TEL-INSTRUMENT ELECTRONICS CORP.
Certain prior year and period amounts have been reclassified to conform to the current period presentation.
On March 24, 2009, Aeroflex Wichita, Inc. (“Aeroflex”) filed a petition against the Company and two of its employees in the District Court, 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 (the “Award”), to develop new Mode-5 radar test sets and kits to upgrade the existing TS-4530 radar test sets to Mode 5. Aeroflex’s petition alleges that in connection with the award, the Company and its named employees misappropriated Aeroflex’s trade secrets; tortuously interfered with its business relationship; conspired to harm Aeroflex and tortiously interfered with its contract and seeks injun ctive relief and damages. The central basis of all the claims in the Aeroflex Action is that the Company misappropriated and used Aeroflex proprietary technology in winning the Award.
TEL-INSTRUMENT ELECTRONICS CORP.
In December 2009, the Kansas court dismissed the Aeroflex civil suit against the Company. While this decision was based on jurisdictional issues, the ruling did note that Aeroflex, after discovery proceedings, did not provide any evidence that Tel or its employees misappropriated Aeroflex trade secrets. The Kansas ruling also referenced the Army’s findings, in its response to the General Accountability Office (“GAO”), which rejected Aeroflex’s claims and determined that Tel used its own proprietary technology on this program. Aeroflex has elected to appeal this Kansas decision and has agreed to stay any action against the two former employees until a decision is reached. The appeal was argued in the Kansas Supreme Court in January 2011 and the Company does not anticipate a decision for some time. Tel remains confidentcon fident as to the outcome of this appeal and any potential follow-on litigation.
In October 2009, the FASB issued Accounting Standards Update 2009-13, “Revenue Recognition (Topic 605)”. This Update provides amendments to the criteria in Subtopic 605-24 for separating consideration in multiple-deliverable revenue arrangements. It establishes a hierarchy of selling prices to determine the selling price of each specific deliverable which includes vendor-specific objective evidence (if available), third-party evidence (if vendor-specific evidence is not available), or estimated selling price if neither of the first two are available. This Update also eliminates the residual method for allocating revenue between the elements of an arrangement and requires that arrangement consideration be allocated at the inception of the arrangement. Finally, this Update expands the disclosure requirements regarding a vendor’s multiple-deliverablemul tiple-deliverable revenue arrangements. This Update is effective for fiscal years beginning on or after June 15, 2010. We do not anticipate any material impact from this Update.
In January 2010, the FASB issued Accounting Standards Update No. 2010-06, Fair Value Measurements and Disclosures (the “Update”), which provides amendments to Accounting Standards Codification 820-10 (Fair Value Measurements and Disclosures – Overall Subtopic) of the Codification. The Update requires improved disclosures about fair value measurements. Separate disclosures need to be made of the amounts of significant transfers in and out of Level 1 and Level 2 fair value measurements along with a description of the reasons for the transfers. Also, disclosure of activity in Level 3 fair value measurements needs to be made on a gross basis rather than a net basis. The Update also requires: (1) fair value measurement disclosures for each class of assets and liabilities, and (2) disclosures about the valuation techniques and inputs used to measure fair value for both recurring and nonrecurring fair value measurements, which are required for fair value measurements that fall in either Level 2 or Level 3. The new disclosures and clarifications of existing disclosures are effective for interim and annual reporting periods beginning after December 15, 2009, except for the Level 3 activity disclosures, which are effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years. The Company has complied with the new disclosure requirements.
TEL-INSTRUMENT ELECTRONICS CORP.
In September 2010 the Company entered into an agreement with BCA Mezzanine Fund LLP (“BCA”) to loan the Company $2.5 million in the form of a Promissory Note (“the “Note”). The Company incurred expenses of $541,604 in connection with this loan, including legal fees, investment banking fees and other transaction fees. These expenses are included as deferred debt expense in the accompanying balance sheet, and these expenses will be amortized over the term of the loan. The features of the note are as follows:
Item 2.MANAGEMENT’S DISCUSSION AND ANALYSIS OF THE
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
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 1995.
Forward-looking statements include, among others, statements concerning the Company’s outlook, pricing trends and forces within the industry, the completion dates of capital projects, expected sales growth, cost reduction strategies and their results, long-term goals of the Company and other statements of expectations, beliefs, including statements regarding litigation, 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 cost and availability of its raw materials; the actions of its 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. A number of these factors are discussed in the Company’s filings with the Securities and Exchange Commission.
Critical Accounting Policies
In preparing the 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 Financial Statements included in our Form 10-K. The Company’s accounting policies that require a higher degree of judgment and complexity used in the preparation of financial statements include:
Revenue recognition – revenues are recognized at the time of shipment to, or acceptance by customer provided title and risk of loss is transferred to the customer. Provisions, when appropriate, are made where the right to return exists.
Revenues on repairs and calibrations are recognized at the time the repaired or calibrated unit is shipped, as it is at that time the work is completed.
Due to the unique nature of the ITATS program wherein a significant portion of this contract was not to be delivered for over a year, revenues under this contract were recognized on a percentage-of-completion basis, which recognizes sales and profit as they are earned, rather than at the time of shipment. Revenues and profits are estimated using the cost-to-cost method of accounting where revenues are recognized and profits recorded based upon the ratio of costs incurred to date to our estimate of total costs at completion. The ratio of costs incurred to our estimate of total costs at completion is applied to the contract value to determine the revenues and profits. When adjustments in estimated contract revenues or estimated costs at completion are required, any changes from prior estimates are recognized by recording ad justments in the current period for the inception-to-date effect of the changes on current and prior periods. The Company also receives progress billings on this program, which is a funding mechanism by the government to assist contractors on long-term contracts prior to delivery.
Payments received prior to the delivery of units or services performed are recorded as deferred revenues.
Shipping and handling costs charged to customers are classified as revenue, and the shipping and handling costs incurred are included in cost of goods sold.
15
Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF THE
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
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 1995.
Forward-looking statements include, among others, statements concerning the Company’s outlook, pricing trends and forces within the industry, the completion dates of capital projects, expected sales growth, cost reduction strategies and their results, long-term goals of the Company and other statements of expectations, beliefs, including statements regarding litigation, 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 cost and availability of its raw materials; the actions of its 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. A number of these factors are discussed in the Company’s filings with the Securities and Exchange Commission.
Critical Accounting Policies
In preparing the 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 Financial Statements included in our Form 10-K. The Company’s accounting policies that require a higher degree of judgment and complexity used in the preparation of financial statements include:
Revenue recognition – revenues are recognized at the time of shipment to, or acceptance by customer provided title and risk of loss is transferred to the customer. Provisions, when appropriate, are made where the right to return exists.
Revenues on repairs and calibrations are recognized at the time the repaired or calibrated unit is shipped, as it is at the time that the work is completed.
Due to the unique nature of the ITATS program wherein a significant portion of this contract will not be delivered for over a year, revenues under this contract are recognized on a percentage-of-completion basis, which recognizes sales and profit as they are earned, rather than at the time of shipment. Revenues and profits are estimated using the cost-to-cost method of accounting where revenues are recognized and profits recorded based upon the ratio of costs incurred to date to our estimate of total costs at completion. The ratio of costs incurred to our estimate of total costs at completion is applied to the contract value to determine the revenues and profits. When adjustments in estimated contract revenues or estimated costs at completion are required, any changes from prior estimates are recognized by recording adjus tments in the current period for the inception-to-date effect of the changes on current and prior periods. The Company also receives progress billings on this program, which is a funding mechanism by the government to assist contractors on long-term contracts prior to delivery.
Payments received prior to the delivery of units or services performed are recorded as deferred revenues.
Shipping and handling costs charged to customers are classified as revenue, and the shipping and handling costs incurred are included in cost of goods sold.
14
Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF THE
RESULTS OF OPERATIONS AND FINANCIAL CONDITION (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 estimates have historically been within our expectation and the provision established, the Company cannot guarantee that its estimates will continue to be within the provision established.
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 its estimates will continue to be within the provision established.
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 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.
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 taxable 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 rev erse. 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 is 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 recorded 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 forecas t to determine that such revenues will produce sufficient taxable income to realize the deferred tax assets.
1516
Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF THE
RESULTS OF OPERATIONS AND FINANCIAL CONDITION (Continued)
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 Management’s Discussion and Analysis in the Company’s Annual Report on Form 10-K for the year ended March 31, 2010.
Overview
In the quarter ended December 31, 2010 the Company had record sales of $4.26 million which represented a 152% increase as compared to the same period last year. The revenue increase was due to strong sales of legacy test sets as well as sales of CRAFT 719 and 708 pilot production units. Income from operations increased to approximately $412,000 for the quarter versus an approximately $938,000 loss in the year ago period. Net income for the period was approximately $29,000 due to reductions for: (1) a non-cash charge of $129,684 for revaluing the BCA warrant options to fair market value (see Note 13 to Financial Statements); (2) $102,000 of interest expense; and (3) $105,000 of income tax accruals due to the non-deductibility for income tax purposes of the loss on revaluation of the BCA warrant. The revaluation loss was due to incre ase in value of common stock underlying the warrant from $6.70 per share at the closing of the loan to $8.09 on December 31, 2010. Additionally, the Company purchased a significant amount of inventory in anticipation of shipping orders received as well as orders anticipated from the government as described below.
Sales for the nine months ended December 31. 2010 were $9,772,435 or 9% more than sales for the entire fiscal year ended March 31, 2010, and loss before taxes improved over last year’s nine month period to a $470,582 loss, an improvement of almost $1.5 million. Operating expenses in the current nine month period were reduced by $446,209 to $4,522,857, or 9%.
Two of the Company’s key new products are currently undergoing evaluation by the U.S. Navy. Technical Evaluation of the CRAFT program has been going well and should be completed in the next few months. However, the U.S. Navy has delayed production of the 160 units ($3.6 million) of the AN/USM-708 until Technical Evaluation is completed. We are currently negotiating this issue with the U.S. Navy. If production order is not released, this could impact our sales growth in the fourth quarter of the current fiscal year. The Company believes that CRAFT will be successfully evaluated and that upon successful completion of the evaluation, the Navy will also exercise the remaining production options for the CRAFT AN/USM-708.
Production and delivery of the ITATS (“Intermediate Level TACAN Test Set”) (AN/ARM-206) units with the U.S. Navy has been delayed as a result of certain issues during technical evaluation. Our subcontractor on this program has proposed a technical solution which is subject to acceptance by the U.S. Navy. The Company believes that these issues will be resolved, but this will delay the production and sales of the ITATS units. The Company has received a production order for 102 units amounting to approximately $5.3 million.
The TS-4530A program with the U.S. Army is going well and the Company expects to begin shipping the initial prototypes in the fourth quarter of the current fiscal year. The Company has received orders totaling approximately $17.6 million for this program.
17
Item 2.MANAGEMENT’S DISCUSSION AND ANALYSIS OF THE
RESULTS OF OPERATIONS AND FINANCIAL CONDITION (Continued)
Overview (continued)
As previously reported, the Company concluded a loan agreement in September 2010 in order to raise additional funding to support the increasing volume of sales and as a bridge to the anticipated higher sales and
cash flow commencing in the latter part of this fiscal year. The $2.5 million loan agreement with BCA Mezzanine Fund L.P. is a five year loan at 14% per year, payable interest only in the first year at approximately $29,000 per month, and thereafter payments will be approximately $69,000 monthly until paid. The loan is described in Note 13 to the Financial Statements.
The Company used the loan proceeds to repay its bank loan, pay accounts payable, and working capital needs to fund increases in inventories and accounts receivable. As a result, the Company increased working capital by approximately $1.8 million as it replaced the bank loan, classified as a current liability, with the BCA Loan, which is mostly classified as long-term debt. The
However, the delays discussed above have adversely affected the Company’s cash flow, and in February 2011,BCA agreed to release part of its lien on Company believes that it now has adequate fundingassets to support the anticipated substantial increase in sales.U.S. Government to allow for progress billings up to $1,000,000.
Shareholder equity declined by approximately $254,000 during$193,000 for the sixnine months ended September 30,December 31, 2010 as the loss for the year was partially offset by proceeds from the issuance of additional common stock. The stock was sold pursuant to the exercise of outstanding employee stock options, and director purchases at the closing market price of the common stock on the NYSE Amex on the date of purchase.
Sales for the quarter ended September 30, 2010 increased $644,822 (26.7%) over the same period in the prior fiscal year to $3,055,933 and the operating loss declined to $84,486 as compared to $290,709 for the quarter ended September 30, 2009.
At September 30,December 31, 2010 the Company’s backlog was approximately $32.8$30 million as compared to approximately $18.3$20.6 million at September 30,December 31, 2009. Recently,The backlog at December 31, 2010 includes only the amount of currently exercised delivery orders on open IDIQ (indefinite delivery/indefinite quantity) contracts, and is expected to materially increase when the volume production orders for the Navy CRAFT AN/USM-708 units are received. Historically, the Company receivedobtains a substantial volume of orders includedwhich are required to be filled in less than twelve months, and, therefore, these anticipated orders are not reflected in the aforementioned backlog, for approximately $6.5 million, most of which will be shipped in the current fiscal year.
Two of the Company’s key new products are currently undergoing evaluation by the U.S. Navy. The Company believes that both products will be successfully evaluated and that upon successful completion of the evaluation, the Navy will exercise the remaining production options for the CRAFT AN/USM-708, and will allow the Company to begin production of the order for 102 units of the ITATS AN/ARM-206 already received.
16
Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF THE
RESULTS OF OPERATIONS AND FINANCIAL CONDITION (Continued)
Overview (continued)
The Company has also received $17 million of delivery orders from the U.S. Army for the TS-4530A program, and the Company expects to begin shipping the qualification units in the next several months.backlog.
As a result of the foregoing, as well as projected sales of other products, the Company anticipates a substantial increase in revenues and solid profits in this fiscal year ending March 31, 2011.2011 as compared to the previous fiscal year. However, fourth quarter sales increases are dependent upon our negotiation with the U.S. Navy regarding the delay of the 160 units of the AN/USM-708 noted above, and shipment of the initial prototypes on the TS-4530A program.
As previously reported, on July 30, 2010, Tel received a letter from the staff of the NYSE Amex that, based on the Tel’s financial statements, Tel was no longer in compliance with the Exchange’s requirement for continued listing of its shares under Section 1009 of the Exchange’s rules. Tel is not in compliance with the listing requirements as its reported stockholders’ equity at March 31, 2010 was $3.85 million as compared to the $4.0 million minimum requirement. Pursuant to Exchange rules, the Company’s stock continues to be listed for trading, and the Company furnished the Exchange with a specific plan of how it will return to compliance on or before January 30, 2012.
18
Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF THE
RESULTS OF OPERATIONS AND FINANCIAL CONDITION (Continued)
On October 18, 2010 the NYSE Amex accepted the Company’s proposed plan to return to compliance with the minimum stockholder equity requirement by January 30, 2012. Based upon the information provided by the Company, the Exchange has determined that the Company has made a reasonable demonstration of its ability to regain compliance with Section 1009 of the Company Guide by January 30, 2012. Based on this, the Exchange will continue the listing of the Company.
The Exchange will periodically review the Company for compliance with the Plan. If the Company does not show progress consistent with the Plan, the Exchange Staff will review the circumstances and could commence delisting proceedings. The Company is confident that it will achieve its objectivesobjective s and maintain its listing on the NYSE Amex.
In December 2009, the Kansas court dismissed the Aeroflex civil suit against the Company. While this decision was based on jurisdictional issues, the ruling did note that Aeroflex, after discovery proceedings, did not provide any evidence that Tel or its employees misappropriated Aeroflex trade secrets. The Kansas ruling also referenced the Army’s findings, in its response to the General Accountability Office, which rejected Aeroflex’s claims and determined that Tel used its own proprietary technology on this program. Aeroflex has elected to appeal this Kansas decision and has agreed to stay any action against the two former employees until a decision is reached. The appeal was argued in the Kansas Supreme Court in January 2011 and the Company does not anticipate a decision for some time.. Tel remains confident as to the outcomeou tcome of this appeal.appeal and any potential follow-on litigation. See Note 11 to the Financial Statements.
17
Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF THE
RESULTS OF OPERATIONS AND FINANCIAL CONDITION (Continued)
Results of Operations (continued)
Sales
For the quarter ended September 30,December 31, 2010, total sales increased $644,822 (26.7%$2,570,762 (152.1%) to $3,055,933$4,261,222 as compared to $2,411,111$1,690,460 for the same quarter in the prior year. Avionics Government sales increased $599,542 (33.3%$2,534,863 (218.1%) to $2,397,847$3,696,848 for the period as compared to $1,798,305$1,161,985 for the same period last year. This increase in Avionics Government sales is primarily attributed to AN/APM-719 units partially offset by a decline in salesshipments of the TR-420.AN/USM-719 units and AN/USM-708 for the CRAFT program, the TR-100 with the U.S. Air Force, and the T-47NH with the U.S. Army. Avionics Commercial sales increased $72,037 (12.3%$92,888 (19.7%) to $658,086$564,874 for the three months ended September 30,December 31, 2010 as compared to $586,049$471,986 in the same period in the prior year. This increase is primarily attributed to revenues associated with repairs and calibrations. There were no sales from Marine Systems a s this division was discontinued..
For the nine months ended December 31, 2010, total sales increased $3,328,665 (51.7%) to $9,772,435 as compared to $6,443,770 for the same period in the prior year. Avionics Government sales increased $3,091,138 (63.7%) to $7,942,668 for the period as compared to $4,851,530 for the same period last year. This increase in Avionics Government sales is primarily attributed to shipments of the AN/USM-719 units and AN/USM-708 for the CRAFT program, the TR-100 with the U.S. Air Force, and the T-47NH with the U.S. Army. Commercial sales increased $337,217 (22.6%) to $1,829,767 for the nine months ended December 31, 2010 as compared to $1,492,550 in the same period in the prior year. This increase is due to the timing of orders and shipments.shipments as well as the increase in revenues associated with repairs and calibrations. The Company continues to experience weakness in the commercial market and does not expect this growth in the commercial segment to continue.
ForFourth quarter sales increases are dependent upon our negotiation with the six months ended September 30, 2010, total sales increased $757,903 (15.9%) to $5,511,213 as compared to $4,753,310 forU.S. Navy regarding the same period in the prior year. Avionics Government sales increased $556,775 (15.1%) to $4,246,320 for the period as compared to $3,689,545 for the same period last year. This increase in Avionics Government sales is primarily attributed to AN/APM-719 units partially offset by a decline in salesdelay of the TR-420. Commercial sales increased $244,329 (23.9%) to $1,264,893 for160 units of the six months ended September 30, 2010 as compared to $1,020,564 inAN/USM-708 noted above, and shipment of the same period ininitial prototypes on the prior year. This increase is due to the timingTS-4530A program.
19
Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF THE
RESULTS OF OPERATIONS AND FINANCIAL CONDITION (Continued)
Results of orders and shipments. The Company continues to experience weakness in the commercial market and does not expect this growth in the commercial segment to continue.Operations (continued)
Gross Margin
Gross margin increased $221,583 (17.8%$1,125,200 (151.9%) to $1,469,235$1,866,016 for the quarter ended September 30,December 31, 2010 as compared to $1,247,652$740,816 for the same quarter in the prior fiscal year. The increase in gross margin is primarily attributed to the increase in volume. The gross margin percentage for the quarter ended September 30,December 31, 2010 was 48.1%43.8% the same as compared to 51.7% for the quarter ended September 30,December 31, 2009. Gross profit is lower as a percent of sales due to a change in sales mix.
Gross margin increased $225,501 (9.6%$1,350,701 (44%) to $2,551,615$4,417,631 for the sixnine months ended September 30,December 31, 2010 as compared to $2,326,114$3,066,930 for the same period in the prior fiscal year. The increase in gross margin is primarily attributed to the increase in volume. The gross margin percentage for the sixnine months ended September 30,December 31, 2010 was 46.3%45.2% as compared to 48.9%47.6% for the sixnine months ended September 30,December 31, 2009. The decrease in gross margin percentage is due to a change in sales mix.
18
Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF THE
RESULTS OF OPERATIONS AND FINANCIAL CONDITION (Continued)
Results of Operations (continued)mix and lower prices on the AN/USM-719.
Operating Expenses
Selling, general and administrative expenses decreased $18,178 (2.6%$55,017 (7.4%) and 67,531 (4.4%$122,548 (5.4%) to $692,631$686,380 and $1,450,675,$2,137,055, respectively, for the three and sixnine months ended September 30,December 31, 2010, as compared to $710,809$741,397 and $1,518,206$2,259,603 for the three and sixnine months ended September 30,December 31, 2009. This decrease is attributed mainly to a decrease in legal fees associated with the Aeroflex litigation offset partly by an increase in outside commissions.
Engineering, research and development expenses increased $33,538 (4.1%decreased $169,933 (18.1%) to $861,090$767,366 for three months ended SeptemberDecember 31, 2010 as compared to $827,552$937,299 for the three months ended September 30,December 31, 2009 primarily as a result of increased salaries and fringes offset mostly by lower outside contractor costs.and material costs associated with the near completion of major programs. Engineering, research and development expenses decreased $153,728 (8.7%$323,661 (11.9%) to $1,618,436$2,385,802 for sixnine months ended September 30,December 31, 2010 as compared to $1,772,164$2,709,463 for the sixnine months ended September 30,December 31, 2009, primarily as a result of reduced outside contractor expenses associated with the near completion of major programs. Further decreases are expected
Income (Loss) From Operations
As a result of the above, the Company recorded income from operations of $412,270, for the quarter ended December 31, 2010 as major engineering projects are completed.compared to a loss from operations of $937,880 for the quarter ended December 31, 2009. The Company also recorded a loss from operations of $105,226 for the nine months ended December 31, 2010 as compared to a loss from operations of $1,902,136 for the nine months ended December 31, 2009.
Other Income (Expense).net
(Expenses), net
Interest expense increased as a result of interest on the new $2.5 million loan from BCA, increased cumulative borrowings and interest rate on the line of credit (which was not paid off until September 2010), and increased interest expensesexpense associated with the officers’ subordinated notes, and higher interest rate associated with the line of credit.notes. Amortization of debt discount is in connection with the stock options issued in conjunction with the officers’ subordinated notes and warrants issued in conjunction with the loan from BCA. The amortization of deferred expenses is also associated with the loan from BCA. The Company also incurred a loss associated with the revaluation of the warrant issued to BCA in the amount of $129,684.
20
Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF THE
RESULTS OF OPERATIONS AND FINANCIAL CONDITION (Continued)
Results of Operations (continued)
Loss before Income Taxes
As a result of the above, the Company recorded a lossincome before income taxes of $146,342,$134,397, for the quarter ended September 30,December 31, 2010 as compared to a loss before income taxes of $302,111$953,093 for the quarter ended September 30,December 31, 2009. The Company also recorded a loss before income taxes of $604,979$470,582 for the sixnine months ended September 30,December 31, 2010 as compared to a loss before income taxes of $982,759$1,935,852 for the sixnine months ended September 30,December 31, 2009.
Income Taxes
An income tax provision of $105,385 was recorded for the three months ended December 31, 2010 as compared to an income tax benefit of $241,573 was recorded$380,763 for the sixthree months ended September 30, 2010 as compared to $392,610 for the six months ended September 30,December 31, 2009. The change is due to the lower lossincome before taxes for the sixthree months ended September 30,December 31, 2010. An income tax benefit of $136,188 was recorded for the nine months ended December 31, 2010 as compared to an income tax benefit of $773,373 for the nine months ended December 31, 2009 as a result of the lower loss for the period. These amounts represent the effective federal and state tax rate of approximately 40% on the Company’s net income or loss before taxes.taxes, but the Company does not pay Federal Income taxes due to its net operating loss carryforward The high income tax accrual for the pe riod was due to the non-deductibility of the loss on revaluation of the BCA warrant.
Net Loss
As a result of the above, the Company recorded net lossesincome of $87,699 and $363,111$29,012 for the three and six months ended September 30,December 31, 2010 as compared to a net lossesloss of $181,418 and $590,149$572,330 for the three and sixended December 31, 2009. The Company recorded a net loss of $334,394 for the nine months ended September 30,December 31, 2010 as compared to a net loss of $1,162,479 for the nine months ended December 31, 2009.
1921
Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF THE
RESULTS OF OPERATIONS AND FINANCIAL CONDITION (Continued)
Liquidity and Capital Resources
At September 30,December 31, 2010, the Company had working capital of $4,112,687$4,232,123 as compared to $2,319,588 at March 31, 2010, primarily as a result of the increase in accounts receivable and inventories and the payment of the line of credit with the bank that was classified as a current liability with the long-term BCA loan, partially offset by the increase in accounts payable and other accrued expenses.payable..
During the sixnine months ended September 30,December 31, 2010, the Company had a net increase in cash of $315,258.$267,038. The Company’s principal sources and uses of funds were as follows:
Cash used in operating activities. For the sixnine months ended September 30,December 31, 2010, the Company used $1,026,581$1,065,903 in cash for operations as compared to using $808,001$1,149,419 in cash for operations for the sixnine months ended September 30,December 31, 2009. This is primarily attributed to the increaselower loss from operations mostly offset by increases in accounts receivable and inventories offset mostly by an increase in accounts payable and progress billings as well as the lower loss from operations.inventories.
Cash used in investing activities. Net cash used in investing activities was $90,290$102,470 for the sixnine months ended September 30,December 31, 2010 from $16,108as compared to $36,653 for the sixnine months ended September 30,December 31, 2009 due to the increase in purchases of equipment.
Cash provided by financing activities Net cash provided by financing activities for the sixnine months ended September 30,December 31, 2010 was $1,432,129$1,435,411 as compared to $679,885$722,825 for the sixnine months ended September 30,December 31, 2009. In September 2010 the Company raised $2.5 million in financing which was offset by financing costs and repayment to the bank of the line of credit. This amount was also offset partially by lower proceeds from the issuance of common stock and exercise of stock options.
At September 30,December 31, 2010 the Company’s backlog was approximately $32.8$30 million as compared to approximately $18.3$20.6 million at September 30,December 31, 2009. The backlog at September 30,December 31, 2010 includes only the amount of currently exercised delivery orders on open IDIQ (indefinite delivery/indefinite quantity) contracts, and the Company’s backlog is expected to materially increase when the large volume production orders for the AN/USM-708 and AN/ARM-206 units are received. Historically, the Company obtains a substantial volume of orders which are required to be filled in less than twelve months, and, therefore, these anticipated orders are not reflected in the backlog.
In September 2010 the Company, pursuant to an agreement with BCA Mezzanine Fund LP, borrowed $2.5 million for five years. See Overview and Note 13 to the Financial Statements.
On certain government contracts the Company has been granted progress payments from the government, which allows the Company to bill and collect a portion of its incurred costs on long-term programs before shipment of units, thus helping to fund the costs of these programs.
There was no significant impact on the Company’s operations as a result of inflation for the sixnine months ended September 30,December 31, 2010. These financial statements should be read in conjunction with the Company’s Annual Report on Form 10-K to the Securities and Exchange Commission for the fiscal year ended March 31, 2010.
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Item 4 (T). Controls and Procedures
As of the end of the period covered by this report, the Company conducted an evaluation, under the supervision and with the participation of the principal executive officer and principal financial officer, of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”)). Based on this evaluation, the principal executive officer and principal financial officer concluded that the Company’s disclosure controls and procedures are effective to ensure that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms.
There was no change in the Company’s internal control over financial reporting during the Company’s most recently completed fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
Part II. Other Information
Item 1. Legal Proceedings
See discussion in Item 3 of the Company’s Report on Form 10-K for the fiscal year ended March 31, 2010, Note 11 to the Financial Statements above, and under Management’s Analysis and Discussion of the Results of Operations – Overview included in this report.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
On or about July 22, 2010, three directors entered into agreements with the Company providing that, inter alia, if the Company needed additional capital at any time until September 30, 2010, the directors would purchase shares of common stock at the average closing price of the stock on the NYSE-Amex for the three days preceding the date the Company requested the capital. These agreements are limited as to the amount of capital the Company can request from each director.
On July 26, the Company requested capital under this agreement and sold 7,462 shares of its Common Stock at the average closing price of $6.70 per share to a director pursuant to this agreement. The shares sold were restricted against transfer and were sold pursuant to the exemption from registration provided by Section 4 of the Securities Act of 1933.
See Note 13 to the Financial Statements regarding warrant issued to BCA Mezzanine Fund LP and the restricted nature of any shares issued upon its exercise.
Item 4. Submission of Matters to a Vote of Security Holders
| (a) | The Annual Meeting of Shareholders was held on December 15, 2010 (the “Annual Meeting”). |
| (c) | At the Annual Meeting, the Company’s shareholders voted in favor of re-electing management’s nominees for election as directors of the Company as follows: |
| | For | Against |
| Harold K. Fletcher | 1,636,996 | 35,240 |
| George J. Leon | 1,672,036 | 200 |
| Jeff C. O’Hara | 1,618,996 | 53,240 |
| Robert A. Rice | 1,672,036 | 200 |
| Robert H. Walker | 1,672,036 | 200 |
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Item 4. Submission of Matters to a Vote of Security Holders (continued)
The shareholders also voted 1,672,036 shares in favor of ratifying the audit committee’s appointment of BDO USA, LLP, as the Company’s independent registered public accountants for the fiscal year ending March 31, 2011. Shareholders owning 200 shares voted against this proposal.
The shareholders also ratified the of action of Board of Directors to agree to grant BCA Mezzanine Fund LP limited preemptive rights with respect to shares of common stock to be issued to BCA upon its exercise of the warrant. The vote was 1,608,496 shares in favor with 63,740 shares voted against this proposal.
The shareholders also voted in favor of amending our certificate of incorporation to provide that shares of common stock issued upon exercise of the warrant granted to BCA have preemptive rights, but shall be designated Series A common stock and no other shares of common stock shall have preemptive rights. The vote was 1,608,496 shares in favor with 63,740 shares voted against this proposal.
Item 5. Other Information
The Company filed a restated certificate of incorporation with the state of New Jersey reflecting the shareholders vote in the last paragraph 4(c) above.
Item 6. Exhibits
Exhibits
31.1 Certification by CEO pursuant to Rule 15d-14 under the Securities Exchange Act.
31.2 Certification by CFO pursuant to Rule 15d-14 under the Securities Exchange Act.
32.1 Certification by CEO and CFO pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
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SIGNATURES
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
TEL-INSTRUMENT ELECTRONICS CORP.
Date: November 12, 2010February 14, 2011 By:&# 160; /s/ Harold K. FletcherJeffrey C. O’Hara
Harold K. FletcherJeffrey C. O’Hara
CEO
Date: November 12, 2010February 14, 2011 By:&# 160; /s/ Joseph P. Macaluso
Joseph P. Macaluso
Principal Accounting Officer
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