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Tel Instrument Electronics (TIKK)

Filed: 12 Aug 21, 4:16pm


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: June 30, 2021

 

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

 

Commission File Number: 001-31990

 

TEL-INSTRUMENT ELECTRONICS CORP.

(Exact name of registrant as specified in its charter)

 

New Jersey

22-1441806

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)

 

One Branca Road

East Rutherford, NJ 07073

(Address of principal executive offices)

 

(201) 933-1600

(Registrant’s telephone number, including area code)

 

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

 

Title of each class

 

Trading Symbol(s)

 

Name of each exchange on which registered

N/A

 

N/A

 

N/A

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12 months, and (2) has been subject to such filing requirements for the past 90 days.  Yes ☒   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, smaller reporting company, or an emerging growth company.  See the definitions of “large, accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large, accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company

  

Emerging growth company

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ☐ 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes ☐   No ☒

 

As of August 11, 2021, there were 3,255,887 shares outstanding of the registrant’s common stock. 

 

 

TEL-INSTRUMENT ELECTRONICS CORP.

 

TABLE OF CONTENTS

 

PART I  FINANCIAL INFORMATION

  

Page

Item 1.

Unaudited Condensed Consolidated Financial Statements.

3

   

Item 2.

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

18

   

Item 3.

Quantitative and Qualitative Disclosures About Market Risk.

22

   

Item 4.

Controls and Procedures.

22

   

PART II  OTHER INFORMATION

   

Item 1.

Legal Proceedings.

23

   

Item 1A.

Risk Factors.

23

   

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds.

23

   

Item 3.

Defaults Upon Senior Securities.

23

   

Item 4.

Mine Safety Disclosures.

23

   

Item 5.

Other Information.

23

   

Item 6.

Exhibits.

24

   

Signatures

25

 

 

 

 

PART I FINANCIAL INFORMATION

 

Item 1. Unaudited Condensed Consolidated Financial Statements.

 

TEL-INSTRUMENT ELECTRONICS CORP.

CONDENSED CONSOLIDATED BALANCE SHEETS

 

  

June 30,

2021

  

March 31,

2021

 
  

(unaudited)

     

ASSETS

        
         

Current assets:

        

Cash

 $4,758,819  $3,485,275 

Accounts receivable, net

  1,318,276   1,933,321 

Inventories, net

  3,051,343   3,437,989 

Restricted cash to support appeal bond

  2,011,050   2,011,050 

Prepaid expenses and other current assets

  259,556   263,067 

Total current assets

  11,399,044   11,130,702 
         

Equipment and leasehold improvements, net

  169,388   200,769 

Operating lease right-of-use assets

  1,867,505   1,922,805 

Deferred tax asset, net

  2,521,926   2,675,040 

Other long-term assets

  35,109   35,110 

Total assets

 $15,992,972  $15,964,426 
         

LIABILITIES & STOCKHOLDERS’ EQUITY

        
         

Current liabilities:

        

Operating lease liabilities – current portion

 $194,469  $201,883 

Accounts payable

  384,559   906,149 

Deferred revenues – current portion

  154,382   150,709 

Accrued expenses ‐- vacation pay, payroll and payroll withholdings

  542,074   457,232 

Accrued legal damages

  5,940,943   5,889,023 

Accrued expenses - other

  331,848   365,975 

Total current liabilities

  7,548,275   7,970,971 
         

Operating lease liabilities – long-term

  1,673,036   1,720,921 

Long Term Debt - PPP

  722,577   722,577 

Deferred revenues – long-term

  329,886   332,428 
         

Total liabilities

  10,273,774   10,746,897 
         

Commitments and contingencies

        
         

Stockholders’ equity:

        

Preferred stock, 1,000,000 shares authorized, par value $0.10 per share

        

Preferred stock, 500,000 shares 8% Cumulative Series A Convertible Preferred

issued and outstanding, par value $0.10 per share

  3,695,998   3,695,998 

Preferred stock, 166,667 shares 8% Cumulative Series B Convertible Preferred

issued and outstanding, par value $0.10 per share

  1,147,367   1,147,367 

Common stock, 7,000,000 shares authorized, par value $0.10 per share,

3,255,887 shares issued and outstanding, respectively

  325,586   325,586 

Additional paid-in capital

  7,244,788   7,318,620 

Accumulated deficit

  (6,694,541

)

  (7,270,042

)

Total stockholders’ equity

  5,719,198   5,217,529 

Total liabilities and stockholders’ equity

 $15,992,972  $15,964,426 

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

 

TEL-INSTRUMENT ELECTRONICS CORP.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

 

  

Three Months Ended

 
  

June 30,

2021

  

June 30,

2020

 
         

Net sales

 $4,132,393  $2,939,437 

Cost of sales

  2,117,646   1,434,826 
         

Gross margin

  2,014,747   1,504,611 
         

Operating expenses:

        

Selling, general and administrative

  554,031   661,251 

Litigation expenses

  1,181   2,696 

Engineering, research, and development

  693,575   631,953 

Total operating expenses

  1,248,787   1,295,900 
         

Income from operations

  765,960   208,711 
         

Other income (expense):

        

Interest income

  984   2,846 

Other income

  13,593   13,854 

Interest expense - judgment

  (51,920

)

  (75,144

)

Interest expense

  0   (9,780

)

Total other net (expense)

  (37,343)  (68,224

)

         

Income before income taxes

  728,617   140,487 
         

Income tax expense

  153,116   29,507 
         

Net income

  575,501   110,980 
         

Preferred stock dividends

  (80,000

)

  (80,000

)

         

Net income attributable to common shareholders

 $495,501  $30,980 
         

Basic income per common share

 $0.15  $0.01 

Diluted income per common share

 $0.11  $0.01 
         

Weighted average shares outstanding:

        

Basic

  3,255,887   3,255,887 

Diluted

  5,095,665   3,255,887 

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

 

TEL-INSTRUMENT ELECTRONICS CORP.

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY

For the Three Months Ended June 30, 2021, and 2020

(Unaudited)

 

  

Series A Convertible

Preferred Stock

  

Series B Convertible

Preferred Stock

  

Common Stock

             
  

# of Shares

Issued

  Amount  

# of Shares

Issued

  Amount  

# of Shares

Issued

  Amount  

Additional Paid-In

Capital

  

Accumulated

Deficit

  Total 

Balances at April 1, 2021

  500,000  $3,695,998   166,667  $1,147,367   3,255,887  $325,586  $7,318,620  $(7,270,042) $5,217,529 

8% Dividends on Preferred Stock

  -   60,000   -   20,000   -   -   (80,000)  -   - 

Dividend Payments

  -   (60,000

)

  -   (20,000

)

  -   -   -   -   (80,000)

Stock-based compensation

  -   -   -   -   -   -   6,168   -   6,168 

Net income

  -   -   -   -   -   -   -   575,501   575,501 

Balances at June 30, 2021

  500,000  $3,695,998   166,667  $1,147,367   3,255,887  $325,586  $7,244,788  $(6,694,541) $5,719,198 

 

  

Series A Convertible

Preferred Stock

  

Series B Convertible

Preferred Stock

  

Common Stock

             
  

# of Shares

Issued

  

Amount

  

# of Shares

Issued

  

Amount

  

# of Shares

Issued

  

Amount

  

Additional Paid-In

Capital

  

Accumulated

Deficit

  

Total

 

Balances at April 1, 2020

  500,000  $3,515,998   166,667  $1,087,367   3,255,887  $325,586  $7,616,624  $(7,870,099

)

 $4,675,476 

8% Dividends on Preferred Stock

  -   60,000   -   20,000   -   -   (80,000

)

  -   - 

Stock-based compensation

  -   -   -   -   -   -   5,276   -   5,276 

Net income

  -   -   -   -   -   -   -   110,980   110,980 

Balances at June 30, 2020

  500,000  $3,575,998   166,667  $1,107,367   3,255,887  $325,586  $7,541,900  $(7,759,119

)

 $4,791,732 

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

 

TEL-INSTRUMENT ELECTRONICS CORP.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited) 

  

Three Months Ended

 
  

June 30, 2021

  

June 30, 2020

 

Cash flows from operating activities:

        

Net income

 $575,501  $110,980 

Adjustments to reconcile net income to net cash provided by (used in) operating activities

        

Deferred income taxes

  153,114   61,890 

Depreciation and amortization

  31,381   29,540 

Amortization of right of use assets

  55,300   52,450 

Provision for inventory obsolescence

  0   10,000 

Non-cash stock-based compensation

  6,168   5,276 

Changes in assets and liabilities:

        

(Increase) decrease in accounts receivable

  615,045   (397,653

)

Decrease (increase) in inventories

  386,646   (401,204

)

Decrease (increase) in prepaid expenses & other assets

  3,514   93,873 

(Decrease) in accounts payable and other accrued liabilities

  (555,716

)

  (90,872

)

(Decrease) increase in accrued payroll, vacation pay and payroll taxes

  84,842   (72,689

)

(Decrease) increase in deferred revenues

  1,129   (70,827

)

Decrease in operating lease liabilities

  (55,300

)

  (52,450

)

Increase in accrued legal damages

  51,920   75,144 

Net cash provided by (used in) operating activities

  1,353,544   (646,542

)

         

Cash flows from investing activities:

        

Purchases of equipment

  0   (15,386

)

Net cash used in investing activities

  0   (15,386

)

         

Cash flows from financing activities:

        

Proceeds from SBA PPP Loan

  -   722,577 

Payment of dividends

  (80,000

)

  0 

Repayment of finance lease obligations

  0   (49

)

Net cash (used in) provided by financing activities

  (80,000

)

  722,528 
         

Net increase in cash and restricted cash

  1,273,544   60,600 

Cash and restricted cash at beginning of period

  5,496,325   5,134,739 

Cash and restricted cash at end of period

 $6,769,869  $5,195,339 
         

End of period

        

Cash

 $4,758,819  $3,185,796 

Restricted cash

  2,011,050   2,009,543 
  $6,769,869  $5,195,339 

Beginning of period

        

Cash

 $3,485,275  $3,126,195 

Restricted cash

  2,011,050   2,008,544 
  $5,496,325  $5,134,739 

Supplemental cash flow information:

        

Taxes paid

 $0   4,962 

Interest paid

 $-     

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

 

TEL-INSTRUMENT ELECTRONICS CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Note 1 Business, Organization and Liquidity

 

Business and Organization

 

Tel-Instrument Electronics Corp. (“Tel”, “TIC” or the “Company”) has been in business since 1947.  The Company is a leading designer and manufacturer of avionics test and measurement instruments for the global, commercial air transport, general aviation, and government/military defense markets.  Tel provides instruments to test, measure, calibrate, and repair a wide range of airborne navigation and communication equipment.  The Company sells its equipment in both domestic and international markets. Tel continues to develop new products in anticipation of customers’ needs and to maintain its strong market position.  Its development of multi-function testers has made it easier for customers to perform ramp tests with less operator training, fewer test sets, and lower product support costs.  The Company has become a major manufacturer and supplier of Identification Friend or Foe (“IFF”) flight line test equipment over the last few years.

 

The Company is publicly traded and was quoted on the Over-the-Counter Market Place (“OTCQB”) under the symbol “TIKK”.

 

Liquidity and PPP Loans

 

On June 30, 2021, the Company had positive working capital of $3,850,769 as compared to working capital of $3,159,731 on March 31, 2021. This included approximately $6.8 million of cash including the $2 million supersedes appeal bond. The Company has recorded total damages of $5,940,943, including accrued interest, as a result of the jury verdict associated with the Aeroflex litigation.

 

With a $6.1 million backlog on June 30, 2021, the Company expects that in fiscal year 2022, revenue and profitability will continue to improve.

 

On March 27, 2020, former President Trump signed the Coronavirus Aid, Relief and Economic Security (the “CARES Act”), which, among other things, outlines the provisions of the Paycheck Protection Program (the “PPP”). The Company determined that it met the criteria to be eligible to obtain a loan under the PPP because, among other reasons, in light of the COVID-19 outbreak and the uncertainty of economic conditions related thereto, the loan was considered necessary to support the Company’s ongoing operations and retain all its employees. In addition, former President Trump signed into law the Paycheck Protection Program and Health Care Enhancement Act on April 24, 2020, which increased funding provided by the CARES Act. On May 4, 2020, the Company issued a promissory note (the “Note”) to Bank of America in the principal aggregate amount of $722,577 (the “PPP Loan”) pursuant to the Paycheck Protection Program (“PPP”) under the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”). The amount was deposited in our bank on May 4, 2020. On June 5, 2020, the Paycheck Protection Program Flexibility Act was signed into law and extended the program until December 31, 2020.

 

TIC qualified for full loan forgiveness on the initial tranche on December 18, 2020. On January 6, 2021, updated PPP guidance outlining program changes to enhance its effectiveness and accessibility was released on in accordance with the Economic Aid to Hard-Hit Small Businesses, Non-Profits, and Venues Act. This was available to companies that recorded greater than a 25% sales reduction in any quarter compared to the prior year. The Company qualified for this second round of funding and on March 15, 2021, the company secured a Second Draw PPP loan in the amount of $722,577. A borrower can apply for forgiveness once all loan proceeds for which the borrower is requesting forgiveness have been used. Borrowers can apply for forgiveness any time up to the maturity date of the loan. If borrowers do not apply for forgiveness within 10 months after the last day of the covered period, then PPP loan payments are no longer deferred, and borrowers will begin making loan payments to their PPP lender. The Company plans to file for loan forgiveness of the second tranche of PPP funding during quarter ending September 30, 2021.

 

Based on the foregoing, we believe that our expected cash flows from operations and current cash balances will be sufficient to operate in the normal course of business for next 12 months from the issuance date of these unaudited condensed financial statements, including any payments for settlement of the Aeroflex litigation.

 

The Bank of America extension for the line of credit expired July 30, 2021, the line of credit annual renewal is currently being underwritten with a maturity of July 30, 2022, and subject to completion of the lender’s underwriting procedures. As of June 30, 2021, the Line of Credit draw remained at 0.

 

 

TEL-INSTRUMENT ELECTRONICS CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Note 1 Business, Organization and Liquidity (continued)

 

Impact of the COVID-19 Coronavirus

 

In December 2019, a novel strain of coronavirus, which causes the disease known as COVID-19, was reported to have surfaced in Wuhan, China. Since then, COVID-19 coronavirus has spread globally. In March 2020, the World Health Organization declared the COVID-19 outbreak a pandemic and the U.S. government imposed travel restrictions on travel between the United States, Europe, and certain other countries. The impact of this pandemic has been, and will likely continue to be, extensive in many aspects of society, which has resulted, and will likely continue to result, in significant disruptions to the global economy as well as businesses and capital markets around the world.

 

In response to public health directives and orders and to help minimize the risk of the virus to employees, the Company has taken precautionary measures, including implementing work-from-home policies for certain employees. The impact of the virus, including work-from-home policies, may negatively impact productivity, disrupt the Company's business, and delay certain projects, the magnitude of which will depend, in part, on the length and severity of the restrictions and other limitations on the Company's ability to conduct its business in the ordinary course. Other impacts to the Company's business may include temporary closures of its suppliers and disruptions or restrictions on its employees' ability to travel. Any prolonged material disruption to the Company's employees or suppliers could adversely impact the Company's financial condition and results of operations, including its ability to obtain financing.

 

Note 2 – Summary of Significant Accounting Policies

 

Basis of Presentation

 

In the opinion of management, the accompanying unaudited condensed consolidated financial statements contain all adjustments necessary to present fairly the financial position of Tel-Instrument Electronics Corp. as of June 30, 2021, the results of operations, changes in stockholders’ equity, and statements of cash flow for the three months ended June 30, 2021, and June 30, 2020. These results are not necessarily indicative of the results to be expected for the full year.  The unaudited condensed consolidated financial statements have been prepared in accordance with the requirements of Form 10-Q and consequently do not include disclosures normally made in an Annual Report on Form 10-K.  The March 31, 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 and, in doing so, it is possible more judgement and estimates may be required within the revenue recognition process than are currently in use. 

 

The Company generates revenue from designing, manufacturing, and selling avionic tests and measurement solutions for the global commercial air transport, general aviation, and government/military aerospace and defense markets. The Company also offers calibration and repair services for a wide range of airborne navigation and communication equipment. 

 

 

TEL-INSTRUMENT ELECTRONICS CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Note 2 – Summary of Significant Accounting Policies (continued)

 

Nature of goods and services

 

The following is a description of the products and services from which the Company 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. 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 taking into account available information such as market conditions and internally approved pricing guidelines related to the performance obligations.

 

When determining the transaction price of a contract, an adjustment is made if payment from the customer occurs either significantly before or significantly after performance, resulting in a significant financing component. Applying the practical expedient in paragraph 606-10-32-18, the Company does not assess whether a significant financing component exists if the period between when the Company performs its obligations under the contract and when the customer pays is one year or less. None of the Company’s contracts contained a significant financing component as of June 30, 2021.

 

Replacement Parts

 

The Company offers replacement parts for test equipment, ramp testers, and bench testers. Similar to the sale of test units, the control of the product transfers at a point of time and therefore, revenue is recognized at the point in time when the obligation to the customer has been fulfilled.

 

Extended Warranties

 

The extended warranties sold by the Company provide a level of assurance beyond the coverage for defects that existed at the time of a sale or against certain types of covered damage with coverage terms generally ranging from 5 to 7 years. Amounts received for warranties are recorded as deferred revenue and recognized as revenue ratably over the respective term of the agreements. As of June 30, 2021, $413,304 is expected to be recognized from remaining performance obligations for extended warranties as compared to $408,219 at March 31, 2021.

 

For the three months ended June 30, 2021, the Company recognized revenue of $15,915 from amounts that were included in Deferred Revenue as compared to $22,140 from amounts that were included in Deferred Revenue for the three months ended June 30, 2020.

 

The following table provides a summary of the changes in deferred revenues for the three months ended June 30, 2021:

 

Deferred revenues at April 1, 2021

 $408,219 

Additional extended warranties

  21,000 

Revenue recognized for the three months ended June 30, 2021

  (15,915

)

Deferred revenues at June 30, 2021

 $413,304 

 

 

TEL-INSTRUMENT ELECTRONICS CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Note 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 June 30, 2021, and March 31, 2021, the Company has other deferred revenues of $70,964 and $74,920, respectively.

 

Repair and Calibration Services

 

The Company offers repair and calibration services for units that are returned for annual calibrations and/or for repairs after the 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 generally include a requirement of payment within a range from 30 to 60 days, or in certain cases, up-front deposits. In circumstances where the timing of revenue recognition differs from the timing of invoicing, the Company has determined that the Company's contracts generally do not include a significant financing component. Payments received prior to the delivery of units or services performed are recorded as deferred revenues. Taxes collected from customers, which are subsequently remitted to governmental authorities, are excluded from sales. The Company applied the practical expedient to account for shipping and handling activities as fulfillment cost rather than as a separate performance obligation. Shipping and handling costs charged to customers are classified as sales, and the shipping and handling costs incurred are included in cost of sales.  All sales are denominated in U.S. dollars.

 

The Company chose to apply the available practical expedient as commission eligible sales orders are fulfilled within less than one year and commissions are generally paid by the Company within 30 days of the related sales order fulfillment. Accordingly, management has determined that no change in accounting for costs to obtain a contract will be required for the Company to conform to ASC 606.

 

 

TEL-INSTRUMENT ELECTRONICS CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Note 2 – Summary of Significant Accounting Policies (continued)

 

Disaggregation of revenue

 

In the following tables, revenue is disaggregated by revenue category.

 

  

For the Three Months Ended

June 30, 2021

 
  

Commercial

  

Government

 

Sales Distribution

        

Test Units

 $42,465  $3,569,603 
  $42,465  $3,569,603 

 

The remainder of our revenues for the three months ended June 30, 2021, are derived from repairs and calibration of $445,030,

replacement parts of $56,460, extended warranties of $15,915 and other revenues of $2,920. We do not disaggregate these revenue streams as they are not deemed an important element related to how management operates the business between segments.

 

  

For the Three Months Ended

June 30, 2020

 
  

Commercial

  

Government

 

Sales Distribution

        

Test Units

 $58,573  $2,563,277 
  $58,573  $2,563,277 

 

The remainder of our revenues for the three months ended June 30, 2020, are derived from repairs and calibration of $277,898, replacement parts of $16,070, extended warranties of $22,140 and other revenues of $1,479. We do not disaggregate these revenue streams as they are not deemed an important element related to how management operates the business between segments.

 

In the following table, revenue is disaggregated by geography.

 

  

For the Three Months Ended

June 30, 2021

  

For the Three Months Ended

June 30, 2020

 

Geography

        

United States

 $2,449,414  $1,714,599 

International

  1,682,979   1,224,838 

Total

 $4,132,393  $2,939,437 

 

For the three months ended June 30, 2021, four customers accounted for sales of 10%, 18%, 21% and 26%.

 

For the three months ended June 30, 2020, two customers account for sales of 11% and 16%.

 

New Accounting Pronouncements

 

In June 2016, the FASB issued ASU No. 2016-13 Financial Instruments -Credit Losses (Topic 326), Measurement of Credit Losses on Financial Statements.  The amendment in this update replaces the incurred loss impairment methodology in current GAAP with a methodology that reflects expected credit losses on instruments within its scope, including trade receivables. This update is intended to provide financial statement users with more decision-useful information about the expected credit losses. The effective date of the new standard has been deferred to April 1, 2023. We do not expect the adoption of this standard to have 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.

 

 

TEL-INSTRUMENT ELECTRONICS CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Note 3 Accounts Receivable, net

 

The following table sets forth the components of accounts receivable:

 

  

June 30,

2021

  

March 31,

2021

 

Government

 $1,119,750  $1,700,907 

Commercial

  206,026   239,914 

Less: Allowance for doubtful accounts

  (7,500

)

  (7,500

)

  $1,318,276  $1,933,321 

 

Note 4 Restricted Cash to Support Appeal Bond

 

In January 2018, the Company transferred $2,000,000 to a restricted cash account to secure a letter of credit which was used for collateral for the appeal bond (See Note 12).

 

Note 5 Inventories, net

 

Inventories consist of:

 

 

 

June 30,

2021

  

March 31,

2021

 
         

Purchased parts

 $2,691,826  $2,912,599 

Work-in-process

  934,412   1,020,402 

Finished goods

  105   79,988 

Less: Inventory reserve

  (575,000

)

  (575,000

)

  $3,051,343  $3,437,989 

 

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

 
  

June 30, 2021

  

June 30, 2020

 

Basic net income per share computation:

        

Net income

 $575,501  $110,980 

Less: Preferred dividends

  (80,000

)

  (80,000

)

Net income attributable to common shareholders

  495,501   30,980 

Weighted-average common shares outstanding

  3,255,887   3,255,887 

Basic net income per share

 $0.15  $0.01 

Diluted net income per share computation

        

Net income attributable to common shareholders

 $495,501  $30,980 

Add: Preferred dividends

  80,000   0 

Diluted income attributable to common shareholders

 $575,501  $30,980 

Weighted-average common shares outstanding

  3,255,887   3,255,887 

Incremental shares attributable to the assumed conversion of 

preferred stock

  1,839,778   0 

Total adjusted weighted-average shares

  5,095,665   3,255,887 

Diluted net income per share

 $0.11  $0.01 

 

 

TEL-INSTRUMENT ELECTRONICS CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Note 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:

 

  

June 30, 2021

  

June 30, 2020

 

Convertible preferred stock

  0   1,779,778 

Stock options

  98,500   83,500 
   98,500   1,863,278 

 

Note 7 – Line of Credit

 

The Bank of America extension for the line of credit expired July 30, 2021, the line of credit annual renewal is currently being underwritten with a maturity of July 30, 2022, and subject to completion of the lender’s underwriting procedures.  The initial rate offered will be 5.0%.  The line is collateralized by substantially all of the assets of the Company.

 

As of June 30, 2021, the Line of Credit draw remained at 0. 

 

Note 8 – SBA PPP Loan

 

On January 6, 2021, updated PPP guidance outlining program changes to enhance its effectiveness and accessibility was released on in accordance with the Economic Aid to Hard-Hit Small Businesses, Non-Profits, and Venues Act. This was available to companies that recorded greater than a 25% sales reduction in any quarter compared to the prior year. The Company qualified for this second round of funding and on March 15, 2021, the company secured a Second Draw PPP loan in the amount of $722,577. A borrower can apply for forgiveness once all loan proceeds for which the borrower is requesting forgiveness have been used. Borrowers can apply for forgiveness any time up to the maturity date of the loan. If borrowers do not apply for forgiveness within 10 months after the last day of the covered period, then PPP loan payments are no longer deferred, and borrowers will begin making loan payments to their PPP lender. The Company plans to file for loan forgiveness of the second tranche of PPP funding during quarter ending September 31, 2021.

 

Note 9 Segment Information

 

In accordance with FASB ASC 280, “Disclosures about Segments of an Enterprise and related information”, the Company determined it has 2 reportable segments - avionics government and avionics commercial. There are no inter-segment revenues.

 

The Company is organized primarily on the basis of its avionics products.  The avionics government segment consists primarily of the design, manufacture, and sale of test equipment to the U.S. and foreign governments and militaries either directly or through distributors.  The avionics commercial segment consists of design, manufacture, and sale of test equipment to domestic and foreign airlines, directly or through commercial distributors, and to general aviation repair and maintenance shops. The Company develops and designs test equipment for the avionics industry and as such, the Company’s products and designs cross segments.

 

Management evaluates the performance of its segments and allocates resources to them based on gross margin. The Company’s general and administrative costs and sales and marketing expenses, and engineering costs are not segment specific. As a result, all operating expenses are not managed on a segment basis.  Net interest includes expenses on debt and income earned on cash balances, both maintained at the corporate level.

 

 

 

TEL-INSTRUMENT ELECTRONICS CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Note 9 Segment Information (continued)

 

The tables below present information about reportable segments within the avionics business for the three months ending June 30, 2021, and 2020:

 

Three Months Ended

June 30, 2021

 

Avionics

Government

  

Avionics

Commercial

  

Avionics

Total

  

Corporate

Items

  

Total

 

Net sales

 $3,569,603  $562,790  $4,132,393  $0  $4,132,393 

Cost of sales

  1,762,900   354,746   2,117,646   0   2,117,646 

Gross margin

  1,806,703   208,044   2,014,747   0   2,014,747 
                     

Engineering, research, and development

          693,575   0   693,575 

Selling, general and administrative

          177,792   376,239   554,031 

Litigation costs

          0   1,181   1,181 

Interest income

          0   (984

)

  (984

)

Other income

          0   (13,593

)

  (13,593

)

Interest expense – judgment

          0   51,920   51,920 

Total expenses

          871,367   414,763   1,286,130 

Income before income taxes

         $1,143,380  $(414,763

)

 $728,617 

 

Three Months Ended

June 30, 2020

 

Avionics

Government

  

Avionics

Commercial

  

Avionics

Total

  

Corporate

Items

  

Total

 

Net sales

 $2,563,276  $376,161  $2,939,437  $0  $2,939,437 

Cost of sales

  1,182,282   252,544   1,434,826   0   1,434,826 

Gross margin

  1,380,994   123,617   1,504,611   0   1,504,611 
                     

Engineering, research, and development

          631,953   0   631,953 

Selling, general and administrative

          253,838   407,413   661,251 

Litigation costs

          0   2,696   2,696 

Interest income

          0   (2,846

)

  (2,846)

Other income

          0   (13,854)  (13,854)

Interest expense - judgment

          0   75,144   75,144 

Interest expense

          0   9,780   9,780 

Total expenses

          885,791   478,333   1,364,124 

Income (loss) before income taxes

         $618,820  $(478,333

)

 $140,487 

 

 

TEL-INSTRUMENT ELECTRONICS CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Note 10 – Income Taxes

 

FASB ASC 740-10, “Accounting for Uncertainty in Income Taxes” (“ASC 740-10”) prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return.  The Company has analyzed filing positions in all of the federal and state jurisdictions where it is required to file income tax returns, as well as all open tax years in these jurisdictions.  The Company does not have any unrecognized tax benefits.

 

The tax effect of temporary differences, primarily net operating loss carryforwards, asset reserves and accrued liabilities, gave rise to the Company’s deferred tax asset.  Deferred income taxes are recognized for the tax consequence of such temporary differences at the enacted tax rate expected to be in effect when the differences reverse. The Company had approximately $2.5 million in deferred tax assets at June 30, 2021. The Company recognizes the impact of an uncertain income tax position taken on its income tax return at the largest amount that is more-likely-than-not to be sustained upon audit by the relevant taxing authority.

 

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 $18,467 which expires in August 2021 and has been renewed for an additional eight years. The renewal commences September 2021 with monthly payments of $21,237 with an increase to $23,083 monthly payments in September 2025. As a result, the Company recorded $1,830,858 of right-of-use assets and related operating leases liabilities during the year ended March 31, 2021.

 

The Company's leases generally do not provide an implicit rate, and therefore the Company uses its incremental borrowing rate as the discount rate when measuring operating lease liabilities. The incremental borrowing rate represents an estimate of the interest rate the Company would incur at lease commencement to borrow an amount equal to the lease payments on a collateralized basis over the term of a lease. The Company estimated its incremental borrowing rate based on its credit quality, line of credit agreement and by comparing interest rates available in the market for similar borrowings. The Company used a discount rate of 3.90% at June 30, 2021.

 

The following table reconciles the undiscounted future minimum lease payments (displayed by year and in the aggregate) under non-cancelable operating leases with terms of more than one year to the total lease liabilities recognized on the unaudited condensed consolidated balance sheet as of June 30, 2021:

 

Remaining payments 2022

 $185,591 

2023

  254,840 

2024

  254,840 

2025

  254,840 

2026

  267,767 

Thereafter

  946,417 

Total undiscounted future minimum lease payments

  2,164,295 

Less: Difference between undiscounted lease payments and discounted lease liabilities

  (296,790

)

Present value of net minimum lease payments

  1,867,505 

Less current portion

  (194,469

)

Operating lease liabilities – long-term

 $1,673,036 

 

Total rent expense for the three months ended June 30, 2021, was $92,134, as compared to $90,921 or the three months ended June 30, 2020, respectively.

 

 

TEL-INSTRUMENT ELECTRONICS CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 12 Litigation

 

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.

 

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 $1.3 million for lost profits. The jury also ruled that Tel tortiously interfered with Aeroflex’s non-disclosure agreements with two former Aeroflex employees and awarded damages of $1.5 million for lost profits, resulting in total damages against the Company of $2.8 million. The jury also found that the former Aeroflex employees breached their non-disclosure agreements with Aeroflex and awarded damages against these two individuals totaling $525,000. The jury also decided that punitive damages should be allowed against the Company.

 

Following the verdict, the Company filed a motion for judgment as a matter of law. In the motion, the Company renewed its motion for judgment on Aeroflex’s tortious interference with prospective business opportunity claim arguing that such claim is barred by the statute of limitations. Alternatively, the motion asserts there is insufficient evidence supporting the lost profit award on that claim.  Additionally, the motion for judgment addresses inconsistency between the awards against the former Aeroflex employees for breach of the non-disclosure agreements and the award against the Company for interfering with those agreements. Alternatively, the motion asserts there is insufficient evidence supporting the lost profit award on that claim.

 

During July 2017, the Court heard the Company’s motion for judgment as well as conducting a hearing as to the amount of a punitive damages award. Kansas statutes limit punitive damages to a maximum of $5 million.

 

 

TEL-INSTRUMENT ELECTRONICS CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Note 12 Litigation (continued)

 

Aeroflex submitted a motion to the Court requesting that the judge award punitive damages at the maximum $5 million amount. In October 2017, the Court denied the Company’s motions and awarded Aeroflex an additional $2.1 million of punitive damages, which brings the total Tel damages awarded in this case to approximately $4.9 million. Pursuant to K.S.A. 16-204(d) “any judgment rendered by a court of this state on or after July 1, 1986, shall bear interest on and after the day on which judgment is rendered at the rate provided by subsection (e). The Kansas Secretary of State publishes the interest rate which is modified annually based on market interest rates.

 

For the year starting July 1, 2020, the interest rate was 4.25% and cumulative interest as of fiscal year ended June 30, 2021, was $1,040,943. For the year starting July 1, 2021, the interest rate will be 4.25 %. Interest on the $4,900,000 judgment started to accrue on November 22, 2017, the date the judgment was entered. As of June 30, 2021, the outstanding amount of the judgement and accrued interest is $5,940,943.

 

The Company filed post-trial motions to avoid damage duplication and inconsistency, and to secure judgment as a matter of law or a new trial. The trial court denied those motions. The Company appealed the verdict and the post-trial rulings to the Court of Appeals of the State of Kansas, Case No. 18-119,563. The Company posted a $2 million supersedeas bond. The Plaintiff filed a cross-appeal. The appeal and cross-appeal are fully briefed. The appellate court has not set a date to hear the appeal.

 

The Company is optimistic about the prospects of its appeal for a judgment as a matter of law. The Company was hoping for a decision this calendar year, but this timing will likely be delayed due to the COVID-19 related shutdown of the Kansas court system. As such, the appeal process is expected to take another six months to a year to complete. The Company has 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 2.  Managements 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 $575,501 and net sales of $4,132,393 for the three months ended June 30, 2021, as compared to net income of $110,980 and net sales of $2,939,437 for the same three month period in the prior fiscal year, respectively. Profitability for the three months ended June 30, 2021, versus the same three months ended June 30, 2020, was positively impacted by an increase in sales of $1.2 million or 40.6% . Additionally, operating expenses were reduced by $47,113 or 3.6%. Backlog orders on June 30, 2021, were $6.1 million versus $4.4 million on June 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. We have also been awarded a large contract from the U.S. military for our T-47NH product and are seeing solid demand for our other non-Mode 5 test sets. Our expectation is that we 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 with orders in the first three months exceeding demand for all of FY 2021. Tel Instrument is also working on the next generation of Mode 5 called Mode 5 Level 2B. This could potentially lead to substantial software upgrades in the future for our domestic and international Mode 5 customers. The Navy is also considering a mid-life update of our CRAFT product line which could entail funded engineering starting next fiscal year. This is an important product for the Company, and this should ensure an additional 10 years of product life.

 

The Company is also actively looking at expanding out of its current core avionics market area. TIC is working with Lockheed Martin (LMCO) on a new MADL test set. TIC was awarded this contract after winning a $956,000 competitive solicitation. MADL is a secure communications radio for the F-35. This operates in a much higher frequency range than our other test sets. The contract has been put on hold for at least the next three months due to LMCO funding issues, but we are hopeful that the contract will resume this fall. TIC

has completed the majority of the development work on this new test set. If the funding issue is resolved, this could generate substantial recurring revenues for the Company and would position TIC for further development contracts with LMCO.

 

 

Overview (continued)

 

The main focus area for the Company is moving into the secure communications testing with our new DSR/OMNI test set. The world’s first “All-in-One” Avionics Test Set utilizes true software-designed radio technology that enables it to test all common avionics functions in one 4.5 pound test set. The SDR/OMNI has very wide frequency to accommodate new commercial and military waveforms in an industry leading 4.5-pound package. This is half the weight of competitive test sets. It utilizes the latest touch screen technology and has the capability to replace all TIC commercial test sets and military flight-line test sets 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 fraction 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

 

For the three months ended June 30, 2021, net sales increased $1,192,956 or 40.6% to $4,132,393, as compared to $2,939,437, for the three months ended June 30, 2020.

 

Avionics government sales increased $1,006,327 or 39.3% to $3,569,603 for the three months ended June 30, 2021, as compared to $2,563,276 for the three months ended June 30, 2020. The increase in government sales is primarily attributed to a large government order from DFAS for T-47NH test sets.

 

International sales increased $458,141 or 37.4% to $1,682,979 for the three months ended June 30, 2021, as compared to $1,224,838 for the three months ended June 30, 2020, primarily as a result of the sales via our Korean distributor H2L Technologies.

 

Commercial sales increased $186,629 or 49.6% to $562,790 for the three months ended June 30, 2021, as compared to $376,161 for the three months ended June 30, 2020. Our commercial business is beginning to see a modest recovery from the negative impact of the COVID-19 pandemic.

 

Gross Margin

 

For the three months ended June 30, 2021, total gross margin increased $510,136 or 33.9%, to $2,014,747 as compared to $1,504,611 for the three months ended June 30, 2020, due to the increase in sales volume. The gross margin percentage for the three months ended June 30, 2021, was 48.8% as compared to 51.2% for the three months ended June 30, 2020. The gross margin decrease of 2.4% was due primarily to production costs at full capacity versus prior year partial production capacity resulting from COVID staff absences. Gross margin for quarter ended June 30, 2021, at 48.8% versus fiscal year ended March 31, 2021, at 41.3% or a 7.5% improvement was due primarily to production staff efficiencies. With a $6.1 million backlog on June 30, 2021, the Company expects that in fiscal year 2022, revenue and profitability will continue to improve.

 

 

Operating Expenses

 

Selling, general and administrative expenses decreased $107,220 or 16.2% to $554,031 for the three months ended June 30, 2021, as compared to $661,251 for the three months ended June 30, 2020. The decrease is primarily attributed to better pricing for professional services, reduction in professional services and offset of profit sharing expense increase related to increased sales revenue.

 

Litigation costs decreased slightly by $1,515 to $1,181 for the three months ended June 30, 2021, as compared to $2,696 for the three months ended June 30, 2020.

 

Engineering, research, and development expenses increased $61,622 or 9.8% to $693,575 for the three months ended June 30, 2021, as compared to $631,953 for the three months ended June 30, 2020. Total engineering expense has increased as a result of our increased engineering activities primarily with the SDR-OMNI hand-held product line development.

 

Income from Operations

 

As a result of the above, the Company recorded income from operations of $765,960 for the three months ended June 30, 2021, as compared to income from operations of $208,711 for the three months ended June 30, 2020.

 

Other (Expense), Net

 

For the three months ended June 30, 2021, total other expense was $37,342 as compared to other expense of $68,224 for the three months ended June 30, 2020, primarily the result of lower interest expense on the judgment liability and the repayment of the line of credit.

 

Income before Income Taxes

 

As a result of the above, the Company recorded income before taxes of $728,617 for the three months ended June 30, 2021, as compared to income before taxes of $140,487 for the three months ended June 30, 2020.

 

Income Taxes

 

For the three months ended June 30, 2021, the Company recorded income tax expense of $153,116, as a result of the Company’s taxable income for the quarter, as compared to $29,507 for the three months ended June 30, 2020.

 

Net Income

 

The Company recorded net income of $575,501 for the three months ended June 30, 2021, as compared to net income of $110,980 for the three months ended June 30, 2020.

 

Liquidity and Capital Resources

 

At June 30, 2021, the Company had net working capital of $3,850,769 including accrued legal damages related to the Aeroflex litigation of $5,940,943, as compared to working capital of $3,159,731 at March 31, 2021. This change is primarily the result of lower accounts payable and as well as cash receipts received from the increase is sales.

 

During the three months ended June 30, 2021, the Company’s cash balance (including the $2 million in restricted cash for the appeal) increased by $1.3 million to $6,769,869.  The Company’s principal sources and uses of funds were as follows:

 

Cash provided by (used in) operating activities. For the three months ended June 30, 2021, $1,353,544 in cash from operations was provided, as compared to the three months ended June 30, 2020, the Company used $646,542.  This increase in cash provided for operations is mostly attributed to an increase in Accounts Receivable collections, decrease in inventory purchases, offset by decreased Accounts Payable, due to improved operating income for the period.

 

Cash used in investing activities.  For the three months ended June 30, 2021, the Company did not use any cash in investing activities as compared to the three months ended June 30, 2020, the Company used $15,386 as a result of no capital equipment purchases.

 

Cash (used in) financing activities. For the three months ended June 30, 2021, the Company used $80,000 in cash from financing activities as compared to providing $722,528 for the three months ended June 30,2020.  This decrease is due mainly from the receipt of PPP loan funding received in the prior year.

 

 

Liquidity and Capital Resources (continued)

 

The Bank of America extension for the line of credit expired July 30, 2021, the line of credit annual renewal is currently being underwritten with a maturity of July 30, 2022, and subject to completion of the lender’s underwriting procedures. As of June 30, 2021, the Line of Credit draw remained at zero.

 

On June 30, 2021, the Company has $6.8 million of cash on hand which included $2 million of restricted cash supporting the appeal bond.

 

As of June 30, 2021, the Company has recorded total damages of $5,940,943, including accrued interest, as a result of the jury verdict associated with the Aeroflex litigation as well as the Court’s decision on punitive damages. The Company has recorded accrued interest of $1,040,943 as of June 30, 2021.

 

The Company is very optimistic about the prospects of its appeal for a judgment as a matter of law. The Company had been hoping for a decision from the court during the 2020 calendar year, but timing will likely continue to be delayed due to the three-month COVID-19 related shutdown of the Kansas court system. As such, the appeal process is expected to take at least another 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 and borrowing capability to pay off this liability if we lose the appeal.

 

On March 27, 2020, President Trump signed the Coronavirus Aid, Relief and Economic Security (the “CARES Act”), which, among other things, outlines the provisions of the Paycheck Protection Program (the “PPP”). The Company determined that it met the criteria to be eligible to obtain a loan under the PPP because, among other reasons, in light of the COVID-19 outbreak and the uncertainty of economic conditions related thereto, the loan was considered necessary to support the Company’s ongoing operations and retain all its employees. In addition, President Trump signed into law the Paycheck Protection Program and Health Care Enhancement Act on April 24, 2020, which increased funding provided by the CARES Act. On May 4, 2020, the Company issued a promissory note (the “Note”) to Bank of America in the principal aggregate amount of $722,577 (the “PPP Loan”) pursuant to the Paycheck Protection Program (“PPP”) under the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”). The amount was deposited in our bank on May 4, 2020. On June 5, 2020, the Paycheck Protection Program Flexibility Act was signed into law and extended the program until December 31, 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. Second Draw PPP loans made to eligible borrowers qualify for full loan forgiveness if during the 8- to 24-week covered period following loan disbursement:

 

 oEmployee and compensation levels are maintained in the same manner as required for the First Draw PPP loan
 

o

 The loan proceeds are spent on payroll costs and other eligible expenses; and

 oAt least 60% of the proceeds are spent on payroll costs

 

A borrower can apply for forgiveness once all loan proceeds for which the borrower is requesting forgiveness have been used. Borrowers can apply for forgiveness any time up to the maturity date of the loan. If borrowers do not apply for forgiveness within 10 months after the last day of the covered period, then PPP loan payments are no longer deferred, and borrowers will begin making loan payments to their PPP lender. The Company plans to file for loan forgiveness of the second tranche of PPP funding during quarter ending September 31, 2021.

 

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.

 

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 June 30, 2021.

 

These unaudited condensed consolidated financial statements should be read in conjunction with the Company’s Annual Report on Form 10-K for the fiscal year ended March 31, 2021, filed with the SEC on June 29, 2021 (the “Annual Report”).

 

 

Off-Balance Sheet Arrangements

 

As of June 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 June 30, 2021, the Company has recorded estimated damages to date of $5.9 million, including interest, as a result of a jury verdict associated with the Aeroflex litigation. The Company has filed for an appeal (see Notes 4 and 12). As of June 30, 2021, the Company has cash balances of $6.8 million, including $2 million of restricted cash as well as $1.3 million in accounts receivable. We expect to continue to have sufficient cash to fully cover the Aeroflex damages amount.

 

The Company is very optimistic about the prospects of its appeal for a judgment as a matter of law. The Company had been hoping for a decision from the court during the 2020 calendar year, but timing will likely continue to be delayed due to the three-month COVID-19 related shutdown of the Kansas court system. As such, the appeal process is expected to take at least another 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 June 30, 2021.

 

Item 3.  Defaults upon Senior Securities.

 

There has been no default in the payment of principal, interest, sinking or purchase fund installment, or any other material default, with respect to any indebtedness of the Company.

 

Item 4.  Mine Safety Disclosures.

 

Not applicable.  

 

Item 5.  Other Information.

 

There is no other information required to be disclosed under this item which was not previously disclosed.

 

 

Item 6.  Exhibits.

 

Exhibit No.

 

Description

   

31.1

 

Certification of Principal Executive Officer, pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 302 of 2002*

   

31.2

 

Certification of Principal Financial Officer, pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 302 of 2002*

   

32.1

 

Certification of Principal Executive Officer, pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002*

   

32.2

 

Certification of Principal Financial Officer, pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002*

   

101.INS

 

Inline XBRL Instance Document*

   

101.SCH

 

Inline XBRL Taxonomy Extension Schema Document*

   

101.CAL

 

Inline XBRL Taxonomy Extension Calculation Linkbase Document*

   

101.DEF

 

Inline XBRL Taxonomy Extension Definition Linkbase Document*

   

101.LAB

 

Inline XBRL Taxonomy Extension Label Linkbase Document*

   

101.PRE

 

Inline XBRL Taxonomy Extension Presentation Linkbase Document*

   

104

 

Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)*

 

* Filed herewith

 

 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

  

TEL-INSTRUMENT ELECTRONICS CORP.

     
     

Date: August 12, 2021

 

By:

/s/ Jeffrey C. OHara

 
   

Name: Jeffrey C. O’Hara

 
   

Title:   Chief Executive Officer

Principal Executive Officer

 

 

 

 

 

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