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, 2023
☐ 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 10, 2023, 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. | 19 | |
Item 3. | 24 | |
Item 4. | 24 | |
PART II – OTHER INFORMATION | ||
Item 1. | 25 | |
Item 1A. | 25 | |
Item 2. | 25 | |
Item 3. | 25 | |
Item 4. | 25 | |
Item 5. | 26 | |
Item 6. | 26 | |
27 | ||
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, 2023 | March 31, 2023 | |||||||
(unaudited) | ||||||||
ASSETS | ||||||||
Current assets: | ||||||||
Cash | $ | 4,531,637 | $ | 3,839,398 | ||||
Accounts receivable, net | 1,237,544 | 900,881 | ||||||
Inventories, net | 3,606,661 | 3,586,065 | ||||||
Restricted cash to support appeal bond | 2,011,133 | 2,011,083 | ||||||
Prepaid expenses and other current assets | 244,448 | 817,625 | ||||||
Total current assets | 11,631,423 | 11,155,052 | ||||||
Equipment and leasehold improvements, net | 86,876 | 85,167 | ||||||
Operating lease right-of-use assets | 1,476,765 | 1,526,551 | ||||||
Deferred tax asset, net | 2,547,388 | 2,627,935 | ||||||
Other long-term assets | 35,109 | 35,109 | ||||||
Total assets | $ | 15,777,561 | $ | 15,429,814 | ||||
LIABILITIES & STOCKHOLDERS’ EQUITY | ||||||||
Current liabilities: | ||||||||
Line of credit | $ | 690,000 | $ | 690,000 | ||||
Operating lease liabilities – current portion | 204,065 | 202,087 | ||||||
Accounts payable | 313,222 | 322,582 | ||||||
Deferred revenues - current portion | 107,296 | 123,117 | ||||||
Accrued expenses ‐vacation pay, payroll and payroll withholdings | 304,450 | 240,034 | ||||||
Accrued legal damages | 6,430,943 | 6,360,698 | ||||||
Accrued expenses - other | 166,046 | 157,896 | ||||||
Total current liabilities | 8,216,022 | 8,096,414 | ||||||
Operating lease liabilities – long-term | 1,272,700 | 1,324,464 | ||||||
Other long term liabilities | 51,438 | 53,416 | ||||||
Deferred revenues – long-term | 157,203 | 173,883 | ||||||
Total liabilities | 9,697,363 | 9,648,177 | ||||||
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 authorized, issued and outstanding, par value $0.10 per share | 3,935,998 | 3,875,998 | ||||||
Preferred stock, 166,667 shares 8% Cumulative Series B Convertible Preferred authorized, issued and outstanding, par value $0.10 per share | 1,227,367 | 1,207,367 | ||||||
Common stock, 7,000,000 shares authorized, par value $0.10 per share, 3,255,887 and 3,255,887 shares issued and outstanding, respectively | 325,586 | 325,586 | ||||||
Additional paid-in capital | 6,644,804 | 6,721,535 | ||||||
Accumulated deficit | (6,053,557 | ) | (6,348,849 | ) | ||||
Total stockholders’ equity | 6,080,198 | 5,781,637 | ||||||
Total liabilities and stockholders’ equity | $ | 15,777,561 | $ | 15,429,814 | ||||
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 | |||||||||||||||
December 31, 2017 | December 31, 2016 | December 31, 2017 | December 31, 2016 | |||||||||||||
| Net sales | $ | 2,625,793 | $ | 4,236,519 | 7,955,035 | $ | 14,654,917 | |||||||||
| Cost of sales | 1,689,113 | 2,602,268 | 5,377,195 | 9,318,425 | ||||||||||||
| Gross margin | 936,680 | 1,634,251 | 2,577,840 | 5,336,492 | ||||||||||||
| Operating expenses: | ||||||||||||||||
| Selling, general and administrative | 548,391 | 582,880 | 1,881,072 | 2,042,922 | ||||||||||||
| Litigation expenses | 134,765 | 282,490 | 560,610 | 609,330 | ||||||||||||
| Legal damages | 30,523 | - | 2,130,523 | - | ||||||||||||
| Engineering, research and development | 546,691 | 615,007 | 1,691,631 | 1,783,655 | ||||||||||||
| Total operating expenses | 1,260,370 | 1,480,377 | 6,263,836 | 4,435,907 | ||||||||||||
| (Loss) income from operations | (323,690 | ) | 153,874 | (3,685,996 | ) | 900,585 | ||||||||||
| 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 expense | (14,097 | ) | (11,620 | ) | (38,435 | ) | (46,953 | ) | ||||||||
| Total other income (expense) | (9,746 | ) | 24,021 | 145,880 | 237,178 | |||||||||||
| (Loss) income before income taxes | (333,436 | ) | 177,895 | (3,540,116 | ) | 1,137,763 | ||||||||||
| Income tax expense | - | 36,382 | - | 313,886 | ||||||||||||
| Net (loss) income | (333,436 | ) | 141,513 | (3,540,116 | ) | 823,877 | ||||||||||
| Preferred stock dividends | (30,667 | ) | - | (30,667 | ) | - | ||||||||||
| Net (loss) income attributable to common shareholders | $ | (364,103 | ) | $ | 141,513 | $ | (3,570,783 | ) | $ | 823,877 | ||||||
| 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 | ||||||
| Weighted average shares outstanding: | ||||||||||||||||
| Basic | 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 | ||||||||||||
Three Months Ended | ||||||||
June 30, 2023 | June 30, 2022 | |||||||
Net sales | $ | 2,866,929 | $ | 2,253,757 | ||||
Cost of sales | 1,572,380 | 1,418,572 | ||||||
Gross margin | 1,294,549 | 835,185 | ||||||
Operating expenses: | ||||||||
Selling, general and administrative | 584,858 | 556,933 | ||||||
Engineering, research, and development | 289,441 | 522,103 | ||||||
Total operating expenses | 874,299 | 1,079,036 | ||||||
Income (loss) from operations | 420,250 | (243,851 | ) | |||||
Other (expense) income: | ||||||||
Interest income | 39,289 | 986 | ||||||
Interest expense – other | (13,455 | ) | - | |||||
Interest expense – judgement | (70,245 | ) | (51,920 | ) | ||||
Total other net expense | (44,411 | ) | (50,934 | ) | ||||
Income (loss) before income taxes | 375,839 | (294,785 | ) | |||||
Income tax expense (benefit) | 80,547 | (61,916 | ) | |||||
Net income (loss) | 295,292 | (232,869 | ) | |||||
Preferred dividends | (80,000 | ) | (80,000 | ) | ||||
Net income (loss) attributable to common shareholders | $ | 215,292 | $ | (312,869 | ) | |||
Basic net income (loss) per common share | $ | 0.07 | $ | (0.10 | ) | |||
Diluted net income (loss) per common share | $ | 0.06 | $ | (0.10 | ) | |||
Weighted average shares outstanding: | ||||||||
Basic | 3,255,887 | 3,255,887 | ||||||
Diluted | 5,215,665 | 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, 2023, and 2022
(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, 2023 | 500,000 | $ | 3,875,998 | 166,667 | $ | 1,207,367 | 3,255,887 | $ | 325,586 | $ | 6,721,535 | $ | (6,348,849 | ) | $ | 5,781,637 | ||||||||||||||||||||
8% Dividends on Preferred Stock | - | 60,000 | - | 20,000 | - | - | (80,000 | ) | - | - | ||||||||||||||||||||||||||
Stock-based compensation | - | - | - | - | - | - | 3,269 | - | 3,269 | |||||||||||||||||||||||||||
Net income | - | - | - | - | - | - | - | 295,292 | 295,292 | |||||||||||||||||||||||||||
Balances at June 30, 2023 | 500,000 | $ | 3,935,998 | 166,667 | $ | 1,227,367 | 3,255,887 | $ | 325,586 | $ | 6,644,804 | $ | (6,053,557 | ) | $ | 6,080,198 | ||||||||||||||||||||
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, 2022 | 500,000 | $ | 3,695,998 | 166,667 | $ | 1,147,367 | 3,255,887 | $ | 325,586 | $ | 7,018,353 | $ | (5,960,304 | ) | $ | 6,227,000 | ||||||||||||||||||||
8% Dividends on Preferred Stock | - | 60,000 | - | 20,000 | - | - | (80,000 | ) | - | - | ||||||||||||||||||||||||||
Dividend Payments | - | (60,000 | ) | - | (20,000 | ) | - | - | - | - | (80,000 | ) | ||||||||||||||||||||||||
Stock-based compensation | - | - | - | - | - | - | 6,235 | - | 6,235 | |||||||||||||||||||||||||||
Net loss | - | - | - | - | - | - | - | (232,869 | ) | (232,869 | ) | |||||||||||||||||||||||||
Balances at June 30, 2022 | 500,000 | $ | 3,695,998 | 166,667 | $ | 1,147,367 | 3,255,887 | $ | 325,586 | $ | 6,944,588 | $ | (6,193,173 | ) | $ | 5,920,366 | ||||||||||||||||||||
See accompanying notes to unaudited condensed consolidated financial statements.
TEL-INSTRUMENT ELECTRONICS CORP.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
| 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 | ||||
Three Months Ended | ||||||||
June 30, 2023 | June 30, 2022 | |||||||
Cash flows from operating activities: | ||||||||
Net income (loss) | $ | 295,292 | $ | (232,869 | ) | |||
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities | ||||||||
Deferred income taxes | 80,547 | (61,917 | ) | |||||
Depreciation and amortization | 12,274 | 15,944 | ||||||
Amortization of right of use assets | 49,786 | 47,885 | ||||||
Provision (recovery of) for inventory obsolescence | 1,004 | (25,048 | ) | |||||
Non-cash stock-based compensation | 3,269 | 6,235 | ||||||
Changes in assets and liabilities: | ||||||||
Increase in accounts receivable | (336,663 | ) | (323,287 | ) | ||||
(Increase) decrease in inventories | (21,600 | ) | 149,617 | |||||
Decrease (increase) in prepaid expenses & other assets | 573,177 | (155,078 | ) | |||||
(Decrease) in accounts payable | (9,360 | ) | (238,854 | ) | ||||
Increase in accrued payroll, vacation pay and payroll taxes | 64,416 | 14,243 | ||||||
(Decrease) increase in deferred revenues | (32,501 | ) | 19,428 | |||||
(Decrease) in operating lease liabilities | (49,786 | ) | (47,885 | ) | ||||
(Decrease) in other long term liabilities | (1,978 | ) | - | |||||
Increase in accrued expenses - other | 8,150 | 171,503 | ||||||
Increase in accrued legal damages | 70,245 | 51,920 | ||||||
Net cash provided by (used in) operating activities | 706,272 | (608,163 | ) | |||||
Cash flows from investing activities: | ||||||||
Purchases of equipment | (13,983 | ) | (11,733 | ) | ||||
Net cash used in investing activities | (13,983 | ) | (11,733 | ) | ||||
Cash flows from financing activities: | ||||||||
Payment of dividends | - | (80,000 | ) | |||||
Net cash used in financing activities | - | (80,000 | ) | |||||
Net increase (decrease) in cash and restricted cash | 692,289 | (699,896 | ) | |||||
Cash and restricted cash at beginning of period | 5,850,481 | 6,960,740 | ||||||
Cash and restricted cash at end of period | $ | 6,542,770 | $ | 6,260,844 | ||||
End of period | ||||||||
Cash | $ | 4,531,637 | $ | 4,249,794 | ||||
Restricted cash | 2,011,133 | 2,011,050 | ||||||
| $ | 6,542,770 | $ | 6,260,844 | |||||
Beginning of period | ||||||||
Cash | $ | 3,839,398 | $ | 4,949,690 | ||||
Restricted cash | 2,011,083 | 2,011,050 | ||||||
| $ | 5,850,481 | $ | 6,960,740 | |||||
Supplemental cash flow information: | ||||||||
Taxes paid | $ | - | - | |||||
Interest paid | $ | 13,455 | $ | - | ||||
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 two decades.
The Company is publicly traded and was quoted on the Over-the-Counter Market Place (“OTCQB”) under the symbol “TIKK.”
Liquidity
On June 30, 2023, the Company had positive working capital of $3,415,401 as compared to working capital of $3,058,638 on March 31, 2023. This included approximately $6.5 million of cash including the $2 million restricted cash supporting the appeal bond. The Company has recorded total damages of $6,430,943 including accrued interest, as a result of the jury verdict associated with the Aeroflex litigation. On July 21, 2023, the Kansas Appeals Court announced they rejected all of our appeal arguments. However, there will be no impact on net worth, as these damages have already been fully accrued. TIC is currently deciding whether to pay the full judgement amount or appeal the decision to the Kansas Supreme Court.
The Company had a $5.3 million sales backlog on June 30, 2023.
Bank of America renewed the Company line of credit with a maturity date of July 30, 2023. The line of credit was fully drawn upon for $690,000. The renewal of the line of credit is currently in process.
The Employee Retention Credit (ERC) is a refundable tax credit for businesses that continued to pay employees while shut down due to the COVID-19 pandemic or had significant declines in gross receipts from March 13, 2020 to December 31, 2021. Eligible employers can claim the ERC on an original or adjusted employment tax return for a period within those dates. The Company filed adjusted employment tax returns for quarters one and two of calendar year 2021, with a refund of $628,401 that was received June 1, 2023.
Moving forward, we believe that our expected cash flows from operations and current cash balances, which amounted to approximately $6.5 million, including the approximately $2 million in restricted cash will be sufficient to operate in the normal course of business for next 12 months from the issuance date of these unaudited condensed consolidated financial statements. TIC is currently deciding whether to pay the full judgement amount or appeal the decision to the Kansas Supreme Court.
Currently, the Company has no material future capital expenditure requirements.
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.
TEL-INSTRUMENT ELECTRONICS CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1 – Business, Organization and Liquidity (continued)
Impact of the COVID-19 Coronavirus (continued)
On September 9, 2021, President Biden announced Executive Order 14042 (“Executive Order”) and related initiatives designed to lead the country out of the COVID-19 pandemic. The Executive Order includes policies that will require employees of contractors that do business with the federal government to be vaccinated. On September 24, 2021, The Safer Federal Workforce Task Force released COVID-19 vaccine guidance for Federal contractors and subcontractors. According to this guidance, covered employees must be fully vaccinated by December 8, 2021, or at the latest, by the first day of performance on a covered contract, absent the need for a disability or religious accommodation. In addition, covered contractors must follow the CDC’s mask and physical distance requirements for covered contractor employees and visitors. The Executive Order and the guidance apply to any prime contractor or subcontractor that is a party to a “contract or contract-like instrument” that includes a clause incorporating the requirements of the Executive Order. The new clause applied on or after October 15, 2021, to only new federal contracts, solicitations, contract extensions and renewals.
On December 7, 2021, the federal court in Georgia issued a preliminary injunction temporarily halting the enforcement of EO 14042 (Ensuring Adequate COVID Safety Protocols for Federal Contractors) for all covered contracts nation-wide. New guidance from OMB also followed suit giving federal agencies input on how to go about non-enforcement provisions until legal challenges have been resolved. The updated guidance will remain applicable despite any change to new or existing court decisions. The new guidance does not impact the Safer Federal Workforce Taskforce Guidance.
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, 2023, the results of operations, for the three and nine months ended December 31, 2017 and December 31, 2016,change in stockholders’ equity and statements of cash flowsflow for the ninethree months ended December 31, 2017June 30, 2023 and December 31, 2016.June 30, 2022. 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, 20172023 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, 2017,2023, as filed with the United States Securities and Exchange Commission (the “SEC”) on July 14, 2017June 15, 2023 (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 (v) recognize revenue when (or as) the Company satisfies a performance obligation. The Company only applies the five-step model to contracts when it is probable that the entity will collect the consideration it is entitled to in exchange for the goods and services it transfers to the customer. At contract inception, once the contract is determined to be within the scope of ASC 606, the Company assesses the goods or services promised within each contract and determines those that are performance obligations and assesses whether each promised good or service is distinct. The Company then recognizes as revenue the amount of the transaction price that is allocated to the respective performance obligation when (or as) the performance obligation is satisfied.
The Company accounts for revenue recognition in accordance with ASC 606.The core principle of Topic 606 is to recognize revenues when promised goods or services are transferred to customers in an amount that reflects the consideration that is expected to be received for those goods or services. The 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 - Liquidity– Summary of Significant Accounting Policies (continued)
Nature of goods and Going Concern
The following is a description of the Company as a going concern. As discussed in Note 15 to the Notes to the Condensed Consolidated Financial Statements,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 and ground radios. 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 considering 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, 2023.
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 ranging from 2 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, 2023, $262,394 is expected withinto be recognized from remaining performance obligations for extended warranties as compared to $296,400 at March 31, 2023. 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,2023, the Company hasrecognized revenue of $34,006 from amounts that were included in Deferred Revenue as compared to $23,541 from amounts that were included in Deferred Revenue for the three months ended June 30, days to file an appeal. 2022.
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, 2023 | $ | 296,400 | ||
Revenue recognized for the three months ended June 30, 2023 | (34,006 | ) | ||
Deferred revenues at June 30, 2023 | $ | 262,394 |
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 nineperiods ended June 30, 2023, and March 31, 2023, the Company has other deferred revenues of $2,105 and $600, 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 warranty period has expired. The Company repairs and calibrates a wide range of airborne navigation and communication equipment. Revenue is recognized at the time the repaired or calibrated unit is shipped back to the customer, as it is at this time that the work is completed.
Other
The majority of the Company’s revenues are from contracts with the U.S. government, airlines, aircraft manufacturers, such as Boeing and Lockheed Martin, domestic distributors, international distributors for sales to military and commercial customers, and other commercial customers. The contracts with the U.S. government typically are subject to the Federal Acquisition Regulation (“FAR”) which provides guidance on the types of costs that are allowable in establishing prices for goods and services provided under U.S. government contracts.
Payment terms and conditions vary by contract, although terms 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 do not include a significant financing component. Payments received prior to the delivery of units or services performed are recorded as deferred revenues. Taxes collected from customers, which are subsequently remitted to governmental authorities, are excluded from sales. The Company applied the practical expedient to account for shipping and handling activities as fulfillment cost rather than as a separate performance obligation. Shipping and handling costs charged to customers are classified as sales, and the shipping and handling costs incurred are included in cost of sales. All sales are denominated in U.S. dollars. The Company excludes from revenues all taxes assessed by a governmental authority that are imposed on the sale of its products and collected from customers.
The Company chose to apply the available practical expedient as commission eligible sales orders are fulfilled within less than one year and commissions are generally paid by the Company within 30 days of the related sales order fulfillment. Accordingly, management has determined that no change in accounting for costs to obtain a contract will be required for the Company to conform to ASC 606.
Disaggregation of revenue
In the following tables, revenue is disaggregated by revenue category.
For the Three Months Ended June 30, 2023 | ||||||||
Commercial | Government | |||||||
Sales Distribution | ||||||||
Test Units | $ | 408,959 | $ | 1,977,812 | ||||
| $ | 408,959 | $ | 1,977,812 | |||||
The remainder of our revenues for the three months ended December 31, 2017, thereJune 30, 2023, are derived from repairs and calibration of $342,051, replacement parts of $97,297, extended warranties of $34,006 and other revenues of $6,804. 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, 2022 | ||||||||
Commercial | Government | |||||||
Sales Distribution | ||||||||
Test Units | $ | 107,950 | $ | 1,604,150 | ||||
| $ | 107,950 | $ | 1,604,150 | |||||
TEL-INSTRUMENT ELECTRONICS CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 2 – Summary of Significant Accounting Policies (continued)
The remainder of our revenues for the three months ended June 30, 2022, are derived from repairs and calibration of $475,034, replacement parts of $28,327, extended warranties of $23,541 and other revenues of $14,755. 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, 2023 | For the Three Months Ended June 30, 2022 | |||||||
Geography | ||||||||
United States | $ | 2,263,829 | $ | 1,900,929 | ||||
International | 603,100 | 352,828 | ||||||
Total | $ | 2,866,929 | $ | 2,253,757 | ||||
For the three months ended June 30, 2023, two customers accounted for sales of $1,033,856 or 36%, and $336,844 or 12%.
For the three months ended June 30, 2022, three customers accounted for sales of $566,154 or 25%, $459,351 or 20% and $294,398 or 13%.
The Company, in addition to inside sales efforts, utilizes independent sales agents to sell its products to customers. A related party independent sales agent earned $1,600 in commissions for the three months ended June 30, 2023. The sales agent earned $9,000 for sales and marketing assistance for the three ended June 30, 2023. The same related party independent sales agent earned $11,160 in commissions for the three months ended June 30, 2022. The sales agent earned $9,000 for sales and marketing assistance for the three months ended June 30, 2022.
Long-Lived Assets
The Company assesses the recoverability of the carrying value of its long-lived assets whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future, undiscounted cash flows expected to be generated by an asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell. No impairment losses have been norecognized for the three months ended June 30, 2023 and 2022.
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 is for fiscal years beginning after December 15, 2022 and was adopted by the Company on April 1, 2023. The adoption of this standard did not have a significant impact on our financial position and results of operations.
No other recently issued accounting pronouncements had or are expected to have a material 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 43 – Accounts Receivable, net
The following table sets forth the components of accounts receivable:
June 30, 2023 | March 31, 2023 | |||||||
Government | $ | 747,824 | $ | 651,370 | ||||
Commercial | 496,121 | 255,912 | ||||||
Less: Allowance for doubtful accounts | (6,401 | ) | (6,401 | ) | ||||
| $ | 1,237,544 | $ | 900,881 | |||||
| December 31, 2017 | March 31, 2017 | |||||||
| Government | $ | 1,461,090 | $ | 1,392,482 | ||||
| Commercial | 207,167 | 171,400 | ||||||
| Less: Allowance for doubtful accounts | (7,500 | ) | (7,500 | ) | ||||
| $ | 1,660,757 | $ | 1,556,382 | |||||
Note 4 – Inventories, net
Inventories consist of:
June 30, 2023 | March 31, 2023 | |||||||
Purchased parts | $ | 2,493,793 | $ | 2,602,447 | ||||
Work-in-process | 1,468,045 | 1,388,679 | ||||||
Finished Goods | 105,940 | 55,052 | ||||||
Less: Inventory reserve | (461,117 | ) | (460,113 | ) | ||||
| $ | 3,606,661 | $ | 3,586,065 | |||||
Note 5 – Restricted Cash to support appeal bond
In January 2018, the Company transferred $2,000,000 to a restricted cash account to secure a letter of credit which was used for collateral for the appeal bond (See Notes 14Note 13).
Note 6 – Prepaid expenses and 15)other current assets
Prepaid expenses and other current assets consist of:
June 30, 2023 | March 31, 2023 | |||||||
Prepaid expenses | $ | 203,528 | $ | 148,929 | ||||
Deferred charges | 27,720 | 24,720 | ||||||
Other receivables | 13,200 | 643,976 | ||||||
| $ | 244,448 | $ | 817,625 | |||||
In March 2020, the Coronavirus Aid, Relief, and Economic Security Act was signed into law, providing numerous tax provisions and other stimulus measures, including the Employee Retention Tax Credit (“ERTC”): a refundable tax credit against certain employment taxes. The Taxpayer Certainty and Disaster Tax Relief Act of 2020 and the American Rescue Plan Act of 2021 extended and expanded the availability of the ERTC. We qualified for the ERTC in the first two quarters of 2021. During year ended March 31, 2023, we recorded an aggregate benefit of $628,401 in our consolidated financial statements and the receivable for the ERTC benefit as of March 31, 2023 is in other current assets, which was received June 1, 2023.
Note 7 – Line of Credit
The Company has a line of credit with Bank of America with open availability up to $690,000, with monthly payments of interest only. The borrowing base calculation is tied to accounts receivable and is collateralized by substantially all of the assets of the Company. Interest on any outstanding balance is payable monthly at an annual interest rate equal to the sum of the greater of the BSBY (Bloomberg Short-Term Bank Yield Index rate) daily float plus 3.75 percentage points.
As of June 30, 2023, and March 31, 2023, the outstanding balances were $690,000, respectively. The interest rate on June 30, 2023, was 8.92%.
Bank of America renewed the Company’s line of credit with a maturity date of July 30, 2023. The current renewal is in process at Bank of America.
TEL-INSTRUMENT ELECTRONICS CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 8 – Right of Use Assets and Operating Lease Liability
The Company leases its facility in East Rutherford, NJ with monthly payments of $21,237 until August 2025. Thereafter, monthly payments are $23,083 for the balance of the 8 year lease agreement expiring August 2029.
The Company's leases generally do not provide an implicit rate, and therefore the Company uses its incremental borrowing rate as the discount rate when measuring operating lease liabilities. The incremental borrowing rate represents an estimate of the interest rate the Company would incur at lease commencement to borrow an amount equal to the lease payments on a collateralized basis over the term of a lease. The Company 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% for both June 30, 2023 and March 31,2023. The weighted average remaining lease term is 6.17 years.
Right to use assets is summarized below:
June 30, 2023 | March 31, 2023 | |||||||
Right to use asset | $ | 1,830,857 | $ | 1,830,857 | ||||
Less: Accumulated amortization | (354,092 | ) | (304,306 | ) | ||||
Right to use assets, net | $ | 1,476,765 | $ | 1,526,551 | ||||
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 unaudited condensed consolidated balance sheet as of June 30, 2023:
Remaining payments in fiscal 2024 | $ | 191,130 | ||
2025 | 254,840 | |||
2026 | 267,767 | |||
2027 | 277,000 | |||
2028 | 277,000 | |||
Thereafter | 392,417 | |||
Total undiscounted future minimum lease payments | 1,660,154 | |||
Less: Difference between undiscounted lease payments and discounted lease liabilities | (183,389 | ) | ||
Present value of net minimum lease payments | 1,476,765 | |||
Less current portion | (204,065 | ) | ||
Operating lease liabilities – long-term | $ | 1,272,700 |
Total rent expense for the three months ended June 30, 2023 was $102,811, as compared to $103,908 for the three months ended June 30, 2022.
Note 9 – Stock Options Plans
The Board of Directors (the “Board”) adopted on January 18, 2017, and ratified by the shareholders at the Annual Meeting on January 18, 2017, the Company’s 2016 Stock Option Plan (the “Plan”). The Plan provides for the granting of incentive stock options, by a committee to be appointed by the Board (both the Board and the Committee are referred to herein as the “Committee”) to directors, officers, and employees (excluding directors and officers who are not employees) to purchase shares of the Common Stock of the Company, par value $0.10 per share (the “Stock”), in accordance with the terms and provisions. The 2016 Plan reserves for issuance, options to purchase up to 250,000 shares of its common stock. Options granted under the plan are exercisable up to a period of five years from the date of grant at an exercise price which is not less than the fair market value of the common stock at the date of grant, except to a shareholder owning 10% or more of the outstanding common stock of the Company, as to which the exercise price must be not less than 110% of the fair market value of the common stock at the date of grant. Options are exercisable on a cumulative basis, 20% at or after each of the first, second, and third anniversary of the grant and 40% after the fourth year anniversary.
TEL-INSTRUMENT ELECTRONICS CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 69 – Inventories,Stock Options Plans (continued)
A summary of the status of the Company’s stock option plans for the fiscal year ended March 31, 2023, and year to date June 30, 2023, and changes during the year are presented below (in number of options):
Number of Options | Average Exercise Price | Average Remaining Contractual Term | Aggregate Intrinsic Value | ||||||||||
Outstanding options at April 1, 2023 | 99,000 | $ | 3.13 | 1.78 years | $ | - | |||||||
Options granted | - | $ | - | ||||||||||
Options exercised | - | $ | - | ||||||||||
Options canceled/forfeited | - | $ | - | ||||||||||
Outstanding options at June 30, 2023 | 99,000 | $ | 3.13 | 1.53 years | $ | - | |||||||
Vested Options: | |||||||||||||
June 30, 2023: | 75,600 | $ | 3.17 | 1.1 years | $ | - | |||||||
Remaining options available for grant were 151,000 as of June 30, 2023.
At June 30, 2023, the unamortized compensation expense for stock options was $14,394. Unamortized compensation expense is expected to be recognized over a weighted-average period of approximately 4.0 years.
For the three months ended June 30, 2023, the Company recorded stock compensation costs of $3,269, as compared to $6,235 for the three months ended June 30, 2022.
Note 10 – Income Taxes
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 had approximately $2.5 million in deferred tax assets at June 30, 2023 and approximately $2.6 million in deferred tax assets at March 31, 2023. The Company recognizes the impact of an uncertain income tax position taken on its income tax return at the largest amount that is more-likely-than-not to be sustained upon audit by the relevant taxing authority.
The net income was $295,292 for the three months ended June 30, 2023.
| December 31, 2017 | March 31, 2017 | |||||||
| Purchased parts | $ | 3,839,370 | $ | 3,197,378 | ||||
| Work-in-process | 817,543 | 1,272,235 | ||||||
| Finished goods | 32,411 | 68,566 | ||||||
| Less: Inventory reserve | (380,000 | ) | (330,000 | ) | ||||
| $ | 4,309,324 | $ | 4,208,179 | |||||
TEL-INSTRUMENT ELECTRONICS CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 711 – 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 to common stockholders reflects the potential dilution that could occur if securities, including warrantspreferred stock 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.
| 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 | |||
| 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 | |||
Three Months Ended | Three Months Ended | |||||||
June 30, 2023 | June 30, 2022 | |||||||
Basic net income (loss) per share computation: | ||||||||
Net income (loss) | $ | 295,292 | $ | (232,869 | ) | |||
Less: Preferred dividends | (80,000 | ) | (80,000 | ) | ||||
Net income (loss) attributable to common shareholders | 215,292 | (312,869 | ) | |||||
Weighted-average common shares outstanding | 3,255,887 | 3,255,887 | ||||||
Basic net income (loss) per share | $ | 0.07 | $ | (0.10 | ) | |||
Diluted net income (loss) per share computation | ||||||||
Net income (loss) attributable to common shareholders | $ | 215,292 | $ | (312,869 | ) | |||
Add: Preferred dividends | 80,000 | - | ||||||
Diluted net income (loss) attributable to common shareholders | $ | 295,292 | $ | (312,869 | ) | |||
Weighted-average common shares outstanding | 3,255,887 | 3,255,887 | ||||||
Incremental shares attributable to the assumed conversion of preferred stock | 1,959,778 | - | ||||||
Total adjusted weighted-average shares | 5,215,665 | 3,255,887 | ||||||
Diluted net income (loss) per share | $ | 0.06 | $ | (0.10 | ) | |||
The following table summarizes securities that, if exercised, would have an anti-dilutive effect on earnings per share:
| December 31, 2017 | December 31, 2016 | |||||||
| Convertible preferred stock | 1,000,000 | - | ||||||
| Stock options | 75,000 | 71,000 | ||||||
| Warrants | 50,000 | - | ||||||
| 1,125,000 | 71,000 | |||||||
June 30, 2023 | June 30, 2022 | |||||||
Convertible preferred stock | - | 1,839,778 | ||||||
Stock options | 99,000 | 111,500 | ||||||
| 99,000 | 1,951,278 | |||||||
Note 1112 – Segment Information
In accordance with FASB ASC 280, “Disclosures about Segments of an Enterprise and related information”, the Company determined it has two reportable segments - avionics government and avionics commercial. There are no inter-segment revenues.
The Company is organized primarily on the basis of its avionics products. The avionics government segment consists primarily of the design, manufacture, and sale of test equipment to the U.S. and foreign governments and militaries either directly or through distributors. The avionics commercial segment consists of design, manufacture, and sale of test equipment to domestic and foreign airlines, directly or through commercial distributors, and to general aviation repair and maintenance shops. The Company develops and designs test equipment for the avionics industry and as such, the Company’s products and designs cross segments.
Management evaluates the performance of its segments and allocates resources to them based on gross margin. The Company’s general and administrative costs and sales and marketing expenses, and engineering costs are not segment specific. As a result, all operating expenses are not managed on a segment basis. Net interest includes expenses on debt and income earned on cash balances, both maintained at the corporate level.
TEL-INSTRUMENT ELECTRONICS CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 12 – Segment Information (continued)
The tabletables below presentspresent information about reportable segments within the avionics business for the three months ended June 30, 2023, and nine month periods ending December 31, 2017 and 2016:2022:
Three Months Ended June 30, 2023 | Avionics Government | Avionics Commercial | Avionics Total | Corporate Items | Total | |||||||||||||||
Net sales | $ | 1,977,812 | $ | 889,117 | $ | 2,866,929 | $ | - | $ | 2,866,929 | ||||||||||
Cost of sales | 986,038 | 586,342 | 1,572,380 | - | 1,572,380 | |||||||||||||||
Gross margin | 991,774 | 302,775 | 1,294,549 | - | 1,294,549 | |||||||||||||||
Total expenses | 479,347 | 439,363 | 918,710 | |||||||||||||||||
Income (loss) before income taxes | $ | 815,202 | $ | (439,363 | ) | $ | 375,839 | |||||||||||||
Three Months Ended June 30, 2022 | Avionics Government | Avionics Commercial | Avionics Total | Corporate Items | Total | |||||||||||||||
Net sales | $ | 1,604,150 | $ | 649,607 | $ | 2,253,757 | $ | - | $ | 2,253,757 | ||||||||||
Cost of sales | 962,236 | 456,336 | 1,418,572 | - | 1,418,572 | |||||||||||||||
Gross margin | 641,914 | 193,271 | 835,185 | - | 835,185 | |||||||||||||||
Total expenses | 694,954 | 435,016 | 1,129,970 | |||||||||||||||||
Income (loss) before income taxes | $ | 140,231 | $ | (435,016 | ) | $ | (294,785 | ) | ||||||||||||
Three Months Ended December 31, 2017 | Avionics Government | Avionics Commercial | Avionics Total | Corporate Items | Total | |||||||||||||||
| Net sales | $ | 1,825,744 | $ | 800,049 | $ | 2,625,793 | $ | - | $ | 2,625,793 | ||||||||||
| Cost of sales | 1,013,481 | 675,632 | 1,689,113 | - | 1,689,113 | |||||||||||||||
| Gross margin | 812,263 | 124,417 | 936,680 | - | 936,680 | |||||||||||||||
| Engineering, research, and development | 546,691 | - | 546,691 | |||||||||||||||||
| Selling, general and administrative | 225,610 | 322,781 | 548,391 | |||||||||||||||||
| Litigation costs | 134,765 | 134,765 | ||||||||||||||||||
| 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 | |||||||||||||||||
| Total expenses | 772,301 | 497,815 | 1,270,116 | |||||||||||||||||
| Income (loss) before income taxes | $ | 164,379 | $ | (497,815 | ) | $ | (333,436 | ) | ||||||||||||
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 | |||||||||||||
Note 13 – Fair Value Measurements
| 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 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.
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.
TEL-INSTRUMENT ELECTRONICS CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 13 – Litigation (continued)
On May 23, 2016, the Company filed a motion for summary judgment based on Aeroflex’s lack of jurisdictional standing to bring the case. The motion asserts that Aeroflex does not own the intellectual property at issue since it is a bare licensee of Northrop Grumman. Northrop Grumman has declined to join this suit as plaintiff. The motion asserted Aeroflex lacks standing to sue alone. Also, the motion raises the fact that Aeroflex allowed the license to expire, Aeroflex’s claims are either moot or Aeroflex lacks standing to sue for damages alleged to have accrued after the license ended in 2011. The motion for summary judgment was denied.
The Aeroflex trial on remand in the Kansas District Court began in March 2017. After a nine-week trial, the jury rendered its verdict. The jury found no misappropriation of Aeroflex trade secrets, but it did rule that the Company tortiously interfered with a prospective business opportunity and awarded damages of $1.3 million for lost profits. The jury also ruled that Tel tortiously interfered with Aeroflex’s non-disclosure agreements with two former Aeroflex employees and awarded damages of $1.5 million for lost profits, resulting in total damages against the Company of $2.8 million. The jury also found that the former Aeroflex employees breached their non-disclosure agreements with Aeroflex and awarded damages against these two individuals totaling $525,000. The jury also decided that punitive damages should be allowed against the Company.
Following the verdict, the Company filed a motion for judgment as a matter of law. In the motion, the Company renewed its motion for judgment on Aeroflex’s tortious interference with prospective business opportunity claim arguing that such claim is barred by the statute of limitations. Alternatively, the motion asserts there is insufficient evidence supporting the lost profit award on that claim. Additionally, the motion for judgment addresses inconsistency between the awards against the former Aeroflex employees for breach of the non-disclosure agreements and the award against the Company for interfering with those agreements. Alternatively, the motion asserts there is insufficient evidence supporting the lost profit award on that claim.
During July 2017, the Court heard the Company’s motion for judgment as well as conducting a hearing as to the amount of a punitive damages award. Kansas statutes limit punitive damages to a maximum of $5 million.
Aeroflex submitted a motion to the Court requesting that the judge award punitive damages at the maximum $5 million amount. In October 2017, the Court denied the Company’s motions and awarded Aeroflex an additional $2.1 million of punitive damages, which brings the total Tel damages awarded in this case to approximately $4.9 million.
The journal entry of judgment including judgment against the Company has filed motions in January 2018 for the Court to reconsider the amount of $1.3 million for tortious interference with prospective business advantage, of $1.5 million for tortious interference with existing contracts, and $2.1 million in punitive damages was entered on November 22, 2017. Pursuant to K.S.A. 16-204(d) “any judgment rendered by a court of this state on or after July 1, 1986, shall bear interest on and after the day on which judgment is rendered at the rate provided by subsection (e). The Kansas Secretary of State publishes the rate amount. The amount published for July 1, 2017, through June 30, 2018, was 5.75%, 6.5% July 1, 2018, through June 30, 2019, 7.0% July 1, 2019, through June 30, 2020, and 4.25% July 1, 2020 through June 30, 2022. The interest rate through June 30, 2023 was 5.75%. Interest on the grounds$4,900,000 judgment started to accrue on November 22, 2017, the date the judgment was entered. As of June 30, 2023, the outstanding amount of the judgement and accrued interest is $6,430,943.
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 Company was hoping for a decision from the court in calendar year 2022, but this timing was likely delayed due to the three month COVID-19 related shutdown of the Kansas court system. The appeal decision has been delayed due to the COVID-19 related shutdown of the Kansas court system and the inability of court staff to work remotely on confidentiality issues. During August 2021, in an effort to move the appeal forward, all parties agreed to supply the appeal information to the court on a dedicated and secured laptop that they are duplicativewould be used by the research attorney remotely. The Company had the ability to settle this case at its sole discretion by withdrawing the appeal and not legally supportable. A hearing on this motion is expected withinpaying the next 30 days andjudgment plus interest amount.
On January 28, 2022, Aeroflex filed a final decision is expected withinMotion to Require Supplemental Appeal Bond with the next two to three months. The Judge could deny our motions, reduceCourt of Appeals of the State of Kansas, seeking a bond from the Company in the amount of damages or even order a new trial. Once a final decision has been rendered,$6 million to supplement the existing bond of $2 million.
TEL-INSTRUMENT ELECTRONICS CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 13 – Litigation (continued)
On October 14, 2022, the Company received an order from the Kansas appellate court of appeals lifting the briefing stay that was entered on March 19, 2020. The Kansas appellate court has notified the Company that the argument was set for hearing on March 30, days2023 in Topeka, Kansas which in fact took place. A decision on the case was rendered and released on July 21, 2023, the Kansas Appeals Court rejected each of TIC’s appeal arguments. However, there will be no impact on net worth, as these damages have already been fully accrued. TIC is currently deciding whether to file an appeal. The Company has posted a $2,000,000 bondpay the full judgement amount or appeal the decision to prevent Aeroflex from enforcement actions until a final decision has been rendered by the Kansas Supreme 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.
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’s Discussion and Analysis of Financial Condition and Results of 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, assumptions, and other 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.
The key factors that are not within the Company’s control and that may have a direct bearing on operating results include, but are not limited to, managements’ ability to raise capital in the future, the retention of key employees and changes in the regulation of our industry, as well as the risk factors identified in the Company’s filings.
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.
For purposes of this Quarterly Report, “Tel-Instrument,” “we,” “our,” “us,” or similar references refers to Tel-Instrument Electronics, Inc, unless the context requires otherwise.
Overview
The Company reported net sales of $2,866,929 for the three months ended June 30, 2023. This compared to net sales of $2,253,757 for the same three month period in the prior fiscal year. The increase in sales for the first three months of the current fiscal year was primarily the result of higher SDR/OMNI commercial sales and the CRAFT ECP (“engineering change proposal”) (U.S. Navy) project as a result of completion of the Critical Design Review milestone.
Gross margin for the current quarter was $1,294,549 (45.2%) which is approximately 8 percentage points higher than the three months ended June 30, 2022 of $835,185 (37.1%). This is primarily attributable to fixed production costs being spread over increased volumes as production is ramped up with manufacturing components being delivered by our suppliers to coincide with open order deadlines. This is a result of placing supplier orders further out to manage the long delivery dates.
Net income was $295,292 for the three months ended June 30, 2023, as compared to a loss of $232,869 in the prior year three months ended June 30, 2022.
Overview (continued)
Backlog orders on June 30, 2023, were $5.3 million compared to $6.5 million as of March 31, 2023. The decrease was primarily due to lower than expected bookings during the quarter and invoicing of approximately $646,000 of the CRAFT CDRL project milestone. Roughly $2 million of Navy funding remains on this contract which should be completed in CY 2024. Once the development work is completed, production revenues of approximately $5 million per year are expected over a four-year period.
The Company continues to pursue opportunities in the domestic and international market for our Mode 5 test sets. The international market has been slow over the last year due in part to the recent strength of the dollar. We are still expecting a large follow-on order from the German government this summer. We continue to receive orders from the U.S. Government and Lockheed Martin for our AN/USM-708 and 719 (“CRAFT”) Mode 5 test sets. Our expectation is that orders and back-log will improve this fiscal year as the SDR/OMNI test set continues to enter the marketplace. We also received a $875,000 contract from the U.S. Army in July 2023 to update the TS-4530A software and add new capabilities.
TIC is also exploring new avenues to broaden its product portfolio including designing a high frequency test set for the Lockheed Martin F-35 program. This contract takes advantage of our expertise in RF technology. This is a completely new market for TIC as it involves high frequency communication signals. TIC has successfully completed the engineering portion of the program and recently provided a quote for production units with a value of $1.5 million. TIC will continue to explore funded engineering programs of this nature as this is high margin business that helps diversify and expand our product portfolio.
The main focus area for the Company is moving into the secure communications testing. The key for long-term sustained growth will be to supplement our strong position in military Mode 5 transponder testing with dominant product offerings in the much larger commercial and military communications and navigation test set market. TIC has spent several years and millions of dollars in developing our ground-breaking SDR/OMNI product which is meant to address both the commercial market for transponder and navigation test sets as well as competing in the military secure comm test set market. The SDR/OMNI supports a wide frequency range to accommodate new commercial and military waveforms in an industry leading 4-pound package. This is approximately half the weight of competitive test sets. It is also the only new multi-purpose test set which meets the Class 1 military environmental specifications. It utilizes the latest touch screen technology and has the capability to replace all TIC commercial test sets and military flight-line test sets with one handheld product. The Company started initial production deliveries during December 2022 and has sold over $600,000 of SDR/OMNI test sets as of June 30, 2023. There are several companies competing in this market space, but we believe that our SDR/OMNI design will be extremely competitive, particularly for military applications.
The Aeroflex litigation did not result in a favorable outcome for the Company, despite our belief that we committed no wrongdoing. The jury found no misappropriation of Aeroflex trade secrets, but it did rule that the Company tortiously interfered with a prospective business opportunity and awarded damages. The jury also ruled that Tel tortiously interfered with Aeroflex’s non-disclosure agreements with two former Aeroflex employees. The jury also found that the former Aeroflex employees breached their non-disclosure agreements with Aeroflex. The Court conducted further hearings on the Company’s post-trial motions which sought to reduce the damages award of $2.8 million, as well as the punitive damages claim. The Court denied the Company’s motions and awarded Aeroflex an additional $2.1 million of punitive damages. The Company has filed motions in January 2018 for the Court to reconsider the number of damages on the grounds that they are duplicative and not legally supportable. The Court heard these motions, and such motions were denied. The Company filed for an appeal during 2019. The Company has posted a $2 million bond for the appeal. This $2 million bond amount will remain in place during the appeal process. The appeal process has effectively been in limbo for several years due to the Kansas Supreme Court moving to remote work until October 14, 2022, when the Company received an order from the Kansas appellate court of appeals lifting the briefing stay that was entered on March 19, 2020. The Kansas appellate court has notified the Company that the argument was set for hearing on March 30, 2023 in Topeka, Kansas, and indeed occurred.
A decision on the case was rendered and released on July 21, 2023, the Kansas Appeals Court rejected each of TIC’s appeal arguments. The loss of the appeal is very disappointing to the Company, however there will be no impact on net worth, as these damages have already been fully accrued.
Results of Operations
Sales
Net sales were $2,866,929 for the three months ended June 30, 2023, as compared to $2,253,757 for the same three month period in the prior fiscal year. The increase of $613,172 or 27.2% in sales for the first three months of the current fiscal year was primarily the result of higher SDR/OMNI commercial sales and the CRAFT ECP (“engineering change proposal”) (U.S. Navy) project as a result of completion of the Critical Design Review milestone.
Gross Margin
Gross margin for the current quarter was $1,294,549 (45.2%) which is approximately 8 percentage points higher than the three months ended June 30, 2022 of $835,185 (37.1%). This is primarily attributable to fixed production costs being spread over increased volumes as production is ramped up with manufacturing components being delivered by our suppliers to coincide with open order deadlines. This is a result of placing supplier orders further out to manage the long delivery dates.
Operating Expenses
Selling, general and administrative expenses increased $27,925 (5%) to $584,858 for the three months ended June 30, 2023 respectively, as compared to $556,933 for the three months ended June 30, 2022. The three month increase is primarily a result of marketing documentation for our new SDR/OMNI test set, profit sharing accruals and the resumption of travel and trade show participation.
Engineering, research, and development expenses decreased $232,662 (44.6%) to $289,441 for the three months ended June 30, 2023 as compared to $522,103 for the three months ended June 30, 2022. Total engineering expense decreased primarily as a result of the Navy ECP Contract non-recurring engineering expenditures (“NRE”) which reduced engineering costs in the current quarter by $178,258 with the balance of the decrease a result of cost efficiencies.
Income (loss) from Operations
As a result of the above, the Company recorded income from operations of $420,250 for the three months ended June 30, 2023, as compared to a loss from operations of $243,851 for the three months ended June 30, 2022.
Other Expense, Net
For the three months ended June 30, 2023, total other net expense was $44,411, this is primarily a result of $70,245 accrued interest related to the judgement offset by increased bank interest rates.
As compared to other net expense of $50,934 for the three months ended June 30, 2022, primarily the result of $51,920 accrued interest related to the judgement.
Income (loss) before Income Taxes
The Company recorded income before taxes of $375,839 and a net loss before taxes of $294,785 for the three months ended June 30, 2023 and June 30, 2022, respectively.
Income Tax Expense (Benefit)
For the three months ended June 30, 2023, the Company recorded an income tax expense of $80,547 as compared to an income tax benefit of $61,916 for the same period in the prior year.
Net Income (Loss)
The Company recorded net income of $295,292 and a net loss of $232,869 for the three months ended June 30, 2023 and June 30, 2022, respectively.
Liquidity and Capital Resources
At June 30, 2023, the Company had net working capital of $3,415,401 including accrued legal damages related to the Aeroflex litigation of $6,430,943, as compared to working capital of $3,058,638 at March 31, 2023. The Company had approximately $6.5 million of cash on hand including $2 million of restricted cash supporting the appeal bond.
The Company’s principal sources, and uses of funds were as follows:
Cash provided by (used in) operating activities. For the three months ended June 30, 2023, $706,272 in cash from operations was provided, as compared to the three months ended June 30, 2022, the Company used $608,163. This increase in cash provided for by operations is mostly attributed to a decrease in prepaid expenses, partially offset by an increase in trade receivables related to improved operations.
Cash used in investing activities. For the three months ended June 30, 2023, the Company used $13,983 for purchases of equipment as compared to the three months ended June 30, 2022, the Company used $11,733.
Cash used in financing activities. For the three months ended June 30, 2023, the Company did not use any cash from financing activities as compared to $80,000 for the three months ended June 30, 2022. This decrease is due to dividend payments of $80,000 in the prior year period.
The Bank of America line of credit is in the process of being renewed and the current line of credit matured July 30, 2023. As of June 30, 2023, the $690,000 line of credit was fully used.
On June 30, 2023, the Company had approximately $6.5 million of cash on hand which included $2 million of restricted cash supporting the appeal bond.
As of June 30, 2023, the Company has recorded total damages of $6,430,943 including accrued interest, as a result of the jury verdict associated with the Aeroflex litigation as well as the Court’s decision on punitive damages. The Company has recorded accrued interest of $1,530,943 as of June 30, 2023.
A decision on the case was rendered and released on July 21, 2023, the Kansas Appeals Court rejected each of TIC’s appeal arguments. The loss of the appeal is very disappointing to the Company, however there will be no impact on net worth, as these damages have already been fully accrued. TIC is currently deciding whether to pay the full judgement amount or appeal the decision to the Kansas Supreme Court.
Moving forward, we believe that our expected cash flows from increased operations and increased accounts receivable payments 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.
Currently, the Company has no material future capital expenditure requirements.
These unaudited condensed consolidated financial statements should be read in conjunction with the Company’s Annual Report on For 10-K for the fiscal year ended March 31, 2023, filed with the SEC on June 15, 2023 (the “Annual Report”).
Off-Balance Sheet Arrangements
As of June 30, 2023, the Company had no 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 2023 consolidated financial statements included in our Annual Report.
Item 3. Quantitative and Qualitative Disclosures about Market Risk.
We are a “smaller reporting company” as defined by Rule 12b-2 of the Exchange Act and are not required to provide the information required under this Item. 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 Procedures
The 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 as of the end of the period covered by this Quarterly Report. Based on that evaluation, our management, including the Chief Executive Officer and Chief Financial Officer, concluded that our disclosure controls and procedures were effective in providing reasonable assurance that information required to be disclosed in our reports filed or submitted under the Exchange Act was recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms. 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 Reporting
The Company, including its chief executive officer and chief 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 during the period ended June 30, 2023 or subsequent to the date the Company completed its evaluation 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 litigation (see Note 13) to the Unaudited Condensed Consolidated Financial Statements) did not result in a favorable outcome for the Company, despite our belief that we committed no wrongdoing.
The jury found no misappropriation of Aeroflex trade secrets but found that the Company tortiously interfered with a prospective business opportunity and awarded damages. The jury also ruled that Tel tortiously interfered with Aeroflex’s non-disclosure agreements with two former Aeroflex employees. The jury also found that the former Aeroflex employees breached their non-disclosure agreements with Aeroflex. The Court conducted further hearings on the Company’s post-trial motions which sought to reduce the damages award of $2.8 million, as well as the punitive damages claim. The Court denied the Company’s motions and awarded Aeroflex an additional $2.1 million of punitive damages. The Company has filed motions in January 2018 for the Court to reconsider the amount of damages on the grounds that they are duplicative and not legally supportable. The Court heard these motions, and such motions were denied. In 2019 the Company filed for an appeal. The Company has posted a $2 million bond for the appeal. This $2 million bond amount will remain in place during the appeal process (See Note 5).
As reflected in the accompanying unaudited condensed consolidated balance sheet as of June 30, 2023, the Company has recorded estimated damages to date of approximately $6.4 million, including interest, as a result of a jury verdict associated with the Aeroflex litigation. The Company filed for an appeal (see Notes 5 and 13). As of June 30, 2023, the Company has cash balances of $6.5 million, including $2 million of restricted cash as well as $1.2 million in accounts receivable.
The appeal decision has been delayed due to the COVID-19 related shutdown of the Kansas court system and the inability of court staff to work remotely on confidentiality issues. During August 2021, in an effort to move the appeal forward, all parties agreed to supply the appeal information to the court on a dedicated and secured laptop that would be used by the research attorney remotely. 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 and borrowing capability to pay off this liability if the appeal is lost.
On January 28, 2022, Aeroflex filed a Motion to Require Supplemental Appeal Bond with the Court of Appeals of the State of Kansas, seeking a bond from the Company in the amount of $6 million to supplement the existing bond of $2 million. The Company filed a response.
On October 14, 2022, the Company received an order from the Kansas appellate court of appeals lifting the briefing stay that was entered on March 19, 2020. The Kansas appellate court notified the Company that the argument was set for hearing on March 30, 2023 in Topeka, Kansas, and indeed occurred. A decision on the case was rendered and released on July 21, 2023, the Kansas Appeals Court rejected each of TIC’s appeal arguments. The loss of the appeal is very disappointing to the Company, however there will be no impact on net worth, as these damages have already been fully accrued. The Company is currently deciding whether to pay the judgement amount or appeal to the Kansas Supreme Court.
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.
Not applicable because we are a smaller reporting company. Notwithstanding, 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, 2017,2023, filed with the SEC on July 14, 2017.June 15, 2023.
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, 2023.
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.Company during the quarter ending June 30, 2023.
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 | |||
Date: | By: | /s/ Pauline Romeo | | |
Name: | Pauline Romeo | |||
Title: | Chief Accounting Officer (Principal Financial and Accounting Officer) | |||