 1.3 years | $ | -0- | ||||||||||||||||||||
Remaining options available for grant were 166,500151,500 and 242,500166,500 as of March 31, 20202021, and 2019,2020, respectively.
For the years ended March 31, 20202021, and 2019,2020, the unamortized compensation expense for stock options was $61,592$60,013 and $9,612,$61,592, respectively. Unamortized compensation expense is expected to be recognized over a weighted-average period of approximately 1 year.1.4 years.
A summary of the Company’s non-vested shares as of March 31, 20202021, and changes during the year ended March 31, 20202021, is presented below:
Non-vested Shares | Shares | Weighted-Average Grant-Date Fair value | Shares | Weighted-Average Grant-Date Fair value | ||||||||||||
Non-vested at April 1, 2019 | 20,000 | $ | 5.09 | |||||||||||||
Non-vested on April 1, 2020 | 80,500 | $ | 3.20 | |||||||||||||
Granted | 76,000 | $ | 3.19 | 15,000 | $ | 3.11 | ||||||||||
Vested | (15,500 | ) | $ | 5.60 | (16,700 | ) | $ | 3.20 | ||||||||
Forfeited | $ | - | - | $ | - | |||||||||||
Non-vested at March 31, 2020 | 80,500 | $ | 3.20 | |||||||||||||
Non-vested on March 31, 2021 | 78,800 | $ | 3.18 | |||||||||||||
The compensation cost that has been charged was $21,669$21,996 and $24,016$21,669 for the fiscal years ended March 31, 20202021, and 2019,2020, respectively.
TEL-INSTRUMENT ELECTRONICS CORP.
Notes To Consolidated Financial Statements (Continued)
118.8. Net Income (Loss) per Share
Net income (loss) per share attributable to common stockholders has been computed according to Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC 260”), “Earnings per Share,” which requires a dual presentation of basic and diluted income (loss) per share (“EPS”). Basic EPS attributable to common stockholders represents net income (loss) less preferred dividends divided by the weighted average number of common shares outstanding during a reporting period. Diluted EPS attributable to common stockholders reflects the potential dilution that could occur if securities, including preferred stock, warrants and options, were converted into common stock. The dilutive effect of outstanding warrants and options is reflected in earnings per share by use of the treasury stock method. The dilutive effect of preferred stock is reflected in earnings per share by use of the if-converted method. In applying the treasury stock method for stock-based compensation arrangements, the assumed proceeds are computed as the sum of the amount the employee must pay upon exercise and the amounts of average unrecognized compensation.
March 31, 2020 | March 31, 2019 | |||||||
Basic net income (loss) per share computation: | ||||||||
Net income (loss) | $ | 4,736,490 | $ | 203,038 | ||||
Deemed dividend related to beneficial conversion feature of Series B Convertible Preferred Stock | - | (420,000 | ) | |||||
Less: Preferred dividends | (320,000 | ) | (312,807 | ) | ||||
Net income (loss) attributable to common shareholders | 4,416,490 | (529,769 | ) | |||||
Weighted-average common shares outstanding | 3,255,887 | 3,255,887 | ||||||
Basic net income (loss) per share | $ | 1.36 | $ | (0.16 | ) | |||
Diluted net income (loss) per share computation | ||||||||
Net income (loss) attributable to common shareholders | $ | 4,416,490 | $ | (529,769 | ) | |||
Add: Preferred dividends | 320,000 | - | ||||||
Diluted income (loss) attributable to common shareholders | $ | 4,736,490 | (529,769 | ) | ||||
Weighted-average common shares outstanding | 3,255,887 | 3,255,887 | ||||||
Incremental shares attributable to the assumed exercise of preferred stock, outstanding stock options and warrants | 1,704,778 | - | ||||||
Total adjusted weighted-average shares | 4,960,665 | 3,255,887 | ||||||
Diluted net income (loss) per share | $ | 0.95 | $ | (0.16 | ) | |||
March 31, 2021 | March 31, 2020 | |||||||
Basic net income per share computation: | ||||||||
Net income | $ | 600,057 | $ | 4,736,490 | ||||
Less: Preferred dividends | (320,000 | ) | (320,000 | ) | ||||
Net income attributable to common shareholders | 280,057 | 4,416,490 | ||||||
Weighted-average common shares outstanding | 3,255,887 | 3,255,887 | ||||||
Basic net income per share | $ | 0.09 | $ | 1.36 | ||||
Diluted net income per share computation | ||||||||
Net income attributable to common shareholders | $ | 280,057 | $ | 4,416,490 | ||||
Add: Preferred dividends | 320,000 | 320,000 | ||||||
Diluted income attributable to common shareholders | $ | 600,057 | $ | 4,736,490 | ||||
Weighted-average common shares outstanding | 3,255,887 | 3,255,887 | ||||||
Incremental shares attributable to the assumed conversion of preferred stock | 1,817,278 | 1,704,778 | ||||||
Total adjusted weighted-average shares | 5,073,165 | 4,960,665 | ||||||
Diluted net income per share | $ | 0.12 | $ | 0.95 | ||||
The following table summarizes securities that, if exercised, would have an anti-dilutive effect on earnings per share:
March 31, 2020 | March 31, 2019 | |||||||
Convertible preferred stock | - | 1,629,778 | ||||||
Stock options | 118,500 | 42,500 | ||||||
Warrants | - | 50,000 | ||||||
| 118,500 | 1,722,278 | |||||||
March 31, 2021 | March 31, 2020 | |||||||
Stock options | 98,500 | 118,500 | ||||||
| 98,500 | 118,500 | |||||||
119.9. Segment Information
In accordance with FASB ASC 280, “Disclosures about Segments of an Enterprise and related information”, the Company determined it has two reportable segments - avionics government and avionics commercial. There are no inter-segment revenues.
The Company is organized primarily on the basis of its avionics products. The avionics government segment consists primarily of the design, manufacture, and sale of test equipment to the U.S. and foreign governments and militaries either directly or through distributors. The avionics commercial segment consists of design, manufacture, and sale of test equipment to domestic and foreign airlines, directly or through commercial distributors, and to general aviation repair and maintenance shops. The Company develops and designs test equipment for the avionics industry and as such, the Company’s products and designs cross segments.
Management evaluates the performance of its segments and allocates resources to them based on gross margin. The Company’s general and administrative costs and sales and marketing expenses, and engineering costs are not segment specific. As a result, all operating expenses are not managed on a segment basis. Net interest includes expenses on debt and income earned on cash balances, both maintained at the corporate level. Segment assets include accounts receivable and work-in-process inventory. Asset information, other than accounts receivable and work-in-process inventory, is not reported, since the Company does not produce such information internally. All long-lived assets are located in the U.S.
TEL-INSTRUMENT ELECTRONICS CORP.
Notes To Consolidated Financial Statements (Continued)
119.9. Segment Information (continued)
The tables below present information about reportable segments for the years ended March 31:
| Corporate/ | ||||||||||||||||||||
Avionics | Avionics | Avionics | Reconciling | |||||||||||||||||
2021 | Government | Commercial | Total | Items | Total | |||||||||||||||
Net sales | $ | 9,858,537 | $ | 1,723,983 | $ | 11,582,520 | $ | - | $ | 11,582,520 | ||||||||||
Cost of Sales | 5,474,587 | 1,325,434 | 6,800,021 | - | 6,800,021 | |||||||||||||||
Gross Margin | 4,383,950 | 398,549 | 4,782,499 | - | 4,782,499 | |||||||||||||||
Engineering, research, and development | 2,295,901 | - | 2,295,901 | |||||||||||||||||
Selling, general, and administrative | 767,579 | �� | 1, 397,611 | 2,165,190 | ||||||||||||||||
Litigation expenses | - | 248,004 | 248,004 | |||||||||||||||||
Forgiveness of PPP Loan | (722,577 | ) | (722,577 | ) | ||||||||||||||||
Other income | (30,819 | ) | (30,819 | ) | ||||||||||||||||
Interest income | - | (7,483 | ) | (7,483 | ) | |||||||||||||||
Interest expense - judgment | 231,474 | 231,474 | ||||||||||||||||||
Interest expense - other | - | 29,779 | 29,779 | |||||||||||||||||
| 3,063,480 | 1,145,989 | 4,209,469 | ||||||||||||||||||
Income (loss) before income taxes | $ | 1,719,019 | $ | (1,145,989 | ) | $ | 573,030 | |||||||||||||
Segment Assets | $ | 4,920,076 | $ | 451,234 | $ | 5,371,310 | $ | 10,593,116 | $ | 15,964,426 | ||||||||||
|
| Avionics |
|
| Avionics |
|
| Avionics |
|
| Corporate/ |
|
|
|
|
| ||||
2020 |
| Government |
|
| Commercial |
|
| Total |
|
| Reconciling Items |
|
| Total |
| |||||
Net sales |
| $ | 12,770,363 |
|
| $ | 3,004,580 |
|
| $ | 15,774,943 |
|
| $ | - |
|
| $ | 15,774,943 |
|
Cost of Sales |
|
| 6,606,622 |
|
|
| 1,758,420 |
|
|
| 8,365,042 |
|
|
| - |
|
|
| 8,365,042 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Margin |
|
| 6,163,741 |
|
|
| 1,246,420 |
|
|
| 7,409,901 |
|
|
| - |
|
|
| 7,409,901 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Engineering, research, and development |
|
|
|
|
|
|
|
|
|
| 2,239,811 |
|
|
| - |
|
|
| 2,239,811 |
|
Selling, general, and administrative |
|
|
|
|
|
|
|
|
|
| 941,514 |
|
|
| 1,536,034 |
|
|
| 2,477,548 |
|
Litigation expenses |
|
|
|
|
|
|
|
|
|
| - |
|
|
| 140,050 |
|
|
| 140,050 |
|
Change in fair value of common stock warrant |
|
|
|
|
|
|
|
|
|
| - |
|
|
| 73,000 |
|
|
| 73,000 |
|
Interest income |
|
|
|
|
|
|
|
|
|
| - |
|
|
| (5,819 | ) |
|
| (5,819 | ) |
Interest expense - judgment |
|
|
|
|
|
|
|
|
|
|
|
|
|
| 342,544 |
|
|
| 342,544 |
|
Interest expense - other |
|
|
|
|
|
|
|
|
|
| - |
|
|
| 55,557 |
|
|
| 55,557 |
|
|
|
|
|
|
|
|
|
|
|
| 3,181,325 |
|
|
| 2,141,366 |
|
|
| 5,322,691 |
|
Income (loss) before income taxes |
|
|
|
|
|
|
|
|
| $ | 4,228,576 |
|
| $ | (2,141,366 | ) |
| $ | 2,087,210 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment Assets |
| $ | 3,301,607 |
|
| $ | 1,202, 716 |
|
| $ | 4,504,323 |
|
| $ | 8,835,546 |
|
| $ | 13,339,869 |
|
|
| Avionics |
|
| Avionics |
|
| Avionics |
|
| Corporate/ |
|
|
|
|
| ||||
2019 |
| Government |
|
| Commercial |
|
| Total |
|
| Reconciling Items |
|
| Total |
| |||||
Net sales |
| $ | 9,239,379 |
|
| $ | 2,876,671 |
|
| $ | 12,116,050 |
|
| $ | - |
|
| $ | 12,116,050 |
|
Cost of Sales |
|
| 4,902,016 |
|
|
| 1,796,814 |
|
|
| 6,698,830 |
|
|
| - |
|
|
| 6,698,830 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Margin |
|
| 4,337,363 |
|
|
| 1,079,857 |
|
|
| 5,417,220 |
|
|
| - |
|
|
| 5,417,220 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Engineering, research, and development |
|
|
|
|
|
|
|
|
|
| 2,312,043 |
|
|
| - |
|
|
| 2,312,043 |
|
Selling, general, and administrative |
|
|
|
|
|
|
|
|
|
| 880,641 |
|
|
| 1,334,880 |
|
|
| 2,215,521 |
|
Litigation expenses |
|
|
|
|
|
|
|
|
|
| - |
|
|
| 234,720 |
|
|
| 234,720 |
|
Change in fair value of common stock warrant |
|
|
|
|
|
|
|
|
|
| - |
|
|
| 43,500 |
|
|
| 43,500 |
|
Interest income |
|
|
|
|
|
|
|
|
|
| - |
|
|
| (4,005 | ) |
|
| (4,005 | ) |
Interest expense - judgment |
|
|
|
|
|
|
|
|
|
|
|
|
|
| 310,663 |
|
|
| 310,663 |
|
Interest expense - other |
|
|
|
|
|
|
|
|
|
| - |
|
|
| 101,740 |
|
|
| 101,740 |
|
|
|
|
|
|
|
|
|
|
|
| 3,192,684 |
|
|
| 2,021,498 |
|
|
| 5,214,182 |
|
Income (loss) before income taxes |
|
|
|
|
|
|
|
|
| $ | 2,224,536 |
|
| $ | (2,021,498 | ) |
| $ | 203,038 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment Assets |
| $ | 4,763,198 |
|
| $ | 365,533 |
|
| $ | 5,128,731 |
|
| $ | 3,200,936 |
|
| $ | 8,329,667 |
|
TEL-INSTRUMENT ELECTRONICS CORP.
Notes To Consolidated Financial Statements (Continued)
| Corporate/ | ||||||||||||||||||||
Avionics | Avionics | Avionics | Reconciling | |||||||||||||||||
2020 | Government | Commercial | Total | Items | Total | |||||||||||||||
Net sales | $ | 12,770,363 | $ | 3,004,580 | $ | 15,774,943 | $ | - | $ | 15,774,943 | ||||||||||
Cost of Sales | 6,606,622 | 1,758,420 | 8,365,042 | - | 8,365,042 | |||||||||||||||
Gross Margin | 6,163,741 | 1,246,420 | 7,409,901 | - | 7,409,901 | |||||||||||||||
Engineering, research, and development | 2,239,811 | - | 2,239,811 | |||||||||||||||||
Selling, general, and administrative | 941,514 | 1,536,034 | 2,477,548 | |||||||||||||||||
Litigation expenses | - | 140,050 | 140,050 | |||||||||||||||||
Change in fair value of common stock warrant | - | 73,000 | 73,000 | |||||||||||||||||
Interest income | - | (5,819 | ) | (5,819 | ) | |||||||||||||||
Interest expense - judgment | 342,544 | 342,544 | ||||||||||||||||||
Interest expense - other | - | 55,557 | 55,557 | |||||||||||||||||
| 3,181,325 | 2,141,366 | 5,322,691 | ||||||||||||||||||
Income (loss) before income taxes | $ | 4,228,576 | $ | (2,141,366 | ) | $ | 2,087,210 | |||||||||||||
Segment Assets | $ | 3,301,607 | $ | 1,202,716 | $ | 4,504,323 | $ | 8,835,546 | $ | 13,339,869 | ||||||||||
220.0. Fair Value Measurements
FASB ASC 820, “Fair Value Measurements” defines fair value, establishes a framework for measuring fair value under generally accepted accounting principles and prescribes disclosures about fair value measurements.
TEL-INSTRUMENT ELECTRONICS CORP.
Notes To Consolidated Financial Statements (Continued)
20.Fair Value Measurements (continued)
As defined in ASC 820, fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price). The Company utilizes market data or assumptions that market participants would use in pricing the asset or liability, including assumptions about risk and the risks inherent in the inputs to the valuation technique. These inputs can be readily observable, market corroborated, or generally unobservable. The Company classifies fair value balances based on the observability of those inputs. ASC 820 establishes a fair value hierarchy that prioritizes the inputs used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (level 1 measurement) and the lowest priority to unobservable inputs (level 3 measurement).
The three levels of the fair value hierarchy defined by ASC 820 are as follows:
Level 1 – Quoted prices are available in active markets for identical assets or liabilities as of the reporting date. Active markets are those in which transactions for the asset or liability occur in sufficient frequency and volume to provide pricing information on an ongoing basis. Level 1 primarily consists of financial instruments such as exchange-traded derivatives, marketable securities and listed equities.
Level 2 – Pricing inputs are other than quoted prices in active markets included in level 1, which are either directly or indirectly observable as of the reported date. Level 2 includes those financial instruments that are valued using models or other valuation methodologies. These models are primarily industry-standard models that consider various assumptions, including quoted forward prices for commodities, time value, volatility factors, and current market and contractual prices for the underlying instruments, as well as other relevant economic measures. Substantially all of these assumptions are observable in the marketplace throughout the full term of the instrument, can be derived from observable data or are supported by observable levels at which transactions are executed in the marketplace. Instruments in this category generally include non-exchange-traded derivatives such as commodity swaps, interest rate swaps, options and collars.
Level 3 – Pricing inputs include significant inputs that are generally less observable from objective sources. These inputs may be used with internally developed methodologies that result in management’s best estimate of fair value.
TEL-INSTRUMENT ELECTRONICS CORP.
Notes To Consolidated Financial Statements (Continued)
20. Fair Value Measurements (continued)
The valuation techniques that may be used to measure fair value are as follows:
Market approach — Uses prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities
Income approach — Uses valuation techniques to convert future amounts to a single present amount based on current market expectations about those future amounts, including present value techniques, option-pricing models and excess earnings method
Cost approach — Based on the amount that currently would be required to replace the service capacity of an asset (replacement cost)
The carrying value of the Company’s borrowings is a reasonable estimate of its fair value as borrowings under the Company’s credit facility have variable rates that reflect currently available terms and conditions for similar debt.
The Company’s assessment of the significance of a particular input to the fair value measurement requires judgment and may affect the valuation of fair value assets and liabilities and their placement within the fair value hierarchy levels.
The following table sets forth by level within the fair value hierarchy the Company’s financial assets and liabilities that were accounted for at fair value as of March 31, 20202021, and March 31, 2019.2020. As required by FASB ASC 820, financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.
The Company’s assessment of the significance of a particular input to the fair value measurement requires judgment, and may affect the valuation of fair value assets and liabilities and their placement within the fair value hierarchy levels.
|
|
|
|
| ||||||||||||
|
|
|
|
|
|
|
|
| ||||||||
|
|
|
|
|
|
|
|
| ||||||||
March 31, 2019 |
| Level I |
|
| Level II |
|
| Level III |
|
| Total |
| ||||
Warrant Liability |
| $ | - |
|
| $ | - |
|
| $ | 43,500 |
|
| $ | 43,500 |
|
Total Liabilities |
| $ | - |
|
| $ | - |
|
| $ | 43,500 |
|
| $ | 43,500 |
|
ASC 815, “Derivatives and Hedging” requires that we mark the value of our warrant liability to market and recognize the change in valuation in our statement of operations each reporting period. Determining the warrant liability to be recorded requires us to develop estimates to be used in calculating the fair value of the warrant.
The following table provides a summary of the changes in fair value of our Level 3 financial liabilities for the years ended March 31, 2020 and 2019 as well as the unrealized gains or losses included in income.
Level 3 Reconciliation – Year Ended 3/31/2020 |
| Balance at beginning of period |
|
| Losses for the period (realized and unrealized) |
|
| Purchases, issuances, sales and settlements, net |
|
| Transfers in or out of Level 3 |
|
| Balance at the end of period | |||||
Warrant liability |
| $ | 43,500 |
|
| $ | 73,000 |
|
| $ | (116,500 | ) |
| $ | - |
|
| $ | - |
Total Liabilities |
| $ | 43,500 |
|
| $ | 73,000 |
|
| $ | (116,500 | ) |
| $ | - |
|
| $ | - |
Level 3 Reconciliation – Year Ended 3/31/2019 |
| Balance at beginning of period |
|
| Losses for the period (realized and unrealized) |
|
| Purchases, issuances, sales and settlements, net |
|
| Transfers in or out of Level 3 |
|
| Balance at the end of period | |||||
Warrant liability |
| $ | - |
|
| $ | 43,500 |
|
| $ | - |
| $ | - |
|
| $ | 43,500 | |
Total Liabilities |
| $ | - |
|
| $ | 43,500 |
|
| $ | - |
| $ | - |
|
| $ | 43,500 | |
TEL-INSTRUMENT ELECTRONICS CORP.
Notes To Consolidated Financial Statements (Continued)
20. Fair Value Measurements (continued)
The Company had warrants with an outside investor to purchase 50,000 shares of the Company’s common stock at an exercise price of $3.35 per share or exercising the “put option” to the Company. The warrant liability of the 50,000 warrants was $43,500 at March 31, 2019. These warrants must be convertedexpired September 10, 2019 and were convertible at a purchase price of $3.35 per share or the cash put option must be exercised by September 10, 2019.option. On September 3, 2019, the holder of the warrant informed the Company that it hashad elected to exercise its “put option”, thereby requiring the Company to purchase the warrants held by holder. Total warrants were to purchase a total of 50,000 shares of the Company’s common stock.
TEL-INSTRUMENT ELECTRONICS CORP.
Notes To Consolidated Financial Statements (Continued)
20.Fair Value Measurements (continued)
The value of the warrants for the 50,000 shares of the Company’s common stock at the time of exercise was $116,500, and the Company paid this amount using cash from operations in October 2019, thereby extinguishing the warrant liability. AtOn March 31, 2021, and 2020 the warrant liability was $-0-.
The holder had the right, exercisable at any time, in writing (the “Warrant Put Notice”, to cause the Company, subject to the terms and conditions herein, to purchase from the holder all, or any portion, of the warrant for the warrant put repurchase price (the “Repurchase Price”). The Repurchase Price is the greater of 1) Adjusted EBITDA (as defined below) per share as of the date of the Warrant Put Notice, less $0.01, multiplied by the number of warrants or 2) the product of the current market price per share as of the date of the Warrant Put Notice, less the purchase price of the warrant or warrants, multiplied by the number of warrants, if this amount is higher. “Adjusted EBITDA” means EBITDA, multiplied by 5, plus cash and cash equivalents less unpaid debt divided by the number of shares outstanding on a fully diluted basis.
ASC 815, “Derivatives and Hedging” requires that we mark the value of our warrant liability to market and recognize the change in valuation in our statement of operations each reporting period. Determining the warrant liability to be recorded requires us to develop estimates to be used in calculating the fair value of the warrant.
The following table provides a summary of the changes in fair value of our Level 3 financial liabilities for the years ended March 31, 2021, and 2020 as well as the unrealized gains or losses included in income.
Level 3 Reconciliation – Year Ended 3/31/2021 | Balance at beginning of period | Losses for the period (realized and unrealized) | Purchases, issuances, sales and settlements, net | Transfers in or out of Level 3 | Balance at the end of period | |||||||||||||||
Warrant liability | $ | - | $ | - | $ | - | $ | - | $ | - | ||||||||||
Total Liabilities | $ | - | $ | - | $ | - | $ | - | $ | - | ||||||||||
Level 3 Reconciliation – Year Ended 3/31/2020 | Balance at beginning of period | Losses for the period (realized and unrealized) | Purchases, issuances, sales and settlements, net | Transfers in or out of Level 3 | Balance at the end of period | |||||||||||||||
Warrant liability | $ | 43,500 | $ | 73,000 | $ | (116,500 | ) | $ | - | $ | - | |||||||||
Total Liabilities | $ | 43,500 | $ | 73,000 | $ | (116,500 | ) | $ | - | $ | - | |||||||||
TEL-INSTRUMENT ELECTRONICS CORP.
Notes To Consolidated Financial Statements (Continued)
221.1. Litigation
Contingencies are recorded in the consolidated financial statements when it is probable that a liability will be incurred and the amount of the loss is reasonably estimable, or otherwise disclosed, in accordance with Accounting Standards Codification 450, Contingencies (ASC 450). Significant judgment is required in both the determination of probability and the determination as to whether a loss is reasonably estimable. In the event the Company determines that a loss is not probable, but is reasonably possible, and it becomes possible to develop what the Company believes to be a reasonable range of possible loss, then the Company will include disclosures related to such matter as appropriate and in compliance with ASC 450. To the extent there is a reasonable possibility that the losses could exceed the amounts already accrued, the Company will, when applicable, adjust the accrual in the period the determination is made, disclose an estimate of the additional loss or range of loss or if the amount of such adjustment cannot be reasonably estimated, disclose that an estimate cannot be made.
On March 24, 2009, Aeroflex Wichita, Inc. (“Aeroflex”) filed a petition against the Company and two of its employees in the District Court located in Sedgwick County, Kansas, Case No. 09 CV 1141 (the “Aeroflex Action”), alleging that the Company and its two employees misappropriated Aeroflex’s proprietary technology in connection with the Company winning a substantial contract from the U.S. Army, to develop new Mode-5 radar test sets and kits to upgrade the existing TS-4530 radar test sets to Mode 5 (the “Award”). Aeroflex’s petition, seeking injunctive relief and damages, alleges that in connection with the Award, the Company and its named employees misappropriated Aeroflex’s trade secrets; tortiously interfered with Aeroflex’s business relationship; conspired to harm Aeroflex and tortiously interfered with Aeroflex’s contract. The central basis of all the claims in the Aeroflex Action is that the Company misappropriated and used Aeroflex proprietary technology and confidential information in winning the Award. In February 2009, subsequent to the Company winning the Award, Aeroflex filed a protest of the Award with the Government Accounting Office (“GAO”). In its protest, Aeroflex alleged, inter alia, that the Company used Aeroflex’s proprietary technology in order to win the Award, the same material allegations as were later alleged in the Aeroflex Action. On or about March 17, 2009, the U.S. Army Contracts Attorney and the U.S. Army Contracting Officer each filed a statement with the GAO, expressly rejecting Aeroflex’s allegations that the Company used or infringed on Aeroflex’s proprietary technology in winning the Award and concluding that the Company had used only its own proprietary technology. On April 6, 2009, Aeroflex withdrew its protest.
In December 2009, the Kansas District Court dismissed the Aeroflex Action on jurisdiction grounds. Aeroflex appealed this decision. In May 2012, the Kansas Supreme Court reversed the decision and remanded the Aeroflex Action to the Kansas District Court for further proceedings. The case then entered an extended discovery period in the District Court.
On May 23, 2016, the Company filed a motion for summary judgment based on Aeroflex’s lack of jurisdictional standing to bring the case. The motion asserts that Aeroflex does not own the intellectual property at issue since it is a bare licensee of Northrop Grumman. Northrop Grumman has declined to join this suit as plaintiff. The motion asserted Aeroflex lacks standing to sue alone. Also, the motion raises the fact that Aeroflex allowed the license to expire, Aeroflex’s claims are either moot or Aeroflex lacks standing to sue for damages alleged to have accrued after the license ended in 2011. The motion for summary judgment was denied.
TEL-INSTRUMENT ELECTRONICS CORP.
Notes To Consolidated Financial Statements (Continued)
21. Litigation (continued)
The Aeroflex trial on remand in the Kansas District Court began in March 2017. After a nine-week trial, the jury rendered its verdict. The jury found no misappropriation of Aeroflex trade secrets, but it did rule that the Company tortiously interfered with a prospective business opportunity and awarded damages of $1.3 million for lost profits. The jury also ruled that Tel tortiously interfered with Aeroflex’s non-disclosure agreements with two former Aeroflex employees and awarded damages of $1.5 million for lost profits, resulting in total damages against the Company of $2.8 million. The jury also found that the former Aeroflex employees breached their non-disclosure agreements with Aeroflex and awarded damages against these two individuals totaling $525,000. The jury also decided that punitive damages should be allowed against the Company.
Following the verdict, the Company filed a motion for judgment as a matter of law. In the motion, the Company renewed its motion for judgment on Aeroflex’s tortious interference with prospective business opportunity claim arguing that such claim is barred by the statute of limitations. Alternatively, the motion asserts there is insufficient evidence supporting the lost profit award on that claim. Additionally, the motion for judgment addresses inconsistency between the awards against the former Aeroflex employees for breach of the non-disclosure agreements and the award against the Company for interfering with those agreements. Alternatively, the motion asserts there is insufficient evidence supporting the lost profit award on that claim.
During July 2017, the Court heard the Company’s motion for judgment as well as conducting a hearing as to the amount of a punitive damages award. Kansas statutes limit punitive damages to a maximum of $5 million.
TEL-INSTRUMENT ELECTRONICS CORP.
Notes To Consolidated Financial Statements (Continued)
21.Litigation (continued)
Aeroflex submitted a motion to the Court requesting that the judge award punitive damages at the maximum $5 million amount. In October 2017, the Court denied the Company’s motions and awarded Aeroflex an additional $2.1 million of punitive damages, which brings the total Tel damages awarded in this case to approximately $4.9 million.
The Journal Entry of Judgment including judgment against the Company in the amount of $1.3 million for tortious interference with prospective business advantage, of $1.5 million for tortious interference with existing contracts, and $2.1 million in punitive damages was entered on November 22, 2017. Pursuant to K.S.A. 16-204(d) “any judgment rendered by a court of this state on or after July 1, 1986, shall bear interest on and after the day on which judgment is rendered at the rate provided by subsection (e). The Kansas Secretary of State publishes the rate amount. The amount published for July 1, 2017, through June 30, 2018, iswas 5.75% and, 6.5% July 1, 2018, through June 30, 2019. The current rate beginning2019, and 7.0% July 1, 2019, is 7.0%through June 30, 2020. The interest rate as of March 31, 2021, was 4.25%. Interest on the $4,900,000 judgment started to accrue on November 22, 2017, the date the judgment was entered. As of March 31, 2020,2021, the outstanding amount of the judgement and accrued interest is $5,657,549.$5,889,023.
The Company filed post-trial motions to avoid damage duplication and inconsistency, and to secure judgment as a matter of law or a new trial. The trial court denied those motions. The Company appealed the verdict and the post-trial rulings to the Court of Appeals of the State of Kansas, Case No. 18-119,563. The Company posted a $2 million supersedeas bond. The Plaintiff filed a cross-appeal. The appeal and cross-appeal are fully briefed. The appellate court has not set a date to hear the appeal.
The Company is very optimistic about the prospects of its appeal for a judgment as a matter of law. The Company was hoping for a decision from the court this calendar year, but this timing will likely be delayed due to the three month COVID-19 related shutdown of the Kansas court system. As such, the appeal process is expected to take at least another year to complete.
The Company has the ability to settle this case at its sole discretion by withdrawing the appeal and paying the judgment plus interest amount.
Other than the matters outlined above, 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 any court, public board, government agency, self-regulatory organization or body pending or, to the knowledge of executive officers of our Company, threatened against or affecting our Company, or our common stock in which an adverse decision could have a material effect.
TEL-INSTRUMENT ELECTRONICS CORP.
Notes To Consolidated Financial Statements (Continued)
22. Subsequent Events
PPP Loan
On March 27, 2020, President Trump signed the Coronavirus Aid, Relief and Economic Security (the “CARES Act”), which, among other things, outlines the provisions of the Paycheck Protection Program (the “PPP”). The Company determined that it met the criteria to be eligible to obtain a loan under the PPP because, among other reasons, in light of the COVID-19 outbreak and the uncertainty of economic conditions related thereto, the loan was considered necessary to support the Company’s ongoing operations and retain all its employees. In addition, President Trump signed into law the Paycheck Protection Program and Health Care Enhancement Act on April 24, 2020, which increased funding provided by the CARES Act. On May 4, 2020 the Company issued a promissory note (the “Note”) to Bank of America in the principal aggregate amount of $772,577 (the “PPP Loan”) pursuant to the PPP under the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”). The funds were deposited into the Company’s bank account on May 4, 2020. On June 5, 2020 the Paycheck Protection Program Flexibility Act was signed into law and extended the program until December 31, 2020.
Under the terms of the CARES Act, PPP loan recipients can apply for and be granted forgiveness for all or a portion of loan granted under the program. Such forgiveness will be determined, subject to limitations, based on the use of loan proceeds for payment of payroll costs and any payments of mortgage interest, rent, and utilities. No assurance is provided that the Company will obtain forgiveness of the PPP Loan in whole or in part. The PPP Loan has a two-year term and bears interest at a rate of 1% per annum. Monthly principal and interest payments are deferred for six months after the date of disbursement. The PPP Loan may be prepaid at any time prior to maturity with no prepayment penalties. Based on the June 5, 2020 the Paycheck Protection Program Flexibility Act, certain changes will need to be made to the original Note, based on the new law.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A. Controls and Procedures
a) Evaluation of disclosure controls and procedures.
As of March 31, 2020,2021, management performed, with the participation of our Chief Executive Officer and PrincipalChief Accounting Officer, an evaluation of the effectiveness of our disclosure controls and procedures as defined in Rule 13a-15(e) and 15d-15(f) under the Securities Exchange Act of 1934. Our disclosure controls and procedures are designed to ensure that information required to be disclosed in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and PrincipalChief Accounting Officer, as appropriate to allow timely decisions regarding required disclosures. The Company is considered a smaller reporting company under the appropriate SEC guidance and is currently exempt, based on Section 404(b), from attestation requirements on their internal control over financial reporting.Based on the evaluation required by Rule 13a-15(b) under the Securities Exchange Act of 1934, our Chief Executive Officer and PrincipalChief Accounting Officer concluded that as of March 31, 2020,2021, such disclosure controls and procedures were effective.
b) Management’sManagement’s Annual Report on Internal Control over Financial Reporting
Tel’s management is responsible for establishing and maintaining an adequate system of internal control over financial reporting, as defined in Rule 13a-15(f) under the Exchange Act. The Company’s internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements in accordance with Generally Accepted Accounting Principles (“GAAP”).
Because of its inherent limitations, a system of internal control over financial reporting can provide only reasonable assurance of such reliability and may not prevent or detect misstatements. Also, projection of any evaluation of effectiveness to future periods is subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Management has assessed the effectiveness of the Company’s internal control over financial reporting as of March 31, 2020.2021. In making this assessment, Management used the criteria set forth in the framework established by the Committee of Sponsoring Organizations of the Treadway Commission 2013 Internal Control - Integrated Framework (“COSO”). Based on this assessment, Management has not identified any material weaknesses. A material weakness is a control deficiency, or combination of control deficiencies, that results in more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected on a timely basis. A significant deficiency is a deficiency, or a combination of deficiencies, in internal control over financial reporting that is less severe than a material weakness, yet important enough to merit attention by those responsible for oversight of the company’sCompany’s financial reporting.
Management has concluded that the Company did maintain effective internal control over financial reporting as of March 31, 2020,2021, based on the criteria set forth in 2013 Internal Control—Integrated Framework issued by the COSO.
c) Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting that occurred during our last fiscal quarter that have materially affected or are reasonably likely to materially affect our internal controls over financial reporting.
None.
PART III
Item 10. Directors, Executive Officers and Corporate Governance
Name (age) | Position | Year First Elected a | ||
Stephen A. Fletcher (1)
| Director | 2011 | ||
George J. Leon (2) (3)
| Director | 1986 | ||
Jeffrey C. O’Hara, CPA (1) (4)
| Director; President since August 2007; Chief Executive Officer since December 2010; Chief Operating Officer since June 2006; Vice President since 2005 | 1998 | ||
Robert A. Rice (2) (3)
| Director | 2004 | ||
Robert H. Walker (2) (3) (5)
| Director and Chairman of the Board since April 2011 | 1984 | ||
(1) | Mr. Fletcher is the son of Mr. Harold K. Fletcher, the former Chairman of the Company who passed away in April 2011, and the brother-in-law of Jeffrey C. O’Hara, the Company’s Chief Executive Officer |
(2) | Member of the Audit Committee |
(3) | Member of the Compensation Committee |
(4) | Mr. O’Hara has served as a member of the Board since 1998 and was appointed President of the Company in 2007, and as Chief Executive Officer in December 2010. |
(5) | Mr. Walker has served as a member of the Board since 1984 and was appointed Chairman of the Board in April 2011. |
Background of Directors and Officers
Stephen A. Fletcher is the Chief Executive Officer of Rand McNally, the country’s most trusted source for maps, navigation and travel content (“Rand”). At Rand, Mr. Fletcher is driving growth of the Company’s consumer and enterprise businesses through rapid expansion of core product lines and continued innovation of commercial transportation solutions ranging from advanced mileage and routing software to fleet management and electronic tracking. Prior to Rand, Mr. Fletcher served as a WW general manager at Kodak for more than six years and led a far-reaching organization with operations around the globe including research and development in the US, Germany and Singapore and manufacturing in the US, China and Mexico. Before Kodak, he was President and COO of Konica Minolta Printing Solutions in Ramsey, New Jersey where he quadrupled the business over six years. Mr. Fletcher was also President and CEO of the Tally Printer Corporation in Seattle, Washington and held marketing management positions at Apple Computer and Hewlett Packard.
George J. Leon has served as a member of the Board since 1986. Mr. Leon has substantial experience in finance, and as an investment manager. He is and has been an Investment Manager and beneficiary of the George Leon Family Trust for more than five (5) years.
Jeffrey C. O’Hara,O’Hara, CPAhas served as a member of the Board since 1998, and was made a Vice President in 2005, COO in 2006, and has been President since 2007. Mr. O’Hara was appointed Chief Executive Officer of the Company in December 2010. Prior to joining the Company, Mr. O’Hara held various management positions at General Motors, and other mid-sizedmid- sized private companies. Mr. O’Hara has extensive financial, marketing and operations experience and he has held executive positions as both a Chief Financial Officer and President. Mr. O’Hara has also served on several boards of directors of other companies.
Item 10.Directors, Executive Officers and Corporate Governance (continued)
Background of Directors and Officers (continued)
Robert H. Walker has served as member of our Board since 1984 and was elected Chairman of the Board in April 2011. Mr. Walker, prior to his retirement in 1998, had served as Executive Vice President of Robotic Vision Systems, Inc., which designs, manufactures, markets and sells automated two-dimensional and three-dimensional machine vision-based products and systems for inspection, measurement and identification. Mr. Walker also served as Chief Financial Officer of that company, whose shares were listed on the NASDAQ National Market. Mr. Walker qualifies as the Company’s “Audit Committee Financial Expert” as defined in the regulations promulgated under the Securities Exchange Act.
Item 10.Directors, Executive Officers and Corporate Governance (continued)
Background of Directors and Officers (continued)
Robert A. Ricehas served as a member of the Board since 2004. Mr. Rice is, and has been for more than 5 years, President and Owner of Spurwink Cordage, Inc., a textile manufacturing company located in New England, and is experienced in securities matters and business management.
Family Relationships
As described above, Stephen Fletcher is the son of the Company’s former Chairman and the brother-in-law of the Company’s Chief Executive Officer, Jeffrey O’Hara.
Corporate Governance and Board Meetings
The Board is responsible for supervision of the overall affairs of the Company. The Board held three meetings during fiscal year 20202021 and each of the nominee directors attended all of the meetings. The Company expects directors to attend all formal Board, committee, and shareholder meetings. Three of the directors, Messrs. Leon, Rice and Walker, are independent as that term is defined under the Securities Exchange Act of 1934.
Robert H. Walker was elected Chairman of the Board by the directors at their April 13, 2011, meeting of the Board upon the passing of Harold K. Fletcher who had been Chief Executive Officer and Chairman of the Board since 1982. Jeffrey C. O’Hara was elected the Chief Executive Officer in December 2010.
The Board and, separately, the Audit Committee review and provide oversight of risks and potential risks involving the Company’s operations. The Board reviews and evaluates the process used to assess major risks facing the company and to periodically review assessments prepared by senior management of such risks, as well as options for their mitigation. Frequent interaction between the directors and members of senior management assists in this effort. The Board regularly reviews information regarding our liquidity and operations, as well as the risks associated with each. The Audit Committee is responsible for overseeing the management of financial and accounting risks. The Compensation Committee is responsible for overseeing the management of risk-taking relating to executive compensation plans and arrangements.
To assist it in carrying out its duties, the Board has delegated certain authority to committees. The Board has established standing Audit and Compensation Committees and has delegated nominating responsibility to the three directors who are independent as that term is defined under the Securities Exchange Act of 1934. Our Audit and Compensation Committees consist of only independent, non-employee directors.
Item 10.Directors, Executive Officers and Corporate Governance (continued)
Audit Committee
The Board established a separately designated standing Audit Committee in accordance with Section 3(a)(58)(A) of the Securities Exchange Act of 1934. The Audit Committee is comprised of Messrs. Walker (Chairman), Leon, and Rice. Messrs. Walker, Leon, and Rice are independent, as that term is defined under the Securities Exchange Act of 1934, and
Mr. Walker is a financial expert as defined in the rules promulgated by the SEC pursuant to that Act. Mr. Walker served as director and Executive Vice President of Robotic Vision Systems, Inc., a public company, and as its principal financial officer for over 15 years.
The Audit Committee reviews the Company’s financial statements, and oversees the Company’s accounting, audits, internal controls, and adherence to its Business Conduct Guidelines. The Committee also appoints and recommends to the Board the Company’s independent registered public accounting firm and reviews, evaluates, and approves the independent registered public accountants’ compensation, services performed, and procedures for ensuring its independence with respect to the Company. The Board has adopted a written charter for the Audit Committee, a copy of which is annexed as Exhibit A.
Item 10.Directors, Executive Officers and Corporate Governance (continued)
During fiscal 2020,2021, all three members of the Audit Committee attended all four (4) of the Audit Committee meetings. In the opinion of the Board, and as defined under the Securities Exchange Act of 1934, Messrs. Walker, Leon and Rice are independent of management and free of any relationship which might interfere with their exercise of independent judgment as members of this committee.
The Audit Committee has: (i) reviewed and discussed with management, and with Friedman LLP, and BDO USA, LLP, (the “Auditors”“Auditor”) the Company’s audited financial statements for the fiscal year ended March 31, 2020;2021; (ii) reviewed and discussed with management, and with our AuditorsAuditor the Company’s interim financial statements for the periods ended June 30, 2019,2020, September 30, 20192020 and December 31, 2019;2020; (iii) discussed with the AuditorsAuditor the matters required to be discussed by PCAOB Standard 16, as amended, as adopted by the Public Company Accounting Oversight Board; (iv) received the written disclosures and the letter from the AuditorsAuditor required by applicable requirements of the Public Company Accounting Oversight Board regarding the Auditors’Auditor’ communications with the Audit Committee concerning independence; and (v) discussed with the AuditorsAuditor their independence from the Company. The Audit Committee has also discussed with management of the Company and the AuditorsAuditor such other matters and received such assurances from them as it deemed appropriate. The Audit Committee meets regularly with management and the Auditors,Auditor, and then with the AuditorsAuditor without management present, to discuss the result of the AuditorsAuditor examination, the evaluation of the Company’s internal control over financial reporting and the overall quality of the Company’s accounting.
Compensation Committee
The Compensation Committee, consisting of the independent directors George J. Leon, Robert A. Rice and Robert H. Walker, is responsible for (1) reviewing and evaluating employee stock and other compensation programs and plans, (2) determining the compensation of the Chief Executive Officer, and (3) approving compensation arrangements, including keyman incentive compensation and stock option grants, for management and other employees. The Board created the Compensation Committee by resolution giving it the foregoing authority.
The Compensation Committee met once during the 20202021 fiscal year; Messrs. Leon, Rice and Walker attended the meeting. Messrs. Leon, Rice and Walker are independent, as defined under the Securities Exchange Act of 1934. See “Executive Compensation” below for a discussion of the Committee’s processes and procedures for reviewing and determining compensation.
Section 16(a) Beneficial Ownership Reporting Compliance
As of March 31, 2020,2021, the end of the last fiscal year, the Company believes that all officers, directors and 10% beneficial owners, known to the Company, had, during such last fiscal year, timely filed required forms reporting beneficial ownership of Company securities, other than the Form 3 for Pauline Romeo, based solely on review of certain reports filed with the Securities and Exchange Commission pursuant to Section 16(a) of the Securities Exchange Act of 1934, as amended, and information furnished to the Company.
Code of Ethics
The Company has had corporate governance standards and policies, regulating officer, director and employee conduct for many years. In fiscal 2004, we reviewed our standards and policies and incorporated them into our Code of Business Conduct, which we believe satisfies the rules promulgated by the SEC. The Board has adopted this written Code of Ethics that applies to all of the Company’s officers and employees, including the Chief Executive Officer and the PrincipalChief Accounting Officer. A copy of the Code of Ethics has been previously filed. A copy of the Code of Ethics is available to anyone requesting a copy without cost by writing to the Company, attention Joseph P. Macaluso.
Item 10.Directors, Executive Officers and Corporate Governance (continued)Pauline X. Romeo.
Shareholder Recommendations
There have been no material changes to the Company’s procedures by which shareholders may recommend nominees to the Board of Directors since the Company’s last Annual Report on Form 10-K.
Legal Proceedings
There are no material proceedings to which any director or officer, or any associate of any such director or officer, is a party that is adverse to our Company or any of our subsidiaries or has a material interest adverse to our Company or any of our subsidiaries. No director or executive officer has been a director or executive officer of any business which has filed a bankruptcy petition or had a bankruptcy petition filed against it during the past ten years. No director or executive officer has been convicted of a criminal offense or is the subject of a pending criminal proceeding during the past ten years. No director or executive officer has been the subject of any order, judgment or decree of any court permanently or temporarily enjoining, barring, suspending or otherwise limiting his involvement in any type of business, securities or banking activities during the past ten years. No director or officer has been found by a court to have violated a federal or state securities or commodities law during the past ten years.
Item 11. Executive Compensation
The following table presents information regarding compensation of our principal executive officer, and the most highly compensated executive officers other than the principal executive officer for services rendered during fiscal years 20202021 and 2019.2020.
Summary Compensation Table
Name and Principal Position |
| Fiscal Year |
| Salary ($) (1) |
| Incentive ($) (2) |
| Option Awards ($) (3) |
| All Other Compensation ($) (4) |
| Total ($) |
| Fiscal Year | Salary ($) (1) | Incentive ($) (2) | Option Awards ($) (3) | All Other Compensation ($) (4) | Total ($) | |||||||||||||||||||||||||
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| |||||||||||||||||||||||||||||||
Jeffrey C. O’Hara, CEO President |
| 2020 |
| 180,000 |
| 72,968 |
| 26,335 |
| 25,670 |
| 304,973 |
| 2021 | 180,000 | 9,999 | - | 28,575 | 218,574 | |||||||||||||||||||||||||
|
| 2019 |
| 180,000 |
| - |
| - |
| 24,556 |
| 204,556 |
| 2020 | 180,000 | 72,968 | 26,335 | 25,670 | 304,973 | |||||||||||||||||||||||||
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| |||||||||||||||||||||||||||||||
Joseph P. Macaluso PAO |
| 2020 |
| 140,000 |
| 21,450 |
| 10,534 |
| 9,867 |
| 181,851 |
| |||||||||||||||||||||||||||||||
Joseph P. Macaluso, former PAO | 2021 | 135,876 | 12,500 | - | 11,706 | 160,082 | ||||||||||||||||||||||||||||||||||||||
| 2019 |
| 140,000 |
| - |
| - |
| 9,475 |
| 149,475 |
| 2020 | 140,000 | 21,450 | 10,534 | 9,867 | 181,851 | ||||||||||||||||||||||||||
Pauline X. Romeo CAO (5) | 2021 | 17,500 | - | 15,488 | - | 32,988 | ||||||||||||||||||||||||||||||||||||||
2020 | - | - | - | - | - | |||||||||||||||||||||||||||||||||||||||
Grants of Plan-based Awards Table for Fiscal Year
(1) | The amounts shown in this column represent the dollar value of base cash salary earned by each named executive officer (“NEO”). |
(2) | Incentive compensation for |
(3) | Amounts in this column represent the fair value required by ASC Topic 718 to be included in our financial statements for all options granted during that year (see Note 17 to Notes to the Consolidated Financial Statements). |
(4) | The amounts shown in this column represent amounts for medical and life insurance as well as the Company’s match in the 401(k) Plan |
(5) | On February 8, 2021, the board of directors of TIC appointed Pauline X. Romeo as the Chief Accounting Officer, replacing Joseph P. Macaluso who is no longer the Principal Accounting Officer. Pursuant to the terms of her employment with the Company, Ms. Romeo will receive an annual base salary of $130,000 (the “Annual Salary”),will be eligible to receive certain customary benefits and will participate in the Company’s senior management bonus plan. Additionally, Ms. Romeo received 15,000 stock options pursuant to the Company’s 2016 Stock Option Plan. Upon termination of employment by the Company for reasons other than for cause, Ms. Romeo will be entitled to receive severance payment. |
Grants of Plan-based Awards Table for Fiscal Year
The following table sets forth information on stock options granted during or for the 20202021 fiscal year to our named executive officers:
Name |
| Approval Date |
| Grant Date |
| All Other Option Awards: Number of Shares of Stock (#) |
| Exercise or Base Price of Option Awards ($/Share) |
| Grant date Fair Value of Option Awards ($) |
| Approval Date | Grant Date | All Other Option Awards: Number of Shares of Stock (#) | Exercise or Base Price of Option Awards ($/Share) | Grant date Fair Value of Option Awards ($) | ||||||||||||||||
Jeffrey C. O’Hara |
| 05/08/19 |
| 05/08/19 |
| 25,000 |
| $ | 3.19 |
| $ | 26,335 |
| 05/08/19 | 05/08/19 | 25,000 | $ | 3.19 | $ | 26,335 | ||||||||||||
Joseph P. Macaluso |
| 05/08/19 |
| 05/08/19 |
| 10,000 |
| $ | 3.19 |
| $ | 10,534 |
| 05/08/19 | 05/08/19 | 10,000 | $ | 3.19 | $ | 10,534 | ||||||||||||
Pauline X. Romeo | 01/12/21 | 01/12/21 | 15,000 | $ | 3.11 | $ | 46,650 | |||||||||||||||||||||||||
(1) | J.P. Macaluso resigned as PAO; however, his options remain valid as of March 31, 2021 |
The exercise price of the options granted was the fair market value at the date of grant of the shares underlying such options. The estimated fair value of the shares underlying such options was determined utilizing the methodology described in Note 17 of the notes to the consolidated financial statements.
Item 11. Executive Compensation (continued)
Outstanding Equity Awards at Fiscal Year End
The following table sets forth the outstanding stock option grants held by named executive officers at the end of the 20202021 fiscal year. The option exercise price set forth in the table is based on the closing market price on the date of grant.
Name |
| Number of Securities Underlying Unexercised Options (#) Exercisable |
| Number of Securities Underlying Unexercised Options (#) Unexercisable (1) |
| Option Exercise Price ($) |
| Option Expiration Date | Number of Securities Underlying Unexercised Options (#) Exercisable | Number of Securities Underlying Unexercised Options (#) Unexercisable (1) | Option Exercise Price ($) | Option Expiration Date | ||||||||||||||
|
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|
|
| ||||||||||||||||||
Joseph P. Macaluso |
| 2,000 |
| - |
| $ | 5.85 |
| 4/28/20 | 10,000 | $ | 3.19 | 5/08/24 | |||||||||||||
- |
| 10,000 |
| $ | 3.19 |
| 5/08/24 | |||||||||||||||||||
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| ||||||||||||||||||
Pauline X. Romeo | 15,000 | 3.11 | 1/12/26 | |||||||||||||||||||||||
Jeffrey C. O’Hara |
| 20,000 |
| - |
| $ | 5.85 |
| 4/28/20 | 25,000 | $ | 3.19 | 5/08/24 | |||||||||||||
- |
| 25,000 |
| $ | 3.19 |
| 5/08/24 | |||||||||||||||||||
|
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| ||||||||||||||||||
(1)
(1) | Options are exercisable, on a cumulative basis, 20% at or after each of the first, second, and third anniversary of the grant and 40% after the fourth year anniversary. |
Employment Contracts and Termination of Employment and Change-in-Control
There are no employment contracts, compensatory plans or arrangements, including payments to be received from the Company with respect to any executive officer of Tel which would in any way result in payments to any such person because of his or her resignation, retirement or other termination of employment with the Company, any change in control of the Company or a change in the person’s responsibilities following a change in control of the Company.
Options Exercised and Stock Vested During Fiscal Year 20202120
No shares were acquired upon exercising options awards by our NEO’s during fiscal year 2020.2021.
Options granted to NEOs are consistent with the terms of options granted to other employees pursuant to the Employee Stock Option Plans (see Note 17 of the Notes to the Consolidated Financial Statements). Options granted to NEOs may be tax sheltered to the grantee, and their value constitutes a charge to the Company (see Notes 2 and 17 to the Consolidated Financial Statements).
Incentive Plan
The Company has a key man incentive compensation program. Each year the Compensation Committee determines a percentage of operating profits to be distributed among senior employees, including NEOs. The percentage determined is based on the general performance of the Company, and the amount of operating profits available for shareholders and for reinvestment in the business. This element of compensation provides an incentive for short-term performance.
The percentage of operating profits so determined is then distributed to senior employees, including NEOs and to a category entitled “incentive”, based on (a) the amount of the employee’s base salary, (b) his contribution to the Company, (c) the results of that contribution, (d) an estimated amount of his “special effort” on behalf of the Company, (e) his technical expertise, leadership, and management skills, and (f) the level of the overall compensation paid employees performing similar work in competitive companies. For the year ended March 31, 2020,2021, the CEO is expected to receive $72,968received $9,999 and the PAO will receive $21,450. No incentive awards were made to the NEOs forCAO received $12,500.
For the year ended March 31, 2019.2020, the CEO received $72,968 and the CAO received $21,450.
Other Benefits
The Company sponsors the Tel-Instrument Electronics Corp. 401(k) Plan (the “401k Plan”), a tax qualified Code Section 401(k) retirement savings plan, for the benefit of its employees, including its NEOs. The 401k Plan encourages savings for retirement by enabling participants to make contributions on a pre-tax basis and to defer taxation on earnings on funds contributed to the 401k Plan. The Company makes matching contributions to the Plan. All NEOs can make contributions to the 401k Plan. The NEOs also participate in group health and life benefits generally on the same terms and conditions that apply to other employees.
Item 11. Executive Compensation (continued)
Director Compensation
Directors who are not employees or officers of the Company receive $1,250 in cash and options, at the then market price, to purchase 1,000 shares of Common Stock for attendance at each in-person meeting and $625 in cash and options to purchase 500 shares of Common Stock for attendance at each formal telephonic meeting of the Board or of a committee of the Board. Non-employee directors may elect annually to accept the foregoing compensation or waive the stock option element and receive the $2,500 in cash for attendance at the in-person meeting and $1,250 in cash for each formal telephone meeting. During fiscal year 20202021 non-employee directors earned the following compensation pursuant to this plan.
Name | Cash Compensation | Option Awards ($)(1)(2) | Total $ | |||||||||
George J. Leon | $ | 10,000 | $ | -0- | $ | 10,000 | ||||||
Robert A. Rice | $ | 10,000 | $ | -0- | $ | 10,000 | ||||||
Robert H. Walker (3) | $ | 10,000 | $ | -0- | $ | 10,000 | ||||||
Stephen A. Fletcher | $ | 5,000 | $ | -0- | $ | 5,000 | ||||||
(1) | Amounts in this column, if any, represent the fair value required by ASC 718 to be included in our financial statements for all options granted during fiscal year |
(2) | There are no options outstanding for the directors. |
(3) | Mr. Walker also receives a monthly stipend of $2,400 for his additional responsibility as Chairman of the Board. |
Compensation Policy
The Company does not believe that its compensation policies are reasonably likely to increase corporate risk or have a material adverse effect on the Company.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The following table sets forth certain information known to the Company with respect to the beneficial ownership as of June 19, 2020,28, 2021, by (i) all persons who are beneficial owners of five percent (5%) or more of the Company’s Common Stock, (ii) each director and nominee, (iii) the executive officers, and (iv) all current directors and executive officers as a group. A person is considered to beneficially own any shares: (i) over which such person, directly or indirectly, exercises sole or shared voting or investment power, or (ii) of which such person has the right to acquire beneficial ownership at any time within 60 days through an exercise of stock options or warrants. Unless otherwise indicated, voting and investment power relating to the shares shown in the tables for our directors and executive officers is exercised solely by the beneficial owner or shared by the owner and the owner’s spouse or children.
For purposes of these tables, a person or group of persons is deemed to have “beneficial ownership” of any shares of Common Stock that such person has the right to acquire within 60 days of June 19, 2020.9, 2021. For purposes of computing the percentage of outstanding shares of our Common Stock held by each person or group of persons, any shares that such person or persons has the right to acquire within 60 days of June 19, 202029, 2021, is deemed to be outstanding, but is not deemed to be outstanding for the purpose of computing the percentage ownership of any other person. The inclusion herein of any shares listed as beneficially owned does not constitute an admission of beneficial ownership.
Name and Address |
| Number of Shares Beneficially Owned |
|
|
| Percentage of Class (1) |
| ||
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|
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| ||
Named Directors and Officers |
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| ||
Stephen A. Fletcher, Director |
|
| 3,200 |
| (2) |
|
| 0.1 | % |
3995 Oleander Court |
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Orange Beach, AL 36561 |
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George J. Leon, Director |
|
| 455,971 |
| (3) |
|
| 14.0 | % |
168 Redpath Avenue |
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Toronto, Ontario, Canada M4P 2K6 |
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Jeffrey C. O’Hara, CEO, Director |
|
| 249,356 |
| (4) |
|
| 7.6 | % |
853 Turnbridge Circle |
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Naperville, IL 60540 |
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Robert A. Rice, Director |
|
| 75,564 |
|
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| 2.3 | % |
5 Roundabout Lane |
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Cape Elizabeth, ME 04107 |
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Robert H. Walker, Director |
|
| 75,053 |
|
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| 2.3 | % |
27 Vantage Court |
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Port Jefferson, NY 11777 |
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Joseph P. Macaluso, PAO |
|
| 15,013 |
| (5) |
|
| 0.5 | % |
167 Tennis Court |
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Wall Township, NJ 07719 |
|
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All officers and directors as a group (6 persons) |
|
| 874,157 |
| (6) |
|
| 26.8 | % |
|
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Vincent J. Dowling, Jr. |
|
| 1,582,774 |
| (7) |
|
| 35.2 | % |
54 Ledyard Road |
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West Hartford, CT 06117 |
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Mrs. Sadie Fletcher |
|
| 640,907 |
| (8) |
|
| 19.7 | % |
657 Downing Lane |
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Williamsville, NY 14221 |
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Vincent J. Dowling, Sr. |
|
| 559,556 |
| (9) |
|
| 14.7 | % |
102 Island Creek Drive |
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Indian river Shores, FL 32963 |
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All officers, directors and 5% holders as a group (9 persons) |
|
| 3,657,394 |
| (10) |
|
| 72.2 | % |
Item 12.Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters (continued)
Name and Address | Number of Shares Beneficially Owned | Percentage of Class (1) | |||||||
Named Directors and Officers | |||||||||
Stephen A. Fletcher, Director | 3,200 | (2) | 0.1 | % | |||||
3995 Oleander Court | |||||||||
Orange Beach, AL 36561 | |||||||||
George J. Leon, Director | 455,971 | (3) | 14.0 | % | |||||
168 Redpath Avenue | |||||||||
Toronto, Ontario, Canada M4P 2K6 | |||||||||
Jeffrey C. O’Hara, CEO, Director | 254,356 | (4) | 7.8 | % | |||||
853 Turnbridge Circle | |||||||||
Naperville, IL 60540 | |||||||||
Robert A. Rice, Director | 75,564 | 2.3 | % | ||||||
5 Roundabout Lane | |||||||||
Cape Elizabeth, ME 04107 | |||||||||
Robert H. Walker, Director | 75,053 | 2.3 | % | ||||||
27 Vantage Court | |||||||||
Port Jefferson, NY 11777 | |||||||||
All officers and directors as a group (5 persons) | 864,144 | (8) | 26.5 | % | |||||
Vincent J. Dowling, Jr. | 803,218 | (5) | 21.9 | % | |||||
54 Ledyard Road | |||||||||
West Hartford, CT 06117 | |||||||||
Mrs. Sadie Fletcher | 640,907 | (6) | 19.7 | % | |||||
657 Downing Lane | |||||||||
Williamsville, NY 14221 | |||||||||
Vincent J. Dowling, Sr. | 266,842 | (9) | 7.6 | % | |||||
102 Island Creek Drive | |||||||||
Indian River Shores, FL 32963 | |||||||||
All officers, directors and 5% holders as a group (8 persons) | 2,575,111 | (10) | 65.3 | % | |||||
Item 12.Security Ownership of Certain Beneficial Owners and Managementand Related Stockholder Matters (continued)
(1) | The class includes 3,255,887 shares outstanding in the calculation of the percentage of shares owned by a party. The Common Stock deemed to be owned by the named party includes stock which is not outstanding but subject to currently exercisable options held by the individual named in accordance with Rule 13d-3(d)c) of the Exchange Act. The foregoing information is based on reports made by the named individuals. |
(2) | Mr. Stephen A. Fletcher is the son of Mr. Harold K. Fletcher, former Chief Executive Officer and director of the Company. Mr. Stephen A. Fletcher is the son of Mrs. Sadie Fletcher who beneficially owns 640,907 shares by virtue of the Estate of Harold K. Fletcher. Mr. Fletcher disclaims beneficial ownership of the shares owned by the Estate of Harold K. Fletcher. |
(3) | Includes 423,621 shares owned by the George Leon Family Trust, of which Mr. Leon is a beneficiary. Mr. Leon acts as manager of the trust assets pursuant to an informal family, oral arrangement, and disclaims beneficial ownership of the shares owned by the trust. |
(4) | Includes |
(5) |
|
|
|
| Based on Form 4 filed with the SEC on March 27, 2019. |
| Represents 640,907 shares owned by the Estate of Harold K. Fletcher, former Chief Executive Officer and director of the Company. Mrs. Fletcher is the mother of Stephen A. Fletcher, a director of the Company. |
(7) | Includes 500,000 shares of common stock that may be acquired upon conversion of the Series B Convertible Preferred Stock as well as an additional 59,556 shares that may be acquired based on accrued dividends. The Holder(s) of the Series B Convertible Preferred Stock can vote together with the holders of the Company’s common stock (“Common Stock”) on an as-converted basis on each matter submitted to a vote of holders of Common Stock (whether at a meeting of shareholders or by written consent). In any such vote, the number of votes that may be cast by a Holder shall be equal to one (1) vote for each Conversion Share underlying such Holder’s outstanding shares of Series B Convertible Preferred Stock (see Note 16 to the consolidated financial statements). |
(8) | Includes 7,000 shares subject to currently exercisable options held by all executive officers and directors of the Company (including those individually named above). Also 50,000 shares subject to currently exercisable warrants and 1,000,000 and 190,222 shares of common stock that may be acquired upon conversion of the Series A Convertible Preferred Stock and accrued dividends and 59,556 shares of common stock that may be acquired upon conversion of the Series B Convertible Preferred Stock and accrued dividends. |
(9) | Includes 500,000 shares of common stock that may be acquired upon conversion of the Series B Convertible Preferred Stock as well as an additional 59,556 shares that may be acquired based on accrued dividends. The Holder(s) of the Series B Convertible Preferred Stock can vote together with the holders of the Company’s common stock (“Common Stock”) on an as-converted basis on each matter submitted to a vote of holders of Common Stock (whether at a meeting of shareholders or by written consent). In any such vote, the number of votes that may be cast by a Holder shall be equal to one (1) vote for each Conversion Share underlying such Holder’s outstanding shares of Series B Convertible Preferred Stock (see Note 16 to the consolidated financial statements). |
(10) | Includes 7,000 shares subject to currently exercisable options held by all executive officers and directors of the Company (including those individually named above). Also 50,000 shares subject to currently exercisable warrants and 1,000,000 and 190,222 shares of common stock that may be acquired upon conversion of the Series A Convertible Preferred Stock and accrued dividends and 559,556 shares of common stock that may be acquired upon conversion of the Series B Convertible Preferred Stock and accrued |
Item 12.Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters continued)(continued)
Equity Compensation Plan Information
In December 2016, the Board adopted the 2016 Stock Option Plan (the “2016 Plan”) which reserved for issuance options to purchase up to 250,000 shares of its Common Stock. The stockholders approved the 2016 Plan at the January 2017 annual meeting. Shareholders had previously adopted the 2006 Stock Option Plan, under which substantially all of the options have been granted. Therefore, the Board approved the 2016 Plan, and the terms are substantially the same as under the 2006 Employees Stock Option.
The 2016 Plan reserves for issuance options to purchase up to 250,000 shares of its common stock. All employees, directors and consultants are eligible to receive stock option grants under this plan. The 2016 Plan, which has a term of ten years from the date of adoption, is administered by the Board or by a committee appointed by the Board. The selection of participants, allotment of shares, and other conditions related to the grant of options, to the extent not set forth in the Plan, are determined by the Board. Options granted under the Plan are exercisable up to a period of five years from the date of grant at an exercise price which is not less than the fair market value of the common stock at the date of grant, except to a shareholder owning 10% or more of the outstanding common stock of the Company, as to which the exercise price must be not less than 110% of the fair market value of the common stock at the date of grant. Options, for the most part, are exercisable on a cumulative basis, 20% at or after each of the first, second, and third anniversary of the grant and 40% after the fourth year anniversary. These terms can be modified based upon approval of the Board.
The following table provides information as of March 31, 20202021 regarding compensation plans under which equity securities of the Company are authorized for issuance. See “Equity Compensation Plan Information” under Item 12 below.
Plan category |
| Number of securities to be issued upon exercise of outstanding options |
| Weighted average exercise price of outstanding options |
| Number of options remaining available for future issuance under Equity Compensation Plans |
| Number of securities to be issued upon exercise of outstanding options | Weighted average exercise price of outstanding options | Number of options remaining available for future issuance under Equity Compensation Plans | ||||||||||||||
Equity Compensation Plans approved by shareholders |
| 118,500 |
| $ | 3.98 |
| 166,500 |
| 98,500 | $ | 3.19 | 151,500 | ||||||||||||
Equity Compensation Plans not approved by shareholders |
|
| - |
|
| - |
|
| - |
| - | - | - | |||||||||||
Total |
|
| 118,500 |
| $ | 3.98 |
|
| 166,500 |
| 98,500 | $ | 3.19 | 151,500 | ||||||||||
* See discussion above and Note 17 of Notes to the Consolidated Financial Statements.
Item 13.Certain Relationships and Related Transactions and Director Independence
On February 22, 2010, the Company borrowed $250,000 in exchange for issuing subordinated notes to two executive officers and directors in the amount of $125,000 (individually, the “Subordinated Note” and collectively, the “Subordinated Notes”). The notes became due April 1, 2011 with an interest rate of 1% per month, payable on a monthly basis within 14 days of the end of each month. The holders of Subordinated Notes agreed that the Company’s failure to pay the monthly interest amounts pursuant to the terms of the February 22, 2010 Subordinated Notes will not constitute an event of default on such notes. Upon payment in full of the loan to BCA in November 2014, the Company was able to commence to pay down the principal balance of the Subordinated Notes. During fiscal year 2012, the Company’s Chairman, at the time, passed away. His surviving spouse has retained this Subordinated Note and continues to acknowledge the terms. The remaining principal balances on the notes were fully paid during the year ended March 31, 2017. The Company continues to accrue interest. Total interest expense was $990 for the year ended March 31, 2019. All interest was repaid as of March 31, 2019. Accrued interest at March 31, 2020 and 2019 was $-0- and $-0-, respectively.
The Company has obtained marketing and sales services from a brother-in-law of the Company’s CEO with the related fees and commissions amounting to $145,376$121,769 and $161,026$145,376 for the years ended March 31, 20202021 and 2019,2020, respectively.
Director Independence
On an annual basis, each director and executive officer is obligated to disclose any transactions with the Company in which a director or executive officer, or any member of his or her immediate family, have a direct or indirect material interest in accordance with Item 407(a) of Regulation S-K.
As of June 24, 2020,28, 2021, the Board determined that the following directors are independent under these standards:
Robert Walker, George Leon and Robert Rice.
Item 14.Principal Accounting Fees and Services
As previously reported, the Audit Committee appointed Friedman, LLP to serve as the Company's independent auditor for fiscal year 2020. BDO USA, LLP served as the Company’s registered public accountants for the year ended March 31, 2019.2021.
For the fiscal years ended March 31, 20202021 and 2019,2020, professional services were performed by Friedman, LLP, and BDO USA, LLP, the Company’s independent registered public accountants.accountants, BDO and Wiss. Fees for those years were as follows:
2020 | 2019 | 2021 | 2020 | |||||||||||||
Audit Fees | $ | 157,620 | $ | 151,300 | $ | 147,050 | $ | 157,620 | ||||||||
Audit-Related Fees | - | - | - | - | ||||||||||||
Total Audit and Audit-Related Fees | 157,620 | 151,300 | 147,050 | 157,620 | ||||||||||||
Tax Fees | - | - | - | - | ||||||||||||
All Other Fees | - | - | - | - | ||||||||||||
Total | $ | 157,620 | $ | 151,300 | $ | 147,050 | $ | 157,620 | ||||||||
Audit Fees.This category includes the audit of the Company’s consolidated financial statements and reviews of the financial statements included in the Company’s Quarterly Reports on Form 10-Q and Form 10-K. It also includes advice on accounting matters that arose during, or as a result of, the audit or the review of interim financial statements, and services which are normally provided in connection with regulatory filings, or in an auditing engagement. BDO USA, LLP performed the audit for the fiscal year ended March 31, 2019 and reviews for the first quarter of year 2020. Friedman, LLP performed the audit for the fiscal year ended March 31, 2020 and reviews. Friedman, LLP performed the reviewsaudit for the second and third quarters of fiscal year 2020.ended March 31, 2021 and the reviews.
Audit Related Fees, tax and other fees. No fees under these categories were paid to Friedman, LLP or BDO USA, LLP in 20202021 and/or 2019.2020.
Policy on Audit Committee Pre-Approval of Audit and Permissible Non-Audit Services of Independent Auditor
The Audit Committee has established a policy which requires it to pre-approve all audit and permissible non-audit services, including audit-related and tax services, if any, to be provided by the independent auditor. Pre-approval is generally provided for up to one year and is detailed as to the particular service or category of service to be performed, and is subject to a detailed budget. The auditor and management are required to report periodically to the Audit Committee regarding the extent of services performed and the amount of fees paid to date, in accordance with the pre-approval.
PART IV
Item 15.Exhibits and Financial Statement Schedules
a.) The following documents are filed as a part of this report:
Item 15.Exhibits and Financial Statement Schedules (continued)
c.) Exhibits identified in parentheses below on file with the Securities and Exchange Commission, are incorporated herein by reference as exhibits hereto.
(3.1) | |
(3.2) | |
(3.3) | Tel-Instrument Electronics Corp.’s By-Laws, as amended (incorporated by reference to Registration 33-18978 dated November 7, 1988). |
(3.4) | |
(10.1) | |
(10.2) | |
(10.3) | |
(10.4) | 2006 Stock Option Plan |
(10.5) | |
(10.6) | |
(10.7) | |
(10.8) | |
(10.9) | |
(10.10) | |
(10.11) | |
(10.12) | |
(10.13) | |
(21.1) | |
(23.1) | Consent of Independent Registered Public Accounting Firm – Friedman LLP |
|
|
(31.1) | Certification by CEO pursuant to Rule 15d-14 under the Securities Exchange Act. |
(31.2) | Certification by PAO pursuant to Rule 15d-14 under the Securities Exchange Act. |
(32.1) | |
(32.2) | |
101.INS | XBRL Instance Document |
101.SCH | Taxonomy Extension Schema Document |
101.CAL | Taxonomy Extension Calculation Linkbase Document |
101.DEF | Taxonomy Extension Definition Linkbase Document |
101.LAB | Taxonomy Extension Label Linkbase Document |
101.PRE | Taxonomy Extension Presentation Linkbase Document |
The Company will furnish to a stockholder, upon request, any exhibit at cost.
Pursuant to the requirements of 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.
TEL-INSTRUMENT ELECTRONICS CORP. | |||
(Registrant) | |||
Dated: June 29, | By: | /s/ Jeffrey C. O’Hara | |
Jeffrey C. O’Hara | |||
CEO and Director | |||
(Principal Executive Officer) | |||
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the date indicated and by signature hereto.
Signature | Title | Date | ||||
/s/ Jeffrey C. O’Hara | CEO, President, and Director | June 29, | ||||
Jeffrey C. O’Hara | ||||||
/s/ | Principal Accounting Officer | June 29, | ||||
Pauline X. Romeo |
| |||||
/s/ Stephen A. Fletcher | Director | June 29, | ||||
Stephen A. Fletcher | ||||||
/s/ George J. Leon | Director | June 29, | ||||
George J. Leon | ||||||
/s/ Robert A. Rice | Director | June 29, | ||||
Robert A. Rice | ||||||
/s/ Robert H. Walker | Chairman of the Board, Director | June 29, | ||||
Robert H. Walker |