Torotel 10Q 2020 Q3 Quarterly report

Torotel (TTLO) 10-Q2020 Q3 Quarterly report

Content analysis

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 January 31, 2020

☐TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _____ to _____

Commission File No. 001-8125

TOROTEL, INC.

(Exact name of registrant as specified in its charter)


MISSOURI		44-0610086
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

520 N. ROGERS ROAD, OLATHE, KANSAS		66062
(Address of principal executive offices)		(Zip Code)

(913) 747-6111

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:


Title of each class	Trading Symbol	Name of each exchange on which registered
None	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 preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 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 such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a 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 Securities Exchange Act of 1934). Yes ☐ No ☒

As of March 16, 2020, there were 5,995,750 shares of Common Stock, $0.01 par value, outstanding.

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TOROTEL, INC. AND SUBSIDIARIES

INDEX

Part I. Financial Information (Unaudited)		3

Item 1	Financial Statements	3
	Consolidated Condensed Balance Sheets	3
	Consolidated Condensed Statements of Operations	4
	Consolidated Condensed Statements of Changes in Stockholders’ Equity	5
	Consolidated Condensed Statements of Cash Flows	6
	Notes to Consolidated Condensed Financial Statements	7

Forward-Looking Information		20

Item 2	Management's Discussion and Analysis of Financial Condition and Results of Operations	21

Item 3	Quantitative and Qualitative Disclosures About Market Risk	26

Item 4	Controls and Procedures	26

Part II. Other Information		27

Item 5 Other Information		27

Item 6	Exhibits	27

Signatures		28

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PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

CONSOLIDATED CONDENSED BALANCE SHEETS


	(Unaudited)
	January 31, 2020		April 30, 2019
ASSETS
Current assets:
Cash	$	415,000	$	58,000
Trade receivables, net		2,232,000		2,590,000
Contract assets		949,000		1,104,000
Inventories		3,594,000		3,054,000
Prepaid expenses		222,000		152,000
		7,412,000		6,958,000

Land		265,000		265,000
Buildings and improvements		1,586,000		1,569,000
Equipment		4,362,000		4,045,000
		6,213,000		5,879,000
Less accumulated depreciation		4,294,000		4,056,000
Property, plant and equipment, net		1,919,000		1,823,000

Operating right-of-use assets		2,075,000		—
Deferred income taxes		34,000		34,000
Other assets		153,000		186,000

Total Assets	$	11,593,000	$	9,001,000

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt	$	667,000	$	1,121,000
Current maturities of operating lease liabilities		395,000		—
Current maturities of finance lease liabilities		45,000		—
Trade accounts payable		2,210,000		1,625,000
Accrued liabilities		535,000		824,000
Customer deposits		—		24,000
		3,852,000		3,594,000

Long-term debt, less current maturities		795,000		801,000
Operating lease liabilities, less current maturities		1,945,000		—
		2,740,000		801,000
Stockholders' equity:
Common stock; par value $0.01; 6,000,000 shares authorized; 5,995,750 shares issued and outstanding		60,000		60,000
Capital in excess of par value		12,626,000		12,545,000
Accumulated deficit		(7,685,000)		(7,999,000)
		5,001,000		4,606,000

Total Liabilities and Stockholders' Equity	$	11,593,000	$	9,001,000

The accompanying notes are an integral part of these statements.

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CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS (Unaudited)


	Three Months Ended				Nine Months Ended
	January 31, 2020		January 31, 2019		January 31, 2020		January 31, 2019
Net sales	$	6,094,000	$	4,750,000	$	19,232,000	$	14,097,000
Cost of goods sold		4,460,000		3,680,000		12,526,000		9,874,000
Gross profit		1,634,000		1,070,000		6,706,000		4,223,000
Operating expenses:
Engineering		334,000		351,000		1,116,000		966,000
Selling, general and administrative		1,834,000		1,089,000		5,138,000		3,590,000
		2,168,000		1,440,000		6,254,000		4,556,000
Income (loss) from operations		(534,000)		(370,000)		452,000		(333,000)
Other expense:
Interest expense, net		27,000		36,000		77,000		84,000
Income (loss) before income tax expense		(561,000)		(406,000)		375,000		(417,000)
Income tax expense (benefit)		(125,000)		—		61,000		—
Net income (loss)	$	(436,000)	$	(406,000)	$	314,000	$	(417,000)
Basic earnings (loss) per share	$	(0.08)	$	(0.08)	$	0.05	$	(0.08)

The accompanying notes are an integral part of these statements.

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CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS�� EQUITY (Unaudited)


				Capital In				Total
		Common		Excess of		Accumulated		Stockholders'
	Shares	Stock		Par Value		Deficit		Equity
For The Three Months Ended January 31, 2019:
Balance, October 31, 2018	5,995,750	$	60,000	$	12,491,000	$	(8,652,000)	$	3,899,000
Stock compensation earned	—		—		27,000		—		27,000
Net loss	—		—		—		(406,000)		(406,000)
Balance, January 31, 2019	5,995,750		60,000		12,518,000		(9,058,000)		3,520,000

For The Nine Months Ended January 31, 2019:
Balance, April 30, 2018	5,995,750	$	60,000	$	12,437,000	$	(8,743,000)	$	3,754,000
Stock compensation earned	—		—		81,000		—		81,000
Net loss	—		—		—		(417,000)		(417,000)
Cumulative effect of adoption of new accounting principle	—		—		—		102,000		102,000
Balance, January 31, 2019	5,995,750		60,000		12,518,000		(9,058,000)		3,520,000

For The Three Months Ended January 31, 2020:
Balance, October 31, 2019	5,995,750	$	60,000	$	12,599,000	$	(7,249,000)	$	5,410,000
Stock compensation earned	—		—		27,000		—		27,000
Net loss	—		—		—		(436,000)		(436,000)
Balance, January 31, 2020	5,995,750		60,000		12,626,000		(7,685,000)		5,001,000

For The Nine Months Ended January 31, 2020:
Balance, April 30, 2019	5,995,750	$	60,000	$	12,545,000	$	(7,999,000)	$	4,606,000
Stock compensation earned	—		—		81,000		—		81,000
Net income	—		—		—		314,000		314,000
Balance, January 31, 2020	5,995,750		60,000		12,626,000		(7,685,000)		5,001,000

The accompanying notes are an integral part of these statements.

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CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (Unaudited)


	Nine Months Ended
	January 31, 2020		January 31, 2019
Cash flows from operating activities:
Net income (loss)	$	314,000	$	(417,000)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Stock compensation cost amortized		81,000		81,000
Depreciation		273,000		253,000
Changes in operating assets and liabilities:
Trade receivables		358,000		742,000
Contract assets		155,000		(901,000)
Inventories		(540,000)		(535,000)
Prepaid expenses and other assets		(37,000)		116,000
Operating lease right-of-use assets		192,000		—
Trade accounts payable		585,000		412,000
Accrued liabilities		(83,000)		(147,000)
Current and long-term operating lease liabilities		(133,000)		—
Customer deposits		(24,000)		(194,000)
Net cash provided by (used in) operating activities		1,141,000		(590,000)
Cash flows from investing activities:
Capital expenditures		(370,000)		(108,000)
Proceeds from disposal of equipment		1,000		—
Net cash used in investing activities		(369,000)		(108,000)
Cash flows from financing activities:
Principal payments on long-term debt		(23,000)		(1,671,000)
Principal payments under capital and financing lease obligations		(53,000)		(53,000)
Payments on line of credit		(11,636,000)		(1,258,000)
Proceeds from line of credit		11,297,000		2,286,000
Proceeds from long-term debt		—		859,000
Net cash provided by (used in) financing activities		(415,000)		163,000
Net increase (decrease) in cash		357,000		(535,000)
Cash, beginning of period		58,000		575,000
Cash, end of period	$	415,000	$	40,000
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the period for:
Interest	$	77,000	$	81,000
Capital leases reclassified from long-term debt to finance lease liabilities		98,000		—
Deferred rent reclassified from accrued liabilities to operating right-of-use assets		206,000		—

The accompanying notes are an integral part of these statements.

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NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

NOTE 1 — BASIS OF PRESENTATION

The consolidated condensed balance sheet as of April 30, 2019, which has been derived from the audited financial statements of Torotel, Inc. ("Torotel" or the “Company”), is accompanied by the unaudited interim consolidated condensed financial statements, which reflect the normal recurring adjustments that in the opinion of management are necessary to present fairly Torotel’s consolidated financial position at January 31, 2020, and the consolidated results of operations and cash flows for the three and nine months ended January 31, 2020, and 2019, respectively.

The unaudited interim consolidated condensed financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission ("SEC"). Certain information and note disclosures normally included in the annual financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to those rules and regulations, although management believes the disclosures made are adequate to make the information not misleading. The financial statements contained herein should be read in conjunction with Torotel’s consolidated financial statements and related notes filed on Torotel's Form 10-K for the year ended April 30, 2019 as filed with the SEC on July 23, 2019.

Accounting Pronouncements Recently Adopted

The Company adopted the guidance of ASU No. 2016-02, Leases, (“ASC 842”) as of May 1, 2019 using the modified retrospective transition approach with the cumulative effect recognized at the date of initial application. The comparative information in the prior year has not been adjusted and continues to be reported under ASC 840, Leases, which was the accounting standard in effect for that period. ASC 842 requires lessees to recognize leases on-balance sheet and disclose key information about leasing arrangements. The new standard establishes a right-of-use model (“ROU”) that requires a lessee to recognize a ROU asset and lease liability on the balance sheet for all leases with a term longer than 12 months. Leases are classified as finance or operating, with classification affecting the pattern and classification of expense recognition in the statement of operations and presentation of cash flows. See Note 5—Leases for the required disclosures of the nature, amount, timing, and uncertainty of cash flows arising from leases.

NOTE 2 — NATURE OF OPERATIONS

Torotel conducts business through its wholly owned subsidiary, Torotel Products, Inc. (“Torotel Products”). Torotel Products specializes in the custom design and manufacture of a wide variety of precision magnetic components, consisting of transformers, inductors, reactors, chokes, toroidal coils, high voltage transformers, dry-type transformers and electro-mechanical assemblies, for use in commercial, industrial and military electronics.

NOTE 3—INVENTORIES

The following table summarizes the components of inventories:


		January 31, 2020		April 30, 2019
Raw materials	$	2,420,000	$	1,723,000
Work in process		1,009,000		1,052,000
Finished goods		165,000		279,000
	$	3,594,000	$	3,054,000

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NOTE 4—REVENUE

We determine revenue recognition through the following steps:


1)	Identification of the contract, or contracts, with a customer A contract with a customer exists when (i) the Company enters into an enforceable contract with a customer that defines each party’s rights regarding the services to be transferred and identifies the payment terms related to these services, (ii) the contract has commercial substance and, (iii) the Company determines that collection of substantially all consideration for goods or services that are transferred is probable based on the customer’s intent and ability to pay the promised consideration. The Company applies judgment in determining the customer’s ability and intention to pay, which is based on a variety of factors including the customer’s historical payment experience or, in the case of a new customer, published credit and financial information pertaining to the customer.
2)	Identification of the performance obligations in the contract Performance obligations promised in a contract are identified based on the goods or services that will be transferred to the customer that are both capable of being distinct, whereby the customer can benefit from the service either on its own or together with other resources that are readily available from third parties or from the Company, and are distinct in the context of the contract, whereby the transfer of the goods or services are separately identifiable from other promises in the contract. To the extent a contract includes multiple promised goods or services, the Company must apply judgment to determine whether promised goods or services are capable of being distinct and distinct in the context of the contract. If these criteria are not met the promised goods or services are accounted for as a combined performance obligation.
3)	Determination of the transaction price The transaction price is determined based on the consideration to which the Company will be entitled in exchange for transferring goods or services to the customer. To the extent the transaction price includes variable consideration, the Company estimates the amount of variable consideration that should be included in the transaction price utilizing either the expected value method or the most likely amount method depending on the nature of the variable consideration. Variable consideration is included in the transaction price if, in the Company’s judgment, it is probable that a significant future reversal of cumulative revenue under the contract will not occur. None of the Company's contracts as of January 31, 2020 contained a significant financing component. Determining the transaction price requires significant judgment, which is discussed by revenue category in further detail below.
4)	Allocation of the transaction price to the performance obligations in the contract If the contract contains a single performance obligation, the entire transaction price is allocated to the single performance obligation. However, if a series of distinct goods or services that are substantially the same qualifies as a single performance obligation in a contract with variable consideration, the Company must determine if the variable consideration is attributable to the entire contract or to a specific part of the contract. Contracts that contain multiple performance obligations require an allocation of the transaction price to each performance obligation based on a relative standalone selling price basis unless the transaction price is variable and meets the criteria to be allocated entirely to a performance obligation or to a distinct service that forms part of a single performance obligation. The Company determines standalone selling price based on the price at which the performance obligation is sold separately. If the standalone selling price is not observable through past transactions, the Company estimates the standalone selling price taking into account available information such as market conditions and internally approved pricing guidelines related to the performance obligations.

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Recognition of revenue when, or as, we satisfy a performance obligation

The Company satisfies performance obligations either over time or at a point in time as discussed in further detail below. Revenue is recognized at the time the related performance obligation is satisfied by transferring a promised good or service to a customer.

Performance Obligations Satisfied Over Time

We recognize revenue on agreements for the sale of customized goods for use in commercial aerospace and military electronics on an over time basis.

Commercial Aerospace and Defense Parts

Performance obligations under long-term agreements are considered to be under contract at the time that authorization to ship has been obtained from the customer, except for one long-term agreement which provides a contract for two specific parts if the ship date is within 21 days. Performance obligations under standalone purchase orders are considered to be under contract at the time that the purchase order is received. Parts manufactured for customers in our aerospace and defense product revenue stream must be built to certain specifications that are then qualified by the customer. Due to the proprietary nature of our custom-built products designed for a specific use by our aerospace and defense customers, control is considered to be with the customer as the products are finalized and placed into finished goods. Goods within this revenue stream do not provide simultaneous receipt and benefit to the customer. The goods are controlled by our customers once the finished parts are created. The customers prevent any alternative use of the asset and an enforceable right to payment does exist. We provide for potential losses on any of these agreements when it is probable that we will incur the loss.

Our billing terms for these over-time contracts vary, but are generally based on ship date. Control is transferred as products are completed and closed to finished goods.

Product fees and engineering and design services

For product fees along with engineering and design services, transfer of control is determined by the revenue stream of the associated product. Percentage-of-completion revenue recognition is utilized when revenue recognized exceeds the amount billed to the customer for any project-related services, utilizing labor as the input method.

Performance Obligations Satisfied at a Point in Time

We recognize revenue on agreements for the sale of customized goods for use in the industrial and commercial market on point in time basis.

Industrial and Commercial Parts

Performance obligations under long-term agreements are considered to be under contract at the time that authorization to ship has been obtained from the customer. Performance obligations under standalone purchase orders are considered to be under contract at the time that the purchase order is received. For our commercial customers, control of the underlying product design is retained by Torotel, therefore the products are considered in our control until the moment of shipment. Also, upon shipment the customers have an obligation to pay for the asset and we have an enforceable right to payment. We provide for potential losses on any of these agreements when it is probable that we will incur the loss.

Our billing terms for these point in time sales are generally based on ship date. Control is transferred as products are shipped to the customers.

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Taxes assessed by a governmental authority that are both imposed on and concurrent with a specific revenue-producing transaction, that are collected by the Company from a customer, are excluded from revenue. Shipping and handling costs do not have a material impact to the financial statements. No impairment losses were recognized in the nine months ending January 31, 2020 and 2019, relating to receivables or contract assets arising from contracts with customers.

Disaggregation of Revenue

The following tables summarize revenue from contracts with customers for the three and nine months ended January 31, 2020 and 2019.


	Three Months Ended				Nine Months Ended
	January 31, 2020		January 31, 2019		January 31, 2020		January 31, 2019
Markets
Commercial Aerospace	$	2,277,000	$	1,998,000	$	7,436,000	$	6,741,000
Defense		3,595,000		2,517,000		11,292,000		6,641,000
Industrial		222,000		235,000		504,000		715,000
Total consolidated net sales	$	6,094,000	$	4,750,000	$	19,232,000	$	14,097,000


	Three Months Ended				Nine Months Ended
	January 31, 2020		January 31, 2019		January 31, 2020		January 31, 2019
Product Line
Magnetic components	$	3,230,000	$	2,440,000	$	10,394,000	$	6,983,000
Potted coil assembly		1,299,000		1,321,000		4,226,000		4,186,000
Electro-mechanical assemblies		1,565,000		972,000		4,612,000		2,631,000
Large transformers		—		17,000		—		297,000
Total consolidated net sales	$	6,094,000	$	4,750,000	$	19,232,000	$	14,097,000


	Three Months Ended				Nine Months Ended
	January 31, 2020		January 31, 2019		January 31, 2020		January 31, 2019
Geography
Domestic	$	5,945,000	$	4,205,000	$	18,629,000	$	12,860,000
Foreign		149,000		545,000		603,000		1,237,000
Total consolidated net sales	$	6,094,000	$	4,750,000	$	19,232,000	$	14,097,000

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Contract balances

All contract asset balances relate to customer contracts entered into during the fiscal year ending April 30, 2020. We have no contract liabilities other than customer deposits which represent prepaid consideration for contracts with customers. There have been no significant adjustments to contract asset balances related to contract modifications. We have certain customers totaling revenue of $5,056,000 with variable payment terms related to discounts in the amount of $43,000 in the fiscal year ending April 30, 2020.

Remaining performance obligations

As of January 31, 2020, the aggregate amount of the contracted revenues allocated to our unsatisfied (or partially unsatisfied) performance obligations was $4,156,000. The balance of unsatisfied performance obligations excludes contracts with original maturities of one year or less. We expect to recognize revenue as we satisfy our remaining performance obligations. Total remaining performance obligations to be recognized in the fiscal year ending April 30, 2020 is expected to be $1,651,000. Total remaining performance obligations to be recognized in the fiscal year ending April 30, 2021 is expected to be $2,505,000.

NOTE 5—LEASES

The Company adopted ASC 842 on May 1, 2019 using the modified retrospective transition method; and therefore, the comparative information has not been adjusted for the three and nine months ended January 31, 2019 or as of April 30, 2019. Upon transition to the new standard, the Company elected the package of practical expedients, which permitted the Company not to reassess under the new standard its prior conclusions about lease identification, lease classification and initial direct costs.

The Company leases buildings and equipment under operating and finance leases. The majority of the Company’s operations are conducted in premises occupied under lease agreements with initial base terms ranging from 5 to 15 years, with certain leases containing options to extend the leases for up to an additional 10 years. The Company typically does not believe that exercise of the renewal options is reasonably assured at the inception of the lease agreements and, therefore, considers the initial base term as the lease term. Lease terms vary but generally the leases provide for fixed and escalating rentals or contingent escalating rentals based on the Consumer Price Index.

Operating lease ROU assets and lease liabilities were recognized at commencement date based on the present value of minimum lease payments over the remaining lease term. The minimum lease payments include base rent payments. The Company’s leases have remaining lease terms of approximately 1 year to 8 years, which may include the option to extend the lease when it is reasonably certain the Company will exercise that option. The present value of the lease payments is calculated using the incremental borrowing rate for operating leases, which was determined using a portfolio approach based on the rate of interest that the Company would have to pay to borrow an amount equal to the lease payments on a collateralized basis over a similar term. Operating lease expense is recognized on a straight-line basis over the lease term.

The Company’s lease agreements do not contain any material residual value guarantees. The Company elected the practical expedient to not separate lease and non-lease components and also elected the short-term practical expedient for all leases that qualify. As a result, the Company will not recognize ROU assets or liabilities for short-term leases that qualify for the short-term practical expedient, but instead will recognize the lease payments as lease cost on a straight-line basis over the lease term.

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As a result of adopting ASC 842, the Company’s consolidated balance sheet includes additional operating ROU lease assets and total operating lease liabilities of $2,075,000 and $2,340,000, respectively, at January 31, 2020. The initial measurement occurring on May 1, 2019, resulted in operating lease ROU assets of $2,267,000, finance lease ROU assets of $98,000, current operating lease liabilities of $380,000, current finance lease liabilities of $73,000, noncurrent operating lease liabilities of $2,093,000, and noncurrent finance lease liabilities of $25,000. The difference of $206,000 between the ROU assets and the lease liabilities results from a reclassification of deferred rent to the operating lease ROU asset of $206,000.

The following table provides the operating and finance ROU assets and lease liabilities:


	Balance Sheet Classification		January 31, 2020
Assets
Operating lease right-of-use assets	Operating right-of-use assets	$	2,075,000
Finance lease right-of-use assets	Property, plant and equipment, net		45,000
Total leased assets		$	2,120,000

Liabilities
Current
Operating lease liabilities	Current maturities of operating lease liabilities	$	395,000
Finance lease liabilities	Current maturities of finance lease liabilities		45,000
Noncurrent
Operating lease liabilities	Operating lease liabilities, less current maturities		1,945,000
Total lease liabilities		$	2,385,000

The components of lease expense were as follows:


	Three Months Ended		Nine Months Ended
		January 31, 2020		January 31, 2020

Operating lease expense	$	155,000	$	408,000
Finance lease expense
Amortization of right-of-use assets		11,000		34,000
Interest on lease liabilities		1,000		5,000
Total finance lease expense		12,000		39,000
Total lease expense	$	167,000	$	447,000

The supplemental components of cash flows were as follows:


	Nine Months Ended
		January 31, 2020
Cash paid for amounts included in the measurement of lease liabilities
Operating cash flows from operating leases	$	349,000
Financing cash flows from finance leases		53,000
Total cash paid for amounts included in the measurement of lease liabilities	$	402,000

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The following table represents the weighted-average remaining lease term and discount rate as of January 31, 2020:


	January 31, 2020
	Weighted Average	Weighted Average
	Remaining	Discount
Lease Term and Discount Rate	Lease Term (years)	Rate
Operating leases	6.82	4.52%
Finance leases	0.67	5.43%

Future minimum lease payments on the amended operating lease and future minimum finance lease payments as of January 31, 2020 are as follows:


	Finance Lease		Operating Lease
Fiscal Years Ending April 30,	Payments		Payments
2020	$	18,000	$	122,000
2021		27,000		436,000
2022		—		448,000
2023		—		452,000
2024		—		452,000
2025		—		456,000
2026		—		467,000
2027		—		350,000
	$	45,000	$	3,183,000

NOTE 6—FINANCING AGREEMENTS

On October 19, 2018, Torotel entered into three new business loan agreements (the “financing agreements”) with Cornerstone Bank (the “Bank”). The financing agreements provide for an asset-backed revolving line of credit, a guidance line of credit, and a real estate term loan. On October 19, 2019, Torotel renewed the asset-backed revolving line of credit. A summary of the notes issued under the financing agreements is provided below:


		January 31, 2020		April 30, 2019
5.50% asset-based revolving line of credit with a maturity date of October 19, 2020	$	636,000	$	975,000
6.25% guidance line of credit with a maturity date of October 19, 2019		-		54,000
5.35% mortgage note payable in monthly installments of $5,573, including interest, with final payment of $690,829 due October 19, 2023		778,000		795,000
5.50% equipment term loan note payable in monthly installments of $1,034, including interest, with final payment of $1,034 due on May 13, 2024		48,000		-
Capital lease obligations (see Note 5)		-		98,000
Total long-term debt		1,462,000		1,922,000
Less current installments		667,000		1,121,000
Long-term debt, excluding current installments	$	795,000	$	801,000

The asset-based revolving line of credit is intended to be used for working capital purposes and has a capacity of $1,500,000. The asset-based revolving line of credit is renewable annually upon mutual agreement of Torotel and the Bank. The Company intends to renew the asset-based revolving line of credit. The associated interest rate is equal to the greater of the floating Cornerstone Bank Corporate Base Rate (5.50% as of January 31, 2020) or a floor of 5.0%. Monthly repayments of interest only are required under the asset-based revolving line of credit promissory note with the principal due at maturity. The borrowing base of the revolving line of credit is limited to 80% of eligible accounts receivable, plus

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50% of eligible inventory, plus 80% of eligible equipment. This asset-based revolving line of credit is cross collateralized and cross defaulted with all other financing agreements of Torotel with the Bank. Pursuant to a Commercial Security Agreement dated October 19, 2018, between Torotel and the Bank (the “Commercial Security Agreement”), which was entered into in connection with the financing agreements, the asset-based revolving line of credit is secured by a first lien on all business assets of Torotel. Under the revolving line of credit, if the aggregate principal amount of the outstanding advances exceeds the applicable borrowing base, Torotel must pay the Bank an amount equal to the difference between the outstanding principal balance of the revolving line of credit and the borrowing base.

The real estate term loan is in the principal amount of $815,000 and contains a 5-year term with a 20-year amortization period, with the balance at maturity on October 19, 2023. The associated interest rate is fixed at 5.35%. Monthly repayments of approximately $5,573, consisting of both interest and principal, are required. The final payment of approximately $690,829 is due on the maturity date. This real estate term loan is cross collateralized and cross defaulted with the other financing agreements. The real estate term loan is secured by a first lien priority real estate mortgage on the property located at 620 North Lindenwood Drive in Olathe, Kansas pursuant to the Commercial Security Agreement.

The equipment note was a guidance line of credit to be used for equipment purchases and had a capacity of $250,000. On May 13, 2019, Torotel converted the guidance line of credit relating to the equipment note into an equipment term loan. The equipment term loan is in the principal amount of $54,000 and contains a 5-year term with a 5-year amortization period, with the balance at maturity on May 13, 2024. The associated interest rate is fixed at 5.50%. Monthly repayments of approximately $1,034, consisting of both interest and principal, are required. This final payment of approximately $1,034 is due on the maturity date. This equipment term loan is cross collateralized and cross defaulted with the other financing agreements of Torotel and is secured by a purchase money security interest in the assets purchased as well as a first lien on all business assets of Torotel.

The financing agreements contain customary representations, warranties, and covenants of Torotel for the benefit of the Bank, as well as customary default provisions. Other than the borrowing base limitations under the asset-based revolving line of credit, none of the financing agreements requires Torotel to comply with any financial covenants. Prepayments are allowed without penalty under all of the financing agreements.

Irrevocable Standby Letter of Credit

Under the terms of a lease amendment for its manufacturing facility located in Olathe, Kansas, Torotel provided the landlord an irrevocable standby letter of credit in the original amount of $300,000 as additional security. On January 1, 2020, the letter of credit was reduced from $300,000 to $225,000. The balance under the letter of credit will automatically reduce in accordance with the below schedule if not drawn upon:


Date of Reduction		Amount of Reduction		Balance of Letter of Credit
January 1, 2021	$	75,000	$	150,000
January 1, 2022		75,000		75,000
January 1, 2023		75,000		-

NOTE 7—INCOME TAXES

The Company incurred an income tax benefit of $125,000 during the three months ended January 31, 2020 and incurred income tax expense of $61,000 during the nine months ended January 31, 2020, with an effective tax rate of 22.3% and 16.3%, respectively, compared to no income tax expense or benefit being incurred during the three and nine months ended January 31, 2019.

As of January 31, 2020, the federal tax returns for the fiscal years ended 2017 through 2019 are open to audit until the statute of limitations closes for the years in which our net operating losses are utilized. We would recognize interest and penalties accrued on unrecognized tax benefits as well as interest received from favorable tax settlements

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within income tax expense. As of January 31, 2020, we recorded no accrued interest or penalties related to uncertain tax positions. We expect no significant change in the amount of unrecognized tax benefit, accrued interest or penalties within the next twelve months.

NOTE 8—RESTRICTED STOCK AGREEMENTS

Restricted Stock Agreements, and stock awards thereunder, are authorized by the Compensation and Nominating Committee (the "Committee") and the Board of Directors of Torotel (the "Board"). The terms of the Restricted Stock Agreements afford the grantees all of the rights of a stockholder with respect to the award shares, including the right to vote such shares and to receive dividends and other distributions payable with respect to such shares since the date of award. Under the terms of each agreement, the non-vested shares are restricted as to disposition and subject to forfeiture under certain circumstances. The Restricted Stock Agreements further provide, subject to certain conditions, that if prior to all of the restricted shares having vested, we undergo a change in control, then all of the restricted shares will vest and no longer be subject to restrictions under the Restricted Stock Agreements. The restricted shares are treated as non-vested stock; accordingly, the fair value of the restricted stock at the date of award is offset against capital in excess of par value in the accompanying consolidated balance sheets under stockholders' equity.

Restricted Stock Grants

On September 21, 2016, we entered into Restricted Stock Agreements (“2016 Agreements”) with three key employees for the grant of an aggregate total of 730,000 restricted shares of the Company's common stock (the “Shares”). The Shares were granted, and the 2016 Agreements were entered into, pursuant to the Company’s Stock Award Plan (the “Plan”). The award of the Shares was authorized by both the Committee and the Board as a whole on September 19, 2016. Except for the number of shares granted to each recipient, the terms of each of the 2016 Agreements are identical.

The Shares were granted subject to restrictions that prohibit them from being sold, assigned, pledged or otherwise disposed of until the restrictions lapse. The restrictions will lapse on the fifth anniversary of the date of grant if during the five year restriction period, (1) the Company's cumulative annual growth in revenue is at least 10%, and (2) the average economic value added as a percentage of revenue is at least 2%. The economic value added, which attempts to capture the true economic profit, will be calculated as the operating profit less the cost of capital with adjustments made for taxes. The restrictions will also lapse, if prior to the fifth anniversary of the date of grant, (1) the grantee's employment with the Company is terminated by reason of disability, (2) the grantee dies, or (3) the Committee, in its sole discretion, terminates the restrictions. If the restrictions on the Shares have not lapsed by the fifth anniversary of the date of grant, the Shares will be forfeited to the Company.

Stock Compensation Costs and Restricted Stock Activity

Total stock compensation cost was $81,000 for each of the nine months ended January 31, 2020 and 2019.

Restricted stock activity for each nine month period through January 31 is summarized as follows:


	2020			2019
	Restricted	Weighted		Restricted	Weighted
	Shares	Average		Shares	Average
	Under	Grant		Under	Grant
	Option	Price		Option	Price
Outstanding at May 1	730,000	$	0.740	730,000	$	0.740
Granted	—		—	—		—
Forfeited	—		—	—		—
Outstanding at January 31	730,000	$	0.740	730,000	$	0.740

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NOTE 9—STOCKHOLDERS' EQUITY

The shares of common stock outstanding as of each nine month period ended as of January 31 are summarized as follows:


	2020	2019
Balance, May 1	5,995,750	5,995,750
Shares released from treasury for restricted stock grants	—	—
Newly issued shares for restricted stock grants	—	—
Shares reverted to treasury for restricted stock forfeitures	��—	—
Balance, January 31	5,995,750	5,995,750

NOTE 10—EARNINGS PER SHARE

Basic and diluted earnings per share are computed using the two-class method. The two-class method is an earnings allocation formula that determines net income per share for each class of common stock and participating security according to dividends declared and participation rights in undistributed earnings. Per share amounts are computed by dividing net income attributable to common shareholders by the weighted average shares outstanding during each period.

The basic earnings (loss) per common share were computed as follows:


	Three Months Ended				Nine Months Ended
	January 31, 2020		January 31, 2019		January 31, 2020		January 31, 2019
Net income (loss)	$	(436,000)	$	(406,000)	$	314,000	$	(417,000)
Amounts allocated to participating securities (nonvested restricted shares)		—		—		(38,000)		—
Net income (loss) attributable to common shareholders	$	(436,000)	$	(406,000)	$	276,000	$	(417,000)
Basic weighted average common shares		5,265,750		5,265,750		5,265,750		5,265,750
Earnings (loss) per share attributable to common shareholders:
Basic earnings (loss) per share	$	(0.08)	$	(0.08)	$	0.05	$	(0.08)

ASC 260, Earnings per Share, provides that unvested share-based payment awards that contain non-forfeitable rights to dividends are considered to be participating securities and must be considered in the computation of earnings per share pursuant to the two-class method. Diluted earnings per share is not presented as we do not have any shares considered incremental and dilutive.

NOTE 11—CONTRACT ASSETS

For each of our contracts, the timing of revenue recognition, customer billings, and cash collections results in a net contract asset or liability at the end of each reporting period. Contract assets consist of unbilled receivables typically resulting from revenue recognition under contracts when either control has passed to the customer but the product has not yet shipped or the percentage-of-completion of revenue recognition is utilized when revenue recognized exceeds the amount billed to the customer for any project-related services, utilizing labor as the input method.

January 31, 2020

April 30, 2019

Contract assets

949,000

1,104,000

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Contract assets decreased $155,000 between April 30, 2019 and January 31, 2020 due to decreased satisfaction or partial satisfaction of customer contracts, and relates to the recognition of revenue related to the satisfaction or partial satisfaction of performance obligations for which we have not yet billed.

NOTE 12 — CUSTOMER DEPOSITS

For certain customers, we collect payment at the time the order is placed. These deposits are classified as a liability and will be recognized as revenue at the time performance obligations are satisfied in accordance with our revenue recognition policy. As of January 31, 2020 we had no customer deposits, compared to April 30, 2019, when we had approximately $24,000 in customer deposits related to these arrangements.

NOTE 13 — CONCENTRATIONS OF CREDIT RISK

Financial instruments that potentially subject us to concentrations of credit risk consist principally of cash and accounts receivable. We grant unsecured credit to most of our customers. We do not believe that we are exposed to any extraordinary credit risk as a result of this policy. At various times cash balances exceeded federally insured limits. However, we have incurred no losses in the cash accounts and we do not believe we are exposed to any significant credit risk with respect to our cash.

NOTE 14 – LEASED PROPERTY

The Company adopted ASC 842 on May 1, 2019 using the modified retrospective transition method; and therefore, the comparative information has not been adjusted for the three and nine months ended January 31, 2020 or as of April 30, 2019. Upon transition to the new standard, the Company elected the package of practical expedients, which permitted the Company not to reassess under the new standard its prior conclusions about lease identification, lease classification and initial direct costs.

On February 15, 2019, a lease agreement became effective for tenant occupancy of the 23,924 square foot building owned by Torotel. Monthly installment payments of $11,500 began to be paid to us on March 1, 2019. The lease is for a sixty-two month term with monthly payments escalating periodically from $11,500 to $15,500. The tenant has the right to elect to purchase the building. The election to purchase must be made within the lease term or Torotel is not prohibited from placing the building up for public sale.

Future minimum lease payments on the operating lease as of January 31, 2020 are as follows:


	Operating Lease
Fiscal Years Ending April 30,	Payments
2020	$	37,500
2021		154,000
2022		166,000
2023		178,000
2024		124,000
Total	$	659,500

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Torotel’s leased property (where Torotel is the lessor) by asset category was as follows:


	January 31, 2020		April 30, 2019
Land	$	265,000	$	265,000
Buildings and improvements		1,000,000		1,000,000
		1,265,000		1,265,000
Less accumulated depreciation		(702,000)		(659,000)
Net leased property	$	563,000	$	606,000

Depreciation resulting from the leased property amounted to $5,000 and $15,000 during the three and nine months ending January 31, 2020, respectively.

NOTE 15 – RISKS AND UNCERTAINTIES

We are closely monitoring the coronavirus (COVID-19) pandemic and its potential impacts on our business. The recent outbreak of COVID-19, first identified in Wuhan, Hubei Province, China, continues to spread worldwide, causing weakened international economic conditions. It could cause disruptions to our business, as well as impact our suppliers or their manufacturers, because of worker absenteeism, quarantines, or other travel or health-related restrictions as a result of COVID-19 outbreaks or concerns. If our suppliers or their manufacturers are so affected, our supply chain could be disrupted, our product shipments could be delayed, our costs could be increased and our business could be adversely affected. The extent to which COVID-19 impacts our business will depend on future developments, which are highly uncertain and cannot be predicted, including new information which may emerge on the severity of COVID-19 and the success of efforts to contain or treat COVID-19, among other factors.

NOTE 16 – SUBSEQUENT EVENT

On November 26, 2019, Torotel, entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Standex International Corporation, a Delaware corporation (“Standex”) and Shockwave Acquisition Corporation, a wholly-owned subsidiary of Standex (“Merger Sub”). Under the terms of the Merger Agreement, Merger Sub will be merged (the “Merger”) with and into Torotel, as a result of which Torotel will continue as the surviving corporation and a wholly-owned subsidiary of Standex.

Under the terms of the Merger Agreement, at the effective time of the Merger (the “Effective Time”), each issued and outstanding share of the Company’s common stock (each a “Company Share”), other than shares owned by Standex, Merger Sub, or any wholly-owned subsidiary of the Company, or held in the Company’s treasury, will be cancelled and converted into the right to receive $7.77 per share in cash (the “Merger Consideration”). The Company will cause any shares of Company restricted common stock outstanding and subject to vesting conditions as of the Effective Time (whether vested or unvested) to become fully vested and free of any restrictions immediately prior to the Effective Time, and such shares will be treated as Company Shares for all purposes of the Merger Agreement, including the right to receive the Merger Consideration, subject to any applicable withholdings.

On February 12, 2020, the Company held a special meeting of its shareholders (the “Special Meeting”) to adopt the previously disclosed Agreement and Plan of Merger (the “Merger Agreement”), by and among the Company, Standex International Corporation, a Delaware corporation (“Parent” or “Standex”), and Shockwave Acquisition Corporation, a Missouri corporation and a wholly-owned subsidiary of Parent (the “Merger Sub”), dated November 26, 2019. On February 12, 2020, the Merger Agreement was approved by the requisite vote of the Company’s shareholders at the Special Meeting, as disclosed on the Form 8-K filed February 19, 2020. The Company anticipates that the merger will be completed on or before March 31, 2020.

The closing of the Merger is subject to the satisfaction of various conditions precedent, and the parties expect the Merger to be completed in the first calendar quarter of 2020.

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In June 2019, the Company’s Board of Directors authorized management to proceed with the procurement and integration of manufacturing automation technology with a company owned and controlled by Richard Sizemore. Mr. Sizemore serves on the Company’s Board of Directors. Company management believes that the equipment to be procured will serve specific needs of the Company and is being obtained on reasonable terms to the Company. As of January 31, 2020, the Company has entered into a purchase order and is working with the supplier to configure the automation technology. There has been no delivery of the purchased equipment. The company made a partial payment of $64,000 for the equipment, however, the Company expects payments for the equipment will total approximately $128,000. Except for his ownership and control of the supplier, Mr. Sizemore has no financial interest in the transaction.

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Forward-Looking Information

This report, as well as our other reports filed with or furnished to the Securities and Exchange Commission (the “SEC”), contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). The words “believe,” “estimate,” “anticipate,” “project,” “intend,” “expect,” “plan,” “outlook,” “forecast,” “may,” “should,” “predict,” and similar expressions are intended to identify forward-looking statements. Statements regarding expectations, including performance assumptions and estimates relating to capital requirements, as well as other statements that are not historical facts, are forward-looking statements. This report contains forward-looking statements regarding, among other topics, our expected financial position, results of operations, cash flows, strategy, budgets and management's plans and objectives. Accordingly, these forward-looking statements are based on management’s judgments based on currently available information and assumptions about a number of important factors. While we believe that our assumptions about such factors are reasonable, such factors involve risks and uncertainties that could cause actual results to differ materially from those in the forward-looking statements. These factors include,without limitation:

uncertainty regarding the timing and effect of the proposed merger with Standex;

disruption in our business, customers and suppliers in connection with the proposed merger with Standex;

failure or a delay in the contemplated merger with Standex, and potential litigation related to the proposed merger;

disruption in our business, customers and suppliers in connection with COVID-19;

economic, political and legislative factors that could impact defense spending;

continued production of the Hellfire II missile system for which we supply parts;

loss of key customers and our relatively concentrated customer base;

risks in fulfilling military subcontracts;

our ability to finance operations;

our ability to adequately pass through to customers unanticipated future increases in raw material and labor costs;

delays in developing new products;

markets for new products and the cost of developing new markets;

expected orders that do not occur;

our ability to adequately protect and safeguard our network infrastructure from cyber security vulnerabilities;

our on-going ability to satisfy our debt repayment obligations;

our ability to generate sufficient taxable income to realize the amount of our deferred tax assets; and

the impact of competition and price erosion as well as supply and manufacturing constraints.

In light of these risks and uncertainties, there can be no assurance that the forward-looking information contained in this report will prove accurate, and actual results may differ materially from these forward-looking statements. We assume no obligation to update any forward-looking statements made herein.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Overview

Torotel, Inc. ("Torotel") conducts substantially all of its business primarily through its wholly owned subsidiary, Torotel Products, Inc. ("Torotel Products"). The terms “we,” “us,” “our,” and the “Company” as used herein include Torotel and all of its subsidiaries, including Torotel Products, unless the context otherwise requires. Torotel specializes in the custom design and manufacture of a wide variety of precision magnetic components consisting of transformers, inductors, reactors, chokes, toroidal coils, high voltage transformers, dry-type transformers and electro-mechanical assemblies for use in military, commercial aerospace and industrial electronic applications. These products are used to modify and control electrical voltages and currents in electronic devices. Torotel sells these products to original equipment manufacturers, which use them in applications such as:

aircraft navigational equipment;

digital control devices;

airport runway lighting devices;

medical equipment;

avionics systems;

radar systems;

down-hole drilling;

conventional missile guidance systems; and

other aerospace and defense applications.

Torotel markets its components primarily through an internal sales force and independent manufacturers’ representatives paid on a commission basis. These commissions are earned when a product is sold and/or shipped to a customer within the representative’s assigned territory. Torotel also utilizes its engineering department in its direct sales efforts for the purpose of expanding its reach into new markets and/or customers.

The industry mix of the customers that accounted for Torotel’s net sales for the first nine months of the fiscal year ending April 30, 2020 (“fiscal year 2020”) was 59% defense, 39% commercial aerospace, and 2% industrial compared to 47% defense, 48% commercial aerospace, and 5% industrial for the same period in the fiscal year ending April 30, 2019 (“fiscal year 2019”). Approximately 97% of Torotel’s sales during the first nine months of fiscal year 2020 have been derived from domestic customers.

Torotel is an approved source for magnetic components used in numerous military and commercial aerospace systems, which means Torotel is automatically solicited for any procurement needs for such applications. The magnetic components manufactured by Torotel are sold primarily in the United States, and most sales are awarded on a competitive bid basis. The markets in which Torotel competes are highly competitive. A substantial number of companies sell components of the type manufactured and sold by Torotel. In addition, Torotel sells to a number of customers who have the capability of manufacturing their own electronic components. The principal methods of competition for electronic products in the markets served by Torotel include, among other factors, price, on-time delivery performance, lead times, customized product engineering and technical support, marketing capabilities, quality assurance, manufacturing efficiency, and existing relationships with customers’ engineers. While we believe magnetic components are generally not susceptible to rapid technological change, Torotel’s sales, which do not represent a significant share of the industry’s market, are susceptible to decline given the competitive nature of the market.

Business and Industry Considerations

Defense Markets

During the first nine months of fiscal years 2020 and 2019 the amount of consolidated revenues derived from contracts with prime contractors of the U.S. Department of Defense (“DoD”) was approximately 59% and 47%

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respectively. As a result, our financial results in any period could be impacted substantially by spending cuts or increases in the DoD budget and the funds appropriated for certain military programs.

Despite ongoing uncertainty associated with the DoD budget, we believe our overall defense business outlook remains favorable due to the present demand for the potted coil assembly and other existing orders from major defense contractors. As of January 31, 2020, our consolidated order backlog for the defense market was nearly $12.0 million, which included $6.7 million for the potted coil assembly.

Commercial Aerospace and Industrial Markets

We provide magnetic components and electro-mechanical assemblies for a variety of applications in the commercial aerospace and industrial markets. The primary demand drivers for these markets include commercial aircraft orders, oil and gas drilling exploration activity, and general economic growth. While domestic economic growth remains positive, the above demand drivers could be impacted by short-term changes in the economy such as spikes or declines in the price of oil, war, terrorism, or changes in regulation. Other threats to our anticipated positive near-term and long-term market outlook include delays on the development and production of new commercial aircraft and competition from international suppliers. As of January 31, 2020, our consolidated order backlog for the aerospace and industrial markets was $4.8 million. However, a material portion of our business has been converted to long-term agreements.

Business Outlook

Our backlog as of January 31, 2020 as compared to January 31, 2019 increased from $16.5 million to $16.9 million, a 2% increase. This was due primarily to an increase in the potted coil assembly orders. We anticipate that net sales for the full fiscal year 2020 will improve from net sales for fiscal year 2019. This is primarily due to the timing of newer program revenue that is projected to ship in fiscal year 2020. We anticipate that 41% of our $16.9 million backlog as of January 31, 2020 is expected to ship and be converted to sales in fiscal year 2020.

Proposed Merger

As previously reported, on November 26, 2019 we entered into the Merger Agreement with Standex. The Merger Agreement provides that, upon the terms and subject to the conditions set forth therein and in accordance with applicable law, the Company will merge with and into Merger Sub, with the Company continuing as the surviving entity.

Pursuant to the terms and subject to the conditions set forth in the Merger Agreement, at the effective time of the Merger each issued and outstanding share of the Company’s common stock will be cancelled and converted into the right to receive $7.77 per share in cash (the “Merger Consideration”). The Company will cause any shares of Company restricted common stock outstanding and subject to vesting conditions as of the effective time of the Merger (whether vested or unvested) to become fully vested and free of any restrictions immediately prior to the effective time, and such shares will be entitled to receive the Merger Consideration, subject to any applicable withholdings.

The closing of the Merger is contingent upon the satisfaction of various conditions precedent set forth in the Merger Agreement and the parties expect that the Merger will be completed in the first calendar quarter of 2020.

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For further information about the Merger Agreement and the proposed Merger, please see the Current Reports on Form 8-K filed by us on December 3, 2019 and February 12, 2020. The Merger is subject to risks and uncertainties, and we cannot assure you that we will be able to complete the Merger on the expected timeline or at all.

COVID-19 Outbreak and Risks to the Company

We are closely monitoring the coronavirus (COVID-19) pandemic and its potential impact on our business. The recent outbreak of COVID-19, first identified in Wuhan, Hubei Province, China, continues to spread worldwide, causing weakened international economic conditions. It could cause disruptions to our business, as well as impact our suppliers or their manufacturers, because of worker absenteeism, quarantines, or other travel or health-related restrictions as a result of COVID-19 outbreaks or concerns, and may also increase costs associated with ensuring the safety and health of personnel. If our suppliers or their manufacturers are so affected, our supply chain could be disrupted, our product shipments could be delayed, our costs could be increased and our business could be adversely affected. While we do not expect that COVID-19 will have a material adverse effect on our business or financial results at this time, because of the unpredictability of COVID-19, management will continue to monitor the areas being impacted by COVID-19 and continuously assess the risks to the business. We are currently reviewing our business continuity plans.

Consolidated Results of Operations

The following management comments regarding Torotel’s results of operations and outlook should be read in conjunction with the Consolidated Condensed Financial Statements and Notes to the Consolidated Condensed Financial Statements included in Part I, Item 1 of this Quarterly Report.

This discussion and analysis of the results of operations include the operations of Torotel and its subsidiary Torotel Products as of January 31, 2020.

Net Sales


	Three Months Ended				Nine Months Ended
	January 31, 2020		January 31, 2019		January 31, 2020		January 31, 2019
Magnetic components	$	3,230,000	$	2,440,000	$	10,394,000	$	6,983,000
Potted coil assembly		1,299,000		1,321,000		4,226,000		4,186,000
Electro-mechanical assemblies		1,565,000		972,000		4,612,000		2,631,000
Large transformers		—		17,000		—		297,000
Total	$	6,094,000	$	4,750,000	$	19,232,000	$	14,097,000

Consolidated net sales in the three and nine months ended January 31, 2020 increased 28%, or $1,344,000 and 36%, or $5,135,000, compared to the three and nine months ended January 31, 2019. Consolidated net sales increased in both periods primarily because of increased demand in magnetic components and electro-mechanical assemblies.

Gross Profit


	Three Months Ended						Nine Months Ended
		January 31, 2020		January 31, 2019				January 31, 2020		January 31, 2019
Gross profit	$	1,634,000		$	1,070,000		$	6,706,000		$	4,223,000
Gross profit % of net sales		27	%		23	%		35	%		30	%

Consolidated gross profit increased by 53%, or $564,000 and 59%, or $2,483,000, in the three and nine months ended January 31, 2020 compared to the three and nine months ended January 31, 2019. Consolidated gross profit increased in both periods primarily due to increased direct labor efficiencies during the first quarter of fiscal year 2020, as well as overall increases in overhead efficiencies, reduction of expenses associated with non-direct operational labor and changes in product mix during both the three and nine month periods. The gross profit percentage decreased by 8% for

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the three months ended January 31, 2020 when compared to the nine months ended January 31, 2020. This reduction in gross profit percentage is primarily due to product mix within sales, temporary inefficiencies related to the introduction of several new products, and an increase in fringe benefits during the third quarter.

Operating Expenses


	Three Months Ended				Nine Months Ended
	January 31, 2020		January 31, 2019		January 31, 2020		January 31, 2019
Engineering	$	334,000	$	351,000	$	1,116,000	$	966,000
Selling, general and administrative		1,834,000		1,089,000		5,138,000		3,590,000
Total	$	2,168,000	$	1,440,000	$	6,254,000	$	4,556,000

Engineering expenses decreased 5%, or $17,000 and increased 16%, or $150,000, in the three and nine months ended January 31, 2020 compared to the three and nine months ended January 31, 2019. The decrease in the three month period primarily resulted from a decrease in headcount during the third quarter of fiscal year 2020. The increase in the nine month period primarily resulted from an increase in headcount during the first quarter of fiscal year 2020.

Selling, general and administrative expenses increased 68%, or $745,000 and 43%, or $1,548,000, in the three and nine months ended January 31, 2020 compared to the three and nine months ended January 31, 2019. The increase primarily resulted from an increase in headcount during the first quarter of fiscal year 2020 and increased expenses relating to the proposed merger during the second and third quarters of fiscal year 2020. For further information about the Merger Agreement and the proposed Merger, please see the Current Report on Form 8-K filed by us on December 3, 2019.

Earnings (loss) from Operations


	Three Months Ended				Nine Months Ended
	January 31, 2020		January 31, 2019		January 31, 2020		January 31, 2019
Torotel Products	$	105,000	$	(294,000)	$	1,820,000	$	69,000
Torotel		(639,000)		(76,000)		(1,368,000)		(402,000)
Total	$	(534,000)	$	(370,000)	$	452,000	$	(333,000)

For the reasons discussed under each of the Gross Profit and Operating Expenses headings above, consolidated earnings from operations decreased by $164,000 and increased by $785,000, for the three and nine months ended January 31, 2020 when compared to the three and nine months ended January 31, 2019.

Other Earnings Items


	Three Months Ended				Nine Months Ended
	January 31, 2020		January 31, 2019		January 31, 2020		January 31, 2019
Income (loss) from operations	$	(534,000)	$	(370,000)	$	452,000	$	(333,000)
Interest expense		27,000		36,000		77,000		84,000
Income (loss) before income taxes		(561,000)		(406,000)		375,000		(417,000)
Income tax expense (benefit)		(125,000)		—		61,000		—
Net income (loss)	$	(436,000)	$	(406,000)	$	314,000	$	(417,000)

We anticipate that our effective income tax rate for fiscal year ending April 30, 2020 will be 16.3%. For additional discussion related to Income Taxes, see Note 7 of Notes to the Consolidated Financial Statements.

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Financial Condition and Liquidity

Cash generated by operations together with the borrowing under our lines of credit are our primary sources of liquidity. The following table highlights the sources of liquidity available to us as of January 31, 2020 compared to January 31, 2019.


	January 31,
		2020		2019
Cash	$	415,000	$	40,000
Amount available under our equipment loan		-		196,000
Amount available under our 6.25% asset-based revolving line of credit		864,000		222,000
Total funds available	$	1,279,000	$	458,000

Operating Activities

The following table compares net cash provided by (used in) operating activities during the nine months ended January 31, 2020 compared to the nine months ended January 31, 2019.

Net cash provided by operating activities increased $1,731,000 during the nine months ended January 31, 2020 versus the comparable period of the 2019 fiscal year primarily due to increases in operating income and contract assets.

Investing Activities

The increase of $261,000 in net cash used in investing activities during the nine months ended January 31, 2020 compared to the comparable period of fiscal year 2019 was due to higher capital expenditures. Capital expenditures during the nine months ended January 31, 2020 were primarily related to the purchase of system upgrades and automation equipment. We expect capital expenditure spending to rise moderately during the remainder of fiscal year 2020 which is consistent with the anticipated needs of our business.

Financing Activities

The decrease of $578,000 in net cash provided by financing activities during the nine months ended January 31, 2020 from the comparable period in fiscal year 2019 is due primarily to payments made on the asset-based revolving line of credit in fiscal year 2020.

Capital Resources

We believe that the projected cash flow from operations, and available borrowings under our existing financing arrangements to supplement our working capital needs, will be sufficient to meet our anticipated funding requirements for the foreseeable future, based on historical levels. As of January 31, 2020, our total borrowing capacity is $1,500,000, of

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which approximately $864,000 has been drawn, under our asset-based revolving line of credit, plus $415,000 of cash on hand.

We believe that inflation will have only a minimal effect on future operations since such effects are expected to be offset by sales price increases, which are not expected to have a significant effect upon demand.

Critical Accounting Policies

We discuss our critical accounting policies and estimates in Item 7, “Management's Discussion and Analysis of Financial Condition and Results of Operations,” in our Annual Report on Form 10-K for the year ended April 30, 2019 filed with the SEC on July 23, 2019. We have made no significant change in our critical accounting policies since April 30, 2019.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Not Applicable

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Torotel’s management, with the participation of its Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of Torotel’s disclosure controls and procedures, as such term is defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended, as of the end of the period covered by this report. Based on such evaluation, the Chief Executive Officer and the Chief Financial Officer have concluded that Torotel’s disclosure controls and procedures are effective as of the end of the period covered by this report.

Changes in Internal Control

There were no significant changes in Torotel’s internal control over financial reporting or in other factors that in management’s estimates have materially affected, or are reasonably likely to materially affect, Torotel’s internal control over financial reporting during the fiscal quarter covered by this Quarterly Report on Form 10-Q.

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PART II. OTHER INFORMATION

Item 5. Other Information

Item 6. Exhibits

a) Exhibits


Exhibit 3.1		Articles of Incorporation, as amended (incorporated by reference to Exhibit 3.1 of Form 8-K filed with the SEC on September 25, 2009)
Exhibit 3.2		Amended and Restated By-laws (incorporated by reference to Exhibit 3.2 of Form 10-Q filed with the SEC on March 13, 2018)
Exhibit 10.1†		Employment Agreement dated September 12, 2019, by and between the Company and Heath C. Hancock (incorporated by reference to Exhibit 10.1 of Form 10-Q filed with the SEC on September 13, 2019)
Exhibit 31.1*		Officer Certification
Exhibit 31.2*		Officer Certification
Exhibit 32.1**		Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
Exhibit 32.2**		Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
Exhibit 101.INS		XBRL Instance Document
Exhibit 101.SCH		XBRL Taxonomy Extension Schema Document
Exhibit 101.CAL		XBRL Taxonomy Extension Calculation Linkbase Document
Exhibit 101.DEF		XBRL Taxonomy Extension Definition Linkbase Document
Exhibit 101.LAB		XBRL Taxonomy Extension Label Linkbase Document
Exhibit 101.PRE		XBRL Taxonomy Extension Presentation Linkbase Document

* Filed herewith.

** The Certifications attached as Exhibits 32.1 and 32.2 that accompany this Quarterly Report on Form 10-Q are not deemed filed with the Securities and Exchange Commission and are not to be incorporated by reference into any filing of Torotel, Inc., irrespective of any general incorporation language contained in such filing.

† Indicates management contract or compensatory plan.

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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.


	Torotel, Inc.
Date: March 16, 2020	/s/ Heath C. Hancock
	Heath C. Hancock
	Chief Financial Officer
	Principal Financial Officer

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Nine Months Ended

January 31, 2020

January 31, 2019

Net cash provided by (used in) operating activities