UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
☒QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: December 31, 2017June 30, 2021
☐TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number: 001-31990
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) | (I.R.S. Employer Identification No.) |
One Branca Road East Rutherford, NJ 07073 |
(Address of principal executive offices) |
(201) 933-1600 |
(Registrant’s telephone number, including area code) |
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||
N/A | N/A | N/A |
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.files). Yes ý☒ No ☐
Indicate by check mark whether the registrant is a large, accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large, accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large, accelerated filer | ☐ | Accelerated filer | ☐ |
Non-accelerated filer | ☒ | Smaller reporting company | ☒ |
Emerging growth company | ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
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 of February 8, 2018,August 11, 2021, there were 3,255,887 shares outstanding of the registrant’s common stock.
TEL-INSTRUMENT ELECTRONICS CORP.
TABLE OF CONTENTS
PART I – FINANCIAL INFORMATION | ||
Page | ||
Item 1. | 3 | |
Item 2. | 18 | |
Item 3. | 22 | |
Item 4. | 22 | |
PART II – OTHER INFORMATION | ||
Item 1. | 23 | |
Item 1A. | 23 | |
Item 2. | 23 | |
Item 3. | 23 | |
Item 4. | 23 | |
Item 5. | 23 | |
Item 6. | 24 | |
25 | ||
PART I – FINANCIAL INFORMATION
Item 1.Unaudited Condensed Consolidated Financial Statements.
TEL-INSTRUMENT ELECTRONICS CORP.
CONDENSED CONSOLIDATED BALANCE SHEETS
December 31, 2017 | March 31, 2017 | |||||||
| (unaudited) | ||||||||
| ASSETS | ||||||||
| Current assets: | ||||||||
| Cash and cash equivalents | $ | 263,983 | $ | 287,873 | ||||
| Accounts receivable, net | 1,660,757 | 1,556,382 | ||||||
| Inventories, net | 4,309,324 | 4,208,179 | ||||||
| Restricted cash to support appeal bond | 2,000,000 | - | ||||||
| Prepaid expenses and other current assets | 107,450 | 188,578 | ||||||
| Total current assets | 8,341,514 | 6,241,012 | ||||||
| Equipment and leasehold improvements, net | 197,602 | 161,427 | ||||||
| Other long-term assets | 35,109 | 33,509 | ||||||
| Total assets | 8,574,225 | 6,435,948 | ||||||
| LIABILITIES & STOCKHOLDERS’ DEFICIT | ||||||||
| Current liabilities: | ||||||||
| Current portion of long-term debt | 3,696 | 291,991 | ||||||
| Line of credit | 1,000,000 | 200,000 | ||||||
| Capital lease obligations – current portion | 6,718 | 6,268 | ||||||
| Accounts payable and accrued liabilities | 2,431,763 | 2,072,955 | ||||||
| Federal and state taxes payable | - | 4,105 | ||||||
| Deferred revenues – current portion | 54,671 | 123,720 | ||||||
| Accrued legal damages | 4,930,523 | 2,800,000 | ||||||
| Accrued payroll, vacation pay and payroll taxes | 396,207 | 527,413 | ||||||
| Total current liabilities | 8,823,578 | 6,026,452 | ||||||
| Capital lease obligations – long-term | 8,664 | 13,760 | ||||||
| Long-term debt | - | 2,124 | ||||||
| Deferred revenues – long-term | 353,280 | 352,973 | ||||||
| Warrant liability | - | 95,000 | ||||||
| Total liabilities | 9,185,522 | 6,490,309 | ||||||
| Commitments | ||||||||
| Mezzanine Equity: | ||||||||
Preferred stock, 1,000,000 shares authorized, par value $0.10 per share, 500,000 shares 8% Cumulative Series A Convertible Preferred issued and outstanding | 2,990,667 | - | ||||||
| Total mezzanine equity | 2,990,667 | - | ||||||
| Stockholders’ (deficit): | ||||||||
Common stock, 4,000,000 shares authorized, par value $0.10 per share, 3,255,887 shares issued and outstanding, respectively | 325,586 | 325,586 | ||||||
| Paid-in capital in excess of par value, common stock | 8,099,882 | 8,107,369 | ||||||
| Accumulated deficit | (12,027,432 | ) | (8,487,316 | ) | ||||
| Total stockholders’ deficit | (3,601,964 | ) | (54,361 | ) | ||||
| Total liabilities, mezzanine equity and stockholders’ deficit | $ | 8,574,225 | $ | 6,435,948 | ||||
June 30, 2021 | March 31, 2021 | |||||||
(unaudited) | ||||||||
ASSETS | ||||||||
Current assets: | ||||||||
Cash | $ | 4,758,819 | $ | 3,485,275 | ||||
Accounts receivable, net | 1,318,276 | 1,933,321 | ||||||
Inventories, net | 3,051,343 | 3,437,989 | ||||||
Restricted cash to support appeal bond | 2,011,050 | 2,011,050 | ||||||
Prepaid expenses and other current assets | 259,556 | 263,067 | ||||||
Total current assets | 11,399,044 | 11,130,702 | ||||||
Equipment and leasehold improvements, net | 169,388 | 200,769 | ||||||
Operating lease right-of-use assets | 1,867,505 | 1,922,805 | ||||||
Deferred tax asset, net | 2,521,926 | 2,675,040 | ||||||
Other long-term assets | 35,109 | 35,110 | ||||||
Total assets | $ | 15,992,972 | $ | 15,964,426 | ||||
LIABILITIES & STOCKHOLDERS’ EQUITY | ||||||||
Current liabilities: | ||||||||
Operating lease liabilities – current portion | $ | 194,469 | $ | 201,883 | ||||
Accounts payable | 384,559 | 906,149 | ||||||
Deferred revenues – current portion | 154,382 | 150,709 | ||||||
Accrued expenses ‐- vacation pay, payroll and payroll withholdings | 542,074 | 457,232 | ||||||
Accrued legal damages | 5,940,943 | 5,889,023 | ||||||
Accrued expenses - other | 331,848 | 365,975 | ||||||
Total current liabilities | 7,548,275 | 7,970,971 | ||||||
Operating lease liabilities – long-term | 1,673,036 | 1,720,921 | ||||||
Long Term Debt - PPP | 722,577 | 722,577 | ||||||
Deferred revenues – long-term | 329,886 | 332,428 | ||||||
Total liabilities | 10,273,774 | 10,746,897 | ||||||
Commitments and contingencies | ||||||||
Stockholders’ equity: | ||||||||
Preferred stock, 1,000,000 shares authorized, par value $0.10 per share | ||||||||
Preferred stock, 500,000 shares 8% Cumulative Series A Convertible Preferred issued and outstanding, par value $0.10 per share | 3,695,998 | 3,695,998 | ||||||
Preferred stock, 166,667 shares 8% Cumulative Series B Convertible Preferred issued and outstanding, par value $0.10 per share | 1,147,367 | 1,147,367 | ||||||
Common stock, 7,000,000 shares authorized, par value $0.10 per share, 3,255,887 shares issued and outstanding, respectively | 325,586 | 325,586 | ||||||
Additional paid-in capital | 7,244,788 | 7,318,620 | ||||||
Accumulated deficit | (6,694,541 | ) | (7,270,042 | ) | ||||
Total stockholders’ equity | 5,719,198 | 5,217,529 | ||||||
Total liabilities and stockholders’ equity | $ | 15,992,972 | $ | 15,964,426 | ||||
See accompanying notes to unaudited condensed consolidated financial statements.
TEL-INSTRUMENT ELECTRONICS CORP.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
| Three Months Ended | Nine Months Ended | Three Months Ended | ||||||||||||||||||||||
December 31, 2017 | December 31, 2016 | December 31, 2017 | December 31, 2016 | June 30, 2021 | June 30, 2020 | |||||||||||||||||||
| Net sales | $ | 2,625,793 | $ | 4,236,519 | 7,955,035 | $ | 14,654,917 | $ | 4,132,393 | $ | 2,939,437 | |||||||||||||
| Cost of sales | 1,689,113 | 2,602,268 | 5,377,195 | 9,318,425 | 2,117,646 | 1,434,826 | ||||||||||||||||||
| Gross margin | 936,680 | 1,634,251 | 2,577,840 | 5,336,492 | 2,014,747 | 1,504,611 | ||||||||||||||||||
| Operating expenses: | ||||||||||||||||||||||||
| Selling, general and administrative | 548,391 | 582,880 | 1,881,072 | 2,042,922 | 554,031 | 661,251 | ||||||||||||||||||
| Litigation expenses | 134,765 | 282,490 | 560,610 | 609,330 | 1,181 | 2,696 | ||||||||||||||||||
| Legal damages | 30,523 | - | 2,130,523 | - | ||||||||||||||||||||
| Engineering, research and development | 546,691 | 615,007 | 1,691,631 | 1,783,655 | ||||||||||||||||||||
Engineering, research, and development | 693,575 | 631,953 | ||||||||||||||||||||||
| Total operating expenses | 1,260,370 | 1,480,377 | 6,263,836 | 4,435,907 | 1,248,787 | 1,295,900 | ||||||||||||||||||
| (Loss) income from operations | (323,690 | ) | 153,874 | (3,685,996 | ) | 900,585 | ||||||||||||||||||
Income from operations | 765,960 | 208,711 | ||||||||||||||||||||||
| Other income (expense): | ||||||||||||||||||||||||
| Proceeds from life insurance | - | - | 92,678 | - | ||||||||||||||||||||
| Amortization of deferred financing costs | (649 | ) | (1,359 | ) | (3,363 | ) | (4,072 | ) | ||||||||||||||||
| Change in fair value of common stock warrants | 5,000 | 37,000 | 95,000 | 288,203 | ||||||||||||||||||||
Interest income | 984 | 2,846 | ||||||||||||||||||||||
Other income | 13,593 | 13,854 | ||||||||||||||||||||||
Interest expense - judgment | (51,920 | ) | (75,144 | ) | ||||||||||||||||||||
| Interest expense | (14,097 | ) | (11,620 | ) | (38,435 | ) | (46,953 | ) | 0 | (9,780 | ) | |||||||||||||
| Total other income (expense) | (9,746 | ) | 24,021 | 145,880 | 237,178 | |||||||||||||||||||
Total other net (expense) | (37,343 | ) | (68,224 | ) | ||||||||||||||||||||
| (Loss) income before income taxes | (333,436 | ) | 177,895 | (3,540,116 | ) | 1,137,763 | ||||||||||||||||||
Income before income taxes | 728,617 | 140,487 | ||||||||||||||||||||||
| Income tax expense | - | 36,382 | - | 313,886 | 153,116 | 29,507 | ||||||||||||||||||
| Net (loss) income | (333,436 | ) | 141,513 | (3,540,116 | ) | 823,877 | ||||||||||||||||||
Net income | 575,501 | 110,980 | ||||||||||||||||||||||
| Preferred stock dividends | (30,667 | ) | - | (30,667 | ) | - | (80,000 | ) | (80,000 | ) | ||||||||||||||
| Net (loss) income attributable to common shareholders | $ | (364,103 | ) | $ | 141,513 | $ | (3,570,783 | ) | $ | 823,877 | ||||||||||||||
Net income attributable to common shareholders | $ | 495,501 | $ | 30,980 | ||||||||||||||||||||
| Basic (loss) income per common share | $ | (0.11 | ) | $ | 0.04 | $ | (1.10 | ) | $ | 0.25 | ||||||||||||||
| Diluted (loss) income per common share | $ | (0.11 | ) | $ | 0.03 | $ | (1.10 | ) | $ | 0.23 | ||||||||||||||
Basic income per common share | $ | 0.15 | $ | 0.01 | ||||||||||||||||||||
Diluted income per common share | $ | 0.11 | $ | 0.01 | ||||||||||||||||||||
| Weighted average shares outstanding: | ||||||||||||||||||||||||
| Basic | 3,255,887 | 3,255,887 | 3,255,887 | 3,255,887 | 3,255,887 | 3,255,887 | ||||||||||||||||||
| Diluted | 3,255,887 | 3,265,135 | 3,255,887 | 3,266,532 | 5,095,665 | 3,255,887 | ||||||||||||||||||
See accompanying notes to unaudited condensed consolidated financial statements.
TEL-INSTRUMENT ELECTRONICS CORP.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
For the Three Months Ended June 30, 2021, and 2020
(Unaudited)
Series A Convertible Preferred Stock | Series B Convertible Preferred Stock | Common Stock | ||||||||||||||||||||||||||||||||||
# of Shares Issued | Amount | # of Shares Issued | Amount | # of Shares Issued | Amount | Additional Paid-In Capital | Accumulated Deficit | Total | ||||||||||||||||||||||||||||
Balances at April 1, 2021 | 500,000 | $ | 3,695,998 | 166,667 | $ | 1,147,367 | 3,255,887 | $ | 325,586 | $ | 7,318,620 | $ | (7,270,042 | ) | $ | 5,217,529 | ||||||||||||||||||||
8% Dividends on Preferred Stock | - | 60,000 | - | 20,000 | - | - | (80,000 | ) | - | - | ||||||||||||||||||||||||||
Dividend Payments | - | (60,000 | ) | - | (20,000 | ) | - | - | - | - | (80,000 | ) | ||||||||||||||||||||||||
Stock-based compensation | - | - | - | - | - | - | 6,168 | - | 6,168 | |||||||||||||||||||||||||||
Net income | - | - | - | - | - | - | - | 575,501 | 575,501 | |||||||||||||||||||||||||||
Balances at June 30, 2021 | 500,000 | $ | 3,695,998 | 166,667 | $ | 1,147,367 | 3,255,887 | $ | 325,586 | $ | 7,244,788 | $ | (6,694,541 | ) | $ | 5,719,198 | ||||||||||||||||||||
Series A Convertible Preferred Stock | Series B Convertible Preferred Stock | Common Stock | ||||||||||||||||||||||||||||||||||
# of Shares Issued | Amount | # of Shares Issued | Amount | # of Shares Issued | Amount | Additional Paid-In Capital | Accumulated Deficit | Total | ||||||||||||||||||||||||||||
Balances at April 1, 2020 | 500,000 | $ | 3,515,998 | 166,667 | $ | 1,087,367 | 3,255,887 | $ | 325,586 | $ | 7,616,624 | $ | (7,870,099 | ) | $ | 4,675,476 | ||||||||||||||||||||
8% Dividends on Preferred Stock | - | 60,000 | - | 20,000 | - | - | (80,000 | ) | - | - | ||||||||||||||||||||||||||
Stock-based compensation | - | - | - | - | - | - | 5,276 | - | 5,276 | |||||||||||||||||||||||||||
Net income | - | - | - | - | - | - | - | 110,980 | 110,980 | |||||||||||||||||||||||||||
Balances at June 30, 2020 | 500,000 | $ | 3,575,998 | 166,667 | $ | 1,107,367 | 3,255,887 | $ | 325,586 | $ | 7,541,900 | $ | (7,759,119 | ) | $ | 4,791,732 | ||||||||||||||||||||
See accompanying notes to unaudited condensed consolidated financial statements.
TEL-INSTRUMENT ELECTRONICS CORP.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended | ||||||||
June 30, 2021 | June 30, 2020 | |||||||
Cash flows from operating activities: | ||||||||
Net income | $ | 575,501 | $ | 110,980 | ||||
Adjustments to reconcile net income to net cash provided by (used in) operating activities | ||||||||
Deferred income taxes | 153,114 | 61,890 | ||||||
Depreciation and amortization | 31,381 | 29,540 | ||||||
Amortization of right of use assets | 55,300 | 52,450 | ||||||
Provision for inventory obsolescence | 0 | 10,000 | ||||||
Non-cash stock-based compensation | 6,168 | 5,276 | ||||||
Changes in assets and liabilities: | ||||||||
(Increase) decrease in accounts receivable | 615,045 | (397,653 | ) | |||||
Decrease (increase) in inventories | 386,646 | (401,204 | ) | |||||
Decrease (increase) in prepaid expenses & other assets | 3,514 | 93,873 | ||||||
(Decrease) in accounts payable and other accrued liabilities | (555,716 | ) | (90,872 | ) | ||||
(Decrease) increase in accrued payroll, vacation pay and payroll taxes | 84,842 | (72,689 | ) | |||||
(Decrease) increase in deferred revenues | 1,129 | (70,827 | ) | |||||
Decrease in operating lease liabilities | (55,300 | ) | (52,450 | ) | ||||
Increase in accrued legal damages | 51,920 | 75,144 | ||||||
Net cash provided by (used in) operating activities | 1,353,544 | (646,542 | ) | |||||
Cash flows from investing activities: | ||||||||
Purchases of equipment | 0 | (15,386 | ) | |||||
Net cash used in investing activities | 0 | (15,386 | ) | |||||
Cash flows from financing activities: | ||||||||
Proceeds from SBA PPP Loan | - | 722,577 | ||||||
Payment of dividends | (80,000 | ) | 0 | |||||
Repayment of finance lease obligations | 0 | (49 | ) | |||||
Net cash (used in) provided by financing activities | (80,000 | ) | 722,528 | |||||
Net increase in cash and restricted cash | 1,273,544 | 60,600 | ||||||
Cash and restricted cash at beginning of period | 5,496,325 | 5,134,739 | ||||||
Cash and restricted cash at end of period | $ | 6,769,869 | $ | 5,195,339 | ||||
End of period | ||||||||
Cash | $ | 4,758,819 | $ | 3,185,796 | ||||
Restricted cash | 2,011,050 | 2,009,543 | ||||||
| $ | 6,769,869 | $ | 5,195,339 | |||||
Beginning of period | ||||||||
Cash | $ | 3,485,275 | $ | 3,126,195 | ||||
Restricted cash | 2,011,050 | 2,008,544 | ||||||
| $ | 5,496,325 | $ | 5,134,739 | |||||
Supplemental cash flow information: | ||||||||
Taxes paid | $ | 0 | 4,962 | |||||
Interest paid | $ | - | ||||||
| Nine Months Ended | ||||||||
| December 31, 2017 | December 31, 2016 | |||||||
| Cash flows from operating activities: | ||||||||
| Net (loss) income | $ | (3,540,116 | ) | $ | 823,877 | |||
Adjustments to reconcile net (loss) income to net cash used in operating activities: | ||||||||
| Deferred income taxes | - | 317,509 | ||||||
| Depreciation and amortization | 53,221 | 95,209 | ||||||
| Provision for inventory obsolescence | 50,000 | 20,000 | ||||||
| Amortization of deferred financing costs | 3,363 | 4,072 | ||||||
| Change in fair value of common stock warrant | (95,000 | ) | (288,203 | ) | ||||
| Non-cash stock-based compensation | 23,180 | 24,536 | ||||||
| Changes in assets and liabilities: | ||||||||
| Decrease (increase) in accounts receivable | (104,375 | ) | 396,430 | |||||
| (Increase) decrease in inventories | (151,145 | ) | 185,145 | |||||
| Decrease (increase) in prepaid expenses & other assets | 76,165 | (28,774 | ) | |||||
| Increase (decrease) in accounts payable and other accrued expenses | 358,808 | (299,359 | ) | |||||
| Decrease in federal and state taxes | (4,105 | ) | (53,623 | ) | ||||
| Decrease in accrued payroll, vacation pay & withholdings | (131,206 | ) | (224,072 | ) | ||||
| (Decrease) increase in deferred revenues | (68,742 | ) | 338,792 | |||||
| Increase in accrued legal damages | 2,130,523 | - | ||||||
| Restricted cash for appeal bond | (2,000,000 | ) | ||||||
| Decrease in other long-term liabilities | - | (7,800 | ) | |||||
| Net cash (used in) provided by operating activities | (3,399,429 | ) | 1,303,739 | |||||
| Cash flows from investing activities: | ||||||||
| Purchases of equipment | (89,396 | ) | (37,070 | ) | ||||
| Net cash used in investing activities | (89,396 | ) | (37,070 | ) | ||||
| Cash flows from financing activities: | ||||||||
| Proceeds from line of credit | 800,000 | - | ||||||
| Proceeds from issuance of preferred stock, net of expenses | 2,960,000 | - | ||||||
| Payment of warrant liability | - | (720,000 | ) | |||||
| Repayment of long-term debt | (290,419 | ) | (322,894 | ) | ||||
| Repayment of subordinated notes - related parties | - | (25,000 | ) | |||||
| Repayment of capitalized lease obligations | (4,646 | ) | (9,254 | ) | ||||
| Net cash provided by (used in) financing activities | 3,464,935 | (1,077,148 | ) | |||||
| Net decrease in cash and cash equivalents | (23,890 | ) | 189,521 | |||||
| Cash and cash equivalents at beginning of period | 287,873 | 972,633 | ||||||
| Cash and cash equivalents at end of period | $ | 263,983 | $ | 1,162,154 | ||||
| Supplemental cash flow information: | ||||||||
| Taxes paid | $ | 5,000 | $ | 87,374 | ||||
| Interest paid | $ | 50,374 | $ | 107,768 | ||||
See accompanying notes to unaudited condensed consolidated financial statements.
TEL-INSTRUMENT ELECTRONICS CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1 – Business, Organization and Liquidity
Business and Organization
Tel-Instrument Electronics Corp. (“Tel”, “TIC” or the “Company”) has been in business since 1947. The Company is a leading designer and manufacturer of avionics test and measurement instruments for the global, commercial air transport, general aviation, and government/military defense markets. Tel provides instruments to test, measure, calibrate, and repair a wide range of airborne navigation and communication equipment. The Company sells its equipment in both domestic and international markets. Tel continues to develop new products in anticipation of customers’ needs and to maintain its strong market position. Its development of multi-function testers has made it easier for customers to perform ramp tests with less operator training, fewer test sets, and lower product support costs. The Company has become a major manufacturer and supplier of Identification Friend or Foe (“IFF”) flight line test equipment over the last few years.
The Company is publicly traded and was quoted on the Over-the-Counter Market Place (“OTCQB”) under the symbol “TIKK”.
Liquidity and PPP Loans
On June 30, 2021, the Company had positive working capital of $3,850,769 as compared to working capital of $3,159,731 on March 31, 2021. This included approximately $6.8 million of cash including the $2 million supersedes appeal bond. The Company has recorded total damages of $5,940,943, including accrued interest, as a result of the jury verdict associated with the Aeroflex litigation.
With a $6.1 million backlog on June 30, 2021, the Company expects that in fiscal year 2022, revenue and profitability will continue to improve.
On March 27, 2020, former President Trump signed the Coronavirus Aid, Relief and Economic Security (the “CARES Act”), which, among other things, outlines the provisions of the Paycheck Protection Program (the “PPP”). The Company determined that it met the criteria to be eligible to obtain a loan under the PPP because, among other reasons, in light of the COVID-19 outbreak and the uncertainty of economic conditions related thereto, the loan was considered necessary to support the Company’s ongoing operations and retain all its employees. In addition, former President Trump signed into law the Paycheck Protection Program and Health Care Enhancement Act on April 24, 2020, which increased funding provided by the CARES Act. On May 4, 2020, the Company issued a promissory note (the “Note”) to Bank of America in the principal aggregate amount of $722,577 (the “PPP Loan”) pursuant to the Paycheck Protection Program (“PPP”) under the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”). The amount was deposited in our bank on May 4, 2020. On June 5, 2020, the Paycheck Protection Program Flexibility Act was signed into law and extended the program until December 31, 2020.
TIC qualified for full loan forgiveness on the initial tranche on December 18, 2020. On January 6, 2021, updated PPP guidance outlining program changes to enhance its effectiveness and accessibility was released on in accordance with the Economic Aid to Hard-Hit Small Businesses, Non-Profits, and Venues Act. This was available to companies that recorded greater than a 25% sales reduction in any quarter compared to the prior year. The Company qualified for this second round of funding and on March 15, 2021, the company secured a Second Draw PPP loan in the amount of $722,577. A borrower can apply for forgiveness once all loan proceeds for which the borrower is requesting forgiveness have been used. Borrowers can apply for forgiveness any time up to the maturity date of the loan. If borrowers do not apply for forgiveness within 10 months after the last day of the covered period, then PPP loan payments are no longer deferred, and borrowers will begin making loan payments to their PPP lender. The Company plans to file for loan forgiveness of the second tranche of PPP funding during quarter ending September 30, 2021.
Based on the foregoing, we believe that our expected cash flows from operations and current cash balances will be sufficient to operate in the normal course of business for next 12 months from the issuance date of these unaudited condensed financial statements, including any payments for settlement of the Aeroflex litigation.
The Bank of America extension for the line of credit expired July 30, 2021, the line of credit annual renewal is currently being underwritten with a maturity of July 30, 2022, and subject to completion of the lender’s underwriting procedures. As of June 30, 2021, the Line of Credit draw remained at 0.
TEL-INSTRUMENT ELECTRONICS CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1 – Business, Organization and Liquidity (continued)
Impact of the COVID-19 Coronavirus
In December 2019, a novel strain of coronavirus, which causes the disease known as COVID-19, was reported to have surfaced in Wuhan, China. Since then, COVID-19 coronavirus has spread globally. In March 2020, the World Health Organization declared the COVID-19 outbreak a pandemic and the U.S. government imposed travel restrictions on travel between the United States, Europe, and certain other countries. The impact of this pandemic has been, and will likely continue to be, extensive in many aspects of society, which has resulted, and will likely continue to result, in significant disruptions to the global economy as well as businesses and capital markets around the world.
In response to public health directives and orders and to help minimize the risk of the virus to employees, the Company has taken precautionary measures, including implementing work-from-home policies for certain employees. The impact of the virus, including work-from-home policies, may negatively impact productivity, disrupt the Company's business, and delay certain projects, the magnitude of which will depend, in part, on the length and severity of the restrictions and other limitations on the Company's ability to conduct its business in the ordinary course. Other impacts to the Company's business may include temporary closures of its suppliers and disruptions or restrictions on its employees' ability to travel. Any prolonged material disruption to the Company's employees or suppliers could adversely impact the Company's financial condition and results of operations, including its ability to obtain financing.
Note 2 – Summary of Significant Accounting Policies
Basis of Presentation
In the opinion of management, the accompanying unaudited condensed consolidated financial statements contain all adjustments necessary to present fairly the financial position of Tel-Instrument Electronics Corp. (the “Company” or “TIC” or “Tel”) as of December 31, 2017,June 30, 2021, the results of operations, for the three and nine months ended December 31, 2017 and December 31, 2016,changes in stockholders’ equity, and statements of cash flowsflow for the ninethree months ended December 31, 2017June 30, 2021, and December 31, 2016.June 30, 2020. These results are not necessarily indicative of the results to be expected for the full year. The unaudited condensed consolidated 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, 20172021, 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 unaudited condensed consolidated 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, 2017,2021, as filed with the United States Securities and Exchange Commission (the “SEC”) on July 14, 2017June 29, 2021 (the “Annual Report)Report”).
Revenue Recognition
Under Financial Accounting Standards Board (“FASB”) Topic 606, Revenue from Contacts with Customers (“ASC 606”), the Company recognizes revenue when the customer obtains control of promised goods or services, in an amount that reflects the consideration which is expected to be received in exchange for those goods or services. The Company recognizes revenue following the five-step model prescribed under ASC 606: (i) identify contract(s) with a customer; (ii) identify the performance obligation(s) in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligation(s) in the contract; and Going Concern
The Company accounts for revenue recognition in accordance with ASC 606.The core principle of Topic 606 is to recognize revenues when promised goods or services are transferred to customers in an amount that reflects the Condensed Consolidated Financial Statements,consideration that is expected to be received for those goods or services. The ASC 606 defines a five-step process to achieve the core principle and, in doing so, it is possible more judgement and estimates may be required within the revenue recognition process than are currently in use.
The Company generates revenue from designing, manufacturing, and selling avionic tests and measurement solutions for the global commercial air transport, general aviation, and government/military aerospace and defense markets. The Company also offers calibration and repair services for a wide range of airborne navigation and communication equipment.
TEL-INSTRUMENT ELECTRONICS CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 2 – Summary of Significant Accounting Policies (continued)
Nature of goods and services
The following is a description of the products and services from which the Company has recorded total damages of $4,930,523 as a result of the jury verdict associated with the Aeroflex litigationgenerates revenue, as well as the Court’s decisionnature, timing of satisfaction of performance obligations, and significant payment terms for each.
Test Units/Sets
The Company develops and manufactures unit sets to test navigation and communication equipment, such as ramp testers and bench testers for equipment installed in aircraft. The Company recognizes revenue when the customer obtains control of the Company’s product based on punitive damages. The jury found no misappropriationthe contractual shipping terms of Aeroflex trade secrets but it did rulethe contract, which is usually at the time of shipment. Revenue on products is presented gross because the Company is primarily responsible for fulfilling the promise to provide the product, is responsible to ensure that the Company tortiously interferedproduct is produced in accordance with a prospective business opportunitythe related supply agreement and awarded damages. The jury also ruled that Tel tortiously interfered with Aeroflex’s non-disclosure agreements with two former Aeroflex employees. The jury also found thatbears the former Aeroflex employees breached their non-disclosure agreements with Aeroflex. The Court conducted further hearings onrisk of loss while the Company’s post-trial motions which sought to reduce the damages award of $2.8 million,inventory is in-transit. Revenue is measured as well as the punitive damages claim. The Court denied the Company’s motions and awarded Aeroflex an additional $2.1 million of punitive damages, which brings the total Tel damages awarded in this case to approximately $4.9 million. The Company has filed motions in January 2018 for the Court to reconsider the amount of damagesconsideration the Company expects to receive in exchange for transferring products to the customer.
If the contract contains a single performance obligation, the entire transaction price is allocated to the single performance obligation. Contracts that contain multiple performance obligations require an allocation of the transaction price based on the groundsestimated relative standalone selling prices of the promised products or services underlying each performance obligation. The Company determines stand-alone selling prices based on the price at which the performance obligation is sold separately. If the stand-alone selling price is not observable through past transactions, the Company estimates the standalone selling price taking into account available information such as market conditions and internally approved pricing guidelines related to the performance obligations.
When determining the transaction price of a contract, an adjustment is made if payment from the customer occurs either significantly before or significantly after performance, resulting in a significant financing component. Applying the practical expedient in paragraph 606-10-32-18, the Company does not assess whether a significant financing component exists if the period between when the Company performs its obligations under the contract and when the customer pays is one year or less. None of the Company’s contracts contained a significant financing component as of June 30, 2021.
Replacement Parts
The Company offers replacement parts for test equipment, ramp testers, and bench testers. Similar to the sale of test units, the control of the product transfers at a point of time and therefore, revenue is recognized at the point in time when the obligation to the customer has been fulfilled.
Extended Warranties
The extended warranties sold by the Company provide a level of assurance beyond the coverage for defects that theyexisted at the time of a sale or against certain types of covered damage with coverage terms generally ranging from 5 to 7 years. Amounts received for warranties are duplicativerecorded as deferred revenue and not legally supportable. A hearing on this motionrecognized as revenue ratably over the respective term of the agreements. As of June 30, 2021, $413,304 is expected withinto be recognized from remaining performance obligations for extended warranties as compared to $408,219 at March 31, 2021.
For the nextthree months ended June 30, days and a final decision is expected within the next two to three months. The Judge could deny our motions, reduce the amount of damages or even order a new trial. Once a final decision has been rendered,2021, the Company hasrecognized revenue of $15,915 from amounts that were included in Deferred Revenue as compared to $22,140 from amounts that were included in Deferred Revenue for the three months ended June 30, days to file an appeal. 2020.
The Company has postedfollowing table provides a $2,000,000 bond to prevent Aeroflex from enforcement actions until a final decision has been rendered by the Court. This $2 million bond amount would remain in place during the appeal process (See Note 5). The Company believes it has excellent grounds to appeal this verdict. The appeal process would be expected to take several years to complete.
Deferred revenues at April 1, 2021 | $ | 408,219 | ||
Additional extended warranties | 21,000 | |||
Revenue recognized for the three months ended June 30, 2021 | (15,915 | ) | ||
Deferred revenues at June 30, 2021 | $ | 413,304 |
TEL-INSTRUMENT ELECTRONICS CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 14 to the Notes to the Condensed Financial Statements). These funds were used to finance an appeal and provide funds for operations. The accompanying financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.
Other Deferred Revenues
The Company sometimes receives payments in advance of shipment. These amounts are classified as other deferred revenues. For the periods ended June 30, 2021, and March 31, 2021, the Company has other deferred revenues of $70,964 and $74,920, respectively.
Repair and Calibration Services
The Company offers repair and calibration services for units that are returned for annual calibrations and/or for repairs after the ninewarranty period has expired. The Company repairs and calibrates a wide range of airborne navigation and communication equipment. Revenue is recognized at the time the repaired or calibrated unit is shipped back to the customer, as it is at this time that the work is completed.
Other
The majority of the Company’s revenues are from contracts with the U.S. government, airlines, aircraft manufacturers, such as Boeing and Lockheed Martin, domestic distributors, international distributors for sales to military and commercial customers, and other commercial customers. The contracts with the U.S. government typically are subject to the Federal Acquisition Regulation (“FAR”) which provides guidance on the types of costs that are allowable in establishing prices for goods and services provided under U.S. government contracts.
Payment terms and conditions vary by contract, although terms generally include a requirement of payment within a range from 30 to 60 days, or in certain cases, up-front deposits. In circumstances where the timing of revenue recognition differs from the timing of invoicing, the Company has determined that the Company's contracts generally do not include a significant financing component. Payments received prior to the delivery of units or services performed are recorded as deferred revenues. Taxes collected from customers, which are subsequently remitted to governmental authorities, are excluded from sales. The Company applied the practical expedient to account for shipping and handling activities as fulfillment cost rather than as a separate performance obligation. Shipping and handling costs charged to customers are classified as sales, and the shipping and handling costs incurred are included in cost of sales. All sales are denominated in U.S. dollars.
The Company chose to apply the available practical expedient as commission eligible sales orders are fulfilled within less than one year and commissions are generally paid by the Company within 30 days of the related sales order fulfillment. Accordingly, management has determined that no change in accounting for costs to obtain a contract will be required for the Company to conform to ASC 606.
TEL-INSTRUMENT ELECTRONICS CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 2 – Summary of Significant Accounting Policies (continued)
Disaggregation of revenue
In the following tables, revenue is disaggregated by revenue category.
For the Three Months Ended June 30, 2021 | ||||||||
Commercial | Government | |||||||
Sales Distribution | ||||||||
Test Units | $ | 42,465 | $ | 3,569,603 | ||||
| $ | 42,465 | $ | 3,569,603 | |||||
The remainder of our revenues for the three months ended December 31, 2017, thereJune 30, 2021, are derived from repairs and calibration of $445,030,
replacement parts of $56,460, extended warranties of $15,915 and other revenues of $2,920. We do not disaggregate these revenue streams as they are not deemed an important element related to how management operates the business between segments.
For the Three Months Ended June 30, 2020 | ||||||||
Commercial | Government | |||||||
Sales Distribution | ||||||||
Test Units | $ | 58,573 | $ | 2,563,277 | ||||
| $ | 58,573 | $ | 2,563,277 | |||||
The remainder of our revenues for the three months ended June 30, 2020, are derived from repairs and calibration of $277,898, replacement parts of $16,070, extended warranties of $22,140 and other revenues of $1,479. We do not disaggregate these revenue streams as they are not deemed an important element related to how management operates the business between segments.
In the following table, revenue is disaggregated by geography.
For the Three Months Ended June 30, 2021 | For the Three Months Ended June 30, 2020 | |||||||
Geography | ||||||||
United States | $ | 2,449,414 | $ | 1,714,599 | ||||
International | 1,682,979 | 1,224,838 | ||||||
Total | $ | 4,132,393 | $ | 2,939,437 | ||||
For the three months ended June 30, 2021, four customers accounted for sales of 10%, 18%, 21% and 26%.
For the three months ended June 30, 2020, two customers account for sales of 11% and 16%.
New Accounting Pronouncements
In June 2016, the FASB issued ASU No. 2016-13 Financial Instruments -Credit Losses (Topic 326), Measurement of Credit Losses on Financial Statements. The amendment in this update replaces the incurred loss impairment methodology in current GAAP with a methodology that reflects expected credit losses on instruments within its scope, including trade receivables. This update is intended to provide financial statement users with more decision-useful information about the expected credit losses. The effective date of the new standard has been deferred to April 1, 2023. We do not expect the adoption of this standard to have been noa significant impact on our financial position and results of operations.
No other recently issued accounting pronouncements had or are expected to have a material changes inimpact on the Company’s significant accounting policies to those previously disclosed in the Annual Report.unaudited condensed consolidated financial statements.
TEL-INSTRUMENT ELECTRONICS CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 4 3 – Accounts Receivable, net
The following table sets forth the components of accounts receivable:
| December 31, 2017 | March 31, 2017 | June 30, 2021 | March 31, 2021 | |||||||||||||
| Government | $ | 1,461,090 | $ | 1,392,482 | $ | 1,119,750 | $ | 1,700,907 | ||||||||
| Commercial | 207,167 | 171,400 | 206,026 | 239,914 | ||||||||||||
| Less: Allowance for doubtful accounts | (7,500 | ) | (7,500 | ) | (7,500 | ) | (7,500 | ) | ||||||||
| $ | 1,660,757 | $ | 1,556,382 | $ | 1,318,276 | $ | 1,933,321 | |||||||||
Note 5 4 – Restricted Cash to support appeal bondSupport Appeal Bond
In January 2018, the Company transferred $2,000,000 to a restricted cash account to secure a letter of credit which was used for collateral for the appeal bond (See Notes 14 and 15).
Note 5 – Inventories, net
Inventories consist of:
| December 31, 2017 | March 31, 2017 | June 30, 2021 | March 31, 2021 | |||||||||||||
| Purchased parts | $ | 3,839,370 | $ | 3,197,378 | $ | 2,691,826 | $ | 2,912,599 | ||||||||
| Work-in-process | 817,543 | 1,272,235 | 934,412 | 1,020,402 | ||||||||||||
| Finished goods | 32,411 | 68,566 | 105 | 79,988 | ||||||||||||
| Less: Inventory reserve | (380,000 | ) | (330,000 | ) | (575,000 | ) | (575,000 | ) | ||||||||
| $ | 4,309,324 | $ | 4,208,179 | $ | 3,051,343 | $ | 3,437,989 | |||||||||
Note 7 6 – Net Income (Loss) per Share
Net income (loss) per share has been computed according to Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC 260”), “Earnings per Share,” which requires a dual presentation of basic and diluted income (loss) per share (“EPS”). Basic EPS represents net income (loss) divided by the weighted average number of common shares outstanding during a reporting period. Diluted EPS reflects the potential dilution that could occur if securities, including preferred stock, warrants and options, were converted into common stock. The dilutive effect of outstanding warrants and options is reflected in earnings per share by use of the treasury stock method. The dilutive effect of preferred stock is reflected in earnings per share by use of the if-converted method. In applying the treasury stock method for stock-based compensation arrangements, the assumed proceeds are computed as the sum of the amount the employee must pay upon exercise and the amounts of average unrecognized compensation costs attributed to future services. compensation.
| Three Months Ended | Three Months Ended | |||||||
| December 31, 2017 | December 31, 2016 | |||||||
| Basic net (loss) income per share computation: | ||||||||
| Net (loss) income | $ | (364,103 | ) | $ | 141,513 | |||
| Weighted-average common shares outstanding | 3,255,887 | 3,255,887 | ||||||
| Basic net (loss) income per share | $ | (0.11 | ) | $ | 0.04 | |||
| Diluted net (loss) income per share computation | ||||||||
| Net (loss) income | $ | (364,103 | ) | $ | 141,513 | |||
| Add: Change in fair value of warrants | - | 37,000 | ||||||
| Diluted (loss) income | $ | (364,103 | ) | 104,513 | ||||
| Weighted-average common shares outstanding | 3,255,887 | 3,255,887 | ||||||
Incremental shares attributable to the assumed exercise of outstanding stock options and warrants | - | 9,248 | ||||||
| Total adjusted weighted-average shares | 3,255,887 | 3,265,135 | ||||||
| Diluted net (loss) income per share | $ | (0.11 | ) | $ | 0.03 | |||
Three Months Ended | Three Months Ended | |||||||
June 30, 2021 | June 30, 2020 | |||||||
Basic net income per share computation: | ||||||||
Net income | $ | 575,501 | $ | 110,980 | ||||
Less: Preferred dividends | (80,000 | ) | (80,000 | ) | ||||
Net income attributable to common shareholders | 495,501 | 30,980 | ||||||
Weighted-average common shares outstanding | 3,255,887 | 3,255,887 | ||||||
Basic net income per share | $ | 0.15 | $ | 0.01 | ||||
Diluted net income per share computation | ||||||||
Net income attributable to common shareholders | $ | 495,501 | $ | 30,980 | ||||
Add: Preferred dividends | 80,000 | 0 | ||||||
Diluted income attributable to common shareholders | $ | 575,501 | $ | 30,980 | ||||
Weighted-average common shares outstanding | 3,255,887 | 3,255,887 | ||||||
Incremental shares attributable to the assumed conversion of preferred stock | 1,839,778 | 0 | ||||||
Total adjusted weighted-average shares | 5,095,665 | 3,255,887 | ||||||
Diluted net income per share | $ | 0.11 | $ | 0.01 | ||||
TEL-INSTRUMENT ELECTRONICS CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 7 6 – Net Income (Loss) per Share (continued)
| Nine Months Ended | Nine Months Ended | |||||||
| December 31, 2017 | December 31, 2016 | |||||||
| Basic net (loss) income per share computation: | ||||||||
| Net (loss) income | $ | (3,570,783 | ) | $ | 823,877 | |||
| Weighted-average common shares outstanding | 3,255,887 | 3,255,887 | ||||||
| Basic net(loss)income per share | $ | (1.10 | ) | $ | 0.25 | |||
| Diluted net (loss) income per share computation | ||||||||
| Net (loss) income | $ | (3,570,783 | ) | $ | 823,877 | |||
| Change in fair value of warrants | - | 70,000 | ||||||
| Diluted (loss) income | $ | (3,570,783 | ) | 753,877 | ||||
| Weighted-average common shares outstanding | 3,255,887 | 3,255,887 | ||||||
Incremental shares attributable to the assumed exercise of outstanding stock options and warrants | - | 10,645 | ||||||
| Total adjusted weighted-average shares | 3,255,887 | 3,266,532 | ||||||
| Diluted net (loss) income per share | $ | (1.10 | ) | $ | 0.23 | |||
The following table summarizes securities that, if exercised, would have an anti-dilutive effect on earnings per share:share for the three months ended:
| December 31, 2017 | December 31, 2016 | June 30, 2021 | June 30, 2020 | |||||||||||||
| Convertible preferred stock | 1,000,000 | - | 0 | 1,779,778 | ||||||||||||
| Stock options | 75,000 | 71,000 | 98,500 | 83,500 | ||||||||||||
| Warrants | 50,000 | - | ||||||||||||||
| 1,125,000 | 71,000 | 98,500 | 1,863,278 | |||||||||||||
Note 7 – Line of Credit
The Bank of America
As of December 31, 2017June 30, 2021, the Line of Credit draw remained at 0.
Note 8 – SBA PPP Loan
On January 6, 2021, updated PPP guidance outlining program changes to enhance its effectiveness and accessibility was released on in accordance with the Economic Aid to Hard-Hit Small Businesses, Non-Profits, and Venues Act. This was available to companies that recorded greater than a 25% sales reduction in any quarter compared to the prior year. The Company qualified for this second round of funding and on March 31, 2017,15, 2021, the outstanding balances were $1,000,000 and $200,000, respectively. As of December 31, 2017 the remaining availability under this line is $-0-.
Note 11 9 – Segment Information
In accordance with FASB ASC 280, “Disclosures about Segments of an Enterprise and related information”, the Company determined it has two2 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.
TEL-INSTRUMENT ELECTRONICS CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 9 – Segment Information (continued)
The tabletables below presentspresent information about reportable segments within the avionics business for the three months ending June 30, 2021, and nine month periods ending December 31, 2017 and 2016:2020:
Three Months Ended December 31, 2017 | Avionics Government | Avionics Commercial | Avionics Total | Corporate Items | Total | |||||||||||||||||||||||||||||||||||
Three Months Ended June 30, 2021 | Avionics Government | Avionics Commercial | Avionics Total | Corporate Items | Total | |||||||||||||||||||||||||||||||||||
| Net sales | $ | 1,825,744 | $ | 800,049 | $ | 2,625,793 | $ | - | $ | 2,625,793 | $ | 3,569,603 | $ | 562,790 | $ | 4,132,393 | $ | 0 | $ | 4,132,393 | ||||||||||||||||||||
| Cost of sales | 1,013,481 | 675,632 | 1,689,113 | - | 1,689,113 | 1,762,900 | 354,746 | 2,117,646 | 0 | 2,117,646 | ||||||||||||||||||||||||||||||
| Gross margin | 812,263 | 124,417 | 936,680 | - | 936,680 | 1,806,703 | 208,044 | 2,014,747 | 0 | 2,014,747 | ||||||||||||||||||||||||||||||
| Engineering, research, and development | 546,691 | - | 546,691 | 693,575 | 0 | 693,575 | ||||||||||||||||||||||||||||||||||
| Selling, general and administrative | 225,610 | 322,781 | 548,391 | 177,792 | 376,239 | 554,031 | ||||||||||||||||||||||||||||||||||
| Litigation costs | 134,765 | 134,765 | 0 | 1,181 | 1,181 | |||||||||||||||||||||||||||||||||||
| Legal damages | 30,523 | 30,523 | ||||||||||||||||||||||||||||||||||||||
| Amortization of deferred financing costs | - | 649 | 649 | |||||||||||||||||||||||||||||||||||||
| Change in fair value of common stock warrants | - | (5,000 | ) | (5,000 | ) | |||||||||||||||||||||||||||||||||||
| Proceeds from life insurance | - | - | ||||||||||||||||||||||||||||||||||||||
| Interest expense, net | - | 14,097 | 14,097 | |||||||||||||||||||||||||||||||||||||
Interest income | 0 | (984 | ) | (984 | ) | |||||||||||||||||||||||||||||||||||
Other income | 0 | (13,593 | ) | (13,593 | ) | |||||||||||||||||||||||||||||||||||
Interest expense – judgment | 0 | 51,920 | 51,920 | |||||||||||||||||||||||||||||||||||||
| Total expenses | 772,301 | 497,815 | 1,270,116 | 871,367 | 414,763 | 1,286,130 | ||||||||||||||||||||||||||||||||||
| Income (loss) before income taxes | $ | 164,379 | $ | (497,815 | ) | $ | (333,436 | ) | ||||||||||||||||||||||||||||||||
Income before income taxes | $ | 1,143,380 | $ | (414,763 | ) | $ | 728,617 | |||||||||||||||||||||||||||||||||
Three Months Ended June 30, 2020 | Avionics Government | Avionics Commercial | Avionics Total | Corporate Items | Total | |||||||||||||||
Net sales | $ | 2,563,276 | $ | 376,161 | $ | 2,939,437 | $ | 0 | $ | 2,939,437 | ||||||||||
Cost of sales | 1,182,282 | 252,544 | 1,434,826 | 0 | 1,434,826 | |||||||||||||||
Gross margin | 1,380,994 | 123,617 | 1,504,611 | 0 | 1,504,611 | |||||||||||||||
Engineering, research, and development | 631,953 | 0 | 631,953 | |||||||||||||||||
Selling, general and administrative | 253,838 | 407,413 | 661,251 | |||||||||||||||||
Litigation costs | 0 | 2,696 | 2,696 | |||||||||||||||||
Interest income | 0 | (2,846 | ) | (2,846 | ) | |||||||||||||||
Other income | 0 | (13,854 | ) | (13,854 | ) | |||||||||||||||
Interest expense - judgment | 0 | 75,144 | 75,144 | |||||||||||||||||
Interest expense | 0 | 9,780 | 9,780 | |||||||||||||||||
Total expenses | 885,791 | 478,333 | 1,364,124 | |||||||||||||||||
Income (loss) before income taxes | $ | 618,820 | $ | (478,333 | ) | $ | 140,487 | |||||||||||||
TEL-INSTRUMENT ELECTRONICS CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1110 – Segment Information (continued)
Three Months Ended December 31, 2016 | Avionics Government | Avionics Commercial | Avionics Total | Corporate Items | Total | |||||||||||||||
| Net sales | $ | 3,771,384 | $ | 465,135 | $ | 4,236,519 | $ | - | $ | 4,236,519 | ||||||||||
| Cost of sales | 2,297,157 | 305,111 | 2,602,268 | - | 2,602,268 | |||||||||||||||
| Gross margin | 1,474,227 | 160,024 | 1,634,251 | - | 1,634,251 | |||||||||||||||
| Engineering, research, and development | 615,007 | - | 615,007 | |||||||||||||||||
| Selling, general and administrative | 256,599 | 326,281 | 582,880 | |||||||||||||||||
| Litigation costs | 282,490 | 282,490 | ||||||||||||||||||
| Amortization of deferred financing costs | - | 1,359 | 1,359 | |||||||||||||||||
| Change in fair value of common stock warrants | - | (37,000 | ) | (37,000 | ) | |||||||||||||||
| Interest expense, net | - | 11,620 | 11,620 | |||||||||||||||||
| Total expenses | 871,606 | 584,750 | 1,456,356 | |||||||||||||||||
| Income (loss) before income taxes | $ | 762,645 | $ | (584,750 | ) | $ | 177,895 | |||||||||||||
Nine Months Ended December 31, 2017 | Avionics Government | Avionics Commercial | Avionics Total | Corporate Items | Total | |||||||||||||||
| Net sales | $ | 5,826,763 | $ | 2,128,272 | $ | 7,955,035 | $ | - | $ | 7,955,035 | ||||||||||
| Cost of sales | 3,489,223 | 1,887,972 | 5,377,195 | - | 5,377,195 | |||||||||||||||
| Gross margin | 2,337,540 | 240,300 | 2,577,840 | - | 2,577,840 | |||||||||||||||
| Engineering, research, and development | 1,691,631 | - | 1,691,631 | |||||||||||||||||
| Selling, general and administrative | 861,795 | 1,019,277 | 1,881,072 | |||||||||||||||||
| Litigation costs | 560,610 | 560,610 | ||||||||||||||||||
| Legal damages | 2,130,523 | 2,130,523 | ||||||||||||||||||
| Amortization of deferred financing costs | - | 3,363 | 3,363 | |||||||||||||||||
| Change in fair value of common stock warrants | - | (95,000 | ) | (95,000 | ) | |||||||||||||||
| Proceeds from life insurance | (92,678 | ) | (92,678 | ) | ||||||||||||||||
| Interest expense, net | - | 38,435 | 38,435 | |||||||||||||||||
| Total expenses | 2,553,426 | 3,564,530 | 6,117,956 | |||||||||||||||||
| Income (loss) before income taxes | $ | 24,414 | $ | (3,564,530 | ) | $ | (3,540,116 | ) | ||||||||||||
Nine Months Ended December 31, 2016 | Avionics Government | Avionics Commercial | Avionics Total | Corporate Items | Total | |||||||||||||||
| Net sales | $ | 12,981,768 | $ | 1,673,149 | $ | 14,654,917 | $ | - | $ | 14,654,917 | ||||||||||
| Cost of sales | 8,067,636 | 1,250,789 | 9,318,425 | - | 9,318,425 | |||||||||||||||
| Gross margin | 4,914,132 | 422,360 | 5,336,492 | - | 5,336,492 | |||||||||||||||
| Engineering, research, and development | 1,783,655 | - | 1,783,655 | |||||||||||||||||
| Selling, general and administrative | 946,589 | 1,096,333 | 2,042,922 | |||||||||||||||||
| Litigation costs | 609,330 | 609,330 | ||||||||||||||||||
| Amortization of deferred financing costs | - | 4,072 | 4,072 | |||||||||||||||||
| Change in fair value of common stock warrants | - | (288,203 | ) | (288,203 | ) | |||||||||||||||
| Interest expense, net | - | 46,953 | 46,953 | |||||||||||||||||
| Total expenses | 2,730,244 | 1,468,485 | 4,198,729 | |||||||||||||||||
| Income (loss) before income taxes | $ | 2,606,248 | $ | (1,468,485 | ) | $ | 1,137,763 | |||||||||||||
FASB ASC 740-10, “Accounting for Uncertainty in Income Taxes” (“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’s deferred tax asset. 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 reverse. The Company has provided a 100% valuation allowance against its deferred tax asset at December 31, 2017 and March 31, 2017.
In December 2019, the FASB issued ASU No. 2019-12, Income Taxes - simplifying the accounting for income taxes (Topic 740), which is meant to simplify the accounting for income taxes by removing certain exceptions to the general principles in Topic 740, Income Taxes. The amendment also improves consistent application and liabilities as well as reassessingsimplify GAAP for other areas of Topic 740 by clarifying and amending existing guidance. This ASU was effective April 1, 2021, and adoption of this standard had no significant impact on our financial position and results of operations.
Note 11 – Operating Lease Liability
The Company leases its facility in East Rutherford, NJ with monthly payments of $18,467 which expires in August 2021 and has been renewed for an additional eight years. The renewal commences September 2021 with monthly payments of $21,237 with an increase to $23,083 monthly payments in September 2025. As a result, the net realizabilityCompany recorded $1,830,858 of our deferred taxright-of-use assets and related operating leases liabilities during the year ended March 31, 2021.
The Company's leases generally do not provide an implicit rate, and therefore the Company uses its incremental borrowing rate as the discount rate when measuring operating lease liabilities. The Tax Act had no impactincremental borrowing rate represents an estimate of the interest rate the Company would incur at lease commencement to borrow an amount equal to the lease payments on a collateralized basis over the term of a lease. The Company estimated its incremental borrowing rate based on its credit quality, line of credit agreement and by comparing interest rates available in the market for similar borrowings. The Company used a discount rate of 3.90% at June 30, 2021.
The following table reconciles the undiscounted future minimum lease payments (displayed by year and in the aggregate) under non-cancelable operating leases with terms of more than one year to the total lease liabilities recognized on the accompanying financial statements.unaudited condensed consolidated balance sheet as of June 30, 2021:
Remaining payments 2022 | $ | 185,591 | ||
2023 | 254,840 | |||
2024 | 254,840 | |||
2025 | 254,840 | |||
2026 | 267,767 | |||
Thereafter | 946,417 | |||
Total undiscounted future minimum lease payments | 2,164,295 | |||
Less: Difference between undiscounted lease payments and discounted lease liabilities | (296,790 | ) | ||
Present value of net minimum lease payments | 1,867,505 | |||
Less current portion | (194,469 | ) | ||
Operating lease liabilities – long-term | $ | 1,673,036 |
Total rent expense for the three months ended June 30, 2021, was $92,134, as compared to $90,921 or the three months ended June 30, 2020, respectively.
TEL-INSTRUMENT ELECTRONICS CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 12 – Litigation
| March 31, 2017 | Level I | Level II | Level III | Total | ||||||||||||
| Total Assets | $ | - | $ | - | $ | - | $ | - | ||||||||
| Warrant liability | - | - | 95,000 | 95,000 | ||||||||||||
| Total Liabilities | $ | - | $ | - | $ | 95,000 | $ | 95,000 | ||||||||
| Level 3 Reconciliation | Balance at beginning of period | (Gains) and losses for the period (realized and unrealized) | Purchases, issuances, sales and settlements, net | Transfers in or out of Level 3 | Balance at the end of period | |||||||||||||||
| Warrant liability | $ | 95,000 | $ | (95,000 | ) | $ | - | $ | - | $ | - | |||||||||
| Total Liabilities | $ | 95,000 | $ | (95,000 | ) | $ | - | $ | - | $ | - | |||||||||
Contingencies are recorded in the unaudited condensed consolidated financial statements when it is probable that a liability will be incurred and the amount of the loss is reasonably estimable, or otherwise disclosed, in accordance with Accounting Standards Codification 450, Contingencies (“ASC 450”)(ASC 450). Significant judgment is required in both the determination of probability and the determination as to whether a loss is reasonably estimable. In the event the Company determines that a loss is not probable, but is reasonably possible, and it becomes possible to develop what the Company believes to be a reasonable range of possible loss, then the Company will include disclosures related to such matter as appropriate and in compliance with ASC 450. To the extent there is a reasonable possibility that the losses could exceed the amounts already accrued, the Company will, when applicable, adjust the accrual in the period the determination is made, disclose an estimate of the additional loss or range of loss or if the amount of such adjustment cannot be reasonably estimated, disclose that an estimate cannot be made.
On March 24, 2009, Aeroflex Wichita, Inc. (“Aeroflex”) filed a petition against the Company and two of its employees in the District Court located in Sedgwick County, Kansas, Case No. 09 CV 1141 (the “Aeroflex Action”), alleging that the Company and its two employees misappropriated Aeroflex’s proprietary technology in connection with the Company winning a substantial contract from the U.S. Army, to develop new Mode-5 radar test sets and kits to upgrade the existing TS-4530 radar test sets to Mode 5 (the “Award”). Aeroflex’s petition, seeking injunctive relief and damages, alleges that in connection with the Award, the Company and its named employees misappropriated Aeroflex’s trade secrets; tortiously interfered with Aeroflex’s business relationship; conspired to harm Aeroflex and tortiously interfered with Aeroflex’s contract. The central basis of all the claims in the Aeroflex Action is that the Company misappropriated and used Aeroflex proprietary technology and confidential information in winning the Award. In February 2009, subsequent to the Company winning the Award, Aeroflex filed a protest of the Award with the Government Accounting Office (“GAO”).
In its protest, Aeroflex alleged, inter alia, that the Company used Aeroflex’s proprietary technology in order to win the Award, the same
material allegations as were later alleged in the Aeroflex Action. On or about March 17, 2009, the U.S. Army Contracts Attorney, and the U.S. Army Contracting Officer each filed a statement with the GAO, expressly rejecting Aeroflex’s allegations that the Company used or infringed on Aeroflex’s proprietary technology in winning the Award and concluding that the Company had used only its own proprietary technology. On April 6, 2009, Aeroflex withdrew its protest.
In December 2009, the Kansas District Court dismissed the Aeroflex Action on jurisdiction grounds. Aeroflex appealed this decision. In May 2012, the Kansas Supreme Court reversed the decision and remanded the Aeroflex Action to the Kansas District Court for further proceedings. The case then entered an extended discovery period in the District Court.
On May 23, 2016, the Company filed a motion for summary judgment based on Aeroflex’s lack of jurisdictional standing to bring the case. The motion asserts that Aeroflex does not own the intellectual property at issue since it is a bare licensee of Northrop Grumman. Northrop Grumman has declined to join this suit as plaintiff. The motion asserted Aeroflex lacks standing to sue alone. Also, the motion raises the fact that Aeroflex allowed the license to expire, Aeroflex’s claims are either moot or Aeroflex lacks standing to sue for damages alleged to have accrued after the license ended in 2011. The motion for summary judgment was denied.
The Aeroflex trial on remand in the Kansas District Court began in March 2017. After a nine-week trial, the jury rendered its verdict. The jury found no misappropriation of Aeroflex trade secrets but it did rulefound that the Company tortiously interfered with a prospective business opportunity and awarded damages of $1.3 million for lost profits. The jury also ruled that Tel tortiously interfered with Aeroflex’s non-disclosure agreements with two former Aeroflex employees and awarded damages of $1.5 million for lost profits, resulting in total damages against the Company of $2.8 million. The jury also found that the former Aeroflex employees breached their non-disclosure agreements with Aeroflex and awarded damages against these two individuals totaling $525,000. The jury also decided that punitive damages should be allowed against the Company.
Following the verdict, the Company filed a motion for judgment as a matter of law. In the motion, the Company renewed its motion for judgment on Aeroflex’s tortious interference with prospective business opportunity claim arguing that such claim is barred by the statute of limitations. Alternatively, the motion asserts there is insufficient evidence supporting the lost profit award on that claim. Additionally, the motion for judgment addresses inconsistency between the awards against the former Aeroflex employees for breach of the non-disclosure agreements and the award against the Company for interfering with those agreements. Alternatively, the motion asserts there is insufficient evidence supporting the lost profit award on that claim.
During July 2017, the Court heard the Company’s motion for judgment as well as conducting a hearing as to the amount of a punitive damages award. Kansas statutes limit punitive damages to a maximum of $5 million.
TEL-INSTRUMENT ELECTRONICS CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 12 – Litigation (continued)
Aeroflex submitted a motion to the Court requesting that the judge award punitive damages at the maximum $5 million amount. In October 2017, the Court denied the Company’s motions and awarded Aeroflex an additional $2.1 million of punitive damages, which brings the total Tel damages awarded in this case to approximately $4.9 million. Pursuant to K.S.A. 16-204(d) “any judgment rendered by a court of this state on or after July 1, 1986, shall bear interest on and after the day on which judgment is rendered at the rate provided by subsection (e). The Kansas Secretary of State publishes the interest rate which is modified annually based on market interest rates.
For the year starting July 1, 2020, the interest rate was 4.25% and cumulative interest as of fiscal year ended June 30, 2021, was $1,040,943. For the year starting July 1, 2021, the interest rate will be 4.25 %. Interest on the $4,900,000 judgment started to accrue on November 22, 2017, the date the judgment was entered. As of June 30, 2021, the outstanding amount of the judgement and accrued interest is $5,940,943.
The Company filed post-trial motions to avoid damage duplication and inconsistency, and to secure judgment as a matter of law or a new trial. The trial court denied those motions. The Company appealed the verdict and the post-trial rulings to the Court of Appeals of the State of Kansas, Case No. 18-119,563. The Company posted a $2 million supersedeas bond. The Plaintiff filed a cross-appeal. The appeal and cross-appeal are fully briefed. The appellate court has not set a date to hear the appeal.
The Company is optimistic about the prospects of its appeal for a judgment as a matter of law. The Company was hoping for a decision this calendar year, but this timing will likely be delayed due to the COVID-19 related shutdown of the Kansas court system. As such, the appeal process is expected to take another six months to a year to complete. The Company has filed motions in January 2018 for the Courtability to reconsidersettle this case at its sole discretion by withdrawing the amount of damages onappeal and paying the grounds that they are duplicative and not legally supportable. A hearing on this motion is expected within the next 30 days and a final decision is expected within the next two to three months. The Judge could deny our motions, reduce the amount of damages or even order a new trial. Once a final decision has been rendered, the Company has 30 days to file an appeal.judgment plus interest amount. The Company currently has posted a $2,000,000 bondsufficient cash on hand to prevent Aeroflex from enforcement actions until a final decision has been rendered bypay off this liability if we lose the Court. This $2 million bond amount would remain in place during the appeal process (See Note 5). The Company believes it has excellent grounds to appeal this verdict. The appeal process would be expected to take several years to complete.appeal.
Other than the matters outlined above, we are currently not involved in any litigation that we believe could have a material adverse effect on our financial condition or results of operations. There is no action, suit, proceeding, inquiry or investigation before any court, public board, government agency, self-regulatory organization or body pending or, to the knowledge of executive officers of our Company, threatened against or affecting our Company, or our common stock in which an adverse decision could have a material effect.
Item 2. Management’sManagement’s Discussion and Analysis of Financial Condition and Results of Operations.Operations
Forward Looking Statements
This Quarterly Report on Form 10-Q and other reports filed by the Company from time to time with the SEC (collectively the “Filings”) contain or may contain forward-looking statements and information that are based upon beliefs of, and information currently available to, the Company’s management as well as estimates and assumptions made by Company’s management. Readers are cautioned not to place undue reliance on these forward-looking statements, which are only predictions and speak only as of the date hereof. When used in the Filings, the words “may”, “will”, “anticipate”, “believe”, “estimate”, “expect”, “future”, “intend”, “plan”, or the negative of these terms and similar expressions as they relate to the Company or the Company’s management are intended to identify forward-looking statements. Such statements reflect the current view of the Company with respect to future events and we caution you that these statements are not guarantees of future performance or events and are subject to risks, uncertainties, assumptions, and other factors, including the risks contained in the “Risk Factors” section of the Company’s Annual Report on Form 10-K for the year ended March 31, 2017, filed with the SEC on July 14, 2017, relating to the Company’s industry, the Company’s operations and results of operations, and any businesses that the Company may acquire.factors. Should one or more of these risks or uncertainties materialize, or should the underlying assumptions prove incorrect, actual results may differ significantly from those anticipated, believed, estimated, expected, intended, or planned.
Although the Company believes that the expectations reflected in the forward-looking statements are reasonable, the Company cannot guarantee future results, levels of activity, performance, or achievements. Except as required by applicable law, including the securities laws of the United States, the Company does not intend to update any of the forward-looking statements to conform these statements to actual results.
Our unaudited condensed consolidated 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 unaudited condensed consolidated financial statements would be affected to the extent there are material differences between these estimates and actual results. In many cases, the accounting treatment of a particular transaction is specifically dictated by GAAP and does not require management’s judgment in its application. There are also areas in which management’s judgment in selecting any available alternative would not produce a materially different result. The following discussion should be read in conjunction with our financial statements and notes thereto appearing elsewhere in this report.
Overview
The Company has filed motions in January 2018reported net income of $575,501 and net sales of $4,132,393 for the Courtthree months ended June 30, 2021, as compared to reconsidernet income of $110,980 and net sales of $2,939,437 for the amountsame three month period in the prior fiscal year, respectively. Profitability for the three months ended June 30, 2021, versus the same three months ended June 30, 2020, was positively impacted by an increase in sales of damages$1.2 million or 40.6% . Additionally, operating expenses were reduced by $47,113 or 3.6%. Backlog orders on the grounds that they are duplicative and not legally supportable. A hearingJune 30, 2021, were $6.1 million versus $4.4 million on this motion is expected within the nextJune 30, days and a final decision is expected within the next two to three months. The Judge could deny our motions, reduce the amount of damages or even order a new trial. Once a final decision has been rendered, the Company has 30 days to file an appeal. The Company has posted a $2,000,000 bond to prevent Aeroflex from enforcement actions until a final decision has been rendered by the Court. This $2 million bond amount would remain in place during the appeal process (See Note 5). The Company believes it has excellent grounds to appeal this verdict. The appeal process would be expected to take several years to complete. We believe that we will have approximately 2-3 years to generate sufficient cash or secure additional financing to support the repayment of the remaining $2.9 million not covered by the $2 million appeal bond, if we do not prevail with the appeal.2020.
The Company continues to pursue opportunities in the domestic and international opportunities with its “Drive to Mode 5” marketing campaign. All allied countries have a “drop dead” date of January 1, 2020market for implementingour Mode 5 capability; astest sets with good results. We continue to receive volume orders from South Korea, Australia, Canada, the U.K., and Germany for our Mode 5 test sets. We also are receiving volume orders from the U.S. Government and Lockheed Martin for our AN/USM-708 and 719 (“CRAFT”) Mode 5 test sets. We have also been awarded a result,large contract from the U.S. military for our T-47NH product and are seeing solid demand for our other non-Mode 5 test sets. Our expectation is that we believe that thiswill continue to improve both our revenues and gross margins, but the timing of these new orders is largely out of our hands. Nonetheless, we are encouraged by the increasing activity we are seeing for military products. After a sharp drop in FY 2021, the Company is also seeing the beginning of a rebound in commercial test set business with orders in the first three months exceeding demand for all of FY 2021. Tel Instrument is also working on the next generation of Mode 5 called Mode 5 Level 2B. This could potentially lead to substantial software upgrades in the future for our domestic and international Mode 5 business will remain strongcustomers. The Navy is also considering a mid-life update of our CRAFT product line which could entail funded engineering starting next fiscal year. This is an important product for the Company, and this should ensure an additional 10 years of product life.
The Company is also actively looking at expanding out of its current core avionics market area. TIC is working with Lockheed Martin (LMCO) on a new MADL test set. TIC was awarded this contract after winning a $956,000 competitive solicitation. MADL is a secure communications radio for the F-35. This operates in a much higher frequency range than our other test sets. The contract has been put on hold for at least the next three years. We believe thatmonths due to LMCO funding issues, but we are well positioned ashopeful that the contract will resume this fall. TIC
has completed the majority of the development work on this new test set. If the funding issue is resolved, this could generate substantial recurring revenues for the Company and would position TIC for further development contracts with LMCO.
Overview (continued)
The main focus area for the Company is moving into the secure communications testing with our CRAFTnew DSR/OMNI test set. The world’s first “All-in-One” Avionics Test Set utilizes true software-designed radio technology that enables it to test all common avionics functions in one 4.5 pound test set. The SDR/OMNI has very wide frequency to accommodate new commercial and TS-4530Amilitary waveforms in an industry leading 4.5-pound package. This is half the weight of competitive test sets. It utilizes the latest touch screen technology and has the capability to replace all TIC commercial test sets and military flight-line test sets have been endorsedwith one handheld product. With the COVID pandemic, the Company focused all of its engineering efforts on developing a secure communications and navigation test set for the U.S. military. The communications test capability was moved up in our development schedule based on the negative impact of the COVID-19 pandemic on commercial aviation. The U.S. military will need to upgrade thousands of existing communication and navigation test sets over the next several years to address the new frequency and waveform requirements for military radios and we believe the SDR/OMNI is well positioned to capture a large portion of this business.
Once the communications and navigation software are completed, TIC plans to introduce software APPS for the commercial transponder testing market by the U.S. military and we have already delivered test sets into 18 international markets. The new T-47/M5 Mode 5 IFF test set will be a cost-effective upgrade option for our large installed baseend of Mode 4 test sets and we have seen substantial interest and orders for this test set from a number of countries. In addition to international Mode 4 business, we also believe that we will receive some sizable orders from the U.S. Department of Defense (the “DOD”) for additional TS-4530A test sets this calendar year. We believeThis will provide Transponder (Modes A, C, and S), ADS-B, and 978 MHz UAT capability for the large general aviation test market. This will allow us to compete with the IFR 4000 and 6000 test tests for our military and commercial aviation customers. The SDR-Omni product is a game changer in the commercial and military avionics test market as it will allow customers to replace multiple competitive test sets with one unit that this will help drive revenuesis smaller and profitability growth.
The Aeroflex litigation did not result in a favorable outcome for the Company, completed a $3 million issuance of its Series A Preferred Stock with an existing investor. This preferred stock includes an 8% dividend rate and is convertible into shares ofdespite our common stock at a price of $3.00 per share. The proceeds from this transaction are to be used to finance the appeal and for working capital purposes.
The jury found no misappropriation of Aeroflex trade secrets, but it did rule that the Company tortiously interfered with a prospective business opportunity and awarded damages. The jury also ruled that Tel tortiously interfered with Aeroflex’s non-disclosure agreements with two former Aeroflex employees. The jury also found that the former Aeroflex employees breached their non-disclosure agreements with Aeroflex. The Court conducted further hearings on the Company’s post-trial motions which sought to reduce the damages award of $2.8 million, as well as the punitive damages claim. The Court denied the Company’s motions and awarded Aeroflex an additional $2.1 million of punitive damages, which brings the total Tel damages awarded in this case to approximately $4.9 million.damages. The Company has filed motions in January 2018 for the Court to reconsider the amountnumber of damages on the grounds that they are duplicative and not legally supportable. A hearing on this motion is expected within the next 30 daysThe Court heard these motions, and a final decision is expected within the next two to three months.such motions were denied. The Judge could deny our motions, reduce the amount of damages or even order a new trial. Once a final decision has been rendered, the Company has 30 days to file anfiled for the appeal. The Company has posted a $2,000,000$2 million bond to prevent Aeroflex from enforcement actions until a final decision has been rendered byfor the Court.appeal. This $2 million bond amount wouldwill remain in place during the appeal process (See Note 5). process.
Results of Operations
Sales
For the three months ended June 30, 2021, net sales increased $1,192,956 or 40.6% to $4,132,393, as compared to $2,939,437, for the three months ended June 30, 2020.
Avionics government sales increased $1,006,327 or 39.3% to $3,569,603 for the three months ended June 30, 2021, as compared to $2,563,276 for the three months ended June 30, 2020. The increase in government sales is primarily attributed to a large government order from DFAS for T-47NH test sets.
International sales increased $458,141 or 37.4% to $1,682,979 for the three months ended June 30, 2021, as compared to $1,224,838 for the three months ended June 30, 2020, primarily as a result of the sales via our Korean distributor H2L Technologies.
Commercial sales increased $186,629 or 49.6% to $562,790 for the three months ended June 30, 2021, as compared to $376,161 for the three months ended June 30, 2020. Our commercial business is beginning to see a modest recovery from the negative impact of the COVID-19 pandemic.
Gross Margin
For the three months ended June 30, 2021, total gross margin increased $510,136 or 33.9%, to $2,014,747 as compared to $1,504,611 for the three months ended June 30, 2020, due to the increase in sales volume. The gross margin percentage for the three months ended June 30, 2021, was 48.8% as compared to 51.2% for the three months ended June 30, 2020. The gross margin decrease of 2.4% was due primarily to production costs at full capacity versus prior year partial production capacity resulting from COVID staff absences. Gross margin for quarter ended June 30, 2021, at 48.8% versus fiscal year ended March 31, 2021, at 41.3% or a 7.5% improvement was due primarily to production staff efficiencies. With a $6.1 million backlog on June 30, 2021, the Company expects that in fiscal year 2022, revenue and profitability will continue to improve.
Operating Expenses
Selling, general and administrative expenses decreased $107,220 or 16.2% to $554,031 for the three months ended June 30, 2021, as compared to $661,251 for the three months ended June 30, 2020. The decrease is primarily attributed to better pricing for professional services, reduction in professional services and offset of profit sharing expense increase related to increased sales revenue.
Litigation costs decreased slightly by $1,515 to $1,181 for the three months ended June 30, 2021, as compared to $2,696 for the three months ended June 30, 2020.
Engineering, research, and development expenses increased $61,622 or 9.8% to $693,575 for the three months ended June 30, 2021, as compared to $631,953 for the three months ended June 30, 2020. Total engineering expense has increased as a result of our increased engineering activities primarily with the SDR-OMNI hand-held product line development.
Income from Operations
As a result of the above, the Company recorded income from operations of $765,960 for the three months ended June 30, 2021, as compared to income from operations of $208,711 for the three months ended June 30, 2020.
Other (Expense), Net
For the three months ended June 30, 2021, total other expense was $37,342 as compared to other expense of $68,224 for the three months ended June 30, 2020, primarily the result of lower interest expense on the judgment liability and the repayment of the line of credit.
Income before Income Taxes
As a result of the above, the Company recorded income before taxes of $728,617 for the three months ended June 30, 2021, as compared to income before taxes of $140,487 for the three months ended June 30, 2020.
Income Taxes
For the three months ended June 30, 2021, the Company recorded income tax expense of $153,116, as a result of the Company’s taxable income for the quarter, as compared to $29,507 for the three months ended June 30, 2020.
Net Income
The Company believes it has excellent groundsrecorded net income of $575,501 for the three months ended June 30, 2021, as compared to appeal this verdict. The appeal process would be expected to take several years to complete.net income of $110,980 for the three months ended June 30, 2020.
Liquidity and Analysis of Financial Condition and Results of Operations.Capital Resources
At June 30, 2021, the Company to continue as a going concern is dependent upon its ability to achieve profitable operations and/or raise additionalhad net working capital to support the appeal process or pay any finalof $3,850,769 including accrued legal damages amount. In November 2017, the Company signed a subscription agreement in which the Company received $3 million for Series A Convertible Preferred Stock (See Note 14related to the NotesAeroflex litigation of $5,940,943, as compared to working capital of $3,159,731 at March 31, 2021. This change is primarily the Condensed Financial Statements). These funds were used to finance an appealresult of lower accounts payable and provide funds for operations. The accompanying financial statements do not include any adjustments that might be necessary ifas well as cash receipts received from the Companyincrease is unable to continue as a going concern.
During the ninethree months ended December 31, 2017,June 30, 2021, the Company’s cash balance decreased(including the $2 million in restricted cash for the appeal) increased by $23,890$1.3 million to $263,983.$6,769,869. The Company’s principal sources and uses of funds were as follows:
Cash provided by (used in) financingoperating activities.
Cash used in investing activities. For the three months ended June 30, 2021, the Company did not use any cash in investing activities as compared to the three months ended June 30, 2020, the Company used $15,386 as a result of no capital equipment purchases.
Cash (used in) financing activities. For the three months ended June 30, 2021, the Company used $80,000 in cash from financing activities as compared to using $1,077,148providing $722,528 for the ninethree months ended December 31, 2016 primarilyJune 30,2020. This decrease is due mainly from the receipt of PPP loan funding received in the prior year.
Liquidity and Capital Resources (continued)
The Bank of America extension for the line of credit expired July 30, 2021, the line of credit annual renewal is currently being underwritten with a maturity of July 30, 2022, and subject to completion of the lender’s underwriting procedures. As of June 30, 2021, the Line of Credit draw remained at zero.
On June 30, 2021, the Company has $6.8 million of cash on hand which included $2 million of restricted cash supporting the appeal bond.
As of June 30, 2021, the Company has recorded total damages of $5,940,943, including accrued interest, as a result of the proceeds from issuancejury verdict associated with the Aeroflex litigation as well as the Court’s decision on punitive damages. The Company has recorded accrued interest of preferred stock and amounts$1,040,943 as of June 30, 2021.
The Company is very optimistic about the prospects of its appeal for a judgment as a matter of law. The Company had been hoping for a decision from the linecourt during the 2020 calendar year, but timing will likely continue to be delayed due to the three-month COVID-19 related shutdown of credit.the Kansas court system. As such, the appeal process is expected to take at least another year to complete unless a settlement can be reached. The nine months endedCompany has the ability to settle this case at its sole discretion by withdrawing the appeal and paying the judgment plus interest amount. The Company currently has sufficient cash on hand and borrowing capability to pay off this liability if we lose the appeal.
On March 27, 2020, President Trump signed the Coronavirus Aid, Relief and Economic Security (the “CARES Act”), which, among other things, outlines the provisions of the Paycheck Protection Program (the “PPP”). The Company determined that it met the criteria to be eligible to obtain a loan under the PPP because, among other reasons, in light of the COVID-19 outbreak and the uncertainty of economic conditions related thereto, the loan was considered necessary to support the Company’s ongoing operations and retain all its employees. In addition, President Trump signed into law the Paycheck Protection Program and Health Care Enhancement Act on April 24, 2020, which increased funding provided by the CARES Act. On May 4, 2020, the Company issued a promissory note (the “Note”) to Bank of America in the principal aggregate amount of $722,577 (the “PPP Loan”) pursuant to the Paycheck Protection Program (“PPP”) under the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”). The amount was deposited in our bank on May 4, 2020. On June 5, 2020, the Paycheck Protection Program Flexibility Act was signed into law and extended the program until December 31, 2016 included2020.
TIC qualified for full loan forgiveness on the initial tranche on December 18, 2020. On January 6, 2021, updated PPP guidance outlining program changes to enhance its effectiveness and accessibility was released on in accordance with the Economic Aid to Hard-Hit Small Businesses, Non-Profits, and Venues Act. This was available to companies that recorded greater than a $720,000 payment25% sales reduction in any quarter compared to the prior year. The Company qualified for this second round of funding and on March 15, 2021, the company secured a warrant liability that did not occur this year.
| o | Employee and compensation levels are maintained in the same manner as required for the First Draw PPP loan | |
o | The loan proceeds are spent on payroll costs and other eligible expenses; and | |
| o | At least 60% of the proceeds are spent on payroll costs |
A borrower can apply for forgiveness once all loan proceeds for which the borrower is requesting forgiveness have been used. Borrowers can apply for forgiveness any time up to the maturity date of America. The termthe loan. If borrowers do not apply for forgiveness within 10 months after the last day of the covered period, then PPP loanwas for three years, and matures in November 2017. Monthly payments are at $36,551 including interest at 6%. The termno longer deferred, and borrowers will begin making loan was collateralized by substantially all of the assets of the Company. This loan was fully repaid in November 2017. At December 31, 2017 and March 31, 2017, the outstanding balances were $-0- and $285,810, respectively.
Moving forward, we believe that our expected cash flows from operations and current cash balances, which amounted to approximately $6.8 million, including the lineapproximately $2 million in restricted cash will be renewed or thatsufficient to operate in the terms will benormal course of business for next 12 months from the same.
Currently, the Company has no material future capital expenditure requirements.
There was no significant impact on the Company’s operations as a result of inflation for the ninethree months ended December 31, 2017.June 30, 2021.
These unaudited condensed consolidated financial statements should be read in conjunction with the Company’s Annual Report on Form 10-K for the fiscal year ended March 31, 2017,2021, filed with the SEC on July 14, 2017June 29, 2021 (the “Annual Report”).
Off-Balance Sheet Arrangements
As of December 31, 2017,June 30, 2021, the Company had no material off-balance sheet arrangements.
Critical Accounting Policies
Our critical accounting policies are described in Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report. There have been no changes in our critical accounting policies. Our significant accounting policies are described in our notes to the 20172021 consolidated financial statements included in our Annual Report.
Item 3.Quantitative and Qualitative Disclosures about Market Risk.
We do not hold any derivative instruments and do not engage in any hedging activities.
Item 4.Controls and Procedures.
(a)
Evaluation of Disclosure Controls and ProceduresThe Company, including its principal executive officer and principal financial officer, conducted an evaluation of the effectiveness of the design and operation of its disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”) as of the end of the period covered by this report (the “Evaluation Date”). Based upon the evaluation, our principal executive officer and principal financial officer concluded as of the Evaluation Date that our disclosure controls and procedures were effective. Disclosure controls are controls and procedures designed to reasonably ensure that information required to be disclosed in our reports filed under the Exchange Act, such as this report, is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls include controls and procedures designed to reasonably ensure that such information is accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate to allow timely decisions regarding required disclosure.
(b)
Changes in Internal Control over Financial ReportingThe Company, including its principalchief executive officer and principal accountingchief financial officer, reviewed the Company’s internal control over financial reporting, pursuant to Rule 13(a)-15(e) under the Exchange Act and concluded that there was no change in the Company’s internal control over financial reporting during the Company’s most recently completed fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
PART II – OTHER INFORMATION
Item 1.Legal Proceedings.
The Aeroflex Wichita, Inc. (“Aeroflex”litigation (see Note 12 to the Unaudited Condensed Consolidated Financial Statements ) fileddid not result in a petition againstfavorable outcome for the Company, and two of its employees in the District Court located in Sedgwick County, Kansas, Case No. 09 CV 1141 (the “Aeroflex Action”), allegingdespite our belief that the Company and its two employees misappropriated Aeroflex’s proprietary technology in connection with the Company winning a substantial contract from the U.S. Army, to develop new Mode-5 radar test sets and kits to upgrade the existing TS-4530 radar test sets to Mode 5 (the “Award”). Aeroflex’s petition, seeking injunctive relief and damages, alleges that in connection with the Award, the Company and its named employees misappropriated Aeroflex’s trade secrets; tortiously interfered with Aeroflex’s business relationship; conspired to harm Aeroflex and tortiously interfered with Aeroflex’s contract. The central basis of all the claims in the Aeroflex Action is that the Company misappropriated and used Aeroflex proprietary technology and confidential information in winning the Award. In February 2009, subsequent to the Company winning the Award, Aeroflex filed a protest of the Award with the Government Accounting Office (“GAO”). In its protest, Aeroflex alleged, inter alia, that the Company used Aeroflex’s proprietary technology in order to win the Award, the same material allegations as were later alleged in the Aeroflex Action. On or about March 17, 2009, the U.S. Army Contracts Attorney and the U.S. Army Contracting Officer each filed a statement with the GAO, expressly rejecting Aeroflex’s allegations that the Company used or infringed on Aeroflex’s proprietary technology in winning the Award, and concluding that the Company had used only its own proprietary technology. On April 6, 2009, Aeroflex withdrew its protest.we committed no wrong-doing.
The jury found no misappropriation of Aeroflex trade secrets but it did rulefound that the Company tortiously interfered with a prospective business opportunity and awarded damages of $1.3 million for lost profits.damages. The jury also ruled that Tel tortiously interfered with Aeroflex’s non-disclosure agreements with two former Aeroflex employees and awarded damages of $1.5 million for lost profits, resulting in total damages against the Company of $2.8 million.employees. The jury also found that the former Aeroflex employees breached their non-disclosure agreements with Aeroflex and awarded damages against these two individuals totaling $525,000.Aeroflex. The jury also decided that punitive damages should be allowed against the Company.
As reflected in the accompanying unaudited condensed consolidated balance sheet as of June 30, 2021, the Company has recorded estimated damages to date of $5.9 million, including interest, as a result of a jury verdict associated with the Aeroflex litigation. The Company believes it has excellent groundsfiled for an appeal (see Notes 4 and 12). As of June 30, 2021, the Company has cash balances of $6.8 million, including $2 million of restricted cash as well as $1.3 million in accounts receivable. We expect to continue to have sufficient cash to fully cover the Aeroflex damages amount.
The Company is very optimistic about the prospects of its appeal this verdict.for a judgment as a matter of law. The Company had been hoping for a decision from the court during the 2020 calendar year, but timing will likely continue to be delayed due to the three-month COVID-19 related shutdown of the Kansas court system. As such, the appeal process would beis expected to take several yearsat least another year to complete.complete unless a settlement can be reached. The Company has the ability to settle this case at its sole discretion by withdrawing the appeal and paying the judgment plus interest amount. The Company currently has sufficient cash on hand to pay off this liability if we lose the appeal.
Other than the matters outlined above, we are currently not involved in any litigation that we believe could have a material adverse effect on our financial condition or results of operations. There is no action, suit, proceeding, inquiry or investigation before any court, public board, government agency, self-regulatory organization or body pending or, to the knowledge of executive officers of our Company, threatened against or affecting our Company, or our common stock in which an adverse decision could have a material effect.
Item 1A.Risk Factors.
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, 2017,2021, filed with the SEC on July 14, 2017.June 29, 2021.
Item 2.Unregistered Sales of Equity Securities and Use of Proceeds.
There were no unregistered sales of the Company’s equity securities during the quarter ended December 31, 2017 other than those previously reported in a Current Report on Form 8-K filed with the Securities and Exchange Commission on November 16, 2017, regarding the issuance of Series A Preferred Stock.June 30, 2021.
Item 3.Defaults upon Senior Securities.
There has been no default in the payment of principal, interest, sinking or purchase fund installment, or any other material default, with respect to any indebtedness of the Company.
Item 4.Mine Safety Disclosures.
Not applicable.
Item 5.Other Information.
There is no other information required to be disclosed under this item which was not previously disclosed.
Item 6.Exhibits.
Exhibit No. | Description | |
31.1 | ||
31.2 | ||
32.1 | ||
32.2 | ||
101.INS | Inline XBRL Instance Document* | |
101.SCH | Inline XBRL Taxonomy Extension Schema Document* | |
101.CAL | Inline XBRL Taxonomy Extension Calculation Linkbase Document* | |
101.DEF | Inline XBRL Taxonomy Extension Definition Linkbase Document* | |
101.LAB | Inline XBRL Taxonomy Extension Label Linkbase Document* | |
101.PRE | Inline XBRL Taxonomy Extension Presentation Linkbase Document* | |
104 | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)* |
* Filed herewith
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
TEL-INSTRUMENT ELECTRONICS CORP. | ||||
Date: | By: | /s/ Jeffrey C. | ||
Name: Jeffrey C. O’Hara | ||||
Title: Chief Executive Officer Principal Executive Officer | ||||