UNITED STATES

SECURITIES AND EXCHANGE COMMISSION     

WASHINGTON, D.C. 20549  

 


 

FORM 10-Q

 


 

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

 

For the quarterly period ended: December 31, 2019

 

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

 

Commission File Number: 001-31990

 

TEL-INSTRUMENT ELECTRONICS CORP.

(Exact name of registrant as specified in its charter)

 

New Jersey

22-1441806

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)

 

One Branca Road

East Rutherford, NJ 07073

(Address of principal executive offices)

 

(201) 933-1600

(Registrant’s telephone number, including area code)

 

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

 

Title of each class

 

Trading Symbol(s)

 

Name of each exchange on which registered

N/A

 

N/A

 

N/A

                    

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12 months, and (2) has been subject to such filing requirements for the past 90 days.  Yes ☒   No ☐

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).  Yes ☒   No ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company.  See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

Accelerated filer

Non-accelerated filer

☒ 

Smaller reporting company

 

 

Emerging growth company

 

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

 

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

 

As of February 10, 2020, there were 3,255,887 shares outstanding of the registrant’s common stock.

 

 

 

 

TEL-INSTRUMENT ELECTRONICS CORP.

 

TABLE OF CONTENTS

 

PART I – FINANCIAL INFORMATION

 

 

Page

Item 1.

Unaudited Condensed Consolidated Financial Statements.

3

 

 

 

Item 2.

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

24

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk.

30

 

 

 

Item 4.

Controls and Procedures.

30

 

 

 

PART II – OTHER INFORMATION

 

 

 

Item 1.

Legal Proceedings.

31

 

 

 

Item 1A.

Risk Factors.

31

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds.

31

 

 

 

Item 3.

Defaults Upon Senior Securities.

31

 

 

 

Item 4.

Mine Safety Disclosures.

31

 

 

 

Item 5.

Other Information.

31

 

 

 

Item 6.

Exhibits.

32

 

 

 

Signatures

33

 

 

 

 

 

 

PART I – FINANCIAL INFORMATION

 

Item 1.  Unaudited Condensed Consolidated Financial Statements.

 

TEL-INSTRUMENT ELECTRONICS CORP.

CONDENSED CONSOLIDATED BALANCE SHEETS

 

   

December 31,

2019

   

March 31,

2019

 
   

(unaudited)

         

ASSETS

               
                 

Current assets:

               

Cash and cash equivalents

  $ 1,667,364     $ 585,856  

Accounts receivable, net

    2,812,739       2,196,099  

Inventories, net

    3,070,529       2,932,632  

Restricted cash to support appeal bond

    2,007,546       2,004,871  

Prepaid expenses and other current assets

    362,226       275,230  

Total current assets

    9,920,404       7,994,688  
                 

Equipment and leasehold improvements, net

    262,708       236,370  

Operating lease right-of-use assets

    358,379       -  

Deferred tax asset, net

    63,500       63,500  

Other long-term assets

    35,109       35,109  

Total assets

  $ 10,640,100     $ 8,329,667  
                 

LIABILITIES & STOCKHOLDERS’ EQUITY (DEFICIT)

               
                 

Current liabilities:

               

Line of credit

  $ 710,000     $ 800,000  

Finance lease obligations – current portion

    1,935       6,885  

Operating lease liabilities – current portion

    211,471       -  

Accounts payable and accrued liabilities

    1,328,443       1,493,793  

Deferred revenues – current portion

    200,014       97,122  

Accrued legal damages

    5,570,846       5,312,085  

Warrant liability

    -       43,500  

Accrued payroll, vacation pay and payroll taxes

    487,887       394,296  

Total current liabilities

    8,510,596       8,147,681  
                 

Operating lease liabilities – long-term

    146,908       -  

Deferred revenues – long-term

    347,299       264,669  

Total liabilities

    9,004,803       8,412,350  
                 

Commitments and contingencies

               
                 

Stockholders’ equity (deficit):

               

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

               

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

issued and outstanding, par value $0.10 per share

    3,455,998       3,275,998  

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

issued and outstanding, par value $0.10 per share

    1,067,367       1,007,367  

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

3,255,887 shares issued and outstanding, respectively

    325,586       325,586  

Paid-in capital in excess of par value, common stock

    7,691,348       7,914,955  

Accumulated deficit

    (10,905,002

)

    (12,606,589

)

Total stockholders’ equity (deficit)

    1,635,297       (82,683

)

Total liabilities and stockholders’ equity (deficit)

  $ 10,640,100     $ 8,329,667  

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

 

TEL-INSTRUMENT ELECTRONICS CORP.

 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

 

   

Three Months Ended

   

Nine Months Ended

 
   

December 31,

2019

   

December 31,

2018

   

December 31,

2019

   

December 31,

2018

 
                                 

Net sales

  $ 4,733,135     $ 3,975,736     $ 11,951,765     $ 8,012,891  

Cost of sales

    2,520,653       2,006,132       6,284,046       4,562,761  
                                 

Gross margin

    2,212,482       1,969,604       5,667,719       3,450,130  
                                 

Operating expenses:

                               

     Selling, general and administrative

    609,394       530,180       1,847,028       1,652,116  

     Litigation expenses

    16,830       59,680       118,890       134,799  

     Engineering, research and development

    580,517       622,082       1,631,359       1,642,785  

Total operating expenses

    1,206,741       1,211,942       3,597,277       3,429,700  
                                 

Income from operations

    1,005,741       757,662       2,070,442       20,430  
                                 

Other income (expense):

                               

     Interest income

    2,065       1,010       4,083       3,017  

     Change in fair value of common stock warrants

    -       (23,000

)

    (73,000

)

    (23,000

)

     Interest expense - judgment

    (84,715

)

    (72,003

)

    (255,821

)

    (215,226

)

     Interest expense

    (15,514

)

    (24,216

)

    (44,117

)

    (83,251

)

Total other expense

    (98,164

)

    (118,209

)

    (368,855

)

    (318,460

)

                                 

Income (loss) before income taxes

    907,577       639,453       1,701,587       (298,030

)

                                 

Income tax expense

    -       -       -       -  
                                 

Net income (loss)

    907,577       639,453       1,701,587       (298,030

)

                                 

Deemed dividend related to beneficial conversion

    feature of Series B Convertible Preferred Stock

    -       (420,000

)

    -       (420,000

)

Preferred stock dividends

    (80,000

)

    (112,807

)

    (240,000

)

    (232,807

)

                                 

Net income (loss) attributable to common shareholders

  $ 827,577     $ 106,646     $ 1,461,587     $ (950,837

)

                                 

Basic income (loss) per common share

  $ 0.25     $ 0.03     $ 0.45     $ (0.29

)

Diluted income (loss) per common share

  $ 0.18     $ 0.03     $ 0.35     $ (0.29

)

                                 

Weighted average shares outstanding:

                               

Basic

    3,255,887       3,255,887       3,255,887       3,255,887  

Diluted

    4,975,665       3,255,887       4,824,652       3,255,887  

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

 

TEL-INSTRUMENT ELECTRONICS CORP.

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (DEFICIT)

For the Three Months Ended December 31, 2019 and 2018

(Unaudited)

 

   

 

Series A Convertible

    Preferred Stock

   

 

Series B Convertible

 Preferred Stock

   

 

 

Common Stock

                         
   

# of Shares

Issued

   

 Amount

   

# of Shares

Issued

   

Amount

   

# of Shares

Issued

   

 

 Amount

   

Additional Paid-In

Capital

   

Accumulated

Deficit

   

Total

 

Balances at October 1, 2019

    500,000     $ 3,395,998       166,667     $ 1,047,367       3,255,887     $ 325,586     $ 7,766,072     $ (11,812,579

)

  $ 722,444  

8% Dividends on Preferred Stock

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

)

    -       -  

Stock-based compensation

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

Net income

    -       -       -       -       -       -       -       907,577       907,577  

Balances at December 31, 2019

    500,000     $ 3,455,998       166,667     $ 1,067,367       3,255,887     $ 325,586     $ 7,691,348     $ (10,905,002

)

  $ 1,635,297  

 

 

   

Series A Convertible

    Preferred Stock

   

Series B Convertible

 Preferred Stock

   

 

Common Stock

                         
   

# of Shares

Issued

   

 Amount

   

# of Shares

Issued

   

Amount

   

# of Shares

Issued

   

 

 Amount

   

Additional Paid-In

Capital

   

Accumulated

Deficit

   

Total

 

Balances at October 1, 2018

    500,000     $ 3,155,998       -     $ -       3,255,887     $ 325,586     $ 8,096,327     $ (13,747,110

)

  $ (2,169,199

)

8% Dividends on Preferred Stock

    -       60,000       -       19,111       -       -       (79,111

)

    -       -  

Issuance of Series B Preferred Stock, net of expenses

    -       -       166,667       987,925       -       -       -       -       987,925  

Expenses related to short-swing profits from an investor

    -       -       --       -       -       -       (12,793

)

    -       (12,793

)

Stock-based compensation

    -       -       -       -       -       -       5,420       -       5,420  

Net income

    -       -       -       -       -       -       -       639,453       639,453  

Balances at December 31, 2018

    500,000     $ 3,215,998       166,667     $ 1,007,036       3,255,887     $ 325,586     $ 8,009,843     $ (13,107,657

)

  $ (549,194

)

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

 

TEL-INSTRUMENT ELECTRONICS CORP.

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (DEFICIT)

For the Nine Months Ended December 31, 2019 and 2018

(Unaudited)

 

   

Series A Convertible

    Preferred Stock

   

 Series B Convertible

Preferred Stock

   

 Common Stock

                         
   

# of Shares

Issued

   

 Amount

   

# of Shares

Issued

   

Amount

   

# of Shares

Issued

   

 

 Amount

   

Additional Paid-In

Capital

   

Accumulated

Deficit

   

Total

 

Balances at April 1, 2019

    500,000     $ 3,275,998       166,667     $ 1,007,367       3,255,887     $ 325,586     $ 7,914,955     $ (12,606,589

)

  $ (82,683

)

8% Dividends on Preferred Stock

    -       180,000       -       60,000       -       -       (240,000

)

    -       -  

Stock-based compensation

    -       -       -       -       -       -       16,393       -       16,393  

Net income

    -       -       -       -       -       -       -       1,701,587       1,701,587  

Balances at December 31, 2019

    500,000     $ 3,455,998       166,667     $ 1,067,367       3,255,887     $ 325,586     $ 7,691,348     $ (10,905,002

)

  $ 1,635,297  

 

 

   

 Series A Convertible

    Preferred Stock

   

Series B Convertible

 Preferred Stock

   

Common Stock

                         
   

# of Shares

Issued

   

 Amount

   

# of Shares

Issued

   

Amount

   

# of Shares

Issued

   

 

 Amount

   

Additional Paid-In

Capital

   

Accumulated

Deficit

   

Total

 

Balances at April 1, 2018

    500,000     $ 3,035,998       -     $ -       3,255,887     $ 325,586     $ 8,046,975     $ (12,809,627

)

  $ (1,401,068

)

8% Dividends on Preferred Stock

    -       180,000       -       19,111       -       -       (199,111

)

    -       -  

Issuance of Series B Preferred Stock, net of expenses

    -       -       166,667       987,925       -       -       -       -       987,925  

Proceeds from short-swing profits from an investor, net

    -       -       -       -       -       -       143,382       -       143,382  

Stock-based compensation

    -       -       -       -       -       -       18,597       -       18,597  

Net loss

    -       -       -       -       -       -       -       (298,030

)

    (298,030

)

Balances at December 31, 2018

    500,000     $ 3,215,998       166,667     $ 1,007,036       3,255,887     $ 325,586     $ 8,009,843     $ (13,107,657

)

  $ (549,194

)

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

 

 

TEL-INSTRUMENT ELECTRONICS CORP.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

   

Nine Months Ended

 
   

December 31, 2019

   

December 31, 2018

 
                 

Cash flows from operating activities:

               

Net income (loss)

  $ 1,701,587     $ (298,030

)

Adjustments to reconcile net income (loss) to net cash provided by

   (used in) operating activities:

               

Depreciation and amortization

    74,353       52,615  

Amortization of right of use assets

    150,783       -  

Provision for inventory obsolescence

    57,000       55,000  

Change in fair value of common stock warrant

    73,000       23,000  

Non-cash stock-based compensation

    16,393       18,597  
                 

Changes in assets and liabilities:

               

Increase in accounts receivable

    (616,640

)

    (1,176,461

)

(Increase) decrease in inventories

    (193,247

)

    1,120,658  

(Increase) in prepaid expenses & other assets

    (86,996

)

    (92,644

)

Decrease in accounts payable and accrued liabilities

    (165,350

)

    (783,601

)

Increase (decrease) in accrued payroll, vacation pay and payroll taxes

    93,591       (132,288

)

Increase (decrease) in deferred revenues

    185,522       (31,353

)

Decrease in operating lease liabilities

    (150,783

)

    -  

Increase in accrued legal damages

    258,761       156,657  

Net cash provided by (used in) operating activities

    1,397,974       (1,087,850

)

                 

Cash flows from investing activities:

               

Purchases of equipment

    (102,341

)

    -  

Net cash used in investing activities

    (102,341

)

    -  
                 

Cash flows from financing activities:

               

Repayment of long-term debt

    -       (2,124

)

Repayment of line of credit

    (90,000

)

    (180,000

)

Payment of warrant liability

    (116,500

)

    -  

Proceeds from issuance of preferred stock, net of expenses

    -       987,925  

Proceeds from short-swing profits from an investor

    -       143,382  

Repayment of finance lease obligations

    (4,950

)

    (5,097

)

Net cash (used in) provided by financing activities

    (211,450

)

    944,086  
                 

Net increase (decrease) in cash, cash equivalents and restricted cash

    1,084,183       (143,764

)

Cash, cash equivalents and restricted cash at beginning of period

    2,590,727       2,308,678  

Cash, cash equivalents and restricted cash at end of period

  $ 3,674,910     $ 2,164,914  
                 

End of period

               

Cash and cash equivalents

  $ 1,667,364     $ 161,031  

Restricted cash

    2,007,546       2,003,883  
    $ 3,674,910     $ 2,164,914  

Beginning of period

               

Cash and cash equivalents

  $ 585,856     $ 307,812  

Restricted cash

    2,004,871       2,000,866  
    $ 2,590,727     $ 2,308,678  
                 

Supplemental cash flow information:

               

Taxes paid

  $ -     $ -  

Interest paid

  $ 35,080     $ 41,475  

 

Supplemental disclosure of non-cash financing activities:

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.

 

See accompanying notes to unaudited condensed consolidated financial statements.

  

 

TEL-INSTRUMENT ELECTRONICS CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Note 1 – Basis of Presentation

 

In the opinion of management, the accompanying unaudited condensed consolidated financial statements contain all adjustments necessary to present fairly the financial position of Tel-Instrument Electronics Corp. (the “Company” or “TIC” or “Tel”) as of December 31, 2019, the results of operations and changes in stockholders’ equity (deficit) for the three and nine months ended December 31, 2019 and December 31, 2018, and statements of cash flows for the nine months ended December 31, 2019 and December 31, 2018.  These results are not necessarily indicative of the results to be expected for the full year.  The unaudited condensed consolidated financial statements have been prepared in accordance with the requirements of Form 10-Q and consequently do not include disclosures normally made in an Annual Report on Form 10-K.  The March 31, 2019 balance sheet included herein was derived from the audited financial statements included in the Company’s Annual Report on Form 10-K as of that date.  Accordingly, the unaudited condensed consolidated financial statements included herein should be reviewed in conjunction with the financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended March 31, 2019, as filed with the United States Securities and Exchange Commission (the “SEC”) on July 1, 2019 (the “Annual Report”).

 

Note 2 – Liquidity and Going Concern

 

The Aeroflex litigation (see Note 13 to the unaudited condensed consolidated financial statements) did not result in a favorable outcome for the Company, despite our belief that we committed no wrong doing. These unaudited condensed consolidated financial statements have been prepared in conformity with generally accepted accounting principles (“GAAP”), which contemplates continuation of the Company as a going concern.  As reflected in the accompanying unaudited condensed consolidated balance sheet at December 31, 2019, the Company has recorded estimated damages to date of approximately $5.6 million, including interest, as a result of a jury verdict associated with the Aeroflex litigation. The Company has filed for an appeal (see Note 13). In June 2019, Bank of America agreed to extend the Company’s line of credit until March 31, 2020 (see Note 8). In February 2020, Bank of America agreed to extend the line of credit from March 31, 2020 to January 31, 2021. The new agreement includes open availability up to $689,700. Monthly payments will be interest only. While the Company’s operations and profitability have significantly improved, and the Company believes it has sufficient cash and financing in place to fund its plans for the next twelve months, exclusive of any determination that may result from the Aeroflex litigation, due in part to recent large orders it has received that has returned the Company to profitability. The Company may not have sufficient resources to satisfy the judgment if we are not successful in our appeal. We have no commitment from any party to provide additional working capital and there is no assurance that any funding will be available as required, or if available, that its terms will be favorable or acceptable to the Company. This factor raises substantial doubt about the Company’s ability to continue as a going concern within one year of the date that the financial statements are issued.

 

The jury found no misappropriation of Aeroflex trade secrets, but it did find that the Company tortiously interfered with a prospective business opportunity and awarded damages. The jury also ruled that Tel tortiously interfered with Aeroflex’s non-disclosure agreements with two former Aeroflex employees. The jury also found that the former Aeroflex employees breached their non-disclosure agreements with Aeroflex. The Court conducted further hearings on the Company’s post-trial motions which sought to reduce the damages award of $2.8 million, as well as the punitive damages claim.  The Court denied the Company’s motions and awarded Aeroflex an additional $2.1 million of punitive damages. The Company filed motions in January 2018 for the Court to reconsider the amount of damages on the grounds that they are duplicative and not legally supportable. The Court heard these motions and such motions were denied. The Company has filed for the appeal. The Company has posted a $2 million bond for the appeal. This $2 million bond amount will remain in place during the appeal process (See Note 13).

 

The Company is optimistic about the prospects of its appeal for either a judgment as a matter of law or a new trial. The appeal process is expected to take at least another year to complete. However, the Company cannot predict the timing or the outcome of the appeal.

 

The Company believes it has sufficient cash and financing in place to fund its plans for the next twelve months, exclusive of any determination that may result from the Aeroflex litigation.

 

The unaudited condensed consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and satisfaction of liabilities and commitments in the normal course of business. The accompanying unaudited condensed consolidated financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.

 

 

TEL-INSTRUMENT ELECTRONICS CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Note 3 – Summary of Significant Accounting Policies

 

Revenue Recognition

 

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers: Topic 606 which supersedes nearly all existing revenue recognition guidance under GAAP. 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 ASU was effective for the Company in the first quarter of the fiscal year ended March 31, 2019 using either of two methods: (1) retrospective application to each prior reporting period presented with the option to elect certain practical expedients or (2) retrospective application with the cumulative effect of initially applying the ASU recognized at the date of the initial application and providing certain disclosures. The Company adopted Topic 606 pursuant to the method (2) and determined that any cumulative effect for the initial application did not require an adjustment to retained earnings at April 1, 2018.

 

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 ASU 2014-09 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.

 

Nature of goods and services

 

The following is a description of the products and services from which the Company generates revenue, as well as the nature, timing of satisfaction of performance obligations, and significant payment terms for each.

 

Test Units/Sets

 

The Company develops and manufactures unit sets to test navigation and communication equipment, such as ramp testers and bench testers for equipment installed in aircraft. The Company recognizes revenue when the customer obtains control of the Company’s product based on the contractual shipping terms of the contract. 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 December 31, 2019.

 

 

TEL-INSTRUMENT ELECTRONICS CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Note 3 – Summary of Significant Accounting Policies (continued)

 

Revenue Recognition (continued)

  

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 December 31, 2019, approximately $435,694 is expected to be recognized from remaining performance obligations for extended warranties as compared to $349,865 at March 31, 2019.  For the three and nine months ended December 31, 2019, the Company recognized revenue of $22,431 and $63,171, respectively, from amounts that were included in Deferred Revenue as compared to $13,635 and $33,255 for the three and nine months ended December 31, 2018.

 

The following table provides a summary of the changes in deferred revenues for the nine ended December 31, 2019:

 

Deferred revenues at April 1, 2019

  $ 349,865  

Additional extended warranties

    149,000  

Revenue recognized for the nine months ended December 31, 2019

    (63,171

)

Deferred revenues at December 31, 2019

  $ 435,694  

 

Other Deferred Revenues

 

The Company sometimes receives payments in advance of shipment. These amounts are classified as other deferred revenues. For the periods ended December 31, 2019 and March 31, 2019, the Company has other deferred revenues of $111,619 and $11,926, respectively.

 

Repair and Calibration Services

 

The Company offers repair and calibration services for units that are returned for annual calibrations and/or for repairs after the warranty period has expired. The Company repairs and calibrates a wide range of airborne navigation and communication equipment. Revenue is recognized at the time the repaired or calibrated unit is shipped back to the customer, as it is at this time that the work is completed.

 

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. 

 

 

TEL-INSTRUMENT ELECTRONICS CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Note 3 – Summary of Significant Accounting Policies (continued)

 

Revenue Recognition (continued)

 

Other

 

All sales are denominated in U.S. dollars.

 

The Company excludes from revenues all taxes assessed by a governmental authority that are imposed on the sale of its products and collected from customers.

 

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

 

Disaggregation of revenue

 

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

 

   

For the Three Months Ended

December 31, 2019

 
   

Commercial

   

Government

 

Sales Distribution

               

Test Units

  $ 271,230     $ 3,919,604  
    $ 271,230     $ 3,919,604  

 

The remainder of our revenues for the three months ended December 31, 2019 are derived from repairs and calibration of $368,722, replacement parts of $151,065 and extended warranties of $22,514. We do not disaggregate these revenue streams as they are not deemed an important element related to how management operates the business between segments.

 

   

For the Three Months Ended

December 31, 2018

 
   

Commercial

   

Government

 

Sales Distribution

               

Test Units

  $ 46,631     $ 3,484,380  
    $ 46,631     $ 3,484,830  

 

The remainder of our revenues for the three months ended December 31, 2018 are derived from repairs and calibration of $366,563, replacement parts of $64,527 and extended warranties of $13,635. We do not disaggregate these revenue streams as they are not deemed an important element related to how management operates the business between segments.

 

 

TEL-INSTRUMENT ELECTRONICS CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Note 3 – Summary of Significant Accounting Policies (continued)

 

Revenue Recognition (continued)

 

   

For the Nine Months Ended

December 31, 2019

 
   

Commercial

   

Government

 

Sales Distribution

               

Test Units

  $ 782,283     $ 9,531,198  
    $ 782,283     $ 9,531,198  

 

The remainder of our revenues for the nine months ended December 31, 2019 are derived from repairs and calibration of $1,265,978, replacement parts of $309,135 and extended warranties of $63,171. We do not disaggregate these revenue streams as they are not deemed an important element related to how management operates the business between segments.

 

   

For the Nine Months Ended

December 31, 2018

 
   

Commercial

   

Government

 

Sales Distribution

               

Test Units

  $ 642,855     $ 5,861,061  
    $ 642,855     $ 5,861,061  

 

The remainder of our revenues for the nine months ended December 31, 2018 are derived from repairs and calibration of $1,285,839, replacement parts of $189,881 and extended warranties of $33,255. We do not disaggregate these revenue streams as they are not deemed an important element related to how management operates the business between segments.

  

In the following table, revenue is disaggregated by geography.

 

   

For the Three Months

Ended

December 31, 2019

   

For the Three Months

Ended

December 31, 2018

 

Geography

               

United States

  $ 2,070,339     $ 3,085,283  

International

    2,662,796       890,453  

 Total

  $ 4,733,135     $ 3,975,736  

 

   

For the Nine Months

Ended

December 31, 2019

   

For the Nine Months

Ended

December 31, 2018

 

Geography

               

United States

  $ 7,403,229     $ 6,347,050  

International

    4,548,536       1,665,841  

 Total

  $ 11,951,765     $ 8,012,891  

 

 

TEL-INSTRUMENT ELECTRONICS CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Note 3 – Summary of Significant Accounting Policies (continued)

 

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.

 

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 used 6.25%. ASU 2016-02 did not have an impact on our unaudited condensed consolidated statements of income for the nine month period ended December 31, 2019, but had a significant impact on our unaudited consolidated condensed balance sheet as of December 31, 2019.

 

No other recently issued accounting pronouncements had or are expected to have a material impact on the Company’s unaudited condensed consolidated financial statements.

 

 

TEL-INSTRUMENT ELECTRONICS CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

 

Note 4 – Accounts Receivable, net

 

The following table sets forth the components of accounts receivable:

 

   

December 31,

2019

   

March 31,

2019

 

Government

  $ 2,531,909     $ 1,951,729  

Commercial

    288,330       251,870  

Less: Allowance for doubtful accounts

    (7,500 )     (7,500

)

    $ 2,812,739     $ 2,196,099  

 

Note 5 – Restricted Cash to support appeal bond

 

In January 2018, the Company transferred $2,000,000 to a restricted cash account to secure a letter of credit which was used for collateral for the appeal bond (See Note 13).

 

Note 6 – Inventories, net

 

Inventories consist of:

 

   

December 31,

2019

   

March 31,

2019

 
                 

Purchased parts

  $ 2,548,252     $ 2,709,235  

Work-in-process

    967,462       721,397  

Finished goods

    109,815       -  

Less: Inventory reserve

    (555,000

)

    (498,000

)

    $ 3,070,529     $ 2,932,632  

 

Note 7 – Net Income (Loss) per Share

 

Net income (loss) per share has been computed according to Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC 260”), “Earnings per Share,” which requires a dual presentation of basic and diluted income (loss) per share (“EPS”). Basic EPS represents net income (loss) divided by the weighted average number of common shares outstanding during a reporting period. Diluted EPS 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 CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Note 7 – Net Income (Loss) per Share (continued)

 

   

Three Months Ended

   

Three Months Ended

 
   

December 31, 2019

   

December 31, 2018

 

Basic net income per share computation:

               

  Net income

  $ 907,577     $ 639,453  

Deemed dividend related to beneficial conversion feature

              of Series B Convertible Preferred Stock

    -       (420,000

)

  Preferred dividends

    (80,000

)

    (112,807

)

Net income attributable to common shareholders

  $ 827,577     $ 106,646  

  Weighted-average common shares outstanding

    3,255,887       3,255,887  

  Basic net income per share

  $ 0.25     $ 0.03  

Diluted net income per share computation

               

  Net income attributable to common shareholders

  $ 827,577     $ 106,646  

  Add: Preferred dividends

    80,000       -

 

  Diluted income attributable to common shareholders

  $ 907,577     $ 106,646  

  Weighted-average common shares outstanding

    3,255,887       3,255,887  

  Incremental shares attributable to the assumed conversion of 

     preferred stock, and exercise of outstanding stock options and warrants

    1,719,778       -  

  Total adjusted weighted-average shares

    4,975,665       3,255,887  

 Diluted net income (loss) per share

  $ 0.18     $ 0.03  

 

   

Nine Months Ended

   

Nine Months Ended

 
   

December 31, 2019

   

December 31, 2018

 

Basic net income (loss) per share computation:

               

  Net income (loss)

  $ 1,701,587     $ (298,030

)

Deemed dividend related to beneficial conversion feature

              of Series B Convertible Preferred Stock

    -       (420,000

)

  Preferred dividends

    (240,000

)

    (232,807

)

Net income (loss) attributable to common shareholders

  $ 1,461,587     $ (950,837

)

  Weighted-average common shares outstanding

    3,255,887       3,255,887  

  Basic net income (loss) per share

  $ 0.45     $ (0.29

)

Diluted net income (loss) per share computation

               

   Net income (loss) attributable to common shareholders

  $ 1,461,587     $ (950,837

)

   Add: Preferred dividends

    240,000       -  

  Diluted income (loss) attributable to common shareholders

  $ 1,701,587     $ (950,837

)

  Weighted-average common shares outstanding

    3,255,887       3,255,887  

  Incremental shares attributable to the assumed conversion of 

     preferred stock, and exercise of outstanding stock options and warrants

    1,568,765       -  

  Total adjusted weighted-average shares

    4,824,652       3,255,887  

 Diluted net income (loss) per share

  $ 0.35     $ (0.29

)

 

 

 

TEL-INSTRUMENT ELECTRONICS CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Note 7 – Net Income (Loss) per Share (continued)

 

The following table summarizes securities that, if exercised, would have an anti-dilutive effect on earnings per share for the nine months ended:

 

   

December 31, 2019

   

December 31, 2018

 

Convertible preferred stock

    -       1,599,778  

Stock options

    118,500       42,500  

Warrants

    -       50,000  
      118,500       1,692,278  

 

Note 8 – 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. (The Company made this payment.)

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.

 

During the nine months ended December 31, 2019 the Company repaid $90,000 against this line of credit. As of December 31, 2019 and March 31, 2019, the outstanding balances were $710,000 and $800,000, respectively.  As of December 31, 2019 the remaining availability under this line is $-0-.

 

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. The Company’s interest rate was 5.49% at December 31, 2019.

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 February 2020, Bank of America agreed to extend the line of credit from March 31, 2020 to January 31, 2021. The new agreement includes open availability up to $689,700. Monthly payments will be interest only.

 

 

TEL-INSTRUMENT ELECTRONICS CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Note 9 – 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. The tables below present information about reportable segments within the avionics business for the three and nine month periods ending December 31, 2019 and 2018:

 

Three Months Ended

December 31, 2019

 

Avionics

Government

   

Avionics

Commercial

   

Avionics

Total

   

Corporate

Items

   

Total

 

Net sales

  $ 3,919,605     $ 813,530     $ 4,733,135     $ -     $ 4,733,135  

Cost of sales

    2,089,563       431,090       2,520,653       -       2,520,653  

Gross margin

    1,830,042       382,440       2,212,482       -       2,212,482  
                                         

Engineering, research, and development

                    580,517       -       580,517  

Selling, general and administrative

                    195,151       414,243       609,394  

Litigation costs

                    -       16,830       16,830  

Interest income

                    -       (2,065

)

    (2,065

)

Interest expense - judgment

                    -       84,715       84,715  

Interest expense

                    -       15,514       15,514  

Total expenses

                    775,668       529,237       1,304,905  

Income (loss) before income taxes

                  $ 1,436,814     $ (529,237

)

  $ 907,577  

  

 

Three Months Ended

December 31, 2018

 

Avionics

Government

   

Avionics

Commercial

   

Avionics

Total

   

Corporate

Items

   

Total

 

Net sales

  $ 3,484,380     $ 491,356     $ 3,975,736     $ -     $ 3,975,736  

Cost of sales

    1,735,573       270,559       2,006,132       -       2,006,132  

Gross margin

    1,748,807       220,797       1,969,604       -       1,969,604  
                                         

Engineering, research, and development

                    622,082       -       622,082  

Selling, general and administrative

                    228,107       302,073       530,180  

Litigation costs

                    -       59,680       59,680  

Change in fair value of common stock warrants

                    -       23,000       23,000  

Interest income

                    -       (1,010

)

    (1,010

)

Interest expense - judgment

                    -       72,003       72,003  

Interest expense

                    -       24,216       24,216  

Total expenses

                    850,189       479,962       1,330,151  

Income (loss) before income taxes

                  $ 1,119,415     $ (479,962

)

  $ 639,453  

 

 

 

TEL-INSTRUMENT ELECTRONICS CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Note 9 – Segment Information (continued)

 

Nine Months Ended

December 31, 2019

 

Avionics

Government

   

Avionics

Commercial

   

Avionics

Total

   

Corporate

Items

   

Total

 

Net sales

  $ 9,564,199     $ 2,387,566     $ 11,951,765     $ -     $ 11,951,765  

Cost of sales

    4,958,219       1,325,827       6,284,046       -       6,284,046  

Gross margin

    4,605,980       1,061,739       5,667,719       -       5,667,719  
                                         

Engineering, research, and development

                    1,631,359       -       1,631,359  

Selling, general and administrative

                    707,755       1,139,273       1,847,028  

Litigation costs

                    -       118,890       118,890  

Change in fair value of common stock warrants

                    -       73,000       73,000  

Interest income

                    -       (4,083

)

    (4,083

)

Interest expense - judgment

                    -       255,821       255,821  

Interest expense

                    -       44,117       44,117  

Total expenses

                    2,339,114       1,627,018       3,966,132  

Income (loss) before income taxes

                  $ 3,328,605     $ (1,627,018

)

  $ 1,701,587  

 

Nine Months Ended

 December 31, 2018

 

Avionics

Government

   

Avionics

Commercial

   

Avionics

Total

   

Corporate

Items

   

Total

 

Net sales

  $ 5,861,061     $ 2,151,830     $ 8,012,891     $ -     $ 8,012,891  

Cost of sales

    3,211,417       1,351,344       4,562,761       -       4,562,761  

Gross margin

    2,649,644       800,486       3,450,130       -       3,450,130  
                                         

Engineering, research, and development

                    1,642,785       -       1,642,785  

Selling, general and administrative

                    639,414       1,012,702       1,652,116  

Litigation costs

                    -       134,799       134,799  

Change in fair value of common stock warrants

                    -       23,000       23,000  

Interest income

                    -       (3,017

)

    (3,017

)

Interest expense - judgment

                    -       215,226       215,226  

Interest expense 

                    -       83,251       83,251  

Total expenses

                    2,282,199       1,465,961       3,748,160  

Income (loss) before income taxes

                  $ 1,167,931     $ (1,465,961

)

  $ (298,030

)

 

Note 10 – Income Taxes

 

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

 

The tax effect of temporary differences, primarily net operating loss carryforwards, asset reserves and accrued liabilities, gave rise to the Company’s deferred tax asset.  Deferred income taxes are recognized for the tax consequence of such temporary differences at the enacted tax rate expected to be in effect when the differences reverse.  The Company had approximately $3.2 million in deferred tax assets at March 31, 2019, and the Company has provided a valuation allowance that offsets the majority of the asset. 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. Due to the adverse judgment and the resulting losses the past few years, management has established a valuation allowance against this deferred tax asset. This valuation allowance could be reversed when the Company returns to profitability, and can demonstrate that it will be able to utilize the deferred tax asset. The valuation will be re-evaluated as the Company continues to be profitable and will be utilizing a certain portion of its deferred tax asset. Currently, the Company is utilizing existing fully-reserved NOL’s to offset taxable income, thereby resulting in no income tax provision.

 

 

TEL-INSTRUMENT ELECTRONICS CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Note 11 – Fair Value Measurements

 

FASB ASC 820-10, Fair Value Measurements and Disclosures (“ASC 820-10”) defines fair value, establishes a framework for measuring fair value under generally accepted accounting principles and expands disclosures about fair value measurements.

 

As defined in ASC 820-10, 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 observation of those inputs. ASC 820-10 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 820-10 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.

 

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 reflect currently available terms and conditions for similar debt.

 

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 December 31, 2019 and March 31, 2019.  As required by ASC 820-10, financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.

 

 

TEL-INSTRUMENT ELECTRONICS CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Note 11 – Fair Value Measurements (continued)

 

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.

 

December 31, 2019

 

Level I

   

Level II

   

Level III

   

Total

 

Total Assets

  $ -     $ -     $ -     $ -  
                                 

Warrant liability

  $ -     $ -     $ -     $ -  

Total Liabilities

  $ -     $ -     $ -     $ -  

 

March 31, 2019

 

Level I

   

Level II

   

Level III

   

Total

 

Total Assets

  $ -     $ -     $ -     $ -  
                                 

Warrant liability

  $ -     $ -     $ 43,500     $ 43,500  

Total Liabilities

  $ -     $ -     $ 43,500     $ 43,500  

 

The Company adopted the guidance of ASC 815 “Derivative and Hedging”, which 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 from March 31, 2019 through December 31, 2019, as well as the portion of gains or losses included in income attributable to unrealized gains or losses related to the liability held at December 31, 2019:

 

Level 3 Reconciliation

 

Balance at

beginning of period

   

(Gains) and losses

for the period

(realized and unrealized)

   

Purchases, issuances,

sales and

settlements, net

   

Transfers in or

out of Level 3

   

Balance at the

end of period

 

Warrant liability

  $ 43,500     $ 73,000     $ (116,500

)

  $ -     $ -  

Total Liabilities

  $ 43,500     $ 73,000     $ (116,500

)

  $ -     $ -  

 

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 December 31, 2019, 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. 

 

 

TEL-INSTRUMENT ELECTRONICS CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Note 12 – Operating Lease Liability

 

The Company leases its facility in East Rutherford, NJ with monthly payments of $18,467 which expires in August 2021 and includes a renewal option for an additional five years. 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 December 31, 2019.

 

The following table reconciles the undiscounted future minimum lease payments (displayed by year and in the aggregate) under non-cancelable operating leases with terms of more than one year to the total lease liabilities recognized on the unaudited condensed consolidated balance sheet as of December 31, 2019:

 

Remaining payments 2020

  $ 56,970  

 2021

    227,880  

 2022

    93,381  

Total undiscounted future minimum lease payments

    378,231  

Less: Difference between undiscounted lease payments and discounted lease liabilities

    (19,852

)

Present value of net minimum lease payments

    358,379  

Less current portion

    (211,471

)

Operating lease liabilities – long-term

  $ 146,908  

 

Total rent expense for the three and nine months ended December 31, 2019 was $97,664 and $269,282 as compared to $84,861 and $265,788 for the three and nine months ended December 31, 2018.

 

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 3 “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: