See accompanying notes to unaudited condensed consolidated financial statements.
See accompanying notes to unaudited condensed consolidated financial statements.
See accompanying notes to unaudited condensed consolidated financial statements.
See accompanying notes to unaudited condensed consolidated financial statements.
Upon adoption of ASC 842, Leases, on April 1, 2019 the Company recorded $508,551 of right-use assets and related operating leases liabilities.
See accompanying notes to unaudited condensed consolidated financial statements.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1 – Business, Organization and Liquidity
Business and Organization
Tel-Instrument Electronics Corp. (“Tel”, “TIC” or the “Company”) has been in business since 1947. The Company is a leading designer and manufacturer of avionics test and measurement instruments for the global, commercial air transport, general aviation, and government/military defense markets. Tel provides instruments to test, measure, calibrate, and repair a wide range of airborne navigation and communication equipment. The Company sells its equipment in both domestic and international markets. Tel continues to develop new products in anticipation of customers’ needs and to maintain its strong market position. Its development of multi-function testers has made it easier for customers to perform ramp tests with less operator training, fewer test sets, and lower product support costs. The Company has become a major manufacturer and supplier of Identification Friend or Foe (“IFF”) flight line test equipment over the last few years.
The Company is publicly traded and was quoted on the Over-the-Counter Market Place (“OTCQB”) under the symbol “TIKK”.
The Company’s operations have been affected by the recent and ongoing outbreak of the coronavirus disease 2019 (COVID-19) which in March 2020, was declared a pandemic by the World Health Organization. While the business is still strong, we have been impacted by the pandemic in our commercial business and delays in orders from some of our military customers. The pandemic has also impacted our supply chain and our labor force, but we have been working through these issues without having any significant delays. Our international business remains strong mainly due to 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, our CRAFT products, especially for Lockheed Martin for the Joint Strike Fighter (“JSF”) program, and the T-4530i and the TS-4530A. The ultimate disruption which may be caused by the outbreak is uncertain; however, it may result in a material adverse impact on the Company’s financial position, operations and cash flows. Possible areas that may be affected include, but are not limited to, disruption to the Company’s customers and revenue, labor workforce, inability of customers to pay outstanding accounts receivable due and owing to the Company as they limit or shut down their businesses, customers seeking relief or extended payment plans relating to accounts receivable due and owing to the Company, unavailability of products and supplies used in operations, and the decline in value of assets held by the Company, including property and equipment.
Moving forward, we believe that our expected cash flows from operations and current cash balances at September 30, 2020, which amounted to approximately $5.5 million, including the approximately $2 million in restricted cash will be sufficient to operate in the normal course of business for next 12 months from the issuance date of these financial statements, including any payments for settlement of the litigation (see Note 12).
Note 2 – Summary of Significant Accounting Policies
Basis of Presentation
In the opinion of management, the accompanying unaudited condensed consolidated financial statements contain all adjustments necessary to present fairly the financial position of Tel-Instrument Electronics Corp. as of September 30, 2020, the results of operations and changes in stockholders’ equity for the three and six months ended September 30, 2020 and September 30, 2019, and statements of cash flows for the six months ended September 30, 2020 and September 30, 2019. 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, 2020 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, 2020, as filed with the United States Securities and Exchange Commission (the “SEC”) on June 29, 2020 (the “Annual Report”).
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.
TEL-INSTRUMENT ELECTRONICS CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 2 – Summary of Significant Accounting Policies (continued)
Revenue Recognition (continued)
The Company generates revenue from designing, manufacturing and selling avionic tests and measurement solutions for the global commercial air transport, general aviation, and government/military aerospace and defense markets. The Company also offers calibration and repair services for a wide range of airborne navigation and communication equipment.
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, which is usually at the 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 September 30, 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.
TEL-INSTRUMENT ELECTRONICS CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 2 – Summary of Significant Accounting Policies (continued)
Revenue Recognition (continued)
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 September 30, 2020, $388,458 is expected to be recognized from remaining performance obligations for extended warranties as compared to $413,554 at March 31, 2020. For the three and six months ended September 30, 2020, the Company recognized revenue of $22,140 and $44,280, respectively, from amounts that were included in Deferred Revenue as compared to $21,166 and $40,657, respectively, from amounts that were included in Deferred Revenue for the three and six months ended September 30, 2019.
The following table provides a summary of the changes in deferred revenues for the six months ended September 30, 2020:
Deferred revenues at April 1, 2020
|
|
$
|
413,554
|
|
Additional extended warranties
|
|
|
19,184
|
|
Revenue recognized for the six months ended September 30, 2020
|
|
|
(44,280
|
)
|
Deferred revenues at September 30, 2020
|
|
$
|
388,458
|
|
Other Deferred Revenues
The Company sometimes receives payments in advance of shipment. These amounts are classified as other deferred revenues. For the periods ended September 30, 2020 and March 31, 2020, the Company has other deferred revenues of $61,116 and $58,746, respectively.
Repair and Calibration Services
The Company offers repair and calibration services for units that are returned for annual calibrations and/or for repairs after the warranty period has expired. The Company repairs and calibrates a wide range of airborne navigation and communication equipment. Revenue is recognized at the time the repaired or calibrated unit is shipped back to the customer, as it is at this time that the work is completed.
Other
The majority of the Company’s revenues are from contracts with the U.S. government, airlines, aircraft manufacturers, such as Boeing and Lockheed Martin, domestic distributors, international distributors for sales to military and commercial customers, and other commercial customers. The contracts with the U.S. government typically are subject to the Federal Acquisition Regulation (“FAR”) which provides guidance on the types of costs that are allowable in establishing prices for goods and services provided under U.S. government contracts.
Payment terms and conditions vary by contract, although terms generally include a requirement of payment within a range from 30 to 60 days, or in certain cases, up-front deposits. In circumstances where the timing of revenue recognition differs from the timing of invoicing, the Company has determined that the Company's contracts generally do not include a significant financing component. Payments received prior to the delivery of units or services performed are recorded as deferred revenues. Taxes collected from customers, which are subsequently remitted to governmental authorities, are excluded from sales. The Company applied the practical expedient to account for shipping and handling activities as fulfillment cost rather than as a separate performance obligation. Shipping and handling costs charged to customers are classified as sales, and the shipping and handling costs incurred are included in cost of sales.
All sales are denominated in U.S. dollars.
The Company excludes from revenues all taxes assessed by a governmental authority that are imposed on the sale of its products and collected from customers.
TEL-INSTRUMENT ELECTRONICS CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 2 – Summary of Significant Accounting Policies (continued)
Revenue Recognition (continued)
Other (continued)
The Company chose to apply the available practical expedient as commission eligible sales orders are fulfilled within less than one year and commissions are generally paid by the Company within 30 days of the related sales order fulfillment. Accordingly, management has determined that no change in accounting for costs to obtain a contract will be required for the Company to conform to ASC 606.
Disaggregation of revenue
In the following tables, revenue is disaggregated by revenue category.
|
|
For the Three Months Ended
September 30, 2020
|
|
|
|
Commercial
|
|
|
Government
|
|
Sales Distribution
|
|
|
|
|
|
|
|
|
Test Units
|
|
$
|
117,824
|
|
|
$
|
2,921,917
|
|
|
|
$
|
117,824
|
|
|
$
|
2,921,917
|
|
The remainder of our revenues for the three months ended September 30, 2020 are derived from repairs and calibration of $211,542, replacement parts of $7,700, extended warranties of $22,140 and other revenues of $55,273. 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
September 30, 2019
|
|
|
|
Commercial
|
|
|
Government
|
|
Sales Distribution
|
|
|
|
|
|
|
|
|
Test Units
|
|
$
|
182,987
|
|
|
$
|
3,140,454
|
|
|
|
$
|
182,987
|
|
|
$
|
3,140,454
|
|
The remainder of our revenues for the three months ended September 30, 2019 are derived from repairs and calibration of $449,900, replacement parts of $117,661 and extended warranties of $21,166. 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 Six Months Ended
September 30, 2020
|
|
|
|
Commercial
|
|
|
Government
|
|
Sales Distribution
|
|
|
|
|
|
|
|
|
Test Units
|
|
$
|
176,397
|
|
|
$
|
5,485,194
|
|
|
|
$
|
176,397
|
|
|
$
|
5,485,194
|
|
The remainder of our revenues for the six months ended September 30, 2020 are derived from repairs and calibration of $489,440, replacement parts of $23,770, extended warranties of $44,280 and other revenues of $56,752. 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 Six Months Ended
September 30, 2019
|
|
|
|
Commercial
|
|
|
Government
|
|
Sales Distribution
|
|
|
|
|
|
|
|
|
Test Units
|
|
$
|
478,910
|
|
|
$
|
5,644,594
|
|
|
|
$
|
478,910
|
|
|
$
|
5,644,594
|
|
TEL-INSTRUMENT ELECTRONICS CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 2 – Summary of Significant Accounting Policies (continued)
Revenue Recognition (continued)
Disaggregation of revenue (continued)
The remainder of our revenues for the six months ended September 30, 2019 are derived from repairs and calibration of $872,756, replacement parts of $181,713, and extended warranties of $40,657. 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
September 30, 2020
|
|
|
For the Three Months
Ended
September 30, 2019
|
|
Geography
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
759,586
|
|
|
$
|
2,420,423
|
|
International
|
|
|
2,576,810
|
|
|
|
1,491,745
|
|
Total
|
|
$
|
3,336,396
|
|
|
$
|
3,912,168
|
|
|
|
For the Six Months
Ended
September 30, 2020
|
|
|
For the Six Months
Ended
September 30, 2019
|
|
Geography
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
2,474,185
|
|
|
$
|
5,332,890
|
|
International
|
|
|
3,801,648
|
|
|
|
1,885,740
|
|
Total
|
|
$
|
6,275,833
|
|
|
$
|
7,218,630
|
|
For the three and six months ended September 30, 2020, Muirhead Avionics, the Company’s distributor for Western Europe accounted for sales of $2,115,484 and $2,552,742, respectively.
New Accounting Pronouncements
In June 2016, the FASB issued ASU No. 2016-13 Financial Instruments -Credit Losses (Topic 326), Measurement of Credit Losses on Financial Statements. The amendment in this update replaces the incurred loss impairment methodology in current GAAP with a methodology that reflects expected credit losses on instruments within its scope, including trade receivables. This update is intended to provide financial statement users with more decision-useful information about the expected credit losses. The effective date of the new standard has been deferred to April 1, 2023. We do not expect the adoption of this standard to have a significant impact on our financial position and results of operations.
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 unaudited condensed consolidated financial statements.
TEL-INSTRUMENT ELECTRONICS CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 3 – Accounts Receivable, net
The following table sets forth the components of accounts receivable:
|
|
September 30,
2020
|
|
|
March 31,
2020
|
|
Government
|
|
$
|
1,816,595
|
|
|
$
|
1,095,131
|
|
Commercial
|
|
|
143,311
|
|
|
|
324,013
|
|
Less: Allowance for doubtful accounts
|
|
|
(7,500
|
)
|
|
|
(7,500
|
)
|
|
|
$
|
1,952,406
|
|
|
$
|
1,411,644
|
|
Note 4 – Restricted Cash to Support Appeal Bond
In January 2018, the Company transferred $2,000,000 to a restricted cash account to secure a letter of credit which was used for collateral for the appeal bond (See Note 12).
Note 5 – Inventories, net
Inventories consist of:
|
|
September 30,
2020
|
|
|
March 31,
2020
|
|
|
|
|
|
|
|
|
|
|
Purchased parts
|
|
$
|
2,744,088
|
|
|
$
|
3,011,072
|
|
Work-in-process
|
|
|
858,774
|
|
|
|
597,166
|
|
Finished goods
|
|
|
16,035
|
|
|
|
34,441
|
|
Less: Inventory reserve
|
|
|
(570,000
|
)
|
|
|
(550,000
|
)
|
|
|
$
|
3,048,897
|
|
|
$
|
3,092,679
|
|
TEL-INSTRUMENT ELECTRONICS CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 6 – Net Income per Share
Net income per share has been computed according to Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC 260”), “Earnings per Share,” which requires a dual presentation of basic and diluted income per share (“EPS”). Basic EPS represents net income divided by the weighted average number of common shares outstanding during a reporting period. Diluted EPS reflects the potential dilution that could occur if securities, including preferred stock, warrants and options, were converted into common stock. The dilutive effect of outstanding warrants and options is reflected in earnings per share by use of the treasury stock method. The dilutive effect of preferred stock is reflected in earnings per share by use of the if-converted method. In applying the treasury stock method for stock-based compensation arrangements, the assumed proceeds are computed as the sum of the amount the employee must pay upon exercise and the amounts of average unrecognized compensation.
|
|
Three Months Ended
|
|
|
Three Months Ended
|
|
|
|
September 30, 2020
|
|
|
September 30, 2019
|
|
Basic net income per share computation:
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
222,748
|
|
|
$
|
536,234
|
|
Less: Preferred dividends
|
|
|
(80,000
|
)
|
|
|
(80,000
|
)
|
Net income attributable to common shareholders
|
|
|
142,748
|
|
|
|
456,234
|
|
Weighted-average common shares outstanding
|
|
|
3,255,887
|
|
|
|
3,255,887
|
|
Basic net income per share
|
|
$
|
0.04
|
|
|
$
|
0.14
|
|
Diluted net income per share computation
|
|
|
|
|
|
|
|
|
Net income attributable to common shareholders
|
|
$
|
142,748
|
|
|
$
|
456,234
|
|
Add: Preferred dividends
|
|
|
80,000
|
|
|
|
80,000
|
|
Diluted income attributable to common shareholders
|
|
$
|
222,748
|
|
|
$
|
536,234
|
|
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
|
|
|
1,813,062
|
|
|
|
1,689,778
|
|
Total adjusted weighted-average shares
|
|
|
5,068,949
|
|
|
|
4,945,665
|
|
Diluted net income per share
|
|
$
|
0.04
|
|
|
$
|
0.11
|
|
|
|
Six Months Ended
|
|
|
Six Months Ended
|
|
|
|
September 30, 2020
|
|
|
September 30, 2019
|
|
Basic net income per share computation:
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
333,728
|
|
|
$
|
794,010
|
|
Preferred dividends
|
|
|
(160,000
|
)
|
|
|
(160,000
|
)
|
Net income attributable to common shareholders
|
|
|
173,728
|
|
|
|
634,010
|
|
Weighted-average common shares outstanding
|
|
|
3,255,887
|
|
|
|
3,255,887
|
|
Basic net income per share
|
|
$
|
0.05
|
|
|
$
|
0.19
|
|
Diluted net income per share computation
|
|
|
|
|
|
|
|
|
Net income attributable to common shareholders
|
|
$
|
173,728
|
|
|
$
|
634,010
|
|
Add: Preferred dividends
|
|
|
-
|
|
|
|
160,000
|
|
Diluted income attributable to common shareholders
|
|
$
|
173,728
|
|
|
$
|
794,010
|
|
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
|
|
|
-
|
|
|
|
1,689,778
|
|
Total adjusted weighted-average shares
|
|
|
3,255,887
|
|
|
|
4,945,665
|
|
Diluted net income per share
|
|
$
|
0.05
|
|
|
$
|
0.16
|
|
TEL-INSTRUMENT ELECTRONICS CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 6 – Net Income per Share (continued)
The following table summarizes securities that, if exercised, would have an anti-dilutive effect on earnings per share for the three months ended:
|
|
September 30, 2020
|
|
|
September 30, 2019
|
|
Convertible preferred stock
|
|
|
-
|
|
|
|
-
|
|
Stock options
|
|
|
-
|
|
|
|
118,500
|
|
Warrants
|
|
|
-
|
|
|
|
50,000
|
|
|
|
|
-
|
|
|
|
168,500
|
|
The following table summarizes securities that, if exercised, would have an anti-dilutive effect on earnings per share for the six months ended:
|
|
September 30, 2020
|
|
|
September 30, 2019
|
|
Convertible preferred stock
|
|
|
1,794,778
|
|
|
|
-
|
|
Stock options
|
|
|
83,500
|
|
|
|
118,500
|
|
Warrants
|
|
|
-
|
|
|
|
50,000
|
|
|
|
|
1,878,278
|
|
|
|
168,500
|
|
Note 7 – Line of Credit
In March 2020, Bank of America extended the line of credit to January 31, 2021. The new agreement includes a line of credit up to $690,000. Monthly payments are interest only. The line is collateralized by substantially all of the assets of the Company.
As of September 30, 2020 and March 31, 2020, the outstanding balances were $680,000 and $680,000, respectively. As of September 30, 2020 the remaining availability under this line is $10,000. The interest rate at September 30, 2020 was 3.9%.
Note 8 – SBA 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 $722,577 (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. While we are believe that we met the conditions to obtain forgiveness for a large portion of the PPP loan, no assurance is provided that the Company will in fact 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 Paycheck Protection Program Flexibility Act, certain changes will need to be made to the original Note, based on the new law.
The Company submitted its application for 100% loan forgiveness in October 2020. The application is being reviewed by Bank of America and then will be submitted to the SBA for final review and forgiveness.
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 six months ending September 30, 2020 and 2019:
Three Months Ended
September 30, 2020
|
|
Avionics
Government
|
|
|
Avionics
Commercial
|
|
|
Avionics
Total
|
|
|
Corporate
Items
|
|
|
Total
|
|
Net sales
|
|
$
|
2,976,153
|
|
|
$
|
360,243
|
|
|
$
|
3,336,396
|
|
|
$
|
-
|
|
|
$
|
3,336,396
|
|
Cost of sales
|
|
|
1,720,943
|
|
|
|
248,630
|
|
|
|
1,969,573
|
|
|
|
-
|
|
|
|
1,969,573
|
|
Gross margin
|
|
|
1,255,210
|
|
|
|
111,613
|
|
|
|
1,366,823
|
|
|
|
-
|
|
|
|
1,366,823
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Engineering, research, and development
|
|
|
|
|
|
|
|
|
|
|
554,555
|
|
|
|
-
|
|
|
|
554,555
|
|
Selling, general and administrative
|
|
|
|
|
|
|
|
|
|
|
158,154
|
|
|
|
306,655
|
|
|
|
464,809
|
|
Litigation costs
|
|
|
|
|
|
|
|
|
|
|
-
|
|
|
|
5,514
|
|
|
|
5,514
|
|
Interest income
|
|
|
|
|
|
|
|
|
|
|
-
|
|
|
|
(1,879
|
)
|
|
|
(1,879
|
)
|
Interest expense – judgment
|
|
|
|
|
|
|
|
|
|
|
-
|
|
|
|
52,490
|
|
|
|
52,490
|
|
Interest expense
|
|
|
|
|
|
|
|
|
|
|
-
|
|
|
|
9,380
|
|
|
|
9,380
|
|
Total expenses
|
|
|
|
|
|
|
|
|
|
|
712,709
|
|
|
|
372,160
|
|
|
|
1,084,869
|
|
Income (loss) before income taxes
|
|
|
|
|
|
|
|
|
|
$
|
654,114
|
|
|
$
|
(372,160
|
)
|
|
$
|
281,954
|
|
Three Months Ended
September 30, 2019
|
|
Avionics
Government
|
|
|
Avionics
Commercial
|
|
|
Avionics
Total
|
|
|
Corporate
Items
|
|
|
Total
|
|
Net sales
|
|
$
|
3,140,454
|
|
|
$
|
771,714
|
|
|
$
|
3,912,168
|
|
|
$
|
-
|
|
|
$
|
3,912,168
|
|
Cost of sales
|
|
|
1,626,089
|
|
|
|
412,446
|
|
|
|
2,038,535
|
|
|
|
-
|
|
|
|
2,038,535
|
|
Gross margin
|
|
|
1,514,365
|
|
|
|
359,268
|
|
|
|
1,873,633
|
|
|
|
-
|
|
|
|
1,873,633
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Engineering, research, and development
|
|
|
|
|
|
|
|
|
|
|
525,739
|
|
|
|
-
|
|
|
|
525,739
|
|
Selling, general and administrative
|
|
|
|
|
|
|
|
|
|
|
278,026
|
|
|
|
347,137
|
|
|
|
625,163
|
|
Litigation costs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
91,553
|
|
|
|
91,553
|
|
Change in fair value of common stock warrants
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5,500
|
)
|
|
|
(5,500
|
)
|
Interest income
|
|
|
|
|
|
|
|
|
|
|
-
|
|
|
|
(1,018
|
)
|
|
|
(1,018
|
)
|
Interest expense - judgment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
90,596
|
|
|
|
90,596
|
|
Interest expense
|
|
|
|
|
|
|
|
|
|
|
-
|
|
|
|
10,866
|
|
|
|
10,866
|
|
Total expenses
|
|
|
|
|
|
|
|
|
|
|
803,765
|
|
|
|
533,634
|
|
|
|
1,337,399
|
|
Income (loss) before income taxes
|
|
|
|
|
|
|
|
|
|
$
|
1,069,868
|
|
|
$
|
(533,634
|
)
|
|
$
|
536,234
|
|
TEL-INSTRUMENT ELECTRONICS CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 9 – Segment Information (continued)
Six Months Ended
September 30, 2020
|
|
Avionics
Government
|
|
|
Avionics
Commercial
|
|
|
Avionics
Total
|
|
|
Corporate
Items
|
|
|
Total
|
|
Net sales
|
|
$
|
5,539,429
|
|
|
$
|
736,404
|
|
|
$
|
6,275,833
|
|
|
$
|
-
|
|
|
$
|
6,275,833
|
|
Cost of sales
|
|
|
2,903,225
|
|
|
|
501,174
|
|
|
|
3,404,399
|
|
|
|
-
|
|
|
|
3,404,399
|
|
Gross margin
|
|
|
2,636,204
|
|
|
|
235,230
|
|
|
|
2,871,434
|
|
|
|
-
|
|
|
|
2,871,434
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Engineering, research, and development
|
|
|
|
|
|
|
|
|
|
|
1,186,508
|
|
|
|
-
|
|
|
|
1,186,508
|
|
Selling, general and administrative
|
|
|
|
|
|
|
|
|
|
|
411,992
|
|
|
|
714,068
|
|
|
|
1,126,060
|
|
Litigation costs
|
|
|
|
|
|
|
|
|
|
|
-
|
|
|
|
8,210
|
|
|
|
8,210
|
|
Interest income
|
|
|
|
|
|
|
|
|
|
|
-
|
|
|
|
(4,725
|
)
|
|
|
(4,725
|
)
|
Other income
|
|
|
|
|
|
|
|
|
|
|
-
|
|
|
|
(13,854
|
)
|
|
|
(13,854
|
)
|
Interest expense – judgment
|
|
|
|
|
|
|
|
|
|
|
-
|
|
|
|
127,634
|
|
|
|
127,634
|
|
Interest expense
|
|
|
|
|
|
|
|
|
|
|
-
|
|
|
|
19,160
|
|
|
|
19,160
|
|
Total expenses
|
|
|
|
|
|
|
|
|
|
|
1,598,500
|
|
|
|
850,493
|
|
|
|
2,448,993
|
|
Income (loss) before income taxes
|
|
|
|
|
|
|
|
|
|
$
|
1,272,934
|
|
|
$
|
(850,493
|
)
|
|
$
|
422,441
|
|
Six Months Ended
September 30, 2019
|
|
Avionics
Government
|
|
|
Avionics
Commercial
|
|
|
Avionics
Total
|
|
|
Corporate
Items
|
|
|
Total
|
|
Net sales
|
|
$
|
5,644,594
|
|
|
$
|
1,574,036
|
|
|
$
|
7,218,630
|
|
|
$
|
-
|
|
|
$
|
7,218,630
|
|
Cost of sales
|
|
|
2,868,656
|
|
|
|
894,737
|
|
|
|
3,763,393
|
|
|
|
-
|
|
|
|
3,763,393
|
|
Gross margin
|
|
|
2,775,938
|
|
|
|
679,299
|
|
|
|
3,455,237
|
|
|
|
-
|
|
|
|
3,455,237
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Engineering, research, and development
|
|
|
|
|
|
|
|
|
|
|
1,050,842
|
|
|
|
-
|
|
|
|
1,050,842
|
|
Selling, general and administrative
|
|
|
|
|
|
|
|
|
|
|
512,604
|
|
|
|
725,030
|
|
|
|
1,237,634
|
|
Litigation costs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
102,060
|
|
|
|
102,060
|
|
Change in fair value of common stock warrants
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
73,000
|
|
|
|
73,000
|
|
Interest income
|
|
|
|
|
|
|
|
|
|
|
-
|
|
|
|
(2,018
|
)
|
|
|
(2,018
|
)
|
Interest expense - judgment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
171,106
|
|
|
|
171,106
|
|
Interest expense
|
|
|
|
|
|
|
|
|
|
|
-
|
|
|
|
28,603
|
|
|
|
28,603
|
|
Total expenses
|
|
|
|
|
|
|
|
|
|
|
1,563,446
|
|
|
|
1,097,781
|
|
|
|
2,661,227
|
|
Income (loss) before income taxes
|
|
|
|
|
|
|
|
|
|
$
|
1,891,791
|
|
|
$
|
(1,097,781
|
)
|
|
$
|
794,010
|
|
Note 10 – Income Taxes
FASB ASC 740-10, “Accounting for Uncertainty in Income Taxes” (“ASC 740-10”) prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. The Company has analyzed filing positions in all of the federal and state jurisdictions where it is required to file income tax returns, as well as all open tax years in these jurisdictions. The Company does not have any unrecognized tax benefits.
The tax effect of temporary differences, primarily net operating loss carryforwards, asset reserves and accrued liabilities, gave rise to the Company’s deferred tax asset. Deferred income taxes are recognized for the tax consequence of such temporary differences at the enacted tax rate expected to be in effect when the differences reverse. The Company had approximately $2.6 million in deferred tax assets at September 30, 2020. 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.
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 $3.6 million. These carryforward losses are available to offset future taxable income, and begin to expire in the year 2027.
TEL-INSTRUMENT ELECTRONICS CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 11 – Operating Lease Liability
The Company leases its facility in East Rutherford, NJ with monthly payments of $18,467 which expires in August 2021 and 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 September 30, 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 unaudited condensed consolidated balance sheet as of September 30, 2020:
Remaining payments 2021
|
|
$
|
113,940
|
|
2022
|
|
|
93,381
|
|
Total undiscounted future minimum lease payments
|
|
|
207,321
|
|
Less: Difference between undiscounted lease payments and discounted lease liabilities
|
|
|
(6,304
|
)
|
Present value of net minimum lease payments
|
|
|
201,017
|
|
Less current portion
|
|
|
(201,017
|
)
|
Operating lease liabilities – long-term
|
|
$
|
-0-
|
|
Total rent expense for the three and six months ended September 30, 2020 was $90,884 and $181,805, respectively, as compared to $83,824 and $171,618 for the three and six months ended September 30, 2019, respectively.
Note 12 – Litigation
Contingencies are recorded in the unaudited condensed consolidated financial statements when it is probable that a liability will be incurred and the amount of the loss is reasonably estimable, or otherwise disclosed, in accordance with Accounting Standards Codification 450, Contingencies (ASC 450). Significant judgment is required in both the determination of probability and the determination as to whether a loss is reasonably estimable. In the event the Company determines that a loss is not probable, but is reasonably possible, and it becomes possible to develop what the Company believes to be a reasonable range of possible loss, then the Company will include disclosures related to such matter as appropriate and in compliance with ASC 450. To the extent there is a reasonable possibility that the losses could exceed the amounts already accrued, the Company will, when applicable, adjust the accrual in the period the determination is made, disclose an estimate of the additional loss or range of loss or if the amount of such adjustment cannot be reasonably estimated, disclose that an estimate cannot be made.
On March 24, 2009, Aeroflex Wichita, Inc. (“Aeroflex”) filed a petition against the Company and two of its employees in the District Court located in Sedgwick County, Kansas, Case No. 09 CV 1141 (the “Aeroflex Action”), alleging that the Company and its two employees misappropriated Aeroflex’s proprietary technology in connection with the Company winning a substantial contract from the U.S. Army, to develop new Mode-5 radar test sets and kits to upgrade the existing TS-4530 radar test sets to Mode 5 (the “Award”). Aeroflex’s petition, seeking injunctive relief and damages, alleges that in connection with the Award, the Company and its named employees misappropriated Aeroflex’s trade secrets; tortiously interfered with Aeroflex’s business relationship; conspired to harm Aeroflex and tortiously interfered with Aeroflex’s contract. The central basis of all the claims in the Aeroflex Action is that the Company misappropriated and used Aeroflex proprietary technology and confidential information in winning the Award. In February 2009, subsequent to the Company winning the Award, Aeroflex filed a protest of the Award with the Government Accounting Office (“GAO”). In its protest, Aeroflex alleged, inter alia, that the Company used Aeroflex’s proprietary technology in order to win the Award, the same material allegations as were later alleged in the Aeroflex Action. On or about March 17, 2009, the U.S. Army Contracts Attorney and the U.S. Army Contracting Officer each filed a statement with the GAO, expressly rejecting Aeroflex’s allegations that the Company used or infringed on Aeroflex’s proprietary technology in winning the Award, and concluding that the Company had used only its own proprietary technology. On April 6, 2009, Aeroflex withdrew its protest.
In December 2009, the Kansas District Court dismissed the Aeroflex Action on jurisdiction grounds. Aeroflex appealed this decision. In May 2012, the Kansas Supreme Court reversed the decision and remanded the Aeroflex Action to the Kansas District Court for further proceedings. The case then entered an extended discovery period in the District Court.
TEL-INSTRUMENT ELECTRONICS CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 12 – Litigation (continued)
On May 23, 2016, the Company filed a motion for summary judgment based on Aeroflex’s lack of jurisdictional standing to bring the case. The motion asserts that Aeroflex does not own the intellectual property at issue since it is a bare licensee of Northrop Grumman. Northrop Grumman has declined to join this suit as plaintiff. The motion asserted Aeroflex lacks standing to sue alone. Also, the motion raises the fact that Aeroflex allowed the license to expire, Aeroflex’s claims are either moot or Aeroflex lacks standing to sue for damages alleged to have accrued after the license ended in 2011. The motion for summary judgment was denied.
The Aeroflex trial on remand in the Kansas District Court began in March 2017. After a nine-week trial, the jury rendered its verdict. The jury found no misappropriation of Aeroflex trade secrets but found that the Company tortiously interfered with a prospective business opportunity and awarded damages of $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%, 6.5% July 1, 2018 through June 30, 2019, 7.0% July 1, 2019 through June 30, 2020, and 4.25% July 1, 2020 through June 30, 2021. Interest on the $4,900,000 judgment started to accrue on November 22, 2017, the date the judgment was entered. As of September 30, 2020, the outstanding amount of the judgement and accrued interest is $5,785,183.
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, the Company is currently not involved in any litigation that we believe could have a material adverse effect on the Company’s 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 the Company, threatened against or affecting the Company, or its common stock in which an adverse decision could have a material effect.
TEL-INSTRUMENT ELECTRONICS CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 13 – Subsequent Event
On October 30, 2020, Mr. Joseph P. Macaluso informed the Board of Directors of Tel-Instrument Electronics Corp. (the “Company”) that he was resigning from his position as Principal Accounting Officer of the Company, effective as of November 13, 2020.