Form 10-Q TEL INSTRUMENT ELECTRONI For: Sep 30
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E-mailUNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM
For the quarterly period ended:
Commission File Number:
(Exact name of registrant as specified in its charter)
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| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
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| (Address of principal executive offices) |
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| (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 | ||
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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.
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).
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 | ☐ |
| | ☒ | 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 ☐
As of November 12, 2021, there were
TEL-INSTRUMENT ELECTRONICS CORP.
TABLE OF CONTENTS
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PART I – FINANCIAL INFORMATION |
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Item 1. |
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Item 2. |
Management’s Discussion and Analysis of Financial Condition and Results of Operations. |
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Item 3. |
24 |
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Item 4. |
24 |
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PART II – OTHER INFORMATION |
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Item 1. |
25 |
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Item 1A. |
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Item 2. |
Unregistered Sales of Equity Securities and Use of Proceeds. |
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Item 3. |
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Item 4. |
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Item 5. |
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Item 6. |
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PART I – FINANCIAL INFORMATION
Item 1. Unaudited Condensed Consolidated Financial Statements.
TEL-INSTRUMENT ELECTRONICS CORP.
CONDENSED CONSOLIDATED BALANCE SHEETS
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September 30, 2021 |
March 31, 2021 |
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(unaudited) |
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ASSETS |
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Current assets: |
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Cash |
$ | $ | ||||||
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Accounts receivable, net |
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Inventories, net |
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Restricted cash to support appeal bond |
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Prepaid expenses and other current assets |
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Total current assets |
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Equipment and leasehold improvements, net |
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Operating lease right-of-use assets |
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Deferred tax asset, net |
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Other long-term assets |
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Total assets |
$ | $ | ||||||
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LIABILITIES & STOCKHOLDERS’ EQUITY |
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Current liabilities: |
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Operating lease liabilities – current portion |
$ | $ | ||||||
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Accounts payable |
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Deferred revenues - current portion |
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Accrued expenses ‐vacation pay, payroll and payroll withholdings |
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Accrued legal damages |
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Accrued expenses - other |
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Total current liabilities |
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Operating lease liabilities – long-term |
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Long term debt - PPP |
- | |||||||
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Deferred revenues – long-term |
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Total liabilities |
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Commitments and contingencies |
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Stockholders’ equity: |
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| Preferred stock, |
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| Preferred stock, issued and outstanding, par value $ |
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| Preferred stock, issued and outstanding, par value $ |
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| Common stock, |
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Additional paid-in capital |
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Accumulated deficit |
( |
) |
( |
) |
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Total stockholders’ equity |
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Total liabilities and stockholders’ equity |
$ | $ | ||||||
See accompanying notes to unaudited condensed consolidated financial statements.
TEL-INSTRUMENT ELECTRONICS CORP.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
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Three Months Ended |
Six Months Ended |
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September 30, 2021 |
September 30, 2020 |
September 30, 2021 |
September 30, 2020 |
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Net sales |
$ | $ | $ | $ | ||||||||||||
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Cost of sales |
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Gross margin |
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Operating expenses: |
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Selling, general and administrative |
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Litigation expenses |
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Engineering, research, and development |
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Total operating expenses |
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Income from operations |
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Other income (expense): |
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Interest income |
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Other income |
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Gain on forgiveness of PPP loan |
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Interest expense – judgement |
( |
) |
( |
) |
( |
) |
( |
) |
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Interest expense |
( |
) |
( |
) |
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Total other net income, (expense) |
( |
) |
( |
) |
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Income before income taxes |
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Income tax expense |
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Net income |
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Preferred dividends |
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Net income attributable to common shareholders |
$ | $ | $ | $ | ||||||||||||
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Basic income per common share |
$ | $ | $ | $ | ||||||||||||
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Diluted income per common share |
$ | $ | $ | $ | ||||||||||||
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Weighted average shares outstanding: |
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Basic |
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Diluted |
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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 September 30, 2021, and 2020
(Unaudited)
|
Series A Convertible Preferred Stock |
Series B Convertible Preferred Stock |
Common Stock | ||||||||||||||||||||||||||||||||||
|
# of Shares Issued |
Amount |
# of Shares
Issued |
Amount |
# of Shares Issued |
Amount |
Additional Paid-In Capital |
Accumulated Deficit |
Total | ||||||||||||||||||||||||||||
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Balances at July 1, 2021 |
$ | $ | $ | $ | $ | ( |
) |
$ | ||||||||||||||||||||||||||||
| |
- | - | - | - | ( |
) |
- | - | ||||||||||||||||||||||||||||
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Dividend Payments |
- | ( |
) |
- | ( |
) |
- | - | - | - | ( |
) |
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Stock-based compensation |
- | - | - | - | - | - | - | |||||||||||||||||||||||||||||
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Net income |
- | - | - | - | - | - | - | |||||||||||||||||||||||||||||
|
Balances at September 30, 2021 |
$ | $ | $ | $ | $ | ( |
) |
$ | ||||||||||||||||||||||||||||
|
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 |
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Balances at July 1, 2020 |
$ | $ | $ | $ | $ | ( |
) |
$ | ||||||||||||||||||||||||||||
| |
- | - | - | - | ( |
) |
- | - | ||||||||||||||||||||||||||||
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Stock-based compensation |
- | - | - | - | - | - | - | |||||||||||||||||||||||||||||
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Net income |
- | - | - | - | - | - | - | |||||||||||||||||||||||||||||
|
Balances at September 30, 2020 |
$ | $ | $ | $ | $ | ( |
) |
$ | ||||||||||||||||||||||||||||
See accompanying notes to unaudited condensed consolidated financial statements.
TEL-INSTRUMENT ELECTRONICS CORP.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
For the Six Months Ended September 30, 2021, and 2020
(Unaudited)
|
Series A Convertible Preferred Stock |
Series B Convertible Preferred Stock |
Common Stock |
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|
# of Shares Issued |
Amount |
# of Shares Issued |
Amount |
# of Shares Issued |
Amount |
Additional Paid-In Capital |
Accumulated Deficit |
Total |
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Balances at April 1, 2021 |
$ | $ | $ | $ | $ | ( |
) |
$ | ||||||||||||||||||||||||||||
| |
- | - | - | - | ( |
) |
- | - | ||||||||||||||||||||||||||||
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Dividend Payments |
- | ( |
) |
- | ( |
) |
- | - | - | - | ( |
) |
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Stock-based compensation |
- | - | - | - | - | - | - | |||||||||||||||||||||||||||||
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Net income |
- | - | - | - | - | - | - | |||||||||||||||||||||||||||||
|
Balances at September 30, 2021 |
$ | $ | $ | $ | $ | ( |
) |
$ | ||||||||||||||||||||||||||||
|
Series A Convertible Preferred Stock |
Series B Convertible Preferred Stock |
Common Stock |
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|
# of Shares Issued |
Amount |
# of Shares Issued |
Amount |
# of Shares Issued |
Amount |
Additional Paid-In Capital |
Accumulated Deficit |
Total |
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Balances at April 1, 2020 |
$ | $ | $ | $ | $ | ( |
) |
$ | ||||||||||||||||||||||||||||
| |
- | - | - | - | ( |
) |
- | - | ||||||||||||||||||||||||||||
|
Stock-based compensation |
- | - | - | - | - | - | - | |||||||||||||||||||||||||||||
|
Net income |
- | - | - | - | - | - | - | |||||||||||||||||||||||||||||
|
Balances at September 30, 2020 |
$ | $ | $ | $ | $ | ( |
) |
$ | ||||||||||||||||||||||||||||
See accompanying notes to unaudited condensed consolidated financial statements.
TEL-INSTRUMENT ELECTRONICS CORP.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
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Six Months Ended |
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September 30, 2021 |
September 30, 2020 |
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Cash flows from operating activities: |
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Net income |
$ | $ | ||||||
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Adjustments to reconcile net income to net cash provided by (used in) operating activities |
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Deferred income taxes |
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Depreciation and amortization |
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Amortization of right of use assets |
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Provision for inventory obsolescence |
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Forgiveness of PPP Loan |
( |
) |
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Non-cash stock-based compensation |
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Changes in assets and liabilities: |
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Decrease (increase) in accounts receivable |
( |
) |
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Decrease in inventories |
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Decrease (increase) in prepaid expenses & other assets |
( |
) |
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Decrease in accounts payable and other accrued liabilities |
( |
) |
( |
) |
||||
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Decrease in accrued payroll, vacation pay and payroll taxes |
( |
) |
( |
) |
||||
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Decrease in deferred revenues |
( |
) |
( |
) |
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Decrease in operating lease liabilities |
( |
) |
( |
) |
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Increase in accrued legal damages |
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Net cash provided by (used in) operating activities |
( |
) |
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Cash flows from investing activities: |
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Purchases of equipment |
( |
) |
( |
) |
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Net cash used in investing activities |
( |
) |
( |
) |
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Cash flows from financing activities: |
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Proceeds from SBA PPP Loan |
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Payment of dividends |
( |
) |
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Repayment of finance lease obligations |
( |
) |
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Net cash (used in) provided by financing activities |
( |
) |
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Net increase in cash and restricted cash |
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Cash and restricted cash at beginning of period |
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Cash and restricted cash at end of period |
$ | $ | ||||||
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End of period |
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Cash |
$ | $ | ||||||
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Restricted cash |
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| $ | $ | |||||||
|
Beginning of period |
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Cash |
$ | $ | ||||||
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Restricted cash |
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| $ | $ | |||||||
|
Supplemental cash flow information: |
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Taxes paid |
$ | |||||||
|
Interest paid |
$ | $ | ||||||
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 and PPP Loans
On September 30, 2021, the Company had positive working capital of $
With a $
On March 27, 2020, former President Trump signed the Coronavirus Aid, Relief and Economic Security (the “CARES Act”), which, among other things, outlines the provisions of the Paycheck Protection Program (the “PPP”). The Company determined that it met the criteria to be eligible to obtain a loan under the PPP because, among other reasons, in light of the COVID-19 outbreak and the uncertainty of economic conditions related thereto, the loan was considered necessary to support the Company’s ongoing operations and retain all its employees. In addition, former President Trump signed into law the Paycheck Protection Program and Health Care Enhancement Act on April 24, 2020, which increased funding provided by the CARES Act. On May 4, 2020, the Company issued a promissory note (the “Note”) to Bank of America in the principal aggregate amount of $
TIC qualified for full loan forgiveness on the initial tranche on December 18, 2020. On January 6, 2021, updated PPP guidance outlining program changes to enhance its effectiveness and accessibility was released on in accordance with the Economic Aid to Hard-Hit Small Businesses, Non-Profits, and Venues Act. This was available to companies that recorded greater than a 25% sales reduction in any quarter compared to the prior year. The Company qualified for this second round of funding and on March 15, 2021, the Company secured a Second Draw PPP loan in the amount of $
On August 24, 2021, TIC, and the New Jersey Economic Development Authority (NJEDA) signed a small business emergency assistance grant agreement in the amount of $20,000. The funds related to the grant were received from the NJEDA on August 30, 2021, and were recognized as other income during the quarter ended September 30, 2021.
Based on the foregoing, we believe that our expected cash flows from operations and current cash balances will be sufficient to operate in the normal course of business for next 12 months from the issuance date of these unaudited condensed financial statements, including any payments for settlement of the Aeroflex litigation.
The Bank of America line of credit has been renewed for $
TEL-INSTRUMENT ELECTRONICS CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1 – Business, Organization and Liquidity (continued)
Impact of the COVID-19 Coronavirus
In December 2019, a novel strain of coronavirus, which causes the disease known as COVID-19, was reported to have surfaced in Wuhan, China. Since then, COVID-19 coronavirus has spread globally. In March 2020, the World Health Organization declared the COVID-19 outbreak a pandemic and the U.S. government imposed travel restrictions on travel between the United States, Europe, and certain other countries. The impact of this pandemic has been, and will likely continue to be, extensive in many aspects of society, which has resulted, and will likely continue to result, in significant disruptions to the global economy as well as businesses and capital markets around the world.
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 will apply on or after October 15, 2021, to only new federal contracts, solicitations, contract extensions and renewals whose value exceeds $250,000. TIC currently does not have any federal contracts or similar contract-like instruments that are in excess of $250,000, however the vast majority of the TIC employees are fully vaccinated, and TIC is preparing for full compliance of the Executive Order should it apply.
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. as of September 30, 2021, the results of operations change in stockholders’ equity for the three and six months ended September 30, 2021, and September 30, 2020, and statements of cash flow for the six months ended September 30, 2021, and September 30, 2020. These results are not necessarily indicative of the results to be expected for the full year. The unaudited condensed consolidated financial statements have been prepared in accordance with the requirements of Form 10-Q and consequently do not include disclosures normally made in an Annual Report on Form 10-K. The March 31, 2021, 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, 2021, as filed with the United States Securities and Exchange Commission (the “SEC”) on June 29, 2021 (the “Annual 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.
TEL-INSTRUMENT ELECTRONICS CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 2 – Summary of Significant Accounting Policies (continued)
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.
Nature of goods and services
The following is a description of the products and services from which the Company generates revenue, as well as the nature, 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 the contractual shipping terms of the 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 product is produced in accordance with the related supply agreement and bears the risk of loss while the inventory is in-transit. Revenue is measured as the amount of consideration 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 estimated 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 September 30, 2021.
Replacement Parts
The Company offers replacement parts for test equipment, ramp testers, and bench testers. Similar to the sale of test units, the control of the product transfers at a point of time and therefore, revenue is recognized at the point in time when the obligation to the customer has been fulfilled.
Extended Warranties
The following table provides a summary of the changes in deferred revenues for the six months ended September 30, 2021:
|
Deferred revenues at April 1, 2021 |
$ | |||
|
Additional extended warranties |
||||
|
Revenue recognized for the six months ended September 30, 2021 |
( |
) |
||
|
Deferred revenues at September 30, 2021 |
$ |
TEL-INSTRUMENT ELECTRONICS CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 2 – Summary of Significant Accounting Policies (continued)
Other Deferred Revenues
The Company sometimes receives payments in advance of shipment. These amounts are classified as other deferred revenues. For the periods ended September 30, 2021, and March 31, 2021, the Company has other deferred revenues of $
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 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 September 30, 2021 |
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|
Commercial |
Government |
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|
Sales Distribution |
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|
Test Units |
$ | $ | ||||||
| $ | $ | |||||||
The remainder of our revenues for the three months ended September 30, 2021, are derived from repairs and calibration of $
replacement parts of $
|
For the Three Months Ended September 30, 2020 |
||||||||
|
Commercial |
Government |
|||||||
|
Sales Distribution |
||||||||
|
Test Units |
$ | $ | ||||||
| $ | $ | |||||||
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 September 30, 2020, are derived from repairs and calibration of $
|
For the Six Months Ended September 30, 2021 |
||||||||
|
Commercial |
Government |
|||||||
|
Sales Distribution |
||||||||
|
Test Units |
$ | $ | ||||||
| $ | $ | |||||||
The remainder of our revenues for the six months ended September 30, 2021, are derived from repairs and calibration of $
|
For the Six Months Ended September 30, 2020 |
||||||||
|
Commercial |
Government |
|||||||
|
Sales Distribution |
||||||||
|
Test Units |
$ | $ | ||||||
| $ | $ | |||||||
The remainder of our revenues for the six months ended September 30, 2020, are derived from repairs and calibration of $
In the following table, revenue is disaggregated by geography.
|
For the Three Months Ended September 30, 2021 |
For the Three Months Ended September 30, 2020 |
|||||||
|
Geography |
||||||||
|
United States |
$ | $ | ||||||
|
International |
||||||||
|
Total |
$ | $ | ||||||
|
For the Six Months Ended September 30, 2021 |
For the Six Months Ended September 30, 2020 |
|||||||
|
Geography |
||||||||
|
United States |
$ | $ | ||||||
|
International |
||||||||
|
Total |
$ | $ | ||||||
TEL-INSTRUMENT ELECTRONICS CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 2 – Summary of Significant Accounting Policies (continued)
For the three months ended September 30, 2021, three customers accounted for sales of $
For the three and six months ended September 30, 2020, Muirhead Avionics, the Company’s distributor for Western Europe accounted for sales of $
The Company, in addition to inside sales efforts, utilizes independent brokers to sell its products to customers. A related party independent broker has earned approximately $
New Accounting Pronouncements
In June 2016, the FASB issued ASU No. 2016-13 Financial Instruments -Credit Losses (Topic 326), Measurement of Credit Losses on Financial Statements. The amendment in this update replaces the incurred loss impairment methodology in current GAAP with a methodology that reflects expected credit losses on instruments within its scope, including trade receivables. This update is intended to provide financial statement users with more decision-useful information about the expected credit losses. The effective date of the new standard has been deferred to April 1, 2023. We do not expect the adoption of this standard to have 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 impact on the Company’s unaudited condensed consolidated financial statements.
Note 3 – Accounts Receivable, net
The following table sets forth the components of accounts receivable:
|
September 30, 2021 |
March 31, 2021 |
|||||||
|
Government |
$ | $ | ||||||
|
Commercial |
||||||||
|
Less: Allowance for doubtful accounts |
( |
) |
( |
) |
||||
| $ | $ | |||||||
Note 4 – Restricted Cash to Support Appeal Bond
In January 2018, the Company transferred $
Note 5 – Inventories, net
Inventories consist of:
|
September 30, 2021 |
March 31, 2021 |
|||||||
|
Purchased parts |
$ | $ | ||||||
|
Work-in-process |
||||||||
|
Finished goods |
||||||||
|
Less: Inventory reserve |
( |
) |
( |
) |
||||
| $ | $ | |||||||
TEL-INSTRUMENT ELECTRONICS CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 6 – Net Income per Share
Net income 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 per share (“EPS”). Basic EPS represents net income divided by the weighted average number of common shares outstanding during a reporting period. Diluted EPS reflects the potential dilution that could occur if securities, including preferred stock, warrants and options, were converted into common stock. The dilutive effect of outstanding warrants and options is reflected in earnings per share by use of the treasury stock method. The dilutive effect of preferred stock is reflected in earnings per share by use of the if-converted method. In applying the treasury stock method for stock-based compensation arrangements, the assumed proceeds are computed as the sum of the amount the employee must pay upon exercise and the amounts of average unrecognized compensation.
|
Three Months Ended |
Three Months Ended |
|||||||
|
September 30, 2021 |
September 30, 2020 |
|||||||
|
Basic net income per share computation: |
||||||||
|
Net income |
$ | $ | ||||||
|
Less: Preferred dividends |
( |
) |
( |
) |
||||
|
Net income attributable to common shareholders |
||||||||
|
Weighted-average common shares outstanding |
||||||||
|
Basic net income per share |
$ | $ | ||||||
|
Diluted net income per share computation |
||||||||
|
Net income attributable to common shareholders |
$ | $ | ||||||
|
Add: Preferred dividends |
||||||||
|
Diluted income attributable to common shareholders |
$ | $ | ||||||
|
Weighted-average common shares outstanding |
||||||||
|
Incremental shares attributable to the assumed conversion of preferred stock |
||||||||
|
Total adjusted weighted-average shares |
||||||||
|
Diluted net income per share |
$ | $ | ||||||
|
Six Months Ended |
Six Months Ended |
|||||||
|
September 30, 2021 |
September 30, 2020 |
|||||||
|
Basic net income per share computation: |
||||||||
|
Net income |
$ | $ | ||||||
|
Less: Preferred dividends |
( |
) |
( |
) |
||||
|
Net income attributable to common shareholders |
||||||||
|
Weighted-average common shares outstanding |
||||||||
|
Basic net income per share |
$ | $ | ||||||
|
Diluted net income per share computation |
||||||||
|
Net income attributable to common shareholders |
$ | $ | ||||||
|
Add: Preferred dividends |
||||||||
|
Diluted income attributable to common shareholders |
$ | $ | ||||||
|
Weighted-average common shares outstanding |
||||||||
|
Incremental shares attributable to the assumed conversion of preferred stock |
||||||||
|
Total adjusted weighted-average shares |
||||||||
|
Diluted net income per share |
$ | $ | ||||||
TEL-INSTRUMENT ELECTRONICS CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 6 – Net Income per Share (continued)
The following table summarizes securities that, if exercised, would have an anti-dilutive effect on earnings per share for the three months ended:
|
September 30, 2021 |
September 30, 2020 |
|||||||
|
Convertible preferred stock |
||||||||
|
Stock options |
||||||||
The following table summarizes securities that, if exercised, would have an anti-dilutive effect on earnings per share for the six months ended:
|
September 30, 2021 |
September 30, 2020 |
|||||||
|
Convertible preferred stock |
||||||||
|
Stock options |
||||||||
Note 7 – Line of Credit
In August 2021, Bank of America renewed the line of credit with a maturity of July 30, 2022. The agreement includes a line of credit up to $
As of September 30, 2021, the Line of Credit draw has remained at
Note 8 – SBA PPP Loan
On January 6, 2021, updated PPP guidance outlining program changes to enhance its effectiveness and accessibility was released on in accordance with the Economic Aid to Hard-Hit Small Businesses, Non-Profits, and Venues Act. This was available to companies that recorded greater than a 25% sales reduction in any quarter compared to the prior year. The Company qualified for this second round of funding and on March 15, 2021, the Company secured a Second Draw PPP loan in the amount of $
Note 9 – Segment Information
In accordance with FASB ASC 280, “Disclosures about Segments of an Enterprise and related information”, the Company determined it has
The Company is organized primarily on the basis of its avionics products. The avionics government segment consists primarily of the design, manufacture, and sale of test equipment to the U.S. and foreign governments and militaries either directly or through distributors. The avionics commercial segment consists of design, manufacture, and sale of test equipment to domestic and foreign airlines, directly or through commercial distributors, and to general aviation repair and maintenance shops. The Company develops and designs test equipment for the avionics industry and as such, the Company’s products and designs cross segments.
Management evaluates the performance of its segments and allocates resources to them based on gross margin. The Company’s general and administrative costs and sales and marketing expenses, and engineering costs are not segment specific. As a result, all operating expenses are not managed on a segment basis. Net interest includes expenses on debt and income earned on cash balances, both maintained at the corporate level.
TEL-INSTRUMENT ELECTRONICS CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 9 – Segment Information (continued)
The tables below present information about reportable segments within the avionics business for the three and six months ending September 30, 2021, and 2020:
|
Three Months Ended September 30, 2021 |
Avionics Government |
Avionics Commercial |
Avionics Total |
Corporate Items |
Total |
|||||||||||||||
|
Net sales |
$ | $ | $ | $ | $ | |||||||||||||||
|
Cost of sales |
||||||||||||||||||||
|
Gross margin |
||||||||||||||||||||
|
Engineering, research, and development |
||||||||||||||||||||
|
Selling, general and administrative |
||||||||||||||||||||
|
Litigation costs |
||||||||||||||||||||
|
Interest income |
( |
) |
( |
) |
||||||||||||||||
|
Other income |
( |
) |
( |
) |
||||||||||||||||
|
Interest expense – judgment |
||||||||||||||||||||
|
Forgiveness of PPP Loan |
( |
) |
( |
) |
||||||||||||||||
|
Total expenses (income) |
( |
) |
||||||||||||||||||
|
Income before income taxes |
$ | $ | $ | |||||||||||||||||
|
Three Months Ended September 30, 2020 |
Avionics Government |
Avionics Commercial |
Avionics Total |
Corporate Items |
Total |
|||||||||||||||
|
Net sales |
$ | $ | $ | $ | $ | |||||||||||||||
|
Cost of sales |
||||||||||||||||||||
|
Gross margin |
||||||||||||||||||||
|
Engineering, research, and development |
||||||||||||||||||||
|
Selling, general and administrative |
||||||||||||||||||||
|
Litigation costs |
||||||||||||||||||||
|
Interest income |
( |
) |
( |
) |
||||||||||||||||
|
Interest expense - judgment |
||||||||||||||||||||
|
Interest expense |
||||||||||||||||||||
|
Total expenses |
||||||||||||||||||||
|
Income (loss) before income taxes |
$ | $ | ( |
) |
$ | |||||||||||||||
|
Six Months Ended September 30, 2021 |
Avionics Government |
Avionics Commercial |
Avionics Total |
Corporate Items |
Total |
|||||||||||||||
|
Net sales |
$ | $ | $ | $ | $ | |||||||||||||||
|
Cost of sales |
||||||||||||||||||||
|
Gross margin |
||||||||||||||||||||
|
Engineering, research, and development |
||||||||||||||||||||
|
Selling, general and administrative |
||||||||||||||||||||
|
Litigation costs |
||||||||||||||||||||
|
Interest income |
( |
) |
( |
) |
||||||||||||||||
|
Other income |
( |
) |
( |
) |
||||||||||||||||
|
Interest expense – judgment |
||||||||||||||||||||
|
Forgiveness of PPP Loan |
( |
) |
( |
) |
||||||||||||||||
|
Total expenses |
||||||||||||||||||||
|
Income (loss) before income taxes |
$ | $ | ( |
) |
$ | |||||||||||||||
TEL-INSTRUMENT ELECTRONICS CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
|
Six Months Ended September 30, 2020 |
Avionics Government |
Avionics Commercial |
Avionics Total |
Corporate Items |
Total | |||||||||||||||
|
Net sales |
$ | $ | $ | $ | $ | |||||||||||||||
|
Cost of sales |
||||||||||||||||||||
|
Gross margin |
||||||||||||||||||||
|
Engineering, research, and development |
||||||||||||||||||||
|
Selling, general and administrative |
||||||||||||||||||||
|
Litigation costs |
||||||||||||||||||||
|
Interest income |
( |
) |
( |
) |
||||||||||||||||
|
Other income |
( |
) |
( |
) |
||||||||||||||||
|
Interest expense – judgment |
||||||||||||||||||||
|
Interest expense |
||||||||||||||||||||
|
Total expenses |
||||||||||||||||||||
|
Income (loss) before income taxes |
$ | $ | ( |
) |
$ | |||||||||||||||
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 $
The differences between income taxes expected at the U.S. federal statutory income tax rate of
In December 2019, the FASB issued ASU No. 2019-12, Income Taxes - simplifying the accounting for income taxes (Topic 740), which is meant to simplify the accounting for income taxes by removing certain exceptions to the general principles in Topic 740, Income Taxes. The amendment also improves consistent application and simplify GAAP for other areas of Topic 740 by clarifying and amending existing guidance. This ASU was effective April 1, 2021, and adoption of this standard had no significant impact on our financial position and results of operations.
Note 11 – Operating Lease Liability
The Company leases its facility in East Rutherford, NJ with monthly payments of $
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
TEL-INSTRUMENT ELECTRONICS CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 11 – Operating Lease Liability (continued)
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 September 30, 2021:
|
Remaining payments 2022 |
$ | |||
|
2023 |
||||
|
2024 |
||||
|
2025 |
||||
|
2026 |
||||
|
Thereafter |
||||
|
Total undiscounted future minimum lease payments |
||||
|
Less: Difference between undiscounted lease payments and discounted lease liabilities |
( |
) |
||
|
Present value of net minimum lease payments |
||||
|
Less current portion |
( |
) |
||
|
Operating lease liabilities – long-term |
$ |
Total rent expense for the three and six months ended September 30, 2021, was $
Note 12 – Litigation
Contingencies are recorded in the unaudited condensed consolidated financial statements when it is probable that a liability will be incurred and the amount of the loss is reasonably estimable, or otherwise disclosed, in accordance with Accounting Standards Codification 450, Contingencies (ASC 450). Significant judgment is required in both the determination of probability and the determination as to whether a loss is reasonably estimable. In the event the Company determines that a loss is not probable, but is reasonably possible, and it becomes possible to develop what the Company believes to be a reasonable range of possible loss, then the Company will include disclosures related to such matter as appropriate and in compliance with ASC 450. To the extent there is a reasonable possibility that the losses could exceed the amounts already accrued, the Company will, when applicable, adjust the accrual in the period the determination is made, disclose an estimate of the additional loss or range of loss or if the amount of such adjustment cannot be reasonably estimated, disclose that an estimate cannot be made.
On March 24, 2009, Aeroflex Wichita, Inc. (“Aeroflex”) filed a petition against the Company and two of its employees in the District Court located in Sedgwick County, Kansas, Case No. 09 CV 1141 (the “Aeroflex Action”), alleging that the Company and its two employees misappropriated Aeroflex’s proprietary technology in connection with the Company winning a substantial contract from the U.S. Army, to develop new Mode-5 radar test sets and kits to upgrade the existing TS-4530 radar test sets to Mode 5 (the “Award”). Aeroflex’s petition, seeking injunctive relief and damages, alleges that in connection with the Award, the Company and its named employees misappropriated Aeroflex’s trade secrets; tortiously interfered with Aeroflex’s business relationship; conspired to harm Aeroflex and tortiously interfered with Aeroflex’s contract. The central basis of all the claims in the Aeroflex Action is that the Company misappropriated and used Aeroflex proprietary technology and confidential information in winning the Award. In February 2009, subsequent to the Company winning the Award, Aeroflex filed a protest of the Award with the Government Accounting Office (“GAO”).
In its protest, Aeroflex alleged, inter alia, that the Company used Aeroflex’s proprietary technology in order to win the Award, the same
material allegations as were later alleged in the Aeroflex Action. On or about March 17, 2009, the U.S. Army Contracts Attorney, and the U.S. Army Contracting Officer each filed a statement with the GAO, expressly rejecting Aeroflex’s allegations that the Company used or infringed on Aeroflex’s proprietary technology in winning the Award and concluding that the Company had used only its own proprietary technology. On April 6, 2009, Aeroflex withdrew its protest.
In December 2009, the Kansas District Court dismissed the Aeroflex Action on jurisdiction grounds. Aeroflex appealed this decision. In May 2012, the Kansas Supreme Court reversed the decision and remanded the Aeroflex Action to the Kansas District Court for further proceedings. The case then entered an extended discovery period in the District Court.
TEL-INSTRUMENT ELECTRONICS CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 12 – 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 found that the Company tortiously interfered with a prospective business opportunity and awarded damages of $
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 $
For the year starting July 1, 2020, the interest rate was
The Company filed post-trial motions to avoid damage duplication and inconsistency, and to secure judgment as a matter of law or a new trial. The trial court denied those motions. The Company appealed the verdict and the post-trial rulings to the Court of Appeals of the State of Kansas, Case No. 18-119,563. The Company posted a $2 million supersedeas bond. The Plaintiff filed a cross-appeal. The appeal and cross-appeal are fully briefed. The appellate court has not set a date to hear the appeal.
The Company is optimistic about the prospects of its appeal for a judgment as a matter of law. The 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 to pay off this liability if the appeal is lost.
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.
Although the Company believes that the expectations reflected in the forward-looking statements are reasonable, the Company cannot guarantee future results, levels of activity, performance, or achievements. Except as required by applicable law, including the securities laws of the United States, the Company does not intend to update any of the forward-looking statements to conform these statements to actual results.
Our unaudited condensed consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States (“GAAP”). These accounting principles require us to make certain estimates, judgments, and assumptions. We believe that the estimates, judgments, and assumptions upon which we rely are reasonable based upon information available to us at the time that these estimates, judgments, and assumptions are made. These estimates, judgments and assumptions can affect the reported amounts of assets and liabilities as of the date of the financial statements as well as the reported amounts of revenues and expenses during the periods presented. Our unaudited condensed consolidated financial statements would be affected to the extent there are material differences between these estimates and actual results. In many cases, the accounting treatment of a particular transaction is specifically dictated by GAAP and does not require management’s judgment in its application. There are also areas in which management’s judgment in selecting any available alternative would not produce a materially different result. The following discussion should be read in conjunction with our financial statements and notes thereto appearing elsewhere in this report.
Overview
The Company reported net income of $999,676 and $1,575,177 and net sales of $3,610,863 and $7,743,256 for the three and six months ended September 30, 2021. This compared to net income of $222,748 and $333,728 and net sales of $3,336,396 and $6,275,833 for the same three and six month period in the prior fiscal year, respectively. Profitability for the three and six months ended September 30, 2021, versus the same three and six months ended September 30, 2020, was positively impacted by an increase in sales of $274,000 or 8% and $1.5 million or 23%, respectively. Additionally, gross margin percentages increased 5% for the current versus prior three months and 2% for the current versus prior six months, respectively. Backlog orders on September 30, 2021, were $4.1 million versus $5.1 million on September 30, 2020.
The Company continues to pursue opportunities in the domestic and international market for our Mode 5 test sets with good results. We continue to receive volume orders from South Korea, Australia, Canada, the U.K., and Germany for our Mode 5 test sets. We also are receiving volume orders from the U.S. Government and Lockheed Martin for our AN/USM-708 and 719 (“CRAFT”) Mode 5 test sets. Our expectation is that we will continue to improve both our revenues and gross margins, but the timing of these new orders is largely out of our hands. Nonetheless, we are encouraged by the increasing activity we are seeing for military products. After a sharp drop in FY 2021, the Company is also seeing the beginning of a rebound in commercial test set business. TIC is also working on the next generation of Mode 5 called Mode 5 Level 2B. This could potentially lead to substantial software upgrades in the future for our domestic and international Mode 5 customers. The Navy is systematically moving forward on a mid-life update of our CRAFT product line which could entail funded engineering starting next fiscal year. This is an important product for the Company, and this should ensure an additional 10 years of product life.
The Company is also actively looking at expanding out of its current core avionics market area. TIC is working with Lockheed Martin (LMCO) on a new MADL test set. TIC was awarded this contract after winning a $956,000 competitive solicitation. MADL is a secure communications radio for the F-35. This operates in a much higher frequency range than our other test sets. The contract has been put on hold due to LMCO funding issues, we have indications that the contract will resume in the next few months. TIC has completed the majority of the development work on this new test set. If the funding issue is resolved, this could generate substantial recurring revenues for the Company and would position TIC for further development contracts with LMCO.
Overview (continued)
The main focus area for the Company is moving into the secure communications testing with our new SDR/OMNI test set. This Test Set utilizes true software-designed radio technology that enables it to test all common avionics functions in one 4.5 pound test set. The SDR/OMNI has very wide frequency to accommodate new commercial and military waveforms in an industry leading “mil-spec” package. This is half the weight of competitive test sets. It utilizes the latest touch screen technology and has the capability to replace all TIC commercial test sets and military flight-line test sets with one handheld product. With the COVID pandemic, the Company focused all of its engineering efforts on developing a secure communications and navigation test set for the U.S. military. The communications test capability was moved up in our development schedule based on the negative impact of the COVID-19 pandemic on commercial aviation. The U.S. military will need to upgrade thousands of existing communication and navigation test sets over the next several years to address the new frequency and waveform requirements for military radios and we believe the SDR/OMNI is well positioned to capture a large portion of this business.
Once the communications and navigation software are completed, TIC plans to introduce software APPS for the commercial transponder testing market by the end of this calendar year. This will provide Transponder (Modes A, C, and S), ADS-B, and 978 MHz UAT capability for the large general aviation test market. This will allow us to compete with the IFR 4000 and 6000 test tests for our military and commercial aviation customers. The SDR-Omni product is a game changer in the commercial and military avionics test market as it will allow customers to replace multiple competitive test sets with one unit that is smaller and provides more capabilities at a lower of the cost. This new technology could provide us with the opportunity to expand out of our relatively narrow avionics test market niche and enter the much larger secure military and homeland security radio test market which is many times the size of our existing avionics test market. The secure military test set market is very large, and we are anticipating several large competitive DOD solicitations to take place in the next several years.
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 has filed for the 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.
Results of Operations
Sales
Net sales were $3,610,863 and $7,743,256 for the three and six months ended September 30, 2021, as compared to $3,336,396 and $6,275,833 for the same three and six month period in the prior fiscal year, respectively. The increase in sales of approximately $274,000 (8%) and $1.5 million (23%), respectively was due primarily to a slight ease in supply chain procurement issues allowing back log orders to be fulfilled. Additionally, repair order revenue increased 138% and 94% for the comparative three and six months primarily due to the reopening of governmental facilities and the commercial sector slowly returning to normal business as the COVID pandemic restrictions are lifted.
Gross Margin
For the three and six months ended September 30, 2021, total gross margin increased $301,084 (22.0%) and $811,220 (28.3%) to $1,667,907 and $3,682,654 as compared to $1,366,823 and $2,871,434 for the three and six months ended September 30, 2020, primarily as a result of the increase in volume, price adjustments and highly profitable training products. The gross margin percentage for the three months ended September 30, 2021, was 46.2% as compared to 41.0% for the three months ended September 30, 2020. The gross margin percentage for the six months ended September 30, 2021, was 47.6% as compared to 45.8% for the three months ended September 30, 2020.
Operating Expenses
Selling, general and administrative expenses increased $131,809 (28.4%) to $596,618 and $24,591 (2.2%) to $1,150,651 for the three and six months ended September 30, 2021, as compared to $464,809 and $1,126,060, respectively for the three and six months ended September 30, 2020. The three months increase of $131,809 is a result of increased profit sharing reserves, travel resuming, sales commission expense and salary increases all resulting from the rebound of prior year COVID-19 business slow down. The six months net increase of $24,591 is result of various continuing savings with an offset of profit sharing expense increase related to increased profitability trends.
Operating Expenses continued
Litigation costs decreased by $2,294 to $3,220 for the three months ended September 30, 2021, as compared to $5,514 for the three months ended September 30, 2020. Litigation costs decreased $3,810 to $4,400 six months ended September 30, 2021, as compared to $8,210 for the six months ended September 30, 2020. This is a direct result of decreased activity related to the litigation (see Notes 4 and 12 to the unaudited condensed consolidated financial statements). With respect to the Aeroflex litigation, the Company has appealed the $4.9 million judgement and has set aside $2 million in cash to support an appeal bond. The appeal submissions are now complete. We continue to believe that the trial judge erred in his legal ruling on standing and other issues during the trial and that we have strong grounds for the award to be vacated or reduced. Our attorneys estimate that it will take close to a year from now for this appeal to work its way through the Kansas court system
Engineering, research, and development expenses increased $128,297 or 23.1% to $682,852 and $189,919 or 16.0% to $1,376,427 for the three and six months ended September 30, 2021, as compared to $554,555 and $1,186,508 for the three and six months ended September 30, 2020, respectively. Total engineering expense has increased: (1) as a result of our increased engineering activities primarily with the SDR-OMNI hand-held product line final development plans to begin production early 2022 and (2) by the suspension of the MADL program which reduced engineering costs in the prior quarter.
Income from Operations
As a result of the above, the Company recorded income from operations of $385,217 and $1,151,176 for the three and six months ended September 30, 2021, as compared to income from operations of $341,945 and $550,656 for the three and six months ended September 30, 2020.
Other income (expense)
For the three and six months ended September 30, 2021, total other net income was $693,342 and $656,000 as compared to other net expense of $59,991 and $128,215 for the three and six months ended September 30, 2020, primarily the result of the Second Draw PPP loan in the amount of $722,577 being fully forgiven on September 17, 2021 and on August 24, 2021, TIC, and the New Jersey Economic Development Authority (NJEDA) signed a small business emergency assistance grant agreement in the amount of $20,000. We received these funds into our bank account on August 30, 2021.
Income before Income Taxes
As a result of the above, the Company recorded income before taxes of $1,078,559 and $1,807,176 for the three and six months ended September 30, 2021, as compared to income before taxes of $281,954 and $422,441 for the three and six months ended September 30, 2020.
Income Taxes
For the three and six months ended September 30, 2021, the Company recorded income tax expense of $78,883 and $231,999, as a result of the Company’s taxable income for the respective quarters, as compared to $59,206 and $88,713 for the three and six months ended September 30, 2020. The differences between income taxes expected at the U.S. federal statutory income tax rate of 21 percent and the reported income tax expense are due to the recognition of non-taxable PPP funds of $722,577 as other income during the three months ended September 30, 2021. Taxable income was $355,982 and $1,084,599 for the three and six months ended September 30, 2021.
Net Income
The Company recorded net income of $999,676 and $1,575,177 for the three and six months ended September 30, 2021, as compared to net income of $222,748 and $333,728 for the three and six months ended September 30, 2020.
Liquidity and Capital Resources
At September 30, 2021, the Company had net working capital of $4,146,410 including accrued legal damages related to the Aeroflex litigation of $5,993,433, as compared to working capital of $3,159,731 at March 31, 2021. This change is primarily the result of lower accounts payable, pay out of accrued employee vacation time resulting from a policy update capping carryover time, and cash receipts received from the increase in sales, as well as the full forgiveness of the PPP loan.
Liquidity and Capital Resources continued
During the six months ended September 30, 2021, the Company’s cash balance (including the $2 million in restricted cash for the appeal) increased by $1.3 million to $6,819,507. The Company’s principal sources and uses of funds were as follows:
Cash provided by (used in) operating activities. For the six months ended September 30, 2021, $1,484,043 in cash from operations was provided, as compared to the six months ended September 30, 2020, the Company used $374,468. This increase in cash provided for operations is mostly attributed to an increase in net income from increased sales and margin, decrease in inventory purchases, and offset by decrease accounts payable.
Cash used in investing activities. For the six months ended September 30, 2021, the Company used $859 in investing activities as compared to the six months ended September 30, 2020, the Company used $19,247 for IT equipment related upgrades.
Cash (used in) financing activities. For the six months ended September 30, 2021, the Company used $160,000 in cash from financing activities as compared to providing $722,528 for the six months ended September 30,2020. This decrease is due mainly from the receipt of PPP loan funding received in the prior year, compared to a payment of $160,000 dividend in the current period.
The Bank of America line of credit was renewed and will mature July 30, 2022. As of September 30, 2021, the line of credit draw remained at zero.
On September 30, 2021, the Company has $6.8 million of cash on hand which included $2 million of restricted cash supporting the appeal bond.
As of September 30, 2021, the Company has recorded total damages of $5,993,433 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 $1,093,433 as of September 30, 2021.
The Company is very optimistic about the prospects of its appeal for a judgment as a matter of law. Due to the three-month COVID-19 related shutdown of the Kansas court system and subsequent partial reopening of the court system, a major backlog has resulted. As such, the appeal process is expected to take at least a year to complete unless a settlement can be reached. The Company has the ability to settle this case at its sole discretion by withdrawing the appeal and paying the judgment plus interest amount. The Company currently has sufficient cash on hand to pay off this liability if we lose the appeal.
On March 27, 2020, President Trump signed the Coronavirus Aid, Relief and Economic Security (the “CARES Act”), which, among other things, outlines the provisions of the Paycheck Protection Program (the “PPP”). The Company determined that it met the criteria to be eligible to obtain a loan under the PPP because, among other reasons, in light of the COVID-19 outbreak and the uncertainty of economic conditions related thereto, the loan was considered necessary to support the Company’s ongoing operations and retain all its employees. In addition, President Trump signed into law the Paycheck Protection Program and Health Care Enhancement Act on April 24, 2020, which increased funding provided by the CARES Act. On May 4, 2020, the Company issued a promissory note (the “Note”) to Bank of America in the principal aggregate amount of $722,577 (the “PPP Loan”) pursuant to the Paycheck Protection Program (“PPP”) under the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”). The amount was deposited in our bank on May 4, 2020. On June 5, 2020, the Paycheck Protection Program Flexibility Act was signed into law and extended the program until December 31, 2020. TIC qualified for full loan forgiveness on the initial tranche on December 18, 2020.
On January 6, 2021, updated PPP guidance outlining program changes to enhance its effectiveness and accessibility was released on in accordance with the Economic Aid to Hard-Hit Small Businesses, Non-Profits, and Venues Act. This was available to companies that recorded greater than a 25% sales reduction in any quarter compared to the prior year. The Company qualified for this second round of funding and on March 15, 2021, the company secured a Second Draw PPP loan in the amount of $722,577. TIC qualified for full loan forgiveness on September 17, 2021.
On August 24, 2021, TIC, and the New Jersey Economic Development Authority (NJEDA) signed a small business emergency assistance grant agreement in the amount of $20,000. We received these funds into our bank account on August 30, 2021, from NJEDA.
Moving forward, we believe that our expected cash flows from operations and current cash balances, which amounted to approximately $6.8 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 financial statements, including any payments for settlement of the litigation.
Liquidity and Capital Resources (continued)
Currently, the Company has no material future capital expenditure requirements.
There was no significant impact on the Company’s operations as a result of inflation for the three months ended September 30, 2021.
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, 2021, filed with the SEC on June 29, 2021 (the “Annual Report”).
Off-Balance Sheet Arrangements
As of September 30, 2021, 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 2021 consolidated financial statements included in our Annual Report.
Item 3. Quantitative and Qualitative Disclosures about Market Risk.
We do not hold any derivative instruments and do not engage in any hedging activities.
Item 4. Controls and Procedures.
(a) Evaluation of Disclosure Controls and 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. 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 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 12 to the Unaudited Condensed Consolidated Financial Statements ) did not result in a favorable outcome for the Company, despite our belief that we committed no wrong-doing.
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. The Company has filed for the 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 4).
As reflected in the accompanying unaudited condensed consolidated balance sheet as of September 30, 2021, the Company has recorded estimated damages to date of approximately $6 million, including interest, as a result of a jury verdict associated with the Aeroflex litigation. The Company has filed for an appeal (see Notes 4 and 12). As of September 30, 2021, the Company has cash balances of $6.8 million, including $2 million of restricted cash as well as $1.5 million in accounts receivable. We expect to continue to have sufficient cash to fully cover the Aeroflex damages amount.
The Company is very optimistic about the prospects of its appeal for a judgment as a matter of law. Due to the three-month COVID-19 related shutdown of the Kansas court system and subsequent partial reopening of the court system, a major backlog has resulted. As such, the appeal process is expected to take at least to the end of calendar 2021 year to complete unless a settlement can be reached. The Company has the ability to settle this case at its sole discretion by withdrawing the appeal and paying the judgment plus interest amount. The Company currently has sufficient cash on hand to pay off this liability if we lose the appeal.
Other than the matters outlined above, we are currently not involved in any litigation that we believe could have a material adverse effect on our financial condition or results of operations. There is no action, suit, proceeding, inquiry or investigation before any court, public board, government agency, self-regulatory organization or body pending or, to the knowledge of executive officers of our Company, threatened against or affecting our Company, or our common stock in which an adverse decision could have a material effect.
Item 1A. Risk Factors.
We believe there are no changes that constitute material changes from the risk factors previously disclosed in the Company’s Annual Report on Form 10-K for the fiscal year ended March 31, 2021, filed with the SEC on June 29, 2021.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
There were no unregistered sales of the Company’s equity securities during the quarter ended September 30, 2021.
Item 3. Defaults upon Senior Securities.
There has been no default in the payment of principal, interest, sinking or purchase fund installment, or any other material default, with respect to any indebtedness of the Company.
Item 4. Mine Safety Disclosures.
Not applicable.
Item 5. Other Information.
There is no other information required to be disclosed under this item which was not previously disclosed.
Item 6. Exhibits.
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Exhibit No. |
Description |
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31.1 |
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31.2 |
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32.1 |
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32.2 |
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101.INS |
Inline XBRL Instance Document* |
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101.SCH |
Inline XBRL Taxonomy Extension Schema Document* |
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101.CAL |
Inline XBRL Taxonomy Extension Calculation Linkbase Document* |
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|
101.DEF |
Inline XBRL Taxonomy Extension Definition Linkbase Document* |
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101.LAB |
Inline XBRL Taxonomy Extension Label Linkbase Document* |
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101.PRE |
Inline XBRL Taxonomy Extension Presentation Linkbase Document* |
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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.
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TEL-INSTRUMENT ELECTRONICS CORP. |
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Date: November 15, 2021 |
By: |
/s/ Jeffrey C. O’Hara |
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Name: Jeffrey C. O’Hara |
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Title: Chief Executive Officer (Principal Executive Officer) |
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