Upon adoption of ASC 842, Leases, on April 1, 2019 the Company recorded $508,551 of right-of-use assets and related operating leases liabilities.
Notes To Consolidated Financial Statements
1. Business, Organization, and Liquidity
Business and Organization
Tel-Instrument Electronics Corp. (“Tel” 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.
Liquidity
As shown on the balance sheet as of March 31, 2019, the Company had recorded accrued legal damages to date of $5.3 million, including interest, as a result of the jury verdict associated with the Aeroflex litigation. The Company’s line of credit agreement was expiring on May 31, 2019. During June 2019, Bank of America agreed to extend the Company’s line of credit until March 31, 2020 (see Note 22). We had no commitment from any party to provide additional working capital and there was no assurance that any funding would be available as required, or if available, that its terms will be favorable or acceptable to the Company. These factors raised substantial doubt about the Company’s ability to continue as a going concern within one year of the date that the financial statements were issued last year.
The second half of fiscal year 2019 showed a strong turnaround in our business. The Company had net income of $1,140,521 for the second half of the fiscal year ended March 31, 2019. For the year ended March 31, 2020, the Company had income before taxes of $2,087,210.
This increase is the mainly the result of increased international business for our Mode 5 test sets, including our T-47/M5, which has received AIMS (Air Traffic Control Radar Beacon System, Identification Friend or Foe, Mark XII/Mark XIIA, Systems) approval, increased shipments of our CRAFT products, especially for Lockheed Martin for the Joint Strike Fighter (“JSF”) program, and the T-4530i and the TS-4530A.
As a result, at March 31, 2020, the Company had a cash balances of $5,134,739, including $2,008,544 in restricted cash to support the appeal bond. The Company also had working capital of $1,776,176 at March 31, 2020, which was negatively impacted by $5,657,549 in accrued legal damages.
In March 2020, Bank of America agreed to extend the line of credit from March 31, 2020 to January 31, 2021. Monthly payments will be interest only (see Note 10 to the consolidated financial statements). On May 4, 2020, the Company received a Paycheck Protection Program Loan in the amount of $772,577 (see Note 22 to the consolidated financial statements).
The Company is very optimistic about the prospects of its appeal for a judgment as a matter of law. The Company was hoping for a decision from the court this calendar year, but this timing will likely 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.
Moving forward, the Company believes 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 financial statements, including any payments for settlement of the litigation.
TEL-INSTRUMENT ELECTRONICS CORP.
Notes To Consolidated Financial Statements
1. Business, Organization, and Liquidity
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.
2. Summary of Significant Accounting Policies
Principles of Consolidation:
The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States, and include the Company and its wholly-owned subsidiaries. All significant inter-company accounts and transactions have been eliminated.
Revenue Recognition:
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 ASU defines a five-step process to achieve the core principal 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.
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 or 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.
TEL-INSTRUMENT ELECTRONICS CORP.
Notes To Consolidated Financial Statements
2. Summary of Significant Accounting Policies (continued)
Revenue Recognition (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 radios 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, usually at time of shipment. Revenue on products are 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 March 31, 2020.
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 March 31, 2020, approximately $413,554 is expected to be recognized from remaining performance obligations for extended warranties as compared to $361,791 at March 31, 2019. For the year ended March 31, 2020, the Company recognized revenue of $85,311 from amounts that were included in Deferred Revenue as compared to $50,353 for the year ended March 31, 2019.
The following table provides a summary of the changes in deferred revenues related to extended warranties for the year ended March 31, 2020:
Deferred revenues related to extended warranties at April 1, 2019
|
|
$
|
361,791
|
|
Additional extended warranties
|
|
|
137,074
|
|
Revenue recognized for the year ended March 31, 2020
|
|
|
(85,311
|
)
|
Deferred revenues related to extended warranties at March 31, 2020
|
|
$
|
413,554
|
|
Other Deferred Revenues
The Company sometimes receives payments in advance of shipment. These amounts are classified as other deferred revenues. For the period ended March 31, 2020, the Company has other deferred revenues of $58,746.
TEL-INSTRUMENT ELECTRONICS CORP.
Notes To Consolidated Financial Statements
2. Summary of Significant Accounting Policies (continued)
Revenue Recognition (continued):
Nature of goods and services (continued)
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 excludes from revenues all taxes assessed by a governmental authority that are imposed on the sale of its products and collected from customers.
The Company chose to apply the available practical expedient as commission eligible sales orders are fulfilled within less than one year and commissions are generally paid by the Company within 30 days of the related sales order fulfillment. Accordingly, management has determined that no change in accounting for costs to obtain a contract will be required for the Company to conform to ASC 606.
Disaggregation of revenue
In the following tables, revenue is disaggregated by revenue category.
|
|
For the Year Ended
March 31, 2020
|
|
|
|
Commercial
|
|
|
Government
|
|
Sales Distribution
|
|
|
|
|
|
|
|
|
Test Units
|
|
$
|
918,720
|
|
|
$
|
12,737,362
|
|
|
|
$
|
918,720
|
|
|
$
|
12,737,362
|
|
The remainder of our revenues for the year ended March 31, 2020 are derived from repairs and calibration of $1,525,288, replacement parts of $460,103, extended warranties of $85,311, and other revenues of $48,159.
TEL-INSTRUMENT ELECTRONICS CORP.
Notes To Consolidated Financial Statements
2. Summary of Significant Accounting Policies (continued)
Revenue Recognition (continued):
Disaggregation of revenue (continued)
|
|
For the Year Ended
March 31, 2019
|
|
|
|
Commercial
|
|
|
Government
|
|
Sales Distribution
|
|
|
|
|
|
|
|
|
Test Units
|
|
$
|
845,103
|
|
|
$
|
9,239,379
|
|
|
|
$
|
845,103
|
|
|
$
|
9,239,379
|
|
The remainder of our revenues for the year ended March 31, 2019 are derived from repairs and calibration of $1,686,643, replacement parts of $294,572, and extended warranties of $50,353. 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 Year
Ended
March 31, 2020
|
|
|
For the Year
Ended
March 31, 2019
|
|
Geography
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
7,205,596
|
|
|
$
|
9,677,822
|
|
International
|
|
|
8,569,347
|
|
|
|
2,438,228
|
|
Total
|
|
$
|
15,774,943
|
|
|
$
|
12,116,050
|
|
Fair Value of Financial Instruments:
The Company estimates that the fair value of all financial instruments at March 31, 2020 and March 31, 2019, as defined in Financial Accounting Standards Board (“FASB”) ASC 825 “Financial Instruments”, does not differ materially, except for the items discussed below, from the aggregate carrying values of its financial instruments recorded in the accompanying consolidated balance sheets. The estimated fair value amounts have been determined by the Company using available market information and appropriate valuation methodologies. Considerable judgment is required in interpreting market data to develop the estimates of fair value.
The carrying amounts reported in the consolidated balance sheets as of March 31, 2020 and March 31, 2019 for cash, accounts receivable, restricted cash used for the appeal bond, and accounts payable approximate the fair value because of the immediate or short-term maturity of these financial instruments. Each reporting period we evaluate market conditions including available interest rates, credit spreads relative to our credit rating and liquidity in estimating the fair value of our debt. After considering such market conditions, we estimate that the fair value of debt approximates its carrying value.
Cash: Cash primarily consists of deposits held at major banks.
Concentrations of Credit Risk:
Cash held in banks: The Company maintains cash balances at a financial institution that is insured by the Federal Deposit Insurance Corporation (“FDIC”) up to federally insured limits. At times balances may exceed FDIC insured limits. The Company has not experienced any losses in such accounts.
Accounts Receivable: The Company’s avionics customer base is primarily comprised of airlines, distributors, and the U.S. Government. As of March 31, 2020, the Company believes it has no significant credit risk related to its concentration within its accounts receivable.
TEL-INSTRUMENT ELECTRONICS CORP.
Notes To Consolidated Financial Statements (Continued)
2. Summary of Significant Accounting Policies (continued)
Inventories:
Inventories are stated at the lower of cost or net realizable value. Cost is determined on a first-in, first-out basis. Inventories are written down if the estimated net realizable value is less than the recorded value. The Company reviews the carrying cost of inventories by product to determine the adequacy of reserves for obsolescence. In accounting for inventories, the Company must make estimates regarding the estimated realizable value of inventory. The estimate is based, in part, on the Company’s forecasts of future sales and age of inventory. If actual conditions are less favorable than those we have projected, we may need to increase our reserves for excess and obsolete inventories. Any increases in our reserves will adversely impact our results of operations. The establishment of a reserve for excess and obsolete inventory establishes a new cost basis in the inventory. Such reserves are not reduced until the product is sold. If we are able to sell such inventory any related reserves would be reversed in the period of sale. In accordance with industry practice, service parts inventory is included in current assets, although service parts are carried for established requirements during the serviceable lives of the products and, therefore, not all parts are expected to be sold within one year.
Equipment and Leasehold Improvements:
Office and manufacturing equipment are stated at cost, net of accumulated depreciation. Depreciation and amortization are provided on a straight-line basis over periods ranging from 3 to 5 years.
Leasehold improvements are amortized over the term of the lease or the useful life of the asset, whichever is shorter.
Maintenance, repairs, and renewals that do not materially add to the value of the equipment nor appreciably prolong its life are charged to expense as incurred.
When assets are retired or otherwise disposed of, the cost and related accumulated depreciation are removed from the accounts and the resulting gain or loss is included in the Statement of Operations.
Engineering, Research and Development Costs:
Engineering, research and development costs are expensed as incurred.
Deferred Revenues:
Amounts billed in advance of the period in which the service is rendered or product delivered are recorded as deferred revenue. At March 31, 2020 and 2019, deferred revenues totaled $472,300 and $361,791, respectively. See above for additional information regarding our revenue recognition policies.
Net Income (Loss) per Common Share Attributable to Common Shareholders:
Net income (loss) per share attributable to common stockholders has been computed according to Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC 260”), “Earnings per Share,” which requires a dual presentation of basic and diluted income (loss) per share (“EPS”). Basic EPS attributable to common stockholders represents net income (loss) less preferred dividends divided by the weighted average number of common shares outstanding during a reporting period. Diluted EPS attributable to common stockholders 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.
TEL-INSTRUMENT ELECTRONICS CORP.
Notes To Consolidated Financial Statements (Continued)
2. Summary of Significant Accounting Policies (continued)
Income Taxes
The Company accounts for income taxes using the asset and liability method described in FASB ASC 740, “Income Taxes”. Deferred tax assets arise from a variety of sources, the most significant being: a) tax losses that can be carried forward to be utilized against profits in future years; b) expenses recognized for financial reporting purposes but disallowed in the tax return until the associated cash flow occurs; and c) valuation changes of assets which need to be tax effected for book purposes but are deductible only when the valuation change is realized.
Deferred tax assets and liabilities are determined based on differences between financial reporting and tax bases of assets and liabilities and are measured using enacted tax rates and laws that are expected to be in effect when such differences are expected to reverse. The measurement of deferred tax assets is reduced, if necessary, by a valuation allowance for any tax benefit which is not more likely than not to be realized. In assessing the need for a valuation allowance, future taxable income is estimated, considering the realization of tax loss carryforwards. Valuation allowances related to deferred tax assets can also be affected by changes to tax laws, changes to statutory tax rates and future taxable income levels. In the event it was determined that the Company would not be able to realize all or a portion of our deferred tax assets in the future, we would reduce such amounts through a charge to income in the period in which that determination is made. Conversely, if we were to determine that we would be able to realize our deferred tax assets in the future in excess of the net carrying amounts, we would decrease the recorded valuation allowance through an increase to income in the period in which that determination is made. In its evaluation of a valuation allowance the Company takes into account existing contracts and backlog, and the probability that options under these contract awards will be exercised as well as sales of existing products. The Company prepares profit projections based on the revenue and expenses forecast to determine that such revenues will produce sufficient taxable income to realize the deferred tax assets.
The Company accounts for uncertainties in income taxes under ASC 740-10-50 which 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. ASC 740-10 requires that the Company determine whether the benefits of its tax positions are more-likely-than-not of being sustained upon audit based on the technical merits of the tax position. The Company recognizes the impact of an uncertain income tax position taken on its income tax return at the largest amount that is more-likely-than-not to be sustained upon audit by the relevant taxing authority. The implementation of ASC 740-10 had no impact on the Company’s results of operations or financial position.
Despite the Company’s belief that its tax return positions are consistent with applicable tax laws, one or more positions may be challenged by taxing authorities. Settlement of any challenge can result in no change, a complete disallowance, or some partial adjustment reached through negotiations or litigation. Interest and penalties related to income tax matters, if applicable, will be recognized as income tax expense.
During the years ended March 31, 2020 and 2019 the Company did not incur any expense related to interest or penalties for income tax matters, and no such amounts were accrued as of March 31, 2020 and 2019. The Company’s tax years remain open for examination by the tax authorities primarily beginning 2015 through present.
Stock-based Compensation:
The Company accounts for stock-based compensation in accordance with FASB ASC 718 which requires the measurement of stock-based compensation based on the fair value of the award on the date of grant. The Company recognizes compensation cost on awards on a straight-line basis over the vesting period, typically four years. The Company estimates the fair value of each option granted using the Black-Scholes option-pricing model. Additional information and disclosure are provided in Note 17 below.
Long-Lived Assets:
The Company assesses the recoverability of the carrying value of its long-lived assets whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future, undiscounted cash flows expected to be generated by an asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell. No impairment losses have been recognized for the years ended March 31, 2020 and 2019, respectively.
TEL-INSTRUMENT ELECTRONICS CORP.
Notes To Consolidated Financial Statements (Continued)
2. Summary of Significant Accounting Policies (continued)
Use of Estimates:
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires that management make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The most significant estimates include income taxes, warranty claims, inventory and accounts receivable valuations.
Accounts Receivable:
The Company performs ongoing credit evaluations of its customers and adjusts credit limits based on customer payment and current credit worthiness, as determined by review of their current credit information. The Company continuously monitors credit limits for and payments from its customers and maintains provision for estimated credit losses based on its historical experience and any specific customer issues that have been identified. While such credit losses have historically been within the Company’s expectation and the provision established, the Company cannot guarantee that this will continue.
Warranty Reserves:
Warranty reserves are based upon historical rates and specific items that are identifiable and can be estimated at time of sale. While warranty costs have historically been within the Company’s expectations and the provisions established, future warranty costs could be in excess of the Company’s warranty reserves. A significant increase in these costs could adversely affect the Company’s operating results for the period and the periods these additional costs materialize. Warranty reserves are adjusted from time to time when actual warranty claim experience differs from estimates. For the year ended March 31, 2020 warranty costs were $51,858 as compared to $58,082 for the year ended March 31, 2019 and are included in Cost of Sales in the accompanying consolidated statement of operations. See Note 7 for warranty reserves.
Risks and Uncertainties:
The Company’s operations are subject to a number of risks, including but not limited to changes in the general economy, demand for the Company’s products, the success of its customers, research and development results, reliance on the government and commercial markets, litigation, and the renewal of its line of credit. The Company has major contracts with the U.S. Government, which like all government contracts are subject to termination.
New Accounting Pronouncements
Recently Adopted Authoritative Pronouncements:
In February 2016, the FASB established Topic 842, Leases, by issuing Accounting Standards Update (ASU) No. 2016-02, which requires lessees to recognize leases on-balance sheet and disclose key information about leasing arrangements. Topic 842 was subsequently amended by ASU No. 2018-01, Land Easement Practical Expedient for Transition to Topic 842; ASU No. 2018-10, Codification Improvements to Topic 842, Leases; and ASU No. 2018-11, Targeted Improvements. The new standard establishes a right-of-use model (ROU) that requires a lessee to recognize a ROU asset and lease liability on the balance sheet for all leases with a term longer than 12 months. Leases will be classified as finance or operating, with classification affecting the pattern and classification of expense recognition in the income statement. The new standard was effective on April 1, 2019. A modified retrospective transition approach is required, applying the new standard to all leases existing at the date of initial application. An entity may choose to use either (1) its effective date or (2) the beginning of the earliest comparative period presented in the financial statements as its date of initial application. If an entity chooses the second option, the transition requirements for existing leases also apply to leases entered into between the date of initial application and the effective date. The entity must also recast its comparative period financial statements and provide the disclosures required by the new standard for the comparative periods. The Company adopted the new standard on April 1, 2019 and uses the effective date as the date of initial application. Consequently, financial information will not be updated and the disclosures required under the new standard will not be provided for dates and periods before April 1, 2019. The new standard provides a number of optional practical expedients in transition. The Company elects the ‘package of practical expedients’, which permits the Company not to reassess under the new standard prior conclusions about lease identification, lease classification and initial direct costs.
TEL-INSTRUMENT ELECTRONICS CORP.
Notes To Consolidated Financial Statements (Continued)
2. Summary of Significant Accounting Policies (continued)
New Accounting Pronouncements (continued)
Recently Adopted Authoritative Pronouncements (continued):
At the inception of an arrangement, the Company determines whether the arrangement is or contains a lease based on the circumstances present. Leases with a term greater than one year are recognized on the balance sheet as right-of-use assets, lease liabilities, and, if applicable, long-term lease liabilities. Lease liabilities and the corresponding right-of-use assets are recorded based on the present values of lease payments over the lease terms. The interest rate implicit in lease contracts is typically not readily determinable. As such, the Company utilizes the appropriate incremental borrowing rates, which are the rates that would be incurred to borrow on a collateralized basis, over similar terms, amounts equal to the lease payments in a similar economic environment. At adoption, the Company recognized additional operating lease liabilities of $508,551 with corresponding ROU assets of the same amount based on the present value of the remaining minimum rental payments under current leasing standards for existing operating leases. 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 used incremental borrowing rates as of April 1, 2019 for operating leases that commenced prior to that date. 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 uses 6.25%. ASU 2016-02 did not have an impact on our consolidated statements of income for the year ended March 31, 2020, but had a significant impact on our consolidated balance sheet as of March 31, 2020.
In November 2016, the FASB issued ASU 2016-18 Statement of Cash Flows (Topic 230): Restricted Cash. ASU 2016-18 requires entities to show the changes in the total of cash, cash equivalents, restricted cash and restricted cash equivalents in the statement of cash flows. As a result, entities will no longer present transfers between cash and cash equivalents and restricted cash and restricted cash equivalents in the statement of cash flows. The ASU requires changes in the Company’s restricted cash to be classified as either operating activities, investing activities or financing activities in the Consolidated Statement of Cash Flows, depending on the nature of the activities that gave rise to the restriction. The new standard is effective for our annual reporting period ended March 31, 2020 and was adopted on a retrospective approach. The adoption of this standard did not have a significant impact on our financial position and results of operations.
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 new standard has been deferred to April 1, 2021. We do not expect the adoption of this standard to have a significant impact on our financial position and results of operations.
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 is effective April 1, 2021, and 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 consolidated financial statements.
TEL-INSTRUMENT ELECTRONICS CORP.
Notes To Consolidated Financial Statements (Continued)
3. Accounts Receivable
The following table sets forth the components of accounts receivable:
|
|
March 31,
|
|
|
|
2020
|
|
|
2019
|
|
Government
|
|
$
|
1,095,131
|
|
|
$
|
1,951,729
|
|
Commercial
|
|
|
324,013
|
|
|
|
251,870
|
|
Less: Allowance for doubtful accounts
|
|
|
(7,500
|
)
|
|
|
(7,500
|
)
|
|
|
$
|
1,411,644
|
|
|
$
|
2,196,099
|
|
4. Inventories
Inventories consist of:
|
|
March 31,
|
|
|
|
2020
|
|
|
2019
|
|
Purchased parts
|
|
$
|
3,011,072
|
|
|
$
|
2,709,235
|
|
Work-in-process
|
|
|
597,166
|
|
|
|
721,397
|
|
Finished goods
|
|
|
34,441
|
|
|
|
-
|
|
Less: Allowance for obsolete inventory
|
|
|
(550,000
|
)
|
|
|
(498,000
|
)
|
|
|
$
|
3,092,679
|
|
|
$
|
2,932,632
|
|
Work-in-process inventory includes $516,431 and $673,437 for government contracts at March 31, 2020 and 2019, respectively.
5. Equipment and Leasehold Improvements
Equipment and leasehold improvements consist of the following:
|
|
March 31,
|
|
|
|
2020
|
|
|
2019
|
|
Leasehold improvements
|
|
$
|
118,992
|
|
|
$
|
95,858
|
|
Machinery and equipment
|
|
|
1,879,397
|
|
|
|
1,773,349
|
|
Automobiles
|
|
|
23,712
|
|
|
|
23,712
|
|
Sales equipment
|
|
|
595,475
|
|
|
|
595,475
|
|
Assets under finance leases
|
|
|
637,189
|
|
|
|
637,189
|
|
Less: Accumulated depreciation & amortization
|
|
|
(2,991,015
|
)
|
|
|
(2,889,213
|
)
|
|
|
$
|
263,750
|
|
|
$
|
236,370
|
|
Depreciation and amortization expense related to the assets above for the years ended March 31, 2020 and 2019 was $104,652 and $60,954 respectively (see Note 12 for additional information on finance leases).
6. 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 21 to the consolidated financial statements).
7. Accrued Expenses
Accrued vacation pay, payroll and payroll withholdings consist of the following:
|
|
March 31,
|
|
|
|
2020
|
|
|
2019
|
|
|
|
|
|
|
|
|
|
|
Accrued vacation pay
|
|
$
|
336,039
|
|
|
$
|
325,647
|
|
Accrued profit sharing
|
|
|
110,894
|
|
|
|
-
|
|
Accrued compensation and payroll withholdings
|
|
|
65,799
|
|
|
|
68,649
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
512,732
|
|
|
$
|
394,296
|
|
Accrued vacation pay, payroll and payroll withholdings includes $135,105 and $76,214 at March 31, 2020 and 2019, respectively, which is due to officers.
TEL-INSTRUMENT ELECTRONICS CORP.
Notes To Consolidated Financial Statements (Continued)
7. Accrued Expenses (continued)
Accrued expenses - other consist of the following:
|
|
March 31,
|
|
|
|
2020
|
|
|
2019
|
|
|
|
|
|
|
|
|
|
|
Accrued commissions
|
|
$
|
32,181
|
|
|
$
|
46,853
|
|
Accrued legal costs
|
|
|
47,772
|
|
|
|
30,000
|
|
Accrued consulting fees
|
|
|
5,050
|
|
|
|
164,059
|
|
Warranty reserve
|
|
|
118,734
|
|
|
|
118,014
|
|
Other
|
|
|
91,476
|
|
|
|
73,546
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
295,213
|
|
|
$
|
432,472
|
|
The following table provides a summary of the changes in warranty reserves for the years ended March 31, 2020 and 2019:
|
|
March 31,
|
|
|
|
2020
|
|
|
2019
|
|
Warranty reserve, at beginning of period
|
|
$
|
118,014
|
|
|
$
|
111,983
|
|
Warranty expense
|
|
|
51,858
|
|
|
|
58,082
|
|
Warranty deductions
|
|
|
(51,138
|
)
|
|
|
(52,051
|
)
|
Warranty reserve, at end of period
|
|
$
|
118,734
|
|
|
$
|
118,014
|
|
Accrued expenses – related parties consists of the following:
|
|
March 31,
|
|
|
|
2020
|
|
|
2019
|
|
|
|
|
|
|
|
|
|
|
Interest and other expenses due to the Company’s President/CEO
|
|
|
-
|
|
|
|
3,017
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
-
|
|
|
$
|
3,017
|
|
8. Income Taxes
On December 22, 2017, the U.S. Government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the “TCJA”). The TJCA made broad changes to the U.S. tax code, including, but not limited to, (1) reducing the U.S. federal corporate tax rate from 35% to 21%; (2) eliminating the corporate alternative minimum tax; (3) creating a new limitation on deductible interest expense; (4) creating the base erosion and anti-abuse tax, a new minimum tax; (5) limitation on the deductibility of certain executive compensation; (6) enhancing the option to claim accelerated depreciation deductions on qualified property, and (7) changing the rules related to uses and limitations of NOLs in tax years beginning after December 31, 2017.
TEL-INSTRUMENT ELECTRONICS CORP.
Notes To Consolidated Financial Statements (Continued)
8. Income Taxes (continued)
Income tax benefit:
|
|
Fiscal Year Ended
|
|
|
|
March 31,
|
|
|
March 31,
|
|
|
|
2020
|
|
|
2019
|
|
Current:
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
-
|
|
|
$
|
-
|
|
State and local
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Total current tax provision
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Deferred:
|
|
|
|
|
|
|
|
|
Federal
|
|
|
-
|
|
|
|
-
|
|
State and local
|
|
|
(409
|
)
|
|
|
-
|
|
Release of valuation allowance
|
|
|
(2,648,871
|
)
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax benefit
|
|
|
(2,649,280
|
)
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Total benefit
|
|
$
|
(2,649,280
|
)
|
|
$
|
-0-
|
|
The approximate values of the components of the Company’s deferred taxes at March 31, 2020 and 2019 are as follows:
|
|
March 31,
|
|
|
March 31,
|
|
|
|
2020
|
|
|
2019
|
|
Deferred tax assets (liabilities):
|
|
|
|
|
|
|
|
|
Net operating loss carryforwards
|
|
$
|
845,898
|
|
|
$
|
1,345,245
|
|
Tax credits
|
|
|
329,032
|
|
|
|
329,032
|
|
Charitable contributions
|
|
|
126
|
|
|
|
116
|
|
Legal damages
|
|
|
1,194,268
|
|
|
|
1,117,904
|
|
Allowance for doubtful accounts
|
|
|
1,575
|
|
|
|
1,576
|
|
Reserve for inventory obsolescence
|
|
|
115,517
|
|
|
|
104,626
|
|
Inventory capitalization
|
|
|
48,750
|
|
|
|
70,633
|
|
Vacation accrual
|
|
|
76,879
|
|
|
|
68,416
|
|
Warranty reserve
|
|
|
24,938
|
|
|
|
24,794
|
|
Deferred revenues
|
|
|
99,197
|
|
|
|
76,009
|
|
Stock options
|
|
|
15,683
|
|
|
|
15,687
|
|
AMT credit
|
|
|
64,766
|
|
|
|
63,500
|
|
Depreciation
|
|
|
(3,849
|
)
|
|
|
5,070
|
|
Deferred tax asset
|
|
|
2,812,780
|
|
|
|
3,222,608
|
|
Less valuation allowance
|
|
|
(100,000
|
)
|
|
|
(3,159,108
|
)
|
|
|
|
|
|
|
|
|
|
Deferred tax asset, net
|
|
$
|
2,712,780
|
|
|
$
|
63,500
|
|
The recognized deferred tax asset is based upon the expected utilization of its benefit from future taxable income. The Company has federal net operating loss (“NOL”) carryforwards of approximately $4,028,000 as of March 31, 2020. These carryforward losses are available to offset future taxable income, and begin to expire in the year 2027. New Jersey State NOL carryforwards approximate $2,735,000 as of March 31, 2020. New Jersey State NOL carryforwards expire in 20 years, and certain of these amounts begin to expire in 2030.
The foregoing amounts are management’s estimates, and the actual results could differ from those estimates. Future profitability in this competitive industry depends on continually obtaining and fulfilling new profitable sales agreements and modifying products. The inability to obtain new profitable contracts or the failure of the Company’s engineering development efforts could reduce estimates of future profitability, which could affect the Company’s ability to realize the deferred tax assets.
TEL-INSTRUMENT ELECTRONICS CORP.
Notes To Consolidated Financial Statements (Continued)
8. Income Taxes (continued)
A reconciliation of the income tax (benefit) provision at the statutory Federal tax rate of 21% for the years ended March 31, 2020 and 2019, respectively, to the income tax (benefit) provision recognized in the financial statements is as follows:
|
|
March 31,
|
|
|
March 31,
|
|
|
|
2020
|
|
|
2019
|
|
|
|
|
|
|
|
|
|
|
Income tax provision – statutory rate
|
|
$
|
438,314
|
|
|
$
|
42,638
|
|
Income tax expenses – state and local, net of federal benefit
|
|
|
67
|
|
|
|
1,027
|
|
Permanent items
|
|
|
5,865
|
|
|
|
32,031
|
|
Change in value of warrants – permanent difference
|
|
|
15,330
|
|
|
|
9,135
|
|
True-up of prior year’s deferred taxes
|
|
|
(36,164
|
)
|
|
|
15,386
|
|
Valuation allowance
|
|
|
(3,059,107
|
)
|
|
|
(118,625
|
)
|
Rate changes
|
|
|
-
|
|
|
|
3,102
|
|
Other
|
|
|
(13,585
|
)
|
|
|
15,306
|
|
Income tax provision (benefit)
|
|
$
|
(2,649,280
|
)
|
|
$
|
-0-
|
|
9. Related Parties
Subordinated Notes
On February 22, 2010, the Company borrowed $250,000 in exchange for issuing subordinated notes to two executive officers and directors in the amount of $125,000 (individually, the “Subordinated Note” and collectively, the “Subordinated Notes”). The notes became due April 1, 2011 with an interest rate of 1% per month, payable on a monthly basis within 14 days of the end of each month. The holders of Subordinated Notes agreed that the Company’s failure to pay the monthly interest amounts pursuant to the terms of the February 22, 2010 Subordinated Notes will not constitute an event of default on such notes. Upon payment in full of the loan to BCA in November 2014, the Company was able to commence to pay down the principal balance of the Subordinated Notes. During fiscal year 2012, the Company’s Chairman, at the time, passed away. His surviving spouse has retained this Subordinated Note and continues to acknowledge the terms. The remaining principal balances on the notes were fully paid during the year ended March 31, 2017. The Company continues to accrue interest. Total interest expense was $990 for the year ended March 31, 2019. All interest was repaid as of March 31, 2019. Accrued interest at March 31, 2020 and 2019 was $-0- and $-0-, respectively.
Services
The Company has obtained marketing and sales services from a brother-in-law of the Company’s CEO with the related fees and commissions amounting to $145,376 and $161,026 for the years ended March 31, 2020 and 2019, respectively. At March 31, 2020, $15,650 was due this individual, which is included in accounts payable in the accompanying consolidated balance sheet.
10. Line of Credit
On March 21, 2016, the Company entered into a line of credit agreement with Bank of America, which expired March 31, 2017. In March 2017, the Company extended until March 31, 2018. The line provided a revolving credit facility with borrowing capacity of up to $1,000,000. There were no covenants or borrowing base calculations associated with this line of credit. On August 29, 2018, the Company entered a Loan Modification Agreement (the “Agreement”) with the bank. The Company had been working with the bank and had paid $100,000 to the bank to lower the outstanding balance to $900,000 at the signing of the Agreement. The Agreement had the following provisions:
1)
|
The Company to make an additional principal payment of $50,000 by October 1, 2018.
|
2)
|
Borrowing base calculation tied to accounts receivable and inventories.
|
3)
|
The Agreement expired May 31, 2019.
|
4)
|
Interest on any outstanding balances was payable monthly at an annual interest rate equal to the LIBOR (London Interbank Offered Rates) Daily Floating plus 3.75 percentage points.
|
5)
|
The line was collateralized by substantially all of the assets of the Company.
|
6)
|
The Company will make principal payments of $5,000 per month from September 30, 2018 through November 30, 2018 and principal payments of $10,000 per month from December 31, 2018 to May 31, 2019.
|
7)
|
Beginning with the fiscal year ended March 31, 2019, the Company must maintain a debt service coverage ratio.
|
TEL-INSTRUMENT ELECTRONICS CORP.
Notes To Consolidated Financial Statements (Continued)
10. Line of Credit (continued)
During June 2019, Bank of America agreed to extend the Company’s line of credit until March 31, 2020. The new Loan Modification Agreement (the “Amended Loan Modification Agreement”) with the bank contains the following provisions:
1)
|
The Company to make an additional principal payment of $10,000 at closing.
|
2)
|
Borrowing base calculation tied to accounts receivable.
|
3)
|
The Amended Loan Modification Agreement expires March 31, 2020.
|
4)
|
Interest on any outstanding balances is payable monthly at an annual interest rate equal to the LIBOR (London Interbank Offered Rates) Daily Floating plus 3.75 percentage points.
|
5)
|
The line is collateralized by substantially all of the assets of the Company.
|
6)
|
The Company will make principal payments of $10,000 per month until March 31, 2020.
|
7)
|
The covenant for the debt service ratio is deleted.
|
In March 2020, Bank of America extended the line of credit from March 31, 2020 to January 31, 2021. The new agreement includes open availability up to $690,000. Monthly payments are interest only.
During the year ended March 31, 2020 the Company repaid $120,000 against this line of credit. As of March 31, 2020 and March 31, 2019, the outstanding balances were $680,000 and $800,000, respectively. As of March 31, 2020 the remaining availability under this line is $10,000. The interest rate at March 31, 2020 was 4.74%.
11. Commitments
The Company sponsors a 401k Plan in which employee contributions on a pre-tax basis are supplemented by matching contributions by the Company. The Company charged to operations $34,047 and $23,047 as its matching contribution to the Company’s 401k Plan for the years ended March 31, 2020 and 2019, respectively.
12. Finance and Capital Lease Obligations
The Company has entered into lease commitments for equipment that meet the requirements for capitalization. The equipment has been capitalized and shown in equipment and leasehold improvements in the accompanying consolidated balance sheets. The related obligations are also recorded in the accompanying consolidated balance sheets and are based upon the present value of the future minimum lease payments with an interest rate of 9%. The net book value of equipment acquired under capitalized lease obligations amounted to $4,802 and $10,041 at March 31, 2020 and 2019, respectively. There were no new capital lease obligations during the years ended March 31, 2020 and 2019. As of March 31, 2020 and 2019, accumulated amortization under capital leases was $632,387 and $627,148, respectively.
At March 31, 2020 the remaining balance was $49. The Company included capital lease obligations as of March 31, 2019 under the finance lease obligations caption in the consolidated balance sheet.
TEL-INSTRUMENT ELECTRONICS CORP.
Notes To Consolidated Financial Statements (Continued)
13. Operating Lease Liability
The Company leases its general office and manufacturing facility in East Rutherford, NJ with monthly payments of $18,467 under an operating lease agreement which expired July 31, 2016. The lease is for a five year period, beginning August 1, 2011, with a five year option in a one-story facility. In June 2016, the Company extended the lease term for another five years until August 2021. Under terms of the lease, the Company is also responsible for its proportionate share of the additional rent to include all real estate taxes, insurance, snow removal, landscaping and other building charges. The Company is also responsible for the utility costs for the premises. The lease has a renewal option for five years.
The Company leases a small office in Lawrence, Kansas under an operating lease agreement which expired June 30, 2020.
The Company also has an operating lease for office equipment with monthly payments of $523 which expires in May 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 used incremental borrowing rates as of April 1, 2019 for operating leases that commenced prior to that date. 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 6.25% at March 31, 2020.
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 consolidated balance sheet as of March 31, 2020:
2021
|
|
$
|
227,880
|
|
2022
|
|
|
93,381
|
|
Total undiscounted future minimum lease payments
|
|
|
321,261
|
|
Less: Difference between undiscounted lease payments and discounted lease liabilities
|
|
|
(14,521
|
)
|
Present value of net minimum lease payments
|
|
|
306,740
|
|
Less current portion
|
|
|
(214,793
|
)
|
Operating lease liabilities – long-term
|
|
$
|
91,947
|
|
Total rent expense for the years ended March 31, 2020 and 2019 were $358,328 and $352,529, respectively.
Disclosures related to periods prior to adoption of ASU 2016-02
The Company adopted ASU 2016-02 using a modified retrospective adoption method at April 1, 2019 as noted in Note 2 “Recently Adopted Authoritative Pronouncements”. As required, the following disclosure is provided for periods prior to adoption. Minimum operating lease commitments as of March 31, 2019 that have initial or remaining lease terms in excess of one year are as follows:
Years Ended March 31,
|
|
Amount
|
|
2020
|
|
$
|
327,434
|
|
2021
|
|
|
312,431
|
|
2022
|
|
|
128,610
|
|
|
|
$
|
768,475
|
|
TEL-INSTRUMENT ELECTRONICS CORP.
Notes To Consolidated Financial Statements (Continued)
14. Significant Customer Concentrations
For the years ended March 31, 2020 and 2019, sales to the U.S. Government represented approximately 30% and 39%, respectively of net sales. For the year ended March 31, 2020 one direct customer represented 10% of total sales and 12% of government sales. One international distributor represented 13% of total sales and 15% of government sales for the year ended March 31, 2020. One U.S. distributor represented 20% of commercial sales for the year ended March 31, 2020. This U.S. Distributor accounted for 20% and 24% of commercial sales for the years ended March 31, 2020 and 2019, respectively. For the year ended March 31, 2019 one direct customer accounted for 12% of total sales and 16% of government sales for the year ended March 31, 2019. No other customer accounted for more than 10% of commercial or government net sales for the year ended March 31, 2019.
Net sales to foreign customers, which, for the most part, are international distributors were $8,569,347 and $2,438,228 for the years ended March 31, 2020 and 2019, respectively. All other sales were to customers located in the U.S. The following table presents net sales by U.S. and foreign countries:
|
|
2020
|
|
|
2019
|
|
United States
|
|
$
|
7,205,596
|
|
|
$
|
9,677,822
|
|
Foreign countries
|
|
|
8,569,347
|
|
|
|
2,438,228
|
|
Total Avionics Sales
|
|
$
|
15,774,943
|
|
|
$
|
12,116,050
|
|
Net sales related to any single foreign country did not comprise more than 10% of consolidated net sales. The Company had no assets outside the United States.
Receivables from the U.S. Government represented approximately 27% and 3%, respectively, of total receivables at March 31, 2020 and 2019, respectively. As of March 31, 2020, two individual customers represented in total 24% of the Company’s outstanding accounts receivable, ranging between 11% and 13% of the Company’s outstanding accounts receivable at March 31, 2020. As of March 31, 2019, three individual customers represented in total 72% of the Company’s outstanding accounts receivable, ranging between 14% and 37% of the Company’s outstanding accounts receivable. No other customers represented more than 10% of outstanding accounts receivable for the years ended March 31, 2020 and 2019.
15. Series A 8% Convertible Preferred Stock
On November 14, 2017, the Company entered into definitive subscription agreements with an accredited investor, pursuant to which the investor purchased an aggregate of 500,000 shares of the Company’s Series A Preferred Stock (the “Series A Preferred”) for an aggregate of $3 million. The Company used such proceeds for the payment of any Court judgment and/or settlement related to the Aeroflex Wichita, Inc. litigation, working capital purposes, and for payment of fees and expenses associated with this transaction. The Closing occurred following the satisfaction of customary closing conditions. The securities issued pursuant to the Subscription Agreements were not registered under the Securities Act of 1933, as amended (the “Securities Act”), but qualified for exemption under Section 4(a)(2) of the Securities Act. The securities were exempt from registration under Section 4(a)(2) of the Securities Act because the issuance of such securities by the Company did not involve a “public offering,” as defined in Section 4(a)(2) of the Securities Act, due to the insubstantial number of persons involved in the transaction, size of the offering, manner of the offering and number of securities offered. The Company did not undertake an offering in which it sold a high number of securities to a high number of investors. In addition, these shareholders had the necessary investment intent as required by Section 4(a)(2) of the Securities Act since they agreed to, and received, share certificates bearing a legend stating that such securities are restricted pursuant to Rule 144 of the Securities Act. This restriction ensures that these securities would not be immediately redistributed into the market and therefore not be part of a “public offering.” Based on an analysis of the above factors, the Company has met the requirements to qualify for exemption under Section 4(a)(2) of the Securities Act.
TEL-INSTRUMENT ELECTRONICS CORP.
Notes To Consolidated Financial Statements (Continued)
15. Series A 8% Convertible Preferred Stock (continued)
The shares of Series A Preferred have a stated value of $6.00 per share (the “Series A Stated Value”) and are convertible into Common Stock at a price of $3.00 per share. The holders of shares of the Series A Preferred shall be entitled to receive dividends out of any assets legally available, to the extent permitted by New Jersey law, at an annual rate equal to 8% of the Series A Stated Value of such shares of Series A Preferred, calculated on the basis of a 360 day year, consisting of twelve 30-day months, and shall accrue from the date of issuance of such shares of Series A Preferred, payable quarterly in cash. Any unpaid dividends shall accrue at the same rate. To the extent not paid on the last day of March, June, September and December of each calendar year, all dividends on any share of Series A Preferred shall accumulate whether or not declared by the Board and shall remain accumulated dividends until paid. As of March 31, 2020 the Company recognized $570,667 as deemed dividends and are included in the carrying value of the Series A Convertible Preferred Stock. The Holders will vote together with the holders of the Company’s Common Stock on an as-converted basis on each matter submitted to a vote of holders of Common Stock (whether at a meeting of shareholders or by written consent). Effective beginning on the third anniversary of the Original Issue Date, and upon 30 days’ written notice to the Holders of Series A Preferred, the Company may, in its sole discretion, redeem the Series A Preferred at the aggregate Series A Stated Value plus any accrued and accumulated but unpaid dividends.
The Company has also evaluated its convertible preferred stock in accordance with the provisions of ASC 815, Derivatives and Hedging, including consideration of embedded derivatives requiring bifurcation. The issuance of the convertible preferred stock could generate a beneficial conversion feature (“BCF”), which arises when a debt or equity security is issued with an embedded conversion option that is beneficial to the investor or in the money at inception because the conversion option has an effective strike price that is less than the market price of the underlying stock at the commitment date. The Series A Convertible Preferred Stock, and the associated dividends, did not generate a BCF upon issuance as the fair value of the Company's common stock was greater than the conversion price.
16. Series B 8% Convertible Preferred Stock
On October 5, 2018, the Company entered into definitive subscription agreement with an accredited investor, pursuant to which the investor purchased an aggregate of 166,667 shares of the Company’s Series B Preferred Stock (the “Series B Preferred”) for an aggregate of $1 million. The Company used such proceeds for working capital to finance its operations based on the current and expected increase in business, and for payment of fees and expenses associated with this transaction. The Closing occurred following the satisfaction of customary closing conditions. The securities issued pursuant to this subscription agreement were not registered under the Securities Act of 1933, as amended (the “Securities Act”), but qualified for exemption under Section 4(a)(2) of the Securities Act. The securities were exempt from registration under Section 4(a)(2) of the Securities Act because the issuance of such securities by the Company did not involve a “public offering,” as defined in Section 4(a)(2) of the Securities Act, due to the insubstantial number of persons involved in the transaction, size of the offering, manner of the offering and number of securities offered. The Company did not undertake an offering in which it sold a high number of securities to a high number of investors. In addition, this individual had the necessary investment intent as required by Section 4(a)(2) of the Securities Act since he agreed to, receive share certificates bearing a legend stating that such securities are restricted pursuant to Rule 144 of the Securities Act. This restriction ensures that these securities would not be immediately redistributed into the market and therefore not be part of a “public offering.” Based on an analysis of the above factors, the Company has met the requirements to qualify for exemption under Section 4(a)(2) of the Securities Act.
The shares of Series B Preferred have a stated value of $6.00 per share (the “Series B Stated Value”) and are convertible into Common Stock at a price of $2.00 per share. The holder of shares of the Series B Preferred shall be entitled to receive dividends out of any assets legally available, to the extent permitted by New Jersey law, at an annual rate equal to 8% of the Series B Stated Value of such shares of Series B Preferred, calculated on the basis of a 360 day year, consisting of twelve 30-day months, and shall accrue from the date of issuance of such shares of Series B Preferred, payable quarterly in cash. Any unpaid dividends shall accrue at the same rate. To the extent not paid on the last day of March, June, September and December of each calendar year, all dividends on any share of Series B Preferred shall accumulate whether or not declared by the Board and shall remain accumulated dividends until paid. As of March 31, 2020, the Company recognized $119,110 as deemed dividends and are included in the carrying value of the Series B Convertible Preferred Stock. The Holders will vote together with the holders of the Company’s Common Stock on an as-converted basis on each matter submitted to a vote of holders of Common Stock (whether at a meeting of shareholders or by written consent). Effective beginning on the third anniversary of the Original Issue Date, and upon 30 days’ written notice to the Holders of Series B Preferred, the Company may, in its sole discretion, redeem the Series B Preferred at the aggregate Series B Stated Value plus any accrued and accumulated but unpaid dividends.
TEL-INSTRUMENT ELECTRONICS CORP.
Notes To Consolidated Financial Statements (Continued)
16. Series B 8% Convertible Preferred Stock (continued)
The Company has also evaluated its convertible preferred stock in accordance with the provisions of ASC 815, Derivatives and Hedging, including consideration of embedded derivatives requiring bifurcation. The issuance of the convertible preferred stock could generate a beneficial conversion feature (“BCF”), which arises when a debt or equity security is issued with an embedded conversion option that is beneficial to the investor or in the money at inception because the conversion option has an effective strike price that is less than the market price of the underlying stock at the commitment date. The Company recognized the BCF by allocating the intrinsic value of the conversion option, which is the number of shares of common stock available upon conversion multiplied by the difference between the effective conversion price per share and the fair value of common stock per share on the commitment date, to additional paid-in capital, resulting in a discount on the convertible preferred stock. As the convertible preferred stock may be converted immediately, the Company recognized a BCF of $420,000 as a deemed dividend in the statements of operations for the year ended March 31, 2019. The deemed dividend had no impact on the Company’s stockholders’ deficit. The associated dividend for the Series B preferred stock generated a BCF in the amount of $14,667 for the period ended March 31, 2019.
17. Stock Option Plans
In December 2016, the Board adopted the 2016 Stock Option Plan (the “2016 Plan”) which reserved for issuance options to purchase up to 250,000 shares of its Common Stock. The stockholders approved the Plan at the January 2017 annual meeting. Shareholders had previously adopted the 2006 Stock Option Plan, under which substantially all of the options have been granted. Therefore, the Board approved the 2016 Plan, and the terms are substantially the same as under the 2006 Employees Stock Option. The 2016 Plan reserves for issuance options to purchase up to 250,000 shares of its common stock. All employees, directors and consultants are eligible to receive stock option grants under this plan. The 2016 Plan, which has a term of ten years from the date of adoption, is administered by the Board or by a committee appointed by the Board. The selection of participants, allotment of shares, and other conditions related to the grant of options, to the extent not set forth in the Plan, are determined by the Board. Options granted under the Plan are exercisable up to a period of five years from the date of grant at an exercise price which is not less than the fair market value of the common stock at the date of grant, except to a shareholder owning 10% or more of the outstanding common stock of the Company, as to which the exercise price must be not less than 110% of the fair market value of the common stock at the date of grant. Options, for the most part, are exercisable on a cumulative basis, 20% at or after each of the first, second, and third anniversary of the grant and 40% after the fourth year anniversary.
TEL-INSTRUMENT ELECTRONICS CORP.
Notes To Consolidated Financial Statements (Continued)
17. Stock Option Plans (continued)
The fair value of each option awarded is estimated on the date of grant using the Black-Scholes option valuation model that uses the assumptions noted in the following table. Expected volatilities are based on historical volatility of Common Stock. The expected life of the options granted represents the period of time from date of grant to expiration (5 years). The risk-free interest rate is based on the U.S. Treasury yield in effect at the time of grant. There were no stock options granted for the year ended March 31, 2019. The per share weighted-average fair value of stock options granted for the year ended March 31, 2020 was $1.05 on the date of grant using the Black Scholes option-pricing model with the following assumptions:
|
|
Dividend
|
|
|
Risk-free
|
|
|
|
|
|
|
|
|
|
Yield
|
|
|
Interest rate
|
|
|
Volatility
|
|
|
Life
|
2020
|
|
|
0.0
|
%
|
|
|
2.28
|
%
|
|
|
33.15
|
%
|
|
5 years
|
A summary of the status of the Company’s stock option plans for the fiscal years ended March 31, 2020 and 2019 and changes during the years are presented below (in number of options):
|
|
Number of
Options
|
|
|
Average
Exercise Price
|
|
Average Remaining
Contractual Term
|
|
Aggregate
Intrinsic Value
|
|
Outstanding options at April 1, 2018
|
|
|
72,500
|
|
|
$
|
5.26
|
|
|
|
|
|
|
Options granted
|
|
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
Options exercised
|
|
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
Options canceled/forfeited
|
|
|
(30,000
|
)
|
|
$
|
5.07
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding options at March 31, 2019
|
|
|
42,500
|
|
|
$
|
5.40
|
|
1.6 years
|
|
$
|
-0-
|
|
Options granted
|
|
|
76,000
|
|
|
$
|
3.19
|
|
|
|
|
|
|
Options exercised
|
|
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
Options canceled/forfeited
|
|
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding options at March 31, 2020
|
|
|
118,500
|
|
|
$
|
3.98
|
|
2.8 years
|
|
$
|
13,295
|
|
Vested Options:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2020:
|
|
|
38,000
|
|
|
$
|
5.65
|
|
0.3 years
|
|
$
|
2,734-
|
|
March 31, 2019:
|
|
|
22,500
|
|
|
$
|
5.68
|
|
1.3 years
|
|
$
|
-0-
|
|
Remaining options available for grant were 166,500 and 242,500 as of March 31, 2020 and 2019, respectively.
For the years ended March 31, 2020 and 2019, the unamortized compensation expense for stock options was $61,592 and $9,612, respectively. Unamortized compensation expense is expected to be recognized over a weighted-average period of approximately 1 year.
A summary of the Company’s non-vested shares as of March 31, 2020 and changes during the year ended March 31, 2020 is presented below:
Non-vested Shares
|
|
Shares
|
|
|
Weighted-Average
Grant-Date
Fair value
|
|
|
|
|
|
|
|
|
|
|
Non-vested at April 1, 2019
|
|
|
20,000
|
|
|
$
|
5.09
|
|
Granted
|
|
|
76,000
|
|
|
$
|
3.19
|
|
Vested
|
|
|
(15,500
|
)
|
|
$
|
5.60
|
|
Forfeited
|
|
|
|
|
|
$
|
-
|
|
Non-vested at March 31, 2020
|
|
|
80,500
|
|
|
$
|
3.20
|
|
The compensation cost that has been charged was $21,669 and $24,016 for the fiscal years ended March 31, 2020 and 2019, respectively.
TEL-INSTRUMENT ELECTRONICS CORP.
Notes To Consolidated Financial Statements (Continued)
18. Net Income (Loss) per Share
Net income (loss) per share attributable to common stockholders has been computed according to Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC 260”), “Earnings per Share,” which requires a dual presentation of basic and diluted income (loss) per share (“EPS”). Basic EPS attributable to common stockholders represents net income (loss) less preferred dividends divided by the weighted average number of common shares outstanding during a reporting period. Diluted EPS attributable to common stockholders 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.
|
|
March 31, 2020
|
|
|
March 31, 2019
|
|
Basic net income (loss) per share computation:
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
4,736,490
|
|
|
$
|
203,038
|
|
Deemed dividend related to beneficial conversion feature of
Series B Convertible Preferred Stock
|
|
|
-
|
|
|
|
(420,000
|
)
|
Less: Preferred dividends
|
|
|
(320,000
|
)
|
|
|
(312,807
|
)
|
Net income (loss) attributable to common shareholders
|
|
|
4,416,490
|
|
|
|
(529,769
|
)
|
Weighted-average common shares outstanding
|
|
|
3,255,887
|
|
|
|
3,255,887
|
|
Basic net income (loss) per share
|
|
$
|
1.36
|
|
|
$
|
(0.16
|
)
|
Diluted net income (loss) per share computation
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to common shareholders
|
|
$
|
4,416,490
|
|
|
$
|
(529,769
|
)
|
Add: Preferred dividends
|
|
|
320,000
|
|
|
|
-
|
|
Diluted income (loss) attributable to common shareholders
|
|
$
|
4,736,490
|
|
|
|
(529,769
|
)
|
Weighted-average common shares outstanding
|
|
|
3,255,887
|
|
|
|
3,255,887
|
|
Incremental shares attributable to the assumed exercise of
preferred stock, outstanding stock options and warrants
|
|
|
1,704,778
|
|
|
|
-
|
|
Total adjusted weighted-average shares
|
|
|
4,960,665
|
|
|
|
3,255,887
|
|
Diluted net income (loss) per share
|
|
$
|
0.95
|
|
|
$
|
(0.16
|
)
|
The following table summarizes securities that, if exercised, would have an anti-dilutive effect on earnings per share:
|
|
March 31, 2020
|
|
|
March 31, 2019
|
|
Convertible preferred stock
|
|
|
-
|
|
|
|
1,629,778
|
|
Stock options
|
|
|
118,500
|
|
|
|
42,500
|
|
Warrants
|
|
|
-
|
|
|
|
50,000
|
|
|
|
|
118,500
|
|
|
|
1,722,278
|
|
19. Segment Information
In accordance with FASB ASC 280, “Disclosures about Segments of an Enterprise and related information”, the Company determined it has two reportable segments - avionics government and avionics commercial. There are no inter-segment revenues.
The Company is organized primarily on the basis of its avionics products. The avionics government segment consists primarily of the design, manufacture, and sale of test equipment to the U.S. and foreign governments and militaries either directly or through distributors. The avionics commercial segment consists of design, manufacture, and sale of test equipment to domestic and foreign airlines, directly or through commercial distributors, and to general aviation repair and maintenance shops. The Company develops and designs test equipment for the avionics industry and as such, the Company’s products and designs cross segments.
Management evaluates the performance of its segments and allocates resources to them based on gross margin. The Company’s general and administrative costs and sales and marketing expenses, and engineering costs are not segment specific. As a result, all operating expenses are not managed on a segment basis. Net interest includes expenses on debt and income earned on cash balances, both maintained at the corporate level. Segment assets include accounts receivable and work-in-process inventory. Asset information, other than accounts receivable and work-in-process inventory, is not reported, since the Company does not produce such information internally. All long-lived assets are located in the U.S.
TEL-INSTRUMENT ELECTRONICS CORP.
Notes To Consolidated Financial Statements (Continued)
19. Segment Information (continued)
The tables below present information about reportable segments for the years ended March 31:
|
|
Avionics
|
|
|
Avionics
|
|
|
Avionics
|
|
|
Corporate/
|
|
|
|
|
|
2020
|
|
Government
|
|
|
Commercial
|
|
|
Total
|
|
|
Reconciling Items
|
|
|
Total
|
|
Net sales
|
|
$
|
12,770,363
|
|
|
$
|
3,004,580
|
|
|
$
|
15,774,943
|
|
|
$
|
-
|
|
|
$
|
15,774,943
|
|
Cost of Sales
|
|
|
6,606,622
|
|
|
|
1,758,420
|
|
|
|
8,365,042
|
|
|
|
-
|
|
|
|
8,365,042
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Margin
|
|
|
6,163,741
|
|
|
|
1,246,420
|
|
|
|
7,409,901
|
|
|
|
-
|
|
|
|
7,409,901
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Engineering, research, and development
|
|
|
|
|
|
|
|
|
|
|
2,239,811
|
|
|
|
-
|
|
|
|
2,239,811
|
|
Selling, general, and administrative
|
|
|
|
|
|
|
|
|
|
|
941,514
|
|
|
|
1,536,034
|
|
|
|
2,477,548
|
|
Litigation expenses
|
|
|
|
|
|
|
|
|
|
|
-
|
|
|
|
140,050
|
|
|
|
140,050
|
|
Change in fair value of common stock warrant
|
|
|
|
|
|
|
|
|
|
|
-
|
|
|
|
73,000
|
|
|
|
73,000
|
|
Interest income
|
|
|
|
|
|
|
|
|
|
|
-
|
|
|
|
(5,819
|
)
|
|
|
(5,819
|
)
|
Interest expense - judgment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
342,544
|
|
|
|
342,544
|
|
Interest expense - other
|
|
|
|
|
|
|
|
|
|
|
-
|
|
|
|
55,557
|
|
|
|
55,557
|
|
|
|
|
|
|
|
|
|
|
|
|
3,181,325
|
|
|
|
2,141,366
|
|
|
|
5,322,691
|
|
Income (loss) before income taxes
|
|
|
|
|
|
|
|
|
|
$
|
4,228,576
|
|
|
$
|
(2,141,366
|
)
|
|
$
|
2,087,210
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment Assets
|
|
$
|
3,301,607
|
|
|
$
|
1,202, 716
|
|
|
$
|
4,504,323
|
|
|
$
|
8,835,546
|
|
|
$
|
13,339,869
|
|
|
|
Avionics
|
|
|
Avionics
|
|
|
Avionics
|
|
|
Corporate/
|
|
|
|
|
|
2019
|
|
Government
|
|
|
Commercial
|
|
|
Total
|
|
|
Reconciling Items
|
|
|
Total
|
|
Net sales
|
|
$
|
9,239,379
|
|
|
$
|
2,876,671
|
|
|
$
|
12,116,050
|
|
|
$
|
-
|
|
|
$
|
12,116,050
|
|
Cost of Sales
|
|
|
4,902,016
|
|
|
|
1,796,814
|
|
|
|
6,698,830
|
|
|
|
-
|
|
|
|
6,698,830
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Margin
|
|
|
4,337,363
|
|
|
|
1,079,857
|
|
|
|
5,417,220
|
|
|
|
-
|
|
|
|
5,417,220
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Engineering, research, and development
|
|
|
|
|
|
|
|
|
|
|
2,312,043
|
|
|
|
-
|
|
|
|
2,312,043
|
|
Selling, general, and administrative
|
|
|
|
|
|
|
|
|
|
|
880,641
|
|
|
|
1,334,880
|
|
|
|
2,215,521
|
|
Litigation expenses
|
|
|
|
|
|
|
|
|
|
|
-
|
|
|
|
234,720
|
|
|
|
234,720
|
|
Change in fair value of common stock warrant
|
|
|
|
|
|
|
|
|
|
|
-
|
|
|
|
43,500
|
|
|
|
43,500
|
|
Interest income
|
|
|
|
|
|
|
|
|
|
|
-
|
|
|
|
(4,005
|
)
|
|
|
(4,005
|
)
|
Interest expense - judgment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
310,663
|
|
|
|
310,663
|
|
Interest expense - other
|
|
|
|
|
|
|
|
|
|
|
-
|
|
|
|
101,740
|
|
|
|
101,740
|
|
|
|
|
|
|
|
|
|
|
|
|
3,192,684
|
|
|
|
2,021,498
|
|
|
|
5,214,182
|
|
Income (loss) before income taxes
|
|
|
|
|
|
|
|
|
|
$
|
2,224,536
|
|
|
$
|
(2,021,498
|
)
|
|
$
|
203,038
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment Assets
|
|
$
|
4,763,198
|
|
|
$
|
365,533
|
|
|
$
|
5,128,731
|
|
|
$
|
3,200,936
|
|
|
$
|
8,329,667
|
|
TEL-INSTRUMENT ELECTRONICS CORP.
Notes To Consolidated Financial Statements (Continued)
20. Fair Value Measurements
FASB ASC 820, “Fair Value Measurements” defines fair value, establishes a framework for measuring fair value under generally accepted accounting principles and prescribes disclosures about fair value measurements.
As defined in ASC 820, fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price). The Company utilizes market data or assumptions that market participants would use in pricing the asset or liability, including assumptions about risk and the risks inherent in the inputs to the valuation technique. These inputs can be readily observable, market corroborated, or generally unobservable. The Company classifies fair value balances based on the observability of those inputs. ASC 820 establishes a fair value hierarchy that prioritizes the inputs used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (level 1 measurement) and the lowest priority to unobservable inputs (level 3 measurement).
The three levels of the fair value hierarchy defined by ASC 820 are as follows:
Level 1 – Quoted prices are available in active markets for identical assets or liabilities as of the reporting date. Active markets are those in which transactions for the asset or liability occur in sufficient frequency and volume to provide pricing information on an ongoing basis. Level 1 primarily consists of financial instruments such as exchange-traded derivatives, marketable securities and listed equities.
Level 2 – Pricing inputs are other than quoted prices in active markets included in level 1, which are either directly or indirectly observable as of the reported date. Level 2 includes those financial instruments that are valued using models or other valuation methodologies. These models are primarily industry-standard models that consider various assumptions, including quoted forward prices for commodities, time value, volatility factors, and current market and contractual prices for the underlying instruments, as well as other relevant economic measures. Substantially all of these assumptions are observable in the marketplace throughout the full term of the instrument, can be derived from observable data or are supported by observable levels at which transactions are executed in the marketplace. Instruments in this category generally include non-exchange-traded derivatives such as commodity swaps, interest rate swaps, options and collars.
Level 3 – Pricing inputs include significant inputs that are generally less observable from objective sources. These inputs may be used with internally developed methodologies that result in management’s best estimate of fair value.
TEL-INSTRUMENT ELECTRONICS CORP.
Notes To Consolidated Financial Statements (Continued)
20. Fair Value Measurements (continued)
The valuation techniques that may be used to measure fair value are as follows:
Market approach — Uses prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities
Income approach — Uses valuation techniques to convert future amounts to a single present amount based on current market expectations about those future amounts, including present value techniques, option-pricing models and excess earnings method
Cost approach — Based on the amount that currently would be required to replace the service capacity of an asset (replacement cost)
The carrying value of the Company’s borrowings is a reasonable estimate of its fair value as borrowings under the Company’s credit facility have variable rates that reflect currently available terms and conditions for similar debt.
The Company’s assessment of the significance of a particular input to the fair value measurement requires judgment, and may affect the valuation of fair value assets and liabilities and their placement within the fair value hierarchy levels.
The following table sets forth by level within the fair value hierarchy the Company’s financial assets and liabilities that were accounted for at fair value as of March 31, 2020 and March 31, 2019. As required by FASB ASC 820, financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.
The Company’s assessment of the significance of a particular input to the fair value measurement requires judgment, and may affect the valuation of fair value assets and liabilities and their placement within the fair value hierarchy levels.
March 31, 2020
|
|
Level I
|
|
|
Level II
|
|
|
Level III
|
|
|
Total
|
|
Warrant Liability
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Total Liabilities
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
March 31, 2019
|
|
Level I
|
|
|
Level II
|
|
|
Level III
|
|
|
Total
|
|
Warrant Liability
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
43,500
|
|
|
$
|
43,500
|
|
Total Liabilities
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
43,500
|
|
|
$
|
43,500
|
|
ASC 815, “Derivatives and Hedging” requires that we mark the value of our warrant liability to market and recognize the change in valuation in our statement of operations each reporting period. Determining the warrant liability to be recorded requires us to develop estimates to be used in calculating the fair value of the warrant.
The following table provides a summary of the changes in fair value of our Level 3 financial liabilities for the years ended March 31, 2020 and 2019 as well as the unrealized gains or losses included in income.
Level 3 Reconciliation – Year Ended 3/31/2020
|
|
Balance at
beginning of period
|
|
|
Losses
for the period
(realized and unrealized)
|
|
|
Purchases, issuances,
sales and
settlements, net
|
|
|
Transfers in or
out of Level 3
|
|
|
Balance at the
end of period
|
Warrant liability
|
|
$
|
43,500
|
|
|
$
|
73,000
|
|
|
$
|
(116,500
|
)
|
|
$
|
-
|
|
|
$
|
-
|
Total Liabilities
|
|
$
|
43,500
|
|
|
$
|
73,000
|
|
|
$
|
(116,500
|
)
|
|
$
|
-
|
|
|
$
|
-
|
Level 3 Reconciliation – Year Ended 3/31/2019
|
|
Balance at
beginning of period
|
|
|
Losses
for the period
(realized and unrealized)
|
|
|
Purchases, issuances,
sales and
settlements, net
|
|
|
Transfers in or
out of Level 3
|
|
|
Balance at the
end of period
|
Warrant liability
|
|
$
|
-
|
|
|
$
|
43,500
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
43,500
|
Total Liabilities
|
|
$
|
-
|
|
|
$
|
43,500
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
43,500
|
TEL-INSTRUMENT ELECTRONICS CORP.
Notes To Consolidated Financial Statements (Continued)
20. Fair Value Measurements (continued)
The Company had warrants with an outside investor to purchase 50,000 shares of the Company’s common stock at an exercise price of $3.35 per share or exercising the “put option” to the Company. The warrant liability of the 50,000 warrants was $43,500 at March 31, 2019. These warrants must be converted at a purchase price of $3.35 per share or the cash put option must be exercised by September 10, 2019. On September 3, 2019, the holder of the warrant informed the Company that it has elected to exercise its “put option”, thereby requiring the Company to purchase the warrants held by holder. Total warrants were to purchase a total of 50,000 shares of the Company’s common stock.
The value of the warrants for the 50,000 shares of the Company’s common stock at the time of exercise was $116,500, and the Company paid this amount using cash from operations in October 2019, thereby extinguishing the warrant liability. At March 31, 2020 the warrant liability was $-0-.
The holder had the right, exercisable at any time, in writing (the “Warrant Put Notice”, to cause the Company, subject to the terms and conditions herein, to purchase from the holder all, or any portion, of the warrant for the warrant put repurchase price (the “Repurchase Price”). The Repurchase Price is the greater of 1) Adjusted EBITDA (as defined below) per share as of the date of the Warrant Put Notice, less $0.01, multiplied by the number of warrants or 2) the product of the current market price per share as of the date of the Warrant Put Notice, less the purchase price of the warrant or warrants, multiplied by the number of warrants, if this amount is higher. “Adjusted EBITDA” means EBITDA, multiplied by 5, plus cash and cash equivalents less unpaid debt divided by the number of shares outstanding on a fully diluted basis.
21. Litigation
Contingencies are recorded in the consolidated financial statements when it is probable that a liability will be incurred and the amount of the loss is reasonably estimable, or otherwise disclosed, in accordance with Accounting Standards Codification 450, Contingencies (ASC 450). 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.
TEL-INSTRUMENT ELECTRONICS CORP.
Notes To Consolidated Financial Statements (Continued)
21. Litigation (continued)
The Aeroflex trial on remand in the Kansas District Court began in March 2017. After a nine-week trial, the jury rendered its verdict. The jury found no misappropriation of Aeroflex trade secrets but it did rule that the Company tortiously interfered with a prospective business opportunity and awarded damages of $1.3 million for lost profits. The jury also ruled that Tel tortiously interfered with Aeroflex’s non-disclosure agreements with two former Aeroflex employees and awarded damages of $1.5 million for lost profits, resulting in total damages against the Company of $2.8 million. The jury also found that the former Aeroflex employees breached their non-disclosure agreements with Aeroflex and awarded damages against these two individuals totaling $525,000. The jury also decided that punitive damages should be allowed against the Company.
Following the verdict, the Company filed a motion for judgment as a matter of law. In the motion, the Company renewed its motion for judgment on Aeroflex’s tortious interference with prospective business opportunity claim arguing that such claim is barred by the statute of limitations. Alternatively, the motion asserts there is insufficient evidence supporting the lost profit award on that claim. Additionally, the motion for judgment addresses inconsistency between the awards against the former Aeroflex employees for breach of the non-disclosure agreements and the award against the Company for interfering with those agreements. Alternatively, the motion asserts there is insufficient evidence supporting the lost profit award on that claim.
During July 2017, the Court heard the Company’s motion for judgment as well as conducting a hearing as to the amount of a punitive damages award. Kansas statutes limit punitive damages to a maximum of $5 million.
Aeroflex submitted a motion to the Court requesting that the judge award punitive damages at the maximum $5 million amount. In October 2017, the Court denied the Company’s motions and awarded Aeroflex an additional $2.1 million of punitive damages, which brings the total Tel damages awarded in this case to approximately $4.9 million.
The Journal Entry of Judgment including judgment against the Company in the amount of $1.3 million for tortious interference with prospective business advantage, of $1.5 million for tortious interference with existing contracts, and $2.1 million in punitive damages was entered on November 22, 2017. Pursuant to K.S.A. 16-204(d) “any judgment rendered by a court of this state on or after July 1, 1986, shall bear interest on and after the day on which judgment is rendered at the rate provided by subsection (e). The Kansas Secretary of State publishes the rate amount. The amount published for July 1, 2017 through June 30, 2018 is 5.75% and 6.5% July 1, 2018 through June 30, 2019. The current rate beginning July 1, 2019 is 7.0%. Interest on the $4,900,000 judgment started to accrue on November 22, 2017, the date the judgment was entered. As of March 31, 2020, the outstanding amount of the judgement and accrued interest is $5,657,549.
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 very optimistic about the prospects of its appeal for a judgment as a matter of law. The Company was hoping for a decision from the court this calendar year but this timing will likely 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.
The Company has the ability to settle this case at its sole discretion by withdrawing the appeal and paying the judgment plus interest amount.
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.
TEL-INSTRUMENT ELECTRONICS CORP.
Notes To Consolidated Financial Statements (Continued)
22. Subsequent Events
PPP Loan
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 $772,577 (the “PPP Loan”) pursuant to the PPP under the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”). The funds were deposited into the Company’s bank account 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.
Under the terms of the CARES Act, PPP loan recipients can apply for and be granted forgiveness for all or a portion of loan granted under the program. Such forgiveness will be determined, subject to limitations, based on the use of loan proceeds for payment of payroll costs and any payments of mortgage interest, rent, and utilities. No assurance is provided that the Company will obtain forgiveness of the PPP Loan in whole or in part. The PPP Loan has a two-year term and bears interest at a rate of 1% per annum. Monthly principal and interest payments are deferred for six months after the date of disbursement. The PPP Loan may be prepaid at any time prior to maturity with no prepayment penalties. Based on the June 5, 2020 the Paycheck Protection Program Flexibility Act, certain changes will need to be made to the original Note, based on the new law.