UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q10-Q/A
Qx QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: December 31,June 30, 2011
¨TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number: 001-3199033-18978
TEL-INSTRUMENT ELECTRONICS CORP.
(Exact name of registrant as specified in its charter)
| New Jersey | | 22-1441806 |
(State or other jurisdiction of incorporation or organization)incorporation) | | (I.R.S. Employer Identification No.)
ID Number |
(Exact name of registrant as specified in its charter)
One Branca Road728 Garden Street, Carlstadt, New Jersey | | East Rutherford, NJ 0707307072 |
(Address of principal executive offices)Principal Executive Offices) | | |
(201) 933-1600 |
(Registrant’s telephone number, including area code) |
Registrant’s Telephone No. including Area Code: 201-933-1600
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12 months, and (2) has been subject to such filing requirements for the past 90 days. Yes ý No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files. Yes ý No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act:
| Large accelerated filer | ¨ | | Accelerated filer | ¨ |
| | | | | |
| Non-accelerated filer | ¨ | | Smaller reporting company | ý |
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files. Yes ý No ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ¨ No ý
As
Indicate the number of February 10, 2012, there were 2,683,715 shares outstanding of the registrant’sissuer's common stock.stock, as of the latest practical date: 2,648,215 shares of Common stock, $.10 par value as of August 17, 2011.
TEL-INSTRUMENT ELECTRONICS CORPORATIONEXPLANATORY NOTE
In connection with the preparation of the Company‘s financial statements for the period ended March 31, 2012, the Company re-evaluated certain accounting policies and procedures relating to taxes and determined that it had not properly accounted for a change in the New Jersey tax law N.J.S.A. 54:10A. Such change lowered the Company’s New Jersey tax rate, resulting in lowering the carrying value of the New Jersey net deferred tax assets and increasing the tax provision by $256,644. The restatement did not cause the Company to lose any future benefit, and the result is such that the Company will have lower New Jersey tax expenses in the future.
It was determined that the New Jersey tax law change was effective for the Company’s first quarter of fiscal year 2012 ended June 30, 2011. These accounting corrections had no impact on the Company’s income before tax and solely affect the Company’s net income (loss), basic income (loss) per share and diluted income (loss) per share for the quarter ended June 30, 2011. The adjustment is a non-cash item and does not affect the Company’s operating activities or cash flows from operations.
No other changes have been made. For more current information regarding the Company, readers should refer to the more recent reports filed by the Company with the Securities and Exchange Commission.
TEL-INSTRUMENT ELECTRONICS CORPORATION TABLE OF CONTENTS
PARTPart I – FINANCIAL INFORMATIONFinancial Information | |
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PARTPart II – OTHER INFORMATIONOther Information | |
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Item 1A. | | 23 24 |
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Item 3. | | 23 |
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Item 5. | | 2324 |
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PART I – FINANCIAL INFORMATION
Item 1.1 - Financial Statements.Statements
TEL-INSTRUMENTTEL-INSTRUMENT ELECTRONICS CORPORATION | |
| RESTATED CONDENSED CONSOLIDATED BALANCE SHEETS | |
| | | | | | | |
| | | June 30, 2011 | | | March 31, 2011 | |
| | | (unaudited) | | | | |
| ASSETS | | | | | | |
| | | | | | | |
| Current assets: | | | | | | |
| Cash and cash equivalents | | $ | 715,323 | | | $ | 123,955 | |
| Accounts receivable, net | | | 1,714,744 | | | | 2,585,619 | |
| Unbilled government receivables | | | 1,466,623 | | | | 1,466,623 | |
| Inventories, net | | | 2,520,492 | | | | 2,970,378 | |
| Prepaid expenses and other | | | 101,241 | | | | 70,970 | |
| Deferred debt expense | | | 108,321 | | | | 108,321 | |
| Deferred income tax asset | | | 849,158 | | | | 1,131,175 | |
| Total current assets | | | 7,475,902 | | | | 8,457,041 | |
| | | | | | | | | |
| Equipment and leasehold improvements, net | | | 300,813 | | | | 330,694 | |
| Deferred debt expenses – long-term | | | 346,025 | | | | 373,105 | |
| Deferred income tax asset – non-current | | | 1,461,664 | | | | 1,461,664 | |
| Other assets | | | 52,886 | | | | 35,235 | |
| Total assets | | $ | 9,637,290 | | | $ | 10,657,739 | |
| | | | | | | | | |
| LIABILITIES & STOCKHOLDERS’ EQUITY | | | | | | | | |
| | | | | | | | | |
| Current liabilities: | | | | | | | | |
| Current portion long-term debt | | | 367,859 | | | | 282,798 | |
| Capital lease obligations | | | 7,353 | | | | 15,685 | |
| Accounts payable | | | 730,260 | | | | 1,598,679 | |
| Progress billings | | | - | | | | 424,202 | |
| Deferred revenues – current portion | | | 18,450 | | | | 28,382 | |
| Accrued payroll, vacation pay and payroll taxes | | | 444,357 | | | | 445,738 | |
| Accrued expenses | | | 1,451,387 | | | | 1,287,034 | |
| Total current liabilities | | | 3,019,666 | | | | 4,082,518 | |
| | | | | | | | | |
| Subordinated notes payable-related parties, net of debt discount | | | 250,000 | | | | 250,000 | |
| Deferred revenues | | | 12,037 | | | | 15,381 | |
| Warranty Liability | | | 534,723 | | | | 366,137 | |
| Long-term debt, net of debt discount | | | 1,907,449 | | | | 1,979,114 | |
| Total liabilities | | | 5,723,875 | | | | 6,693,150 | |
| | | | | | | | | |
| Commitments | | | | | | | | |
| | | | | | | | | |
| Stockholders' equity: | | | | | | | | |
Common stock, par value $.10 per share, 2,648,215 and 2,646,215 issued and outstanding as of June 30, 2011 and March 31, 2011, respectively | | | 264,821 | | | | 264,621 | |
| Additional paid-in capital | | | 5,740,952 | | | | 5,711,531 | |
| Accumulated deficit | | | (2,092,358 | ) | | | (2,011,563 | ) |
| Total stockholders' equity | | | 3,913,415 | | | | 3,964,589 | |
| Total liabilities and stockholders' equity | | $ | 9,637,290 | | | $ | 10,657,739 | |
See accompanying notes to restated condensed consolidated financial statements.
TEL-INSTRUMENT ELECTRONICS CORPORATIONCONDENSED CONSOLIDATED BALANCE SHEETS
|
| RESTATED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS |
| (Unaudited) |
| | | December 31, 2011 | | | March 31, 2011 | |
| | | (unaudited) | | | | |
| ASSETS | | | | | | |
| | | | | | | |
| Current assets: | | | | | | |
| Cash and cash equivalents | | $ | 640,170 | | | $ | 123,955 | |
| Accounts receivable, net | | | 1,769,817 | | | | 2,585,619 | |
| Unbilled government receivables | | | 1,466,623 | | | | 1,466,623 | |
| Inventories, net | | | 3,785,971 | | | | 2,970,378 | |
| Prepaid expenses and other | | | 137,542 | | | | 70,970 | |
| Deferred debt expense | | | 108,321 | | | | 108,321 | |
| Deferred income tax asset | | | 1,126,247 | | | | 1,131,175 | |
| Total current assets | | | 9,034,691 | | | | 8,457,041 | |
| | | | | | | | | |
| Equipment and leasehold improvements, net | | | 617,213 | | | | 330,694 | |
| Deferred debt expenses – long-term | | | 291,865 | | | | 373,105 | |
| Deferred income tax asset – non-current | | | 1,461,664 | | | | 1,461,664 | |
| Other assets | | | 56,872 | | | | 35,235 | |
| Total assets | | $ | 11,462,305 | | | $ | 10,657,739 | |
| | | | | | | | | |
| LIABILITIES & STOCKHOLDERS’ EQUITY | | | | | | | | |
| | | | | | | | | |
| Current liabilities: | | | | | | | | |
| Current portion long-term debt | | | 522,959 | | | | 282,798 | |
| Capital lease obligations | | | 62,397 | | | | 15,685 | |
| Accounts payable | | | 1,996,916 | | | | 1,598,679 | |
| Progress billings | | | - | | | | 424,202 | |
| Deferred revenues – current portion | | | 19,985 | | | | 28,382 | |
| Accrued payroll, vacation pay and payroll taxes | | | 410,865 | | | | 445,738 | |
| Accrued expenses | | | 1,674,819 | | | | 1,287,034 | |
| Total current liabilities | | | 4,687,941 | | | | 4,082,518 | |
| | | | | | | | | |
| Subordinated notes payable-related parties | | | 250,000 | | | | 250,000 | |
| Capital lease obligations – long-term | | | 166,727 | | | | - | |
| Deferred revenues | | | 6,342 | | | | 15,381 | |
| Warranty Liability | | | 299,399 | | | | 366,137 | |
| Long-term debt, net of debt discount | | | 1,620,638 | | | | 1,979,114 | |
| Total liabilities | | | 7,031,047 | | | | 6,693,150 | |
| | | | | | | | | |
| Commitments | | | | | | | | |
| | | | | | | | | |
| Stockholders' equity: | | | | | | | | |
Common stock, par value $.10 per share, 2,652,815 and 2,646,215 issued and outstanding as of December 31, 2011 and March 31, 2011, respectively | | | 265,281 | | | | 264,621 | |
| Additional paid-in capital | | | 5,800,944 | | | | 5,711,531 | |
| Accumulated deficit | | | (1,634,967 | ) | | | (2,011,563 | ) |
| Total stockholders' equity | | | 4,431,258 | | | | 3,964,589 | |
| Total liabilities and stockholders' equity | | $ | 11,462,305 | | | $ | 10,657,739 | |
| | | | | | | | | |
| | | Three Months Ended | |
| | | June 30, 2011 | | | June 30, 2010 | |
| | | | | | | |
| Net sales | | $ | 3,990,211 | | | $ | 2,455,280 | |
| Cost of sales | | | 2,128,580 | | | | 1,372,900 | |
| | | | | | | | | |
| Gross margin | | | 1,861,631 | | | | 1,082,380 | |
| | | | | | | | | |
| Operating expenses: | | | | | | | | |
| Selling, general and administrative | | | 798,822 | | | | 758,044 | |
| Engineering, research and development | | | 849,038 | | | | 757,346 | |
| Total operating expenses | | | 1,647,860 | | | | 1,515,390 | |
| | | | | | | | | |
| Income (loss) from operations | | | 213,771 | | | | (433,010 | ) |
| | | | | | | | | |
| Other income (expense): | | | | | | | | |
| Amortization of debt discount | | | (13,395 | ) | | | (5,769 | ) |
| Amortization of debt expense | | | (27,080 | ) | | | - | |
| Change in fair value of common stock warrants | | | (168,586 | ) | | | - | |
| Gain on sale of capital asset | | | - | | | | 3,600 | |
| Proceeds from life insurance policy | | | 300,029 | | | | - | |
| Interest income | | | 93 | | | | 47 | |
| Interest expense | | | (102,694 | ) | | | (23,505 | ) |
| | | | | | | | | |
| Income (loss) before income taxes | | | 202,138 | | | | (458,637 | ) |
| | | | | | | | | |
| Income tax provision (benefit) | | | 282,933 | | | | (183,225 | ) |
| | | | | | | | | |
| Net loss | | $ | (80,795 | ) | | $ | (275,412 | ) |
| | | | | | | | | |
| Net loss per share: | | | | | | | | |
| Basic loss per common share | | $ | (0.03 | ) | | $ | (0.11 | ) |
| Diluted loss per common share | | $ | (0.03 | ) | | $ | (0.11 | ) |
| | | | | | | | | |
| Weighted average shares outstanding: | | | | | | | | |
| Basic | | | 2,647,138 | | | | 2,615,625 | |
| Diluted | | | 2,647,138 | | | | 2,615,625 | |
See accompanying notes to restated condensed consolidated financial statements.
| TEL-INSTRUMENT ELECTRONICS CORPORATION | |
| RESTATED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS | |
| (Unaudited) | |
| | | | |
| | | Three Months ended | |
| | | June 30, 2011 | | | June 30, 2010 | |
| Cash flows from operating activities: | | | | | | |
| Net income (loss) | | $ | (80,795 | ) | | $ | (275,412 | ) |
Adjustments to reconcile net loss to net cash used in operating activities: | | | | | | | | |
| Deferred income taxes | | | 282,017 | | | | (185,940 | ) |
| Depreciation and amortization | | | 56,961 | | | | 42,310 | |
| Provision for inventory obsolescence | | | 10,000 | | | | - | |
| Gain on sale of asset | | | - | | | | (3,600 | ) |
| Amortization of debt discount | | | 13,396 | | | | 5,769 | |
| Increase in cash surrender value of life insurance | | | 2,011 | | | | - | |
| Gain on proceeds from life insurance policy | | | (300,029 | ) | | | - | |
| Change in fair value of common stock warrant | | | 168,586 | | | | - | |
| Non-cash stock-based compensation | | | 24,231 | | | | 23,665 | |
| | | | | | | | | |
| Changes in assets and liabilities: | | | | | | | | |
| Decrease in accounts receivable | | | 870,875 | | | | 96,358 | |
| Decrease (increase) in inventories | | | 439,886 | | | | (119,697 | ) |
| Increase in prepaid expenses & other | | | (3,569 | ) | | | (2,789 | ) |
| Increase in other assets | | | (32,316 | ) | | | (20,278 | ) |
| Decrease in accounts payable | | | (868,419 | ) | | | (12,501 | ) |
(Decrease) increase in accrued payroll, vacation pay and payroll taxes | | | (1,381 | ) | | | 65,486 | |
| Decrease in deferred revenues | | | (13,276 | ) | | | (22,378 | ) |
| (Decrease) increase in progress billings | | | (424,202 | ) | | | 450,694 | |
| Increase (decrease) in accrued expenses | | | 164,353 | | | | (133,095 | ) |
| Net cash provided by (used in) operating activities | | | 308,329 | | | | (91,408 | ) |
| | | | | | | | | |
| Cash flows from investing activities: | | | | | | | | |
| Proceeds from the sale of capital asset | | | - | | | | 3,600 | |
| Purchases of equipment | | | - | | | | (86,801 | ) |
| Net cash used in investing activities | | | - | | | | (83,201 | ) |
| | | | | | | | | |
| Cash flows from financing activities: | | | | | | | | |
| Proceeds from the exercise of stock options | | | 5,390 | | | | 6,075 | |
| Repayment of capitalized lease obligations | | | (8,332 | ) | | | - | |
| Proceeds from borrowings from line of credit | | | - | | | | 150,000 | |
| Proceeds from life insurance policy | | | 285,981 | | | | - | |
| Net cash provided by financing activities | | | 283,039 | | | | 156,075 | |
| | | | | | | | | |
| Net increase (decrease) in cash and cash equivalents | | | 591,368 | | | | (18,534 | ) |
| Cash and cash equivalents at beginning of period | | | 123,955 | | | | 173,048 | |
| Cash and cash equivalents at end of period | | $ | 715,323 | | | $ | 154,514 | |
| | | | | | | | | |
| Taxes paid | | $ | - | | | $ | - | |
| Interest paid | | $ | 87,192 | | | $ | 9,269 | |
| | | | | | | | | |
See accompanying notes to restated condensed consolidated financial statements.
TEL-INSTRUMENTTEL-INSTRUMENT ELECTRONICS CORPORATIONCONDENSED CONSOLIDATED STATEMENTS OF OPERATIONSCORP.| | | Three Months Ended | | | Nine Months Ended | |
| | | December 31, 2011 | | | December 31, 2010 | | | December 31, 2011 | | | December 31, 2010 | |
| | | | | | | | | | | | | |
| Net sales | | $ | 3,673,235 | | | $ | 4,261,222 | | | $ | 11,337,800 | | | $ | 9,772,435 | |
| Cost of sales | | | 2,227,856 | | | | 2,395,206 | | | | 6,547,563 | | | | 5,354,804 | |
| | | | | | | | | | | | | | | | | |
| Gross margin | | | 1,445,379 | | | | 1,866,016 | | | | 4,790,237 | | | | 4,417,631 | |
| | | | | | | | | | | | | | | | | |
| Operating expenses: | | | | | | | | | | | | | | | | |
| Selling, general and administrative | | | 724,636 | | | | 686,380 | | | | 2,191,332 | | | | 2,137,055 | |
| Engineering, research and development | | | 633,136 | | | | 767,366 | | | | 2,160,107 | | | | 2,385,802 | |
| Total operating expenses | | | 1,357,772 | | | | 1,453,746 | | | | 4,351,439 | | | | 4,522,857 | |
| | | | | | | | | | | | | | | | | |
| Income (loss) from operations | | | 87,607 | | | | 412,270 | | | | 438,798 | | | | (105,226 | ) |
| | | | | | | | | | | | | | | | | |
| Other income (expense): | | | | | | | | | | | | | | | | |
| Amortization of debt discount | | | (13,386 | ) | | | (19,164 | ) | | | (40,177 | ) | | | (33,678 | ) |
| Amortization of debt expense | | | (27,081 | ) | | | (27,080 | ) | | | (81,241 | ) | | | (33,098 | ) |
| Change in fair value of common stock warrants | | | 130,433 | | | | (129,684 | ) | | | 66,738 | | | | (129,684 | ) |
| Gain on sale of capital asset | | | 500 | | | | - | | | | 500 | | | | 3,600 | |
| Proceeds from life insurance policy | | | - | | | | - | | | | 300,029 | | | | - | |
| Interest income | | | 224 | | | | 71 | | | | 418 | | | | 219 | |
| Interest expense | | | (103,155 | ) | | | (102,016 | ) | | | (302,265 | ) | | | (172,715 | ) |
| Total other expense | | | (12,465 | ) | | | (277,873 | ) | | | (55,998 | ) | | | (365,356 | ) |
| | | | | | | | | | | | | | | | | |
| Income (loss) before income taxes | | | 75,142 | | | | 134,397 | | | | 382,800 | | | | (470,582 | ) |
| | | | | | | | | | | | | | | | | |
| Income tax expense (benefit) | | | (22,289 | ) | | | 105,385 | | | | 6,204 | | | | (136,188 | ) |
| | | | | | | | | | | | | | | | | |
| Net income (loss) | | | 97,431 | | | | 29,012 | | | | 376,596 | | | | (334,394 | ) |
| | | | | | | | | | | | | | | | | |
| Basic income (loss) per common share | | $ | 0.04 | | | $ | 0.01 | | | $ | 0.14 | | | $ | (0.13 | ) |
| Diluted income (loss) per common share | | $ | 0.04 | | | $ | 0.01 | | | $ | 0.14 | | | $ | (0.13 | ) |
| | | | | | | | | | | | | | | | | |
| Weighted average shares outstanding: | | | | | | | | | | | | | | | | |
| Basic | | | 2,652,864 | | | | 2,626,149 | | | | 2,650,032 | | | | 2,621,417 | |
| Diluted | | | 2,706,078 | | | | 2,642,747 | | | | 2,718,720 | | | | 2,621,417 | |
See accompanying notes to condensed consolidated financial statements.
TEL-INSTRUMENT ELECTRONICS CORPORATIONCONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS(Unaudited)
| | | Nine Months ended |
| | | December 31, 2011 | | | December 31, 2010 |
| Cash flows from operating activities: | | | | | |
| Net income (loss) | | $ | 376,596 | | | $ | (334,394 | ) |
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: | | | | | | | | |
| Deferred income taxes | | | 4,928 | | | | (138,903 | ) |
| Depreciation and amortization | | | 117,376 | | | | 135,293 | |
| Allowance for bad debts | | | (1,200 | ) | | | - | |
| Provision for inventory obsolescence | | | 1,971 | | | | - | |
| Gain on sale of asset | | | (500 | ) | | | (3,600 | ) |
| Amortization of debt discount | | | 40,177 | | | | 33,678 | |
| Amortization of debt expense | | | 81,241 | | | | 33,098 | |
| Increase in cash surrender value of life insurance | | | 2,011 | | | | - | |
| Gain on proceeds from life insurance policy | | | (300,029 | ) | | | - | |
| Change in fair value of common stock warrant | | | (66,738 | ) | | | 129,684 | |
| Non-cash stock-based compensation | | | 68,324 | | | | 75,771 | |
| | | | | | | | | |
| Changes in assets and liabilities: | | | | | | | | |
| Decrease (increase) in accounts receivable | | | 817,002 | | | | (675,089 | ) |
| Decrease in unbilled government receivables | | | - | | | | 821 | |
| Increase in inventories | | | (817,564 | ) | | | (1,086,742 | ) |
| (Increase) decrease in prepaid expenses & other | | | (66,572 | ) | | | 14,719 | |
| (Increase) decrease in other assets | | | (36,302 | ) | | | 11,056 | |
| Increase in accounts payable | | | 398,237 | | | | 740,385 | |
| (Decrease) increase in accrued payroll, vacation pay & withholdings | | | (34,873 | ) | | | 45,458 | |
| Decrease in deferred revenues | | | (17,436 | ) | | | (30,668 | ) |
| Decrease increase in progress billings | | | (424,202 | ) | | | (69,412 | ) |
| Increase in accrued expenses | | | 387,785 | | | | 52,942 | |
| Net cash provided by (used in) operating activities | | | 530,232 | | | | (1,065,903 | ) |
| | | | | | | | | |
| Cash flows from investing activities: | | | | | | | | |
| Proceeds from the sale of capital asset | | | 500 | | | | 3,600 | |
| Purchases of equipment | | | (149,161 | ) | | | (106,070 | ) |
| Net cash used in investing activities | | | (148,661 | ) | | | (102,470 | ) |
| | | | | | | | | |
| Cash flows from financing activities: | | | | | | | | |
| Proceeds from the issuance of common stock | | | - | | | | 50,000 | |
| Proceeds from the exercise of stock options | | | 21,749 | | | | 15,315 | |
| Proceeds from long-term debt | | | - | | | | 2,500,000 | |
| Expenses associated with long-term debt | | | - | | | | (527,796 | ) |
| Repayment of long-term debt | | | (158,493 | ) | | | - | |
| Repayment of capitalized lease obligations | | | (41,295 | ) | | | (2,108 | ) |
| Proceeds from borrowings from line of credit | | | - | | | | 400,000 | |
| Repayment of line of credit | | | - | | | | (1,000,000 | ) |
| Proceeds from life insurance policy | | | 312,683 | | | | - | |
| Net cash provided by financing activities | | | 134,644 | | | | 1,435,411 | |
| | | | | | | | | |
| Net increase in cash and cash equivalents | | | 516,215 | | | | 267,038 | |
| Cash and cash equivalents at beginning of period | | | 123,955 | | | | 173,048 | |
| Cash and cash equivalents at end of period | | $ | 640,170 | | | $ | 440,086 | |
| Taxes paid | | $ | - | | | $ | - | |
| Interest paid | | $ | 269,131 | | | $ | 136,408 | |
| Capitalized lease obligations | | $ | 254,734 | | | $ | 26,387 | |
| | | | | | | | | |
See accompanying notes to condensed consolidated financial statements
TEL-INSTRUMENT ELECTRONICS CORP.
NOTES TO RESTATED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1 – Basis of Presentation
In the opinion of management, the accompanying unaudited restated condensed consolidated financial statements contain all adjustments necessary to present fairly the financial position of Tel-Instrument Electronics Corp. as of December 31,June 30, 2011, the results of operations for the three and nine months ended December 31,June 30, 2011 and December 31,June 30, 2010, and statements of cash flows for the ninethree months ended December 31,June 30, 2011 and December 31,June 30, 2010. These results are not necessarily indicative of the results to be expected for the full year.
The financial statements have been prepared in accordance with the requirements of Form 10-Q and consequently do not include disclosures normally made in an Annual Report on Form 10-K. The March 31, 2011 balance sheet included herein was derived from the audited financial statements included in the Company’s annual report on Form 10-K as of that date. Accordingly, the financial statements included herein should be reviewed in conjunction with the financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended March 31, 2011.
Note 2 – | Note 2 | Revenue Recognition – Percentage-of-Completion – ITATS (“Intermediate Level TACAN Test Set”) (AN/ARM-206) |
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 estimate of total costs at completion. The ratio of costs incurred to date to the 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 adjustments 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. These progress payments are applied to Unbilled Government Receivables resulting from revenues recognized under percentage-of-completion accounting. There have been no progress billings or revenues recognized during the nine months ended December 31, 2011.
In July 2011, the Company secured a $599,000$599k contract modification from the U.S. Navy to incorporate product enhancements to the ITATS AN/ARM-206 TACAN test set resulting from Navy technical evaluation testing. These changes, and the required product verification testing, are expected to be completed by mid-year 2012.take an estimated nine to 12 months to complete. This additional funding will not have a material bottom line impact as most of the engineering work for this contract will be sub-contracted to DRS Sustainment Systems located in St. Louis, MO.Louis. Production deliveries of the 102 ITATS units are now expected to begin in the second halfmiddle of the 2012next calendar yearyear. (See Critical Accounting Policies – Revenue Recognition). These progress payments are applied to Unbilled Government Receivables resulting from revenues recognized under percentage-of-completion accounting.
Note 3 – Accounts Receivable, net
The following table sets forth the components of accounts receivable:
| | | December 31, 2011 | | | March 31, 2011 | | | June 30, 2011 | | | March 31, 2011 | |
| Government | | $ | 1,452,902 | | | $ | 2,344,438 | | | $ | 1,281,152 | | | $ | 2,344,438 | |
| Commercial | | | 352,385 | | | | 277,851 | | | | 470,262 | | | | 277,851 | |
| Less: Allowance for doubtful accounts | | | (35,470 | ) | | | (36,670 | ) | | | (36,670 | ) | | | (36,670 | ) |
| | | $ | 1,769,817 | | | $ | 2,585,619 | | | $ | 1,714,744 | | | $ | 2,585,619 | |
TEL-INSTRUMENT ELECTRONICS CORP.
NOTES TO RESTATED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
Note 4 –Inventories,Inventories, net
Inventories consist of:
| | | December 31, 2011 | | | March 31, 2011 | | | June 30, 2011 | | | March 31, 2011 | |
| | | | | | | | | | | | | |
| Purchased parts | | $ | 2,498,245 | | | $ | 2,119,957 | | | $ | 1,693,513 | | | $ | 2,119,957 | |
| Work-in-process | | | 1,369,246 | | | | 1,184,812 | | | | 1,224,968 | | | | 1,184,812 | |
| Finished goods | | | 98,480 | | | | 110,609 | | | | 57,011 | | | | 110,609 | |
| Less: Inventory reserve | | | (180,000 | )) | | | (445,000 | )) | | | (455,000 | ) | | | (445,000 | ) |
| | | | | | | | | | | $ | 2,520,492 | | | $ | 2,970,378 | |
| | | $ | 3,785,971 | | | $ | 2,970,378 | | |
Note 5 – IncomeEarnings (Loss) Per Share
Financial Accounting Standards Board (“FASB”) ASC 260 requires presentation of basic earnings per share (“("basic EPS”EPS") and diluted earnings per share (“("diluted EPS”EPS").
The Company’s basic income (loss) per common share is based on net income (loss) for the relevant period, divided by the weighted average number of common shares outstanding during the period. Diluted income (loss) per common share is based on net income (loss), divided by the weighted average number of common shares outstanding during the period, including common share equivalents, such as outstanding stock options. Diluted loss per share for the nine monthsperiods ended December 31,June 30, 2011 and 2010 doesdo not include common stock equivalents, as these stock equivalents would be anti-dilutive.
| | | Three Months Ended | | | Three Months Ended | |
| | | December 31, 2011 | | | December 31, 2010 | |
| Basic net income per share computation: | | | | | | |
| Net income (loss) attributable to common stockholders | | $ | 97,431 | | | $ | 29,012 | |
| Weighted-average common shares outstanding | | | 2,652,864 | | | | 2,626,149 | |
| Basic net income per share attributable to common stockholders | | $ | 0.04 | | | $ | 0.01 | |
| Diluted net income per share computation | | | | | | | | |
| Net income attributable to common stockholders | | $ | 97,431 | | | $ | 29,012 | |
| Weighted-average common shares outstanding | | | 2,652,864 | | | | 2,626,149 | |
| Incremental shares attributable to the assumed exercise of outstanding stock options | | | 53,214 | | | | 16,598 | |
| Total adjusted weighted-average shares | | | 2,706,078 | | | | 2,642,747 | |
| Diluted net income per share attributable to common stockholders | | $ | 0.04 | | | $ | 0.01 | |
| | | Three Months Ended | | | Three Months Ended | |
| | | June 30, 2011 | | | June 30, 2010 | |
| Basic net loss per share computation: | | | | | | | | |
| Net loss attributable to common stockholders | | $ | (80,795 | ) | | $ | (275,412 | ) |
| Weighted-average common shares outstanding | | | 2,647,138 | | | | 2,615,625 | |
| Basic net loss per share attributable to common stockholders | | $ | (0.03 | ) | | $ | (0.11 | ) |
| Diluted net loss per share computation | | | | | | | | |
| Net loss attributable to common stockholders | | $ | (80,795 | ) | | $ | (275,412 | ) |
| Weighted-average common shares outstanding | | | 2,647,138 | | | | 2,615,625 | |
| Incremental shares attributable to the assumed exercise of outstanding stock options | | | - | | | | - | |
| Total adjusted weighted-average shares | | | 2,647,138 | | | | 2,615,625 | |
| Diluted net income (loss) per share attributable to common stockholders | | $ | (0.03 | ) | | $ | (0.11 | ) |
TEL-INSTRUMENT ELECTRONICS CORP.
NOTES TO RESTATED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
Note 5 – Income (Loss) Per Share (Continued)
| | | Nine Months Ended | | | Nine Months Ended | |
| | | December 31, 2011 | | | December 31, 2010 | |
| | | | | | | |
| | | | | | | |
| Basic net income (loss) per share computation: | | | | | | |
| Net income (loss) attributable to common stockholders | | $ | 376,596 | | | $ | (334,394 | ) |
| Weighted-average common shares outstanding | | | 2,650,032 | | | | 2,621,417 | |
| Basic net income (loss) per share attributable to common stockholders | | $ | 0.14 | | | $ | (0.13 | ) |
| Diluted net income (loss) per share computation | | | | | | | | |
| Net income (loss) attributable to common stockholders | | $ | $376,596 | | | $ | (334,394 | ) |
| Weighted-average common shares outstanding | | | 2,650,032 | | | | 2,621,417 | |
| Incremental shares attributable to the assumed exercise of outstanding stock options | | | 68,688 | | | | - | |
| Total adjusted weighted-average shares | | | 2,718,720 | | | | 2,621,417 | |
| Diluted net income (loss) per share attributable to common stockholders | | $ | 0.14 | | | $ | (0.13 | ) |
Note 6 – Long-Term Debt
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 arewill be amortized over the term of the loan. The features of the note are as follows:
The features of the note are as follows:
(1)1. | The Note has a term of five (5) years with an annual interest rate of 14% on the outstanding principal amount. Payments for the first year wereare interest only and amountedamount to $28,762 monthly. In September 2011,monthly and after the first year the Company began makingwill make monthly payments of approximately $69,000 for interest and principal for the remaining term of the loan. |
(2)2. | The Company issued BCA a nine-year warrant for 136,090 shares, based upon 4.5% of the fully-dilutedfully –diluted outstanding shares of the Company’s common stock exercisable at $6.70 per share, the average closing price of the common stock over the three days preceding the loan closing on the NYSE-Amex Exchange. In the event of specific major corporate events or the maturity of the five-year loan, BCA can require the Company to purchase the warrant and warrant shares at the higher of the then Exchange market price less the share exercise price, in the case of the purchase of the warrant, or five times operating income per share. In connection with the warrant issued in conjunction with this debt, the Company recorded a debt discount (see above) and warrant liability, which is being marked to fair value at the end of each period (see Note 10 to Notes to the Restated Condensed Consolidated Financial Statements). The debt discount is to be amortized over the life of the loan. |
3.Loan provisions also contain customary representations and warranties.
(3) | Loan provisions also contain customary representations and warranties. |
(4)4. | BCA has a lien on all of the Company’s assets. In February 2011, BCA agreed to release part of its lien on Company assets to the U.S. Government to allow for progress billings up to $1,000,000. |
TEL-INSTRUMENT ELECTRONICS CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 6 – Long-Term Debt (Continued)
(5)5. | The Company may prepay a portion of the principal amount provided that (i) any such prepayment shall be applied in the inverse order of the maturity of the principal amount of the Note, (ii) the Company shall pay to BCA an additional amount equal to (A) 3% of the outstanding principal amount being prepaid if such prepayment is made during the first loan year, and (B) 2% of the outstanding principal amount then being prepaid if such prepayment is being made during the second loan year. Each payment must be not less than $25,000 or multiples of $25,000 in excess thereof. |
TEL-INSTRUMENT ELECTRONICS CORP.
NOTES TO RESTATED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
Note 6 Long-Term Debt (continued)
(6)6. | Upon the occurrence of a Change of Control (as defined in the Agreement) or within five (5) Business Days of an O’Hara Life Insurance Realization Event, (as defined in the Agreement), the Company shall, in each case at the election of BCA, prepay by wire transfer the entire outstanding principal amount of the Note in accordance with the redemption prices (the “Mandatory Redemption Prices”) set forth below (expressed as a percentage of the outstanding principal amount being prepaid and shall pay 103% in the first loan year, 102% in the second loan year, and 100% thereafter), together with (x) Interest, if any, accrued and unpaid on the outstanding principal amount of the Note so prepaid through the date of such prepayment, (y) all reasonable out-of-pocket costs and expenses (including reasonable fees, charges and disbursements of counsel), if any, associated with such prepayment, and (z) all other costs, expenses and indemnities then payable under this Agreement (such amounts, collectively the “Mandatory Redemption Payment”). If a Change of Control or O’Hara Life Insurance Realization Event shall occur during any Loan Year set forth below, the Mandatory Redemption Price shall be determined based upon the percentage indicated above for such Loan Year multiplied by the principal amount which is being prepaid. At the election of BCA, all or any portion of the Mandatory Redemption Payment may be paid in the form of common stock of the Company in marketable conditionMarketable Securities in lieu of cash and to the extent available and to the extent not restricted by any SBIC Regulations. In the event BCA makes the election contemplated by the immediately preceding sentence, the Issuer shall issue to Purchaser that number of shares having an aggregate Current Market Price as of such issuance date equal to that portion of the Mandatory Redemption Payment subject to such election. |
(7)7. | The Note containssenior notes contain a number of affirmative and negative covenants which could restrict our operations. The BCA agreement contains a number of affirmative and negative covenants. For the quarter ended December 31, 2011, the Company was notWe were in compliance with threeall of our covenants related to maintaining agreed upon financial ratios for fixed charges, and debt service as well as a requirement for capital expenditures. However, the Company received a waiver from BCA on each of the above mentioned covenants.June 30, 2011. |
(8)8. | The Company and BCA have amended certain provisions to ease some restrictions. |
TEL-INSTRUMENT ELECTRONICS CORP.
NOTES TO RESTATED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
Note 7 – Stock Options
The Company adopted the FASB ASC 718, utilizing the modified prospective method. FASB ASC 718 requires the measurement of stock-based compensation based on the fair value of the award on the date of grant. Under the modified prospective method, the provisions of ASC 718 apply to all awards granted after the date of adoption. The Company recognizes compensation cost on awards on a straight-line basis over the vesting period, typically four years. As a result of adopting ASC 718, operations werewas charged $21,830$24,231 and $68,324$23,665 for three and nine months ended December 31,June 30, 2011 respectively, as compared to $26,743 and $75,771 for the three and nine months ended December 31, 2010, respectively. The Company estimates the fair value of each option using the Black Scholes option-pricing model with the following weighted-average assumptions: expected dividend yield of 0.0%, risk-free interest rate of 0.86%1.98% to 1.08%2.31%, volatility at 36.07%40.74% to 36.63%40.76% of the Company’s stock, and an expected life of 5 years for options granted for the ninethree months ended December 31, 2011; expected dividend yield of 0.0%, risk-free interest rate of 1.23% to 2.11%, volatility at 39.84% to 41.15%, and an expected life of 5 yearsJune 30, 2010. The Company did not grant any stock options for the ninethree months ended December 31, 2010.June 30, 2011. The Company estimates forfeiture rate based on historical data. Based on an analysis of historical information, the Company has applied a forfeiture rate of 8%.
TEL-INSTRUMENT ELECTRONICS CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 8 – 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 RESTATED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(continued)
(Unaudited)
Note 8 Segment Information (continued)
The table below presents information about reportable segments within the avionics business for the periods ending December 31,June 30, 2011 and 2010:
Three Months Ended December 31, 2011 | | Avionics Gov’t | | | Avionics Comm’l. | | | Avionics Total | | | Corporate Items | | | Total | | |
Three Months Ended June 30, 2011 | | | Avionics Gov’t | | | Avionics Comm’l. | | | Avionics Total | | | Corporate Items | | | Total | |
| Net sales | | $ | 3,163,220 | | | $ | 510,015 | | | $ | 3,673,235 | | | $ | - | | | $ | 3,673,235 | | | | 3,145,592 | | | | 844,619 | | | | 3,990,211 | | | | - | | | | 3,990,211 | |
| Cost of Sales | | | 1,841,826 | | | | 386,030 | | | | 2,227,856 | | | | - | | | | 2,227,856 | | | | 1,674,813 | | | | 453,767 | | | | 2,128,580 | | | | - | | | | 2,128,580 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Gross Margin | | | 1,321,394 | | | | 123,985 | | | | 1,445,379 | | | | - | | | | 1,445,379 | | | | 1,470,779 | | | | 390,852 | | | | 1,861,631 | | | | - | | | | 1,861,631 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Engineering, research, and Development | | | | | | | | | | | 633,136 | | | | - | | | | 633,136 | | |
| Engineering, research, and development | | | | | | | | | | | | 849,038 | | | | | | | | 849,038 | |
| Selling, general, and admin. | | | | | | | | | | | 358,388 | | | | 366,248 | | | | 724,636 | | | | | | | | | | | | 361,816 | | | | 437,006 | | | | 798,822 | |
| Amortization of debt discount | | | | | | | | | | | - | | | | 13,386 | | | | 13,386 | | | | | | | | | | | | - | | | | 13,395 | | | | 13,395 | |
| Amortization of debt expense | | | | | | | | | | | - | | | | 27,081 | | | | 27,081 | | | | | | | | | | | | - | | | | 27,080 | | | | 27,080 | |
| Change in fair value of common stock warrants | | | | | | | | | | | - | | | | (130,433 | ) | | | (130,433 | ) | | | | | | | | | | | - | | | | 168,586 | | | | 168,586 | |
| Proceeds from life insurance | | | | | | | | | | | | - | | | | (300,029 | ) | | | (300,029 | ) |
| Interest (income) expense, net | | | | | | | | | | | - | | | | 102,431 | | | | 102,431 | | | | | | | | | | | | - | | | | 102,601 | | | | 102,601 | |
| Total expenses | | | | | | | | | | | 991,524 | | | | 378,713 | | | | 1,370,237 | | | | | | | | | | | | 1,210,854 | | | | 448,639 | | | | 1,659,493 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Income (loss) before income taxes | | | | | | | | | | $ | 453,855 | | | $ | (378,713 | ) | | $ | 75,142 | | | | | | | | | | | $ | 650,777 | | | $ | (448,639 | ) | | $ | 202,138 | |
Three Months Ended December 31, 2010 | | Avionics Gov’t | | | Avionics Comm’l. | | | Avionics Total | | | Corporate Items | | | Total | | |
Three Months Ended June 30, 2010 | | | Avionics Gov’t | | | Avionics Comm’l. | | | Avionics Total | | | Corporate Items | | | Total | |
| Net sales | | $ | 3,696,348 | | | $ | 564,874 | | | $ | 4,261,222 | | | $ | - | | | $ | 4,261,222 | | | | 1,848,473 | | | $ | 606,807 | | | $ | 2,455,280 | | | $ | - | | | $ | 2,455,280 | |
| Cost of Sales | | | 2,087,951 | | | | 307,255 | | | | 2,395,206 | | | | - | | | | 2,395,206 | | | 940,672 | | | 432,228 | | | | 1,372,900 | | | | - | | | | 1,372,900 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Gross Margin | | | 1,608,397 | | | | 257,619 | | | | 1,866,016 | | | | - | | | | 1,866,016 | | | | 907,801 | | | | 174,579 | | | | 1,082,380 | | | | - | | | | 1,082,380 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Engineering, research, and Development | | | | | | | | | | | 767,366 | | | | - | | | | 767,366 | | |
Engineering, research, and development | | | | | | | | | | | | 757,346 | | | | - | | | | 757,346 | |
| Selling, general, and admin. | | | | | | | | | | | 364,957 | | | | 321,423 | | | | 686,380 | | | | | | | | | | | | 348,095 | | | | 409,949 | | | | 758,044 | |
| Amortization of debt discount | | | | | | | | | | | | | | | 19,164 | | | | 19,164 | | |
| Amortization of debt expense | | | | | | | | | | | | | | | 27,080 | | | | 27,080 | | |
| Change in fair value of common stock warrants | | | | | | | | | | | - | | | | 129,684 | | | | 129,684 | | |
| Interest (income) expense, net | | | | | | | | | | | - | | | | 101,945 | | | | 101,945 | | |
| Gain on sale of asset | | | | | | | | | | | | | | | | (3,600 | ) | | | (3,600 | ) |
| Interest (income) expense,net | | | | | | | | | | | | | | | | 29,227 | | | | 29,227 | |
| Total expenses | | | | | | | | | | | 1,132,323 | | | | 599,296 | | | | 1,731,619 | | | | | | | | | | | | 1,105,441 | | | | 435,576 | | | | 1,541,017 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Income (loss) before income taxes | | | | | | | | | | $ | 733,693 | | | $ | (599,296 | ) | | $ | 134,397 | | | | | | | | | | | $ | (23,061 | ) | | $ | (435,576 | ) | | $ | (458,637 | ) |
TEL-INSTRUMENT ELECTRONICS CORP.
NOTES TO RESTATED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
Note 8 – Segment Information (Continued)
Nine Months Ended December 31, 2011 | | Avionics Gov’t | | | Avionics Comm’l. | | | Avionics Total | | | Corporate Items | | | Total | |
| Net sales | | | 9,470,103 | | | | 1,867,697 | | | | 11,337,800 | | | | - | | | | 11,337,800 | |
| Cost of Sales | | | 5,342,873 | | | | 1,204,690 | | | | 6,547,563 | | | | - | | | | 6,547,563 | |
| | | | | | | | | | | | | | | | | | | | | |
| Gross Margin | | | 4,127,230 | | | | 663,007 | | | | 4,790,237 | | | | - | | | | 4,790,237 | |
| | | | | | | | | | | | | | | | | | | | | |
| Engineering, research, and Development | | | | | | | | | | | 2,160,107 | | | | - | | | | 2,160,107 | |
| Selling, general, and admin. | | | | | | | | | | | 1,046,231 | | | | 1,145,101 | | | | 2,191,332 | |
| Amortization of debt discount | | | | | | | | | | | - | | | | 40,177 | | | | 40,177 | |
| Amortization of debt expense | | | | | | | | | | | - | | | | 81,241 | | | | 81,241 | |
| Change in fair value of common stock warrants | | | | | | | | | | | - | | | | (66,738 | ) | | | (66,738 | ) |
| Proceeds from life insurance | | | | | | | | | | | - | | | | (300,029 | ) | | | (300,029 | ) |
| Interest (income) expense, net | | | | | | | | | | | - | | | | 301,347 | | | | 301,347 | |
| Total expenses | | | | | | | | | | | 3,206,338 | | | | 1,201,099 | | | | 4,407,437 | |
| | | | | | | | | | | | | | | | | | | | | |
| Income (loss) before income taxes | | | | | | | | | | $ | 1,583,899 | | | $ | (1,201,099 | ) | | $ | 382,800 | |
Nine Months Ended December 31, 2010 | | Avionics Gov’t | | | Avionics Comm’l. | | | Avionics Total | | | Corporate Items | | | Total | |
| Net sales | | $ | 7,942,668 | | | $ | 1,829,767 | | | $ | 9,772,435 | | | $ | - | | | $ | 9,772,435 | |
| Cost of Sales | | | 4,208,229 | | | | 1,146,575 | | | | 5,354,804 | | | | - | | | | 5,354,804 | |
| | | | | | | | | | | | | | | | | | | | | |
| Gross Margin | | | 3,374,439 | | | | 683,192 | | | | 4,417,631 | | | | - | | | | 4,417,631 | |
| | | | | | | | | | | | | | | | | | | | | |
| Engineering, research, and Development | | | | | | | | | | | 2,385,802 | | | | - | | | | 2,385,802 | |
| Selling, general, and admin. | | | | | | | | | | | 1,060,756 | | | $ | 1,076,299 | | | | 2,137,055 | |
| Gain on sale of asset | | | | | | | | | | | - | | | | (3,600 | ) | | | (3,600 | ) |
| Amortization of debt discount | | | | | | | | | | | | | | | 33,678 | | | | 33,678 | |
| Amortization of debt expense | | | | | | | | | | | | | | | 33,098 | | | | 33,098 | |
| Change in fair value of common stock warrants | | | | | | | | | | | - | | | | 129,684 | | | | 129,684 | |
| Interest (income) expense, net | | | | | | | | | | | - | | | | 172,496 | | | | 172,496 | |
| Total expenses | | | | | | | | | | | 3,446,558 | | | | 1,441,655 | | | | 4,888,213 | |
| | | | | | | | | | | | | | | | | | | | | |
| Income (loss) before income taxes | | | | | | | | | | $ | 971,073 | | | $ | (1,441,655 | ) | | $ | (470,582 | ) |
TEL-INSTRUMENT ELECTRONICS CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 9 – Income Taxes
The Company adopted FASB ASC 740-10, Accounting for Uncertainty in Income Taxes, effective April 1, 2007. ASC 740-10 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. The Company has analyzed filing positions in all of the federal and state jurisdictions where it is required to file income tax returns, as well as all open tax years in these jurisdictions. The Company does not have any unrecognized tax benefits.
The tax effect of temporary differences, primarily net operating loss carryforwards, asset reserves and accrued liabilities, gave rise to the Company’sCompany's deferred tax asset in the accompanying December 31,June 30, 2011 and March 31, 2011 consolidated balance sheets. Deferred income taxes are recognized for the tax consequence of such temporary differences at the enacted tax rate expected to be in effect when the differences reversereverse. (See Critical Accounting Policies – Income Taxes).Policies)
In connection with the preparation of the Company’s financial statements for the period ended June 30, 2011, the Company re-evaluated certain accounting policies and procedures relating to taxes and determined that it had not properly accounted for a change in the New Jersey tax law N.J.S.A. 54:10A. Such change lowered the Company’s New Jersey tax rate, resulting in lowering the carrying value of the New Jersey net deferred tax assets and increasing the tax provision by $256,644. The restatement did not cause the Company to lose any future benefit, and the result is such that the Company will have lower New Jersey tax expenses in the future.
It was determined that the New Jersey tax law change was effective for the Company’s first quarter of fiscal year 2012 ended June 30, 2011. These accounting corrections had no impact on the Company’s income before tax and solely affect the Company’s net income (loss), basic income (loss) per share and diluted income (loss) per share for the quarter ended June 30, 2011. The adjustment is a non-cash item and does not affect the Company’s operating activities or cash flows from operations.
TEL-INSTRUMENT ELECTRONICS CORP.
NOTES TO RESTATED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
Note 10 – Fair Value Measurements
FASB ASC 820-10, Fair Value Measurements and Disclosures defines fair value, establishes a framework for measuring fair value under generally accepted accounting principles and expands disclosures about fair value measurements.measurements
As defined in ASC 820-10, 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 820-10 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 820-10 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 CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 10 – 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. |
Market approach — Uses prices and other relevant information generated by market transactions involving identical or comparable assets or liabilitiesIncome 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
TEL-INSTRUMENT ELECTRONICS CORP.
NOTES TO RESTATED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
· | 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. |
Note 10 Fair Value Measurements (continued)
· | 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 reflect currently available terms and conditions for similar debt.
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 December 31,June 30, 2011 and March 31, 2011. As required by FASB ASC 820-10, 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.
| December 31, 2011 | | Level I | | | Level II | | | Level III | | | Total | | |
| June 30, 2011 | | | Level I | | Level II | | Level III | | Total | |
| Total Assets | | $ | - | | | $ | - | | | $ | - | | | $ | - | | | $ | - | | | $ | - | | | $ | - | | | $ | - | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Warrant liability | | | - | | | | - | | | | 299,399 | | | | 299,399 | | | | - | | | | - | | | | 534,723 | | | | 534,723 | |
| Total Liabilities | | $ | - | | | $ | - | | | $ | 299,399 | | | $ | 299,399 | | | $ | - | | | $ | - | | | $ | 534,723 | | | $ | 534,723 | |
| March 31, 2011 | | Level I | | | Level II | | | Level III | | | Total | | | Level I | | | Level II | | | Level III | | | Total | |
| Total Assets | | $ | - | | | $ | - | | | $ | - | | | $ | - | | | $ | - | | | $ | - | | | $ | - | | | $ | - | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Warrant liability | | | - | | | | - | | | | 366,137 | | | | 366,137 | | | | - | | | | - | | | | 366,137 | | | | 366,137 | |
| Total Liabilities | | $ | - | | | $ | - | | | $ | 366,137 | | | $ | 366,137 | | | $ | - | | | $ | - | | | $ | 366,137 | | | $ | 366,137 | |
The Company adopted the guidance of ASC 815, which requires that we mark the value of our warrant liability (see Note 6) 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 fair value of the warrant is calculated using the Black-Scholes valuation model.
TEL-INSTRUMENT ELECTRONICS CORP.
NOTES TO RESTATED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
Note 10 – Fair Value Measurements (Continued)(continued)
The common stock warrant was not issued with the intent of effectively hedging any future cash flow, fair value of any asset, liability or any net investment in a foreign corporation. The warrants do not qualify for hedge accounting, and, as such, all changes in the fair value of these warrants are recognized as other income/expense in the statement of operations until such time as the warrants are exercised or expire. Since these common stock warrants do not trade in an active securities market, the Company recognizes a warrant liability and estimates the fair value of these warrants using the Black-Scholes options model using the following assumptions:
| | | At Inception | | | March 31, 2011 | | | December 31, 2011 | | | At Inception | | | March 31, 2011 | | | June 30, 2011 | |
| | | | | | | | | | | | | | | | | | | |
| Risk free interest rate | | | 2.81 | % | | | 3.47 | % | | | 1.89 | % | | | 2.81 | % | | | 3.47 | % | | | 3.18 | % |
| Expected life in years | | | 9.00 | | | | 8.45 | | | | 7.70 | | | | 9 | | | | 8.45 | | | | 8.2 | |
| Expected volatility | | | 28.51 | % | | | 29.11 | % | | | 46.03 | % | | | 28.51 | % | | | 29.11 | % | | | 39.74 | % |
| Fair market value per share | | $ | 6.70 | | | $ | 7.63 | | | $ | 6.08 | | | $ | 6.70 | ) | | $ | 7.63 | ) | | $ | 9.00 | ) |
| Exercise price | | $ | 6.70 | | | $ | 6.70 | | | $ | 6.70 | | | $ | 6.70 | | | $ | 6.70 | | | $ | 6.70 | |
| Warrant Liability | | $ | 281,656 | | | $ | 366,137 | | | $ | 299,399 | | | $ | 281,656 | | | $ | 366,137 | | | $ | 534,723 | |
The volatility calculation was based on the 2418 months for the Company’s stock price prior to the measurement date, utilizing January 1, 2010 as the initial period, as the Company believes that this is the best indicator of future performance, and the source of the risk free interest rate is the US Treasury rate related to 10 year notes. The exercise price is per the agreement, the fair market value is the closing price of our stock on the date of measurement, and the expected life is based on management’s current estimate of when the warrants will be exercised. All inputs to the Black-Scholes options model are evaluated each reporting period.
Note 11 – Reclassifications
Certain prior year and period amounts have been reclassified to conform to the current period presentation.
Note 12 – Litigation
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 (i) misappropriated Aeroflex’s trade secrets; (ii) tortiouslytortuously interfered with its business relationship; (iii) conspired to harm Aeroflex;Aeroflex and (iv) tortiouslytortuously interfered with its contract and seeks injunctive relief and damages. The crux 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.
NOTES TO RESTATED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
Note 12 Litigation (continued)
In February 2009, subsequent to the Award to the Company, 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 Army Contracts Attorney and the Army Contracting Officer each filed a statement with the GAO, expressly rejecting Aeroflex’s allegations that the Company used or infringed Aeroflex 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.
TEL-INSTRUMENT ELECTRONICS CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 12 – Litigation (Continued)
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 the CompanyTel or its employees misappropriated Aeroflex trade secrets. The Kansas ruling also referenced the Army’s findings, in its response to the GAO,General Accountability Office (“GAO”), which rejected Aeroflex’s claims and determined that the CompanyTel 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 know whenanticipate a decision will be forthcoming. The Companyfor some time. Tel remains confident as to the outcome of this appeal and any potential subsequentfollow-on litigation. An estimate of possible loss, if any cannot be made in view of, among other things, the Army findings and the decision of the Kansas court,Court, discussed above, as well as the fact that there has not yet been full discovery of the merits of the claims and defenses.
Other than the matter discussed 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 or by any court, public board, government agency, self-regulatory organization or body pending or, to the knowledge of the executive officers of our company or any of our subsidiaries, threatened against or affecting our company, our common stock, any of our subsidiaries or of our companies or our subsidiaries’ officers or directors in their capacities as such, in which an adverse decision could have a material adverse effect.
Note 13 – New Accounting Pronouncements
In May 2011, the Financial Accounting Standards Board (FASB) issued ASU 2011-04, guidance to improve consistency in application of existing fair value measurement and disclosure requirements. The standard is intended to clarify the application of the requirements, not to establish valuation standards or affect valuation practices outside of financial reporting. The guidance is effective for interim and annual periods beginning on or after December 15, 2011. Application of ASU 2011-04 did not have a material impact on the Company’s financial statements.
2011, with early adoption prohibited.
In June 2011, the FASB issued ASU 2011-05, guidance to improve the comparability, consistency, and transparency of financial reporting and to increase the prominence of items reported in other comprehensive income. The standard eliminates the current option to present components of other comprehensive income as part of the statement of changes in stockholders’ equity. The amendment requires that all non-owner changes in stockholders’ equity be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements. The amendment does not affect how earnings per share is calculated or presented. The guidance is effective for interim and annual periods beginning after December 15, 2011. Early adoption is permitted. The Company currently does not have other comprehensive income. Should the company have other comprehensive income in the future, we will determine if we will present it on a single continuous statement of comprehensive income or in two separate but consecutive statements.
In September 2011,With the FASBexception of the pronouncements noted above, no other accounting standards or interpretations issued ASU 2011-08, “Intangibles — Goodwill and Other (Topic 350).” The objective of this Update isor recently adopted are expected to simplify how entities test goodwill for impairment. This Update permits an entity to first assess qualitative factors to determine whether it is more likely than not thathave a material impact on the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test. The Update is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. Early adoption is permitted, including for annual and interim goodwill impairment tests performed as of a date before September 15, 2011. We do not have any goodwill recorded in ourCompany’s financial statements.position, operations or cash flows.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.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 Section 27A of the Securities Act of 1933, Section 21E of the Exchange Act of 1934, and the Private Securities Litigation Reform Act of 1995.
Readers are cautioned not to place undue reliance on these forward-lookingForward-looking statements which are only predictionsinclude, among others, statements concerning the Company’s outlook, pricing trends and speak only asforces within the industry, the completion dates of capital projects, expected sales growth, cost reduction strategies and their results, long-term goals of the date hereof. When used in the filings, the words “anticipate,” “believe,” “estimate,” “expect,” “future,” “intend,” “plan,”Company and other statements of expectations, beliefs, including statements regarding litigation and utilization of deferred tax assets, future plans and strategies, anticipated events or the negative of these termstrends and similar expressions concerning matters that are not historical facts.
All predictions as they relate to us or our management identify forward-looking statements. Such statements reflect our current view with respect to future eventsresults contain a measure of uncertainty and are subject to risks, uncertainties, assumptions,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 factors. Should one or moreunforeseen circumstances. A number of these risks or uncertainties materialize, or should the underlying assumptions prove incorrect, actual results may differ significantly from those anticipated, believed, estimated, expected, intended, or planned.
Although we believe that the expectations reflected in the forward-looking statementsfactors are reasonable, we cannot guarantee future results, levels of activity, performance, or achievements. Except as required by applicable law, including the securities laws of the United States, we do not intend to update any of the forward-looking statements to conform these statements to actual results.
Our financial statements are prepared in accordance with accounting principles generally accepted in the United States (“GAAP”). These accounting principles require us to make certain estimates, judgments and assumptions. We believe that the estimates, judgments and assumptions upon which we rely are reasonable based upon information available to us at the time that these estimates, judgments and assumptions are made. These estimates, judgments and assumptions can affect the reported amounts of assets and liabilities as of the date of the financial statements as well as the reported amounts of revenues and expenses during the periods presented. Our financial statements would be affected to the extent there are material differences between these estimates and actual results. In many cases, the accounting treatment of a particular transaction is specifically dictated by GAAP and does not require management’s judgment in its application. There are also areas in which management’s judgment in selecting any available alternative would not produce a materially different result. The following discussion should be read in conjunction with our unaudited consolidated financial statements and notes thereto appearing elsewhere in this report.
General
Management’s discussion and analysis of results of financial condition and results of operations 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 of Financial Condition and Results of Operations”discussed in the Company’s Annual Report on Form 10-K for the year ended March 31, 2011, filedfilings with the SEC on June 29, 2011.
Overview
SalesSecurities and income growth continued to be positive for the nine months ended December 31, 2011. Sales for the nine months ended December 31, 2011, increased 16% to $11,337,800 as compared to the same period in the prior year while income from operations increased to $438,798 for the nine months ended December 31, 2011, as compared to a loss of $105,226 for the same period in the prior year.
Previously, the Company announced that it has secured the production release from the U.S. Navy for the $16.2 million CRAFT AN/USM 708 delivery order the Company received in April 2011. Deliveries on this 732 unit order began in the third quarter of the current calendar year. The CRAFT 708 is a multi-purpose flight-line test set that will replace up to eight older test sets currently being used by the U.S. Navy.Exchange Commission.
The TS-4530A product has completed most of the product verification testing and the Company has secured preliminary AIMS approval on the unit. The Company currently has production orders for over $18 million. The Company is currently working to complete some final logistical items and limited production is expected to commence in the fourth quarter of the current fiscal year, subject to receipt of required regulatory approvals.
The Company believes, although no assurance can be given, that with the U.S. Navy’s evaluation approval of the AN/USM-708, the production release for the AN/USM-708, and the completion of testing and subsequent beginning of shipment of the TS-4530A kits and units, the Company can look forward to continued financial growth in the near and mid-term.
The Company also has secured $599,000 in connection with a contract modification from the U.S. Navy to incorporate product enhancements to The ITATS AN/ARM-206 TACAN test set resulting from Navy technical evaluation testing. These changes, and the required product verification testing, are nearing completion. This additional funding will not have a material bottom line financial impact as most of the engineering work for this contract will be sub-contracted to DRS Sustainment Systems located in St. Louis, MO. Production deliveries of the 102 ITATS units ($5.3 million) are now anticipated to begin in the second half of the 2012 calendar year.
As a result of the Company’s improving operations and financial results, the Company’s liquidity and stockholders’ equity, which currently exceeds the NYSE Amex requirement of $4 million, have also improved. The gross profit percentage in the latest quarter declined primarily as a result of the change in sales mix, and the higher production start-up costs associated with the AN/USM-708. As disclosed in Note 6 to the Consolidated Financial Statements, principal payments on the loan to BCA commenced in September 2011.
To support its rapidly growing business, the Company completed its facility relocation to One Branca Road, East Rutherford, New Jersey. The new facility is a modern one story structure that is approximately 40% larger than our previous two story facility which the Company had occupied for over 60 years. The new facility is outfitted with state-of-the-art manufacturing and engineering work stations as well as updated communication and computer systems. The cost of moving was modest, although the Company did experience some disruption in shipments in the third quarter. Additionally, the Company had a modest increase in rent primarily a result of the additional space.
At December 31, 2011, the Company’s backlog was approximately $44.9 million, including the order for 102 ITATS units in the amount of $5 million for which a production order has not yet been released, as compared to approximately $30.0 million at December 31, 2010.
The Company believes that it has adequate liquidity, and backlog to fund operating plans for at least the next twelve months. Currently, the Company has no material future capital expenditure requirements.
Results of Operations
Sales
For the nine months ended December 31, 2011, sales increased $1,565,365 (16.0%) to $11,337,800, as compared to $9,772,435 for the same period in the prior year.
Avionics Government sales increased $1,527,435 (19.2%) to $9,470,103 for the nine months ended December 31, 2011, as compared to $7,942,668 for the same period last year. This increase in Avionics Government sales is primarily attributed to an increase in shipments of the AN/UPM -708 pilot production units and initial pilot production units of the TS-4530A test sets offset by a decline in sales of the AN/USM-719 and certain other products.
Commercial sales decreased $37,930 (2.1%) to $1,867,697 for the nine months ended December 31, 2011, as compared to $1,829,767 in the same period in the prior year. This decrease is due higher sales of the TR-220 offset partially by lower sales from overhaul and repairs.
For the three months ended December 31, 2011, sales decreased $587,987 (13.8%) to $3,673,235, as compared to $4,261,222 for the same period in the prior year. This was partially attributable to manufacturing disruption associated with the October move to the Company’s new facility.
Avionics Government sales decreased $533,128 (14.4%) to $3,163,220 for the three months ended December 31, 2011, as compared to $3,696,348 for the same period last year. This decrease in Avionics Government sales is primarily attributed to the completion of two contracts for the T-47NH and the TR-100AF in the prior year for which there were no contracts in the current fiscal year. The Company had expected to offset this decrease with increased shipment of the AN/USM-708 and kits and the TS-4530A test sets. However, due to certain delays, significant shipments of the AN/USM-708 did not begin until the fourth quarter of the current fiscal year.
Commercial sales decreased $54,859 (9.7%) to $510,015 for the three months ended December 31, 2011 as compared to $564,874 in the same period in the prior year. This decrease is due to lower sales from overhaul and repairs of the Company’s products.
Gross Margin
Gross margin increased $372,606 (8.4%) to $4,790,237 for the nine months ended December 31, 2011, as compared to $4,417,631 for the same quarter in the prior fiscal year. The gross margin percentage for the nine months ended December 31, 2011, was 42.3%, as compared to 45.2% for the nine months ended December 31, 2010. Gross profit increased as a result of volume but gross profit percentage was negatively impacted by the change in sales mix, and the higher production start-up costs associated with the AN/USM-708.
Gross margin decreased $420,637 (22.5%) to $1,445,379 for the three months ended December 31, 2011, as compared to $1,866,016 for the same period in the prior fiscal year. The gross margin percentage for the three months ended December 31, 2011, was 39.3%, as compared to 43.8% for the three months ended December 31, 2010. The decrease in gross profit was primarily as a result of the decrease in sales volume and the higher production start-up costs associated with the AN/USM-708.
Operating Expenses
Selling, general and administrative expenses increased $54,277 (2.5%) to $2,191,332 for the nine months ended December 31, 2011, as compared to $2,137,055 for the nine months ended December 31, 2010. This increase is attributed mainly to higher professional fees, accrued profit sharing expenses, investor relations expenses and recruitment costs offset mostly by lower administrative compensation and outside commission expenses.
Selling, general and administrative expenses increased $38,256 (5.6%) to $724,636 for the three months ended December 31, 2011, as compared to $686,380 for the three months ended December 31, 2010. This increase is attributed mainly to higher professional fees, investor relations, and travel expenses offset mostly by lower administrative compensation expense and lower outside commissions.
Engineering, research and development expenses decreased $134,230 (17.5%) and $225,695 (9.5%) to $633,136 and $2,160,107, respectively, for three and nine months ended December 31, 2011, as compared to $767,366 and $2,385,802 for the same periods last year. For the three months ended December 31, 2011, this decrease is primarily attributed to lower salaries and fringe benefits, material costs and outside contractor expenses. For the nine months ended December 31, 2011, the decrease is attributed to lower outside contractor and recruitment costs as well as lower purchases of materials offset and transfers of charges from other departments partially by an increase in salaries. Engineering, research and development efforts in the last quarter are attributed mostly to finalization of the TS-4530A product and the transfer to manufacturing as well as assistance to manufacturing for the AN/USM-708 product. The Company is also working on new products for both the commercial and government markets.
Other Income (Expense), Net
For the three months ended December 31, 2011, total other expense was $12,465, as compared to other income expense of $277,873 for the three months ended December 31, 2010. This decrease is primarily attributed to the change in the fair value of the common stock warrants from a loss of $129,684 for the three months ended December 31, 2010, as compared to a gain of $130,433 for the three months ended December 31, 2011(see Note 10 of Notes to the Condensed Consolidated Financial Statements). For the nine months ended December 31, 2011, total other expense was $55,998, as compared to other expense of $365,356 for the nine months ended December 31, 2010. This decrease is primarily attributed to the change in the fair value of the common stock warrants from a loss of $129,684 for the nine months ended December 31, 2010, as compared to a gain of $66,738 for the three months ended December 31, 2011 (see Note 10 of Notes to the Condensed Consolidated Financial Statements) as well as the proceeds from a life insurance policy in the amount of $300,029. These amounts were mostly offset by higher interest expense and amortization of debt issuance costs mostly as a result of interest on the $2.5 million loan from BCA, which carries a higher face amount and interest rate than the prior credit facility.
Income (Loss) before Income Taxes
As a result of the above, the Company recorded income before income taxes of $75,142 for the three months ended December 31, 2011, as compared to income before taxes of $134,397 for the three months ended December 31, 2010. For the nine months ended December 31, 2011, the Company recorded income before taxes of $382,800, as compared to a loss before income taxes of $470,582 for the nine months ended December 31, 2010.
Income Taxes
For the three months ended December 31, 2011, the Company recorded an income tax benefit of $22,289, as compared to an income tax provision of $105,385 for the three months ended December 31, 2010. For the nine months ended December 31, 2011, the Company recorded an income tax provision of $6,204, as compared to an income tax benefit of $136,188 for the nine months ended December 31, 2010. These amounts represent the effective federal and state tax rate of approximately 40% on the Company’s net income or loss before taxes. The proceeds on the life insurance policy are not taxable and the gain (loss) on the change in fair value of the common stock warrants is not deductible/taxable.
Net Income (Loss)
As a result of the above, the Company recorded net income of $97,431 and $376,596, respectively, for the three and nine months ended December 31, 2011, as compared to net income of $29,012 for the three months ended December 31, 2010 and a net loss of $334,394 for the nine months ended December 31, 2010.
Liquidity and Capital Resources
At December 31, 2011, the Company had working capital of $4,346,750, as compared to $4,374,523 at March 31, 2011.
During the nine months ended December 31 2011, the Company increased its cash balances by $516,215 to $640,170. The Company’s principal sources and uses of funds were as follows:
Cash provided by/used in operating activities. For the nine months ended December 31, 2011, the Company provided $530,232 in cash from operations as compared to using $1,065,903 in cash for the nine months ended December 31, 2010. This increase is primarily attributed to the higher net income from operations, the proceeds from a life insurance policy and a decrease in accounts receivable offset partially by lower change in accounts payable, inventories and the liquidation of progress billings.
Cash used in investing activities. For the nine months ended December 31, 2011, the Company used $148,661 of its cash for investing activities, as compared to $102,070 for the nine months ended December 31, 2011, due primarily to an increase in the purchases of equipment related to the move to the new facility.
Cash provided by financing activities. Net cash provided by financing activities for the nine months ended December 31, 2011, was $134,644, as compared to $1,435,411 for the nine months ended December 31, 2010. In September 2010, the Company raised $2.5 million in financing (see Note 6) which was offset by financing costs and repayment to the bank of the line of credit. For the nine months ended December 31, 2011, the Company received proceeds of $312,683 from a life insurance policy and $21,749 from the exercise of stock options offset partially by repayment of debt and capital lease obligations associated with the move to our new facility.
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.
The Company believes that it has adequate liquidity and backlog to fund operating plans for at least the next twelve months.
There was no significant impact on the Company’s operations as a result of inflation for the nine months ended December 31, 2011. These financial statements should be read in conjunction with the Company’s Annual Report on Form 10-K to the SEC for the fiscal year ended March 31, 2011, filed with the SEC on June 29, 2011.
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. In certain instances, the Company may offer the unit on trial basis. The Company does not recognize revenue until the unit has been accepted. The Company only offers product on a trial basis in rare instances, and no provision has been made at December 31,June 30, 2011 and March 31, 2011.
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 have been 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 adjustments 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
Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF THE RESULTS OF OPERATIONS AND FINANCIAL CONDITION (Continued)
Critical Accounting Policies (continued)
contracts prior to delivery. In July 2011, the Company secured a $599,000$599k contract modification from the U.S. Navy to incorporate product enhancements to the ITATS AN/ARM-206 TACAN test set resulting from Navy technical evaluation testing. These changes, and the required product verification testing, are expected to take an estimated nine to 12 months to complete. This additional funding will not have a material bottom line impact as most of the engineering work for this contract will be sub-contracted to DRS Sustainment Systems located in St. Louis, MO.Louis. Production deliveries of the 102 ITATS units are now expected to begin in the middle of the next calendar year.
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.
Payments received prior to the delivery of units or services performed are recorded as deferred revenues.revenues
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 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, in order to determine the amount of
Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF THE RESULTS OF OPERATIONS AND FINANCIAL CONDITION (Continued)
Critical Accounting Policies (continued)
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 forecast to determine that such revenues will produce sufficient taxable income to realize the deferred tax assets.
All projections contain a measure of uncertainty and accordingly, actual results could differ materially. As in the case of many development projects, there can be delays which can cause expected revenues to be delayed, and additional expenses to be incurred. Our revenue projections arewere based upon the contract award, which includes the number of units which are expected to be delivered, and our expectation for the completion of the development and production start-up.
Our projections were largely predicated upon the receipt of timely production orders for the CRAFT 708 based on contractual requirements from our U.S. Navy customer and prior experience with U.S. Navy developmental contracts. The delivery of these units and the associated revenues were delayed due in large part to an extended Navy technical evaluation process that did not successfully conclude until April 2011. The CRAFT 708 consists ofis testing new technology and incorporatesincorporated many functions which were never combined together, and, as such, the duration of the testing and Navy technical evaluation (which is outside the Company’s control) took much longer than prior programs. It is as a result of these delays that the Company incurred losses that increasedand the increase in the deferred asset. The Company has successfully completed technical evaluation and has received a production order for CRAFT AN/USM- 708 units valued at $16.2 million. The Company believes, although no assurance can be given, that with this order in combination with existing business and the completion and delivery of units for the TS-4530A program that it will be able to realize its deferred tax asset associated with its net operating loss carryforwards.
Fair Value MeasurementsMeasurements – the Company adopted the guidance of ASC 815, which requires that we mark the value of our warrant liability (see Note 10) to market and recognize any 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 fair value of the warrant is calculated using the Black-Scholes valuation model.
The common stock warrant was not issued with the intent of effectively hedging any future cash flow, fair value of any asset, liability or any net investment in a foreign corporation. The warrants do not qualify for hedge accounting, and, as such, all changes in the fair value of these warrants are recognized as other income/expense in the statement of operations until such time as the warrants are exercised or expire. Since these common stock warrants do not trade in an active securities market, the Company recognizes a warrant liability and estimates the fair value of these warrants using the Black-Scholes options model.
Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF THE RESULTS OF OPERATIONS AND FINANCIAL CONDITION (Continued)
Critical Accounting Policies (continued)
The volatility calculation was based on the 2418 months for the Company’s stock price prior to the measurement date, utilizing January 1, 2010 as the initial period, as the Company believes that this is the best indicator of future performance, and the source of the risk free interest rate is the U.S.US Treasury rate related to 10 year notes. The exercise price is per the agreement, the fair market value is the closing price of our stock on the date of measurement, and the expected life is based on management’s current estimate of when the warrants will be exercised. If the Company used different measurements in calculating the volatility of its stock, it could have an impact on its balance sheet and statement of operations. However, the Company believes the measurement period used is the best predictor of the value of the warrant. All inputs to the Black-Scholes options model are evaluated each reporting period.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF THE RESULTS OF OPERATIONS AND FINANCIAL CONDITION (Continued)
We doGeneral
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, 2011.
Overview
For the three months ended June 30, 2011, the Company recorded a net loss of $80,795 as compared to a net loss of $275,412 for the same period in the prior year. Sales for the three months ended June 30, 2011 increased $1,534,931 (62.5%) to $3,990,211 as compared to the same period last year. Net income was affected by non-cash charges of approximately $199,000 attributed to the Company’s note and warrant issued to BCA Mezzanine Fund LLP in fiscal year 2011, as discussed in Note 6 to the Condensed Consolidated Financial Statements.
As a result of the Company’s improving operations and financial results, sales and profits have continued to increase, and there have been improvements in the Company’s liquidity and stockholders’ equity, which currently exceeds the NYSE Amex requirement of $4 million. The Company has also rescheduled its move to the new facility until this fall.
The U.S. Navy evaluated the Company’s AN/USM-708 test set, which utilizes new generation technology, and concluded it was suitable for fleet use.
The Company announced that it has secured the production release from the U.S. Navy for the $16.2 million CRAFT AN/USM 708 delivery order the Company received in April 2011. Production deliveries on this 732 unit order are expected to begin in the fourth quarter of the current calendar year. The CRAFT 708 is a multi-purpose flight-line test set that will replace up to eight older test sets currently being used by the U.S. Navy.
The Company also has secured a $599k contract modification from the U.S. Navy to incorporate product enhancements to The ITATS AN/ARM-206 TACAN test set resulting from Navy technical evaluation testing. These changes, and the required product verification testing, are expected to take an estimated nine to 12 months to complete. This additional funding will not holdhave a material bottom line impact as most of the engineering work for this contract will be sub-contracted to DRS Sustainment Systems located in St. Louis. Production deliveries of the 102 ITATS units ($5.3 million) are now expected to begin in the middle of the next calendar year.
The TS-4530A product is currently in Army product verification and AIMS testing which is scheduled to be completed in the next several months. Volume production of the TS-4530A is currently scheduled to begin in the third quarter of the current fiscal year subject to receipt of required regulatory approvals.
Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF THE RESULTS OF OPERATIONS AND FINANCIAL CONDITION (Continued)
Overview (continued)
The Company believes, although no assurance can be given, that with the U.S. Navy’s evaluation approval of the AN/USM-708, and the resolution of the issues regarding the ITATS contract, the Company can look forward to continued financial growth in the near and mid-term. Future approval of the TS-4530A unit will enhance this outlook.
At June 30, 2011 the Company’s backlog was approximately $48.4 million, including the order for 102 ITATS units in the amount of $5 million for which a production order has not yet been released, as compared to approximately $25.4 million at June 30, 2010.
The Company believes that it has adequate liquidity, borrowing resources and backlog to fund operating plans for at least the next twelve months. Currently, the Company has no material capital expenditure requirements. The Company believes it will have moderate moving and capital expenditure costs associated with the upcoming move to a new facility located in East Rutherford, NJ.
Results of Operations
Sales
For the first quarter ended June 30, 2011 total sales increased $1,534,931 (62.5%) to $3,990,211 as compared to $2,455,280 for the same quarter in the prior year. Avionics Government sales increased $1,297,119 (70.2%) to $3,145,592 for the period as compared to $1,848,473 for the same period last year. This increase in Avionics Government sales is primarily attributed to an increase in shipments of the AN/UPM -708, the TR-100AF TACAN test sets to the U.S. Air Force and initial pilot production units of the TS-4530A test sets offset partially by lower sales of the AN/USM-719. Commercial sales increased $237,812 (39.2%) to $844,619 for the three months ended June 30, 2011 as compared to $606,807 in the same period in the prior year. This increase is primarily attributed to an increase in its repair and overhaul business.
Gross Margin
Gross margin increased $779,251 (72%) to $1,861,631 for the three months ended June 30, 2011 as compared to $1,082,380 for the same three months in the prior fiscal year. This increase is mostly attributed to the increase in sales volume. The gross margin percentage for the three months ended June 30, 2011 was 46.7% as compared to 44.1% for the three months ended June 30, 2010. This change in gross margin percentage is a result of a change in mix of products sold.
Operating Expenses
Selling, general and administrative expenses increased $40,778 (5.4%) to $798,822 for the three months ended June 30, 2011, as compared to $758,044 for the three months ended June 30, 2010. This increase is attributed mainly to an increase in investor relations expenses and accrued bonus compensation expense offset partially by lower administrative salaries and outside commission expenses.
Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF THE RESULTS OF OPERATIONS AND FINANCIAL CONDITION (Continued)
Results of Operations (continued)
Operating Expenses (continued)
Engineering, research and development expenses increased $91,692 (12.1%) to $849,038 for three months ended June 30, 2011 as compared to $757,346 for the three months ended June 30, 2010, primarily as a result of an increase in salaries as a result of efforts related to finalize the AN/USM-708 product and efforts related to the TS-4530A program. The Company has completed the design of the AN/USM-708 and the TS-4530A program is undergoing product verification.
Other Income (Expense), net
Interest expense and amortization of debt issuance costs increased to $143,169 mostly as a result of interest on the new $2.5 million loan from BCA, which carries a higher face amount and interest rate. Amortization of debt discount is in connection with (i) the stock options issued in conjunction with the officers’ subordinated notes and (ii) warrants issued in conjunction with the loan from BCA. The amortization of deferred debt expense is also associated with the loan from BCA. The Company also incurred a non-cash loss associated with the revaluation of warrants issued in conjunction with the loan to BCA in the amount of $168,586 (see Note 10 of Notes to the Condensed Consolidated Financial Statements). The Company also recorded a gain of $300,029 from proceeds on a life insurance policy.
Income (Loss) before Income Taxes
As a result of the above, the Company recorded income before income taxes of $202,138 for the quarter ended June 30, 2011 as compared to a loss before income taxes of $458,637 for the quarter ended June 30, 2010.
Income Taxes
For the three months ended June 30, 2011, the Company recorded an income tax provision of $282,933 as compared to an income tax benefit of $183,225 for the three months ended June 30, 2010. These amounts represent the effective federal and state tax rate of approximately 34.1% on the Company’s net income or loss before taxes. The proceeds on the life insurance policy are not taxable, and the loss on the change in fair value of the common stock warrants is not deductible. In addition, in connection with the preparation of the Company’s financial statements for the period ended March 31, 2012, the Company re-evaluated certain accounting policies and procedures relating to taxes and determined that it had not properly accounted for a change in the New Jersey tax law N.J.S.A. 54:10A. Such change lowered the Company’s New Jersey tax rate, resulting in lowering the carrying value of the New Jersey net deferred tax assets and increasing the tax provision by $256,644. The restatement did not cause the Company to lose any derivative instrumentsfuture benefit, and dothe result is such that the Company will have lower New Jersey tax expenses in the future. Such change is reflected in the $282,933 tax provision noted above.
Net Loss
As a result of the above, the Company recorded a net loss of $80,795 for the quarter ended June 30, 2011 as compared to a net loss of $275,412 for the quarter ended June 30, 2010.
Item 2.MANAGEMENT’S DISCUSSION AND ANALYSIS OF THE RESULTS OF OPERATIONS AND FINANCIAL CONDITION (Continued)
Liquidity and Capital Resources
At June 30, 2011, the Company had working capital of $4,456,236 as compared to $4,374,523 at March 31, 2011.
During the three months ended June 30 2011, the Company increased cash by $591,638. The Company’s principal sources and uses of funds were as follows:
Cash provided by/used in operating activities. For the three months ended June 30, 2011, the Company provided $308,329 in cash from operations as compared to using $91,408 in cash for the three months ended June 30, 2010. This increase is primarily attributed to the higher net income and decrease in accounts receivable and inventories offset partially by lower accounts payable and the liquidation of progress billings.
Cash used in investing activities. The Company did not engageuse any of its cash for investing activities for the three months ended June 30, 2011. Net cash used in any hedging activities.investing activities was $83,201 for the three months ended June 30, 2010 due primarily to the purchases of equipment.
Cash provided by financing activities. Net cash provided by financing activities for the three months ended June 30, 2011 was $283,039 as compared to $156,075 for the three months ended June 30, 2010. This increase is attributed to the proceeds from a life insurance policy.
In September 2010, the Company, pursuant to an agreement with BCA Mezzanine Fund LP, borrowed $2.5 million for five years (see Note 6 to the Condensed Consolidated 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.
The Company believes that it has adequate liquidity, borrowing resources and backlog to fund operating plans for at least the next twelve months. The Company will have moderate moving and capital expenditure costs associated with the upcoming move.
There was no significant impact on the Company’s operations as a result of inflation for the three months ended June 30, 2011. 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, 2011.
Item 4.Controls and Procedures.Procedures
(a) Controlsand Procedures
Evaluation of Disclosure Controlsdisclosure controls and Proceduresprocedures.
We maintain disclosure controls and procedures designed to ensure that information required to be disclosed in the reports we file pursuant to the Securities Exchange Act of 1934, as amended (the “Exchange Act”) are recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC, and that such information is accumulated and communicated to our Principal Executive Officer (“PEO”) and Principal Financial Officer (“PFO”), to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can only provide a reasonable assurance of achieving the desired control objectives, and in reaching a reasonable level of assurance, management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Management designed the disclosure controls and procedures to provide reasonable assurance of achieving the desired control objectives.
We carried out an evaluation, under the supervision and with the participation of our management, including our PEO and PFO, of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this Quarterly Report. Based upon that evaluation, the PEO and PFO concluded that the Company’s disclosure controls and procedures were effective.not effective due to the fact that the Company did not maintain a sufficient level of resources related to tax accounting thus contributing to a material weakness in internal control. In connection with the preparation of the Company’s financial statements for the fiscal year ended March 31, 2012, the Company re-evaluated certain accounting policies and procedures relating to taxes and determined that it had not properly accounted for a change in the New Jersey tax law N.J.S.A. 54:10A. Such change lowered the Company’s New Jersey tax rate, resulting in lowering the carrying value of the New Jersey net deferred tax assets and increasing the tax provision by $256,644. Such change should have been recorded during the period ended June 30, 2011. The change did not cause the Company to lose any future benefit, and the result is such that the Company will have lower New Jersey tax expenses in the future. Please see Report on Form 8-K filed with the SEC on July 13, 2012.
Notwithstanding the material weakness in accounting for income taxes, management believes that the condensed consolidated financial statements which are included in this Quarterly Report on Form 10-Q/A fairly present, in all material respects, the financial position of the Company at June 30, 2011 and March 31, 2011 and their condensed consolidated results of operations and cash flows for each of the three months ended June 30, 2011 and 2010 in conformity with U.S. generally accepted accounting principles.
Material Weakness and Related Remediation Initiatives
Through the efforts of management, external consultants, and our Audit Committee, we are currently in the process of executing a plan of action to remediate the material weakness identified above. We expect to complete this action plan during fiscal year 2013.
(b) Changes in Internal Control over Financial Reporting
There have been no changes in our internal controls over financial reporting (as such term is defined in Rule 13a-15(f) and 15d-15(f) under the Securities Exchange Act) during the quarter ended December 31,June 30, 2011, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II – OTHER INFORMATIONPart II. Other Information
Item 1.Legal Proceedings.Proceedings
Other than as disclosedSee discussion in Note 12, we are currently not involved in any litigation that we believe could have a material adverse effect on our financial condition or results of operations. There is no action, suit, proceeding, inquiry or investigation before or by any court, public board, government agency, self-regulatory organization or body pending or, to the knowledgeItem 3 of the executive officers of our company or any of our subsidiaries, threatened against or affecting our company, our common stock, any of our subsidiaries or of our companies or our subsidiaries’ officers or directors in their capacities as such, in which an adverse decision could have a material adverse effect.
We believe there are no changes that constitute material changes from the risk factors previously disclosed in the Company’s Annual Report on Form 10-K for the fiscal year ended March 31, 2011 filed withand Note 12 to the SEC on June 29, 2011.Condensed Consolidated Financial Statements above.
Item 2.Unregistered Sales of Equity Securities and Use of Proceeds.Proceeds
There were no unregistered sales of the Company’s equity securities during the quarter ended December 31, 2011. None.
Item 3. Defaults Upon Senior Securities.6.Exhibits
Not applicable.
Item 4. Mine Safety Disclosures.
Not applicable.
Item 5. Other Information.
Submission of Matters of a Vote of Security Holders
The Annual Meeting of Stockholders of Tel-Instrument Electronics Corp. (the “Company”) was held on December 14, 2011. Matters submitted to stockholders at the meeting and the voting results thereof were as follows:
Proposal One – Election of Directors
The stockholders of the Company elected each of the following director nominees proposed by the Company’s Board of Directors to serve until the next annual meeting of stockholders of the Company. The voting results for each director nominee is set forth below.
| Name | | For | | | Against | | | Broker Non-Votes | |
| | | | | | | | | | |
| Mr. Stephen A. Fletcher | | | 1,701,660 | | | | 133,274 | | | | 679,396 | |
| | | | | | | | | | | | | |
| Mr. George J. Leon | | | 1,701,660 | | | | 133,274 | | | | 679,396 | |
| | | | | | | | | | | | | |
| Mr. Jeffrey C. O’Hara | | | 1,701,660 | | | | 133,274 | | | | 679,396 | |
| | | | | | | | | | | | | |
| Mr. Robert A. Rice | | | 1,701,660 | | | | 133,274 | | | | 679,396 | |
| | | | | | | | | | | | | |
| Mr. Robert H. Walker | | | 1,701,660 | | | | 133,274 | | | | 679,396 | |
Proposal Two – Ratification of Appointment of Independent Auditors
The stockholders of the Company ratified the appointment of BDO USA, LLP, as the Company’s independent auditor for the fiscal year ended March 31, 2012. The voting results for the appointment of BDO USA, LLP is set forth below.
| For | | | Against | |
| | | | | |
| | 2,498,472 | | | | 13,858 | |
Exhibit No. | | Description |
| | | |
| 31.1 | | |
| | | |
| 31.2 | | |
| | | |
| 32.1 | | |
| ** | | |
32.2 | | |
| | |
| 101.INS | | XBRL Instance Document**Document |
| ** | | |
| 101.SCH | | XBRL Taxonomy Extension Schema Document** |
| ** | | |
| 101.CAL | | XBRL Taxonomy Extension Calculation Linkbase Document** |
| ** | | |
| 101.DEF | | XBRL Taxonomy Extension Definition Linkbase Document** |
| ** | | |
| 101.LAB | | XBRL Taxonomy Extension Label Linkbase Document** |
| ** | | |
| 101.PRE | | XBRL Taxonomy Extension Presentation Linkbase Document** |
* filed herewith
** Pursuant to Rule 406T of Regulation S-T, these interactive data files are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933 or Section 18 of the Securities Exchange Act of 19341934.
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: February 14,October 12, 2012 | | By: | /s//s/ Jeffrey C. O’Hara | |
| | | | | Name: Jeffrey C. O’Hara | |
| | | | | Title: Chief Executive Officer
Principal Executive Officer
CEO | |
| Date: October 12, 2012 | By: | /s/ Joseph P. Macaluso | |
| | | Joseph P. Macaluso | |
| | | Principal Accounting Officer | |
| | | | | | |
Date: February 14, 2012 | | By: | /s/ Joseph P. Macaluso | |
| | | | Name: Joseph P. Macaluso | |
| | | | Title: Principal Financial Officer
Principal Accounting Officer
| |