TEL INSTRUMENT ELECTRONICS CORP - Quarter Report: 2013 December (Form 10-Q)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: December 31, 2013
¨ 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)
|
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 ý No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files. Yes ý No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act:
|
Large accelerated filer
|
¨
|
Accelerated filer
|
¨
|
|
|
Non-accelerated filer
|
¨
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Smaller reporting company
|
ý
|
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No ý
As of February 10, 2014, there were 3,248,387 shares outstanding of the registrant’s common stock.
TEL-INSTRUMENT ELECTRONICS CORP
TABLE OF CONTENTS
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PART I – FINANCIAL INFORMATION
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Page
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Item 1.
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3
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Item 2.
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15
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Item 3.
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21
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Item 4.
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21
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PART II – OTHER INFORMATION
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Item 1.
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22
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Item 1A.
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22
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Item 2.
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22
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Item 3.
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22
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Item 4.
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22
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Item 5.
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22
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Item 6.
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23
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24
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PART I – FINANCIAL INFORMATION
Item 1. Financial Statements.
TEL-INSTRUMENT ELECTRONICS CORP
CONDENSED CONSOLIDATED BALANCE SHEETS
|
December 31,
2013
|
March 31,
2013
|
|||||||
|
(unaudited)
|
||||||||
|
ASSETS
|
||||||||
|
Current assets:
|
||||||||
|
Cash and cash equivalents
|
$
|
216,347
|
310,297
|
|||||
|
Accounts receivable, net
|
1,129,913
|
557,879
|
||||||
|
Inventories, net
|
4,509,600
|
6,241,181
|
||||||
|
Prepaid expenses and other
|
143,929
|
115,852
|
||||||
|
Deferred financing costs
|
113,876
|
108,321
|
||||||
|
Deferred income tax asset
|
1,239,761
|
1,238,421
|
||||||
|
Total current assets
|
7,353,426
|
8,571,951
|
||||||
|
Equipment and leasehold improvements, net
|
445,735
|
587,958
|
||||||
|
Deferred financing costs – long-term
|
78,921
|
156,463
|
||||||
|
Deferred income tax asset – non-current
|
2,494,347
|
2,546,190
|
||||||
|
Other assets
|
56,872
|
56,872
|
||||||
|
Total assets
|
10,429,301
|
11,919,434
|
||||||
|
LIABILITIES & STOCKHOLDERS’ EQUITY
|
||||||||
|
Current liabilities:
|
||||||||
|
Current portion long-term debt
|
641,254
|
1,229,643
|
||||||
|
Capital lease obligations – current portion
|
69,448
|
74,508
|
||||||
|
Accounts payable
|
2,233,671
|
4,272,431
|
||||||
|
Progress billings
|
795,050
|
-
|
||||||
|
Deferred revenues – current portion
|
8,155
|
18,460
|
||||||
|
Accrued payroll, vacation pay and payroll taxes
|
394,432
|
442,522
|
||||||
|
Accrued expenses
|
1,389,487
|
1,525,538
|
||||||
|
Total current liabilities
|
5,531,497
|
7,563,102
|
||||||
|
Subordinated notes payable-related parties
|
250,000
|
250,000
|
||||||
|
Capital lease obligations – long-term
|
25,159
|
76,055
|
||||||
|
Deferred revenues – long-term
|
118,350
|
1,045
|
||||||
|
Warrant liability
|
511,939
|
198,330
|
||||||
|
Long-term debt, net of debt discount
|
743,290
|
1,134,549
|
||||||
|
Total liabilities
|
7,180,235
|
9,223,081
|
||||||
|
Commitments
|
||||||||
|
Stockholders' equity:
|
||||||||
|
Common stock, par value $0.10 per share, 3,248,387 and 3,011,739 issued and outstanding
as of December 31, 2013 and March 31, 2013, respectively
|
324,886
|
301,171
|
||||||
|
Additional paid-in capital
|
7,941,477
|
7,108,300
|
||||||
|
Accumulated deficit
|
(5,017,297
|
)
|
(4,713,118
|
)
|
||||
|
Total stockholders' equity
|
3,249,066
|
2,696,353
|
||||||
|
Total liabilities and stockholders' equity
|
$
|
10,429,301
|
$
|
11,919,434
|
||||
See accompanying notes to condensed consolidated financial statements.
TEL-INSTRUMENT ELECTRONICS CORP
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
|
Three Months Ended
|
Nine Months Ended
|
|||||||||||||||
|
December 31,
2013
|
December 31,
2012
|
December 31,
2013
|
December 31,
2012
|
|||||||||||||
|
Net sales
|
$
|
4,089,029
|
$
|
2,350,020
|
11,323,585
|
$
|
5,922,258
|
|||||||||
|
Cost of sales
|
2,693,342
|
1,896,652
|
7,465,991
|
4,582,773
|
||||||||||||
|
Gross margin
|
1,395,687
|
453,368
|
3,857,594
|
1,339,485
|
||||||||||||
|
Operating expenses:
|
||||||||||||||||
|
Selling, general and administrative
|
697,919
|
587,146
|
2,022,579
|
1,927,380
|
||||||||||||
|
Engineering, research and development
|
449,477
|
481,055
|
1,378,426
|
1,608,459
|
||||||||||||
|
Total operating expenses
|
1,147,396
|
1,068,201
|
3,401,005
|
3,535,839
|
||||||||||||
|
Income (loss) from operations
|
248,291
|
(614,833
|
)
|
456,589
|
(2,196,354
|
)
|
||||||||||
|
Other income (expense):
|
||||||||||||||||
|
Amortization of debt discount
|
(27,120
|
)
|
(37,948
|
)
|
(75,707
|
)
|
(82,349
|
)
|
||||||||
|
Loss on extinguishment of debt
|
0
|
-
|
(26,600
|
)
|
-
|
|||||||||||
|
Amortization of deferred financing costs
|
(27,827
|
)
|
(68,383
|
)
|
(81,987
|
)
|
(152,174
|
)
|
||||||||
|
Financing costs
|
-
|
(21,441
|
)
|
-
|
(47,918
|
)
|
||||||||||
|
Change in fair value of common stock Warrants
|
(229,726
|
)
|
19,710
|
(272,499
|
)
|
268,767
|
||||||||||
|
Interest income
|
129
|
420
|
163
|
433
|
||||||||||||
|
Interest expense
|
(50,828
|
)
|
(126,490
|
)
|
(252,295
|
)
|
(349,990
|
)
|
||||||||
|
Total other income (expense)
|
(335,372
|
)
|
(234,132
|
)
|
(708,925
|
)
|
(363,231
|
)
|
||||||||
|
Loss before income taxes
|
(87,081
|
)
|
(848,965
|
)
|
(252,336
|
)
|
(2,559,585
|
)
|
||||||||
|
Income tax expense (benefit)
|
58,852
|
(303,788
|
)
|
51,843
|
(915,903
|
)
|
||||||||||
|
Net loss
|
$
|
(145,933
|
)
|
$
|
(545,177
|
)
|
$
|
(304,179
|
)
|
$
|
(1,643,682
|
)
|
||||
|
Basic income (loss) per common share
|
$
|
(0.04
|
)
|
$
|
(0.19
|
)
|
$
|
(0.10
|
)
|
$
|
(0.59
|
)
|
||||
|
Diluted income (loss) per common share
|
$
|
(0.04
|
)
|
$
|
(0.19
|
)
|
$
|
(0.10
|
)
|
$
|
(0.59
|
)
|
||||
|
Weighted average shares outstanding:
|
||||||||||||||||
|
Basic
|
3,247,387
|
2,912,516
|
3,189,123
|
2,776,643
|
||||||||||||
|
Diluted
|
3,247,387
|
2,912,516
|
3,189,123
|
2,776,643
|
||||||||||||
See accompanying notes to condensed consolidated financial statements.
TEL-INSTRUMENT ELECTRONICS CORP
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
|
Nine months ended
|
||||||||
|
December 31,
2013
|
December 31,
2012
|
|||||||
|
Cash flows from operating activities:
|
||||||||
|
Net loss
|
$
|
(304,179
|
)
|
$
|
(1,643,682
|
)
|
||
|
Adjustments to reconcile net loss to net cash
used in operating activities:
|
||||||||
|
Deferred income taxes
|
50,503
|
(919,814
|
)
|
|||||
|
Depreciation and amortization
|
153,818
|
160,140
|
||||||
|
Amortization of debt discount
|
75,707
|
82,349
|
||||||
|
Amortization of deferred financing costs, net
|
81,987
|
152,174
|
||||||
|
Loss on extinguishment of debt
|
26,600
|
-
|
||||||
|
Warrants issued in exchange for services
|
-
|
47,918
|
||||||
|
Change in fair value of common stock warrants
|
272,499
|
(268,767
|
)
|
|||||
|
Non-cash interest expense associated with conversion of note
|
21,003
|
-
|
||||||
|
Non-cash stock-based compensation
|
48,519
|
62,884
|
||||||
|
Changes in assets and liabilities:
|
||||||||
|
(Increase) decrease in accounts receivable, net
|
(572,034
|
)
|
1,041,720
|
|||||
|
Decrease in unbilled government receivables
|
-
|
728,724
|
||||||
|
Decrease (increase) in inventories, net
|
1,731,581
|
(1,780,056
|
)
|
|||||
|
(Increase) decrease in prepaid expenses & other
|
(28,077
|
)
|
126,381
|
|||||
|
(Decrease) increase in accounts payable
|
(2,038,760
|
)
|
1,150,140
|
|||||
|
Decrease in accrued payroll, vacation pay & withholdings
|
(48,090
|
)
|
(70,661
|
)
|
||||
|
Increase (decrease) in deferred revenues
|
107,000
|
(13,125
|
)
|
|||||
|
Increase in progress billings
|
795,050
|
-
|
||||||
|
(Decrease) increase in accrued expenses
|
(98,651
|
)
|
(527,446
|
)
|
||||
|
Net cash provided by (used in) operating activities
|
274,476
|
(1,671,121
|
)
|
|||||
|
Cash flows from investing activities:
|
||||||||
|
Purchases of equipment
|
(11,595
|
)
|
(60,816
|
)
|
||||
|
Net cash used in investing activities
|
(11,595
|
)
|
(60,816
|
)
|
||||
|
Cash flows from financing activities:
|
||||||||
|
Proceeds from note payable – related party
|
100,000
|
-
|
||||||
|
Proceeds from the sale of common stock
|
-
|
1,000,002
|
||||||
|
Proceeds from the issuance of debt
|
-
|
600,000
|
||||||
|
Expenses associated with the issuance of debt
|
-
|
(111,340
|
)
|
|||||
|
Proceeds from the exercise of stock options
|
23,370
|
104,430
|
||||||
|
Repayment of long-term debt
|
(424,245
|
)
|
(127,929
|
)
|
||||
|
Repayment of capitalized lease obligations
|
(55,956
|
)
|
(47,627
|
)
|
||||
|
Net cash (used in) provided by financing activities
|
(356,831
|
)
|
1,417,536
|
|||||
|
Net decrease in cash and cash equivalents
|
(93,950
|
)
|
(314,401
|
)
|
||||
|
Cash and cash equivalents at beginning of period
|
310,297
|
413,195
|
||||||
|
Cash and cash equivalents at end of period
|
$
|
216,347
|
$
|
98,794
|
||||
|
Supplemental cash flow information:
|
||||||||
|
Taxes paid
|
$
|
-
|
$
|
-
|
||||
|
Interest paid
|
$
|
276,546
|
$
|
261,413
|
||||
|
Supplemental non-cash information:
|
||||||||
|
Conversion of debt to equity
|
$
|
700,000
|
$
|
-
|
||||
|
Conversion of accrued interest into equity
|
$
|
37,400
|
$
|
-
|
||||
See accompanying notes to 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”) as of December 31, 2013, the results of operations for the three and nine months ended December 31, 2013 and December 31, 2012, and statements of cash flows for the nine months ended December 31, 2013 and December 31, 2012. These results are not necessarily indicative of the results to be expected for the full year. The 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, 2013 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 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, 2013 , as filed with the United States Securities and Exchange Commission (the “SEC”) on July 16, 2013.
Note 2 – Summary of Significant Accounting Policies
During the nine months ended December 31, 2013, there have been no material changes in the Company’s significant accounting policies to those previously disclosed in the Company’s Annual Report on Form 10-K for the year ended March 31, 2013, as filed with the SEC on July 16, 2013.
Note 3 – Accounts Receivable, net
The following table sets forth the components of accounts receivable:
|
December 31,
2013
|
March 31,
2013
|
|||||||
|
Government
|
$
|
1,042,639
|
$
|
423,165
|
||||
|
Commercial
|
104,556
|
153,654
|
||||||
|
Less: Allowance for doubtful accounts
|
(17,282
|
)
|
(18,940
|
)
|
||||
|
$
|
1,129,913
|
$
|
557,879
|
|||||
Note 4 – Inventories, net
Inventories consist of:
|
December 31,
2013
|
March 31,
2013
|
|||||||
|
Purchased parts
|
$
|
3,624,430
|
$
|
4,418,989
|
||||
|
Work-in-process
|
1,050,622
|
1,636,325
|
||||||
|
Finished goods
|
34,548
|
385,867
|
||||||
|
Less: Inventory reserve
|
(200,000
|
)
|
(200,000
|
)
|
||||
|
$
|
4,509,600
|
$
|
6,241,181
|
|||||
TEL-INSTRUMENT ELECTRONICS CORP
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 5 – Loss Per Share
Net (loss) income per share has been computed according to FASB ASC 260, “Earnings per Share,” which requires a dual presentation of basic and diluted earnings (loss) per share (“EPS”). Basic EPS represents net (loss) 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 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. 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 costs attributed to future services.
Diluted loss per share for the three and nine months ended December 31, 2013 and 2012 does not include common stock equivalents, as these stock equivalents would be anti-dilutive.
|
Three Months Ended
|
Three Months Ended
|
|||||||
|
December 31,
2013
|
December 31,
2012
|
|||||||
|
Basic net loss per share computation:
|
||||||||
|
Net loss
|
$
|
(145,933
|
)
|
$
|
(545,177
|
)
|
||
|
Weighted-average common shares outstanding
|
3,247,387
|
2,912,516
|
||||||
|
Basic net loss per share
|
$
|
(0.04
|
)
|
$
|
(0.19
|
)
|
||
|
Diluted net loss per share computation:
|
||||||||
|
Net loss
|
$
|
(145,933
|
)
|
$
|
(545,177
|
)
|
||
|
Weighted-average common shares outstanding
|
3,247,387
|
2,912,516
|
||||||
|
Incremental shares attributable to the assumed exercise of outstanding stock options
|
-
|
-
|
||||||
|
Total adjusted weighted-average shares
|
3,247,387
|
2,912,516
|
||||||
|
Diluted net loss per share
|
$
|
(0.04
|
)
|
$
|
(0.19
|
)
|
||
|
Nine Months Ended
|
Nine Months Ended
|
|||||||
|
December 31,
2013
|
December 31,
2012
|
|||||||
|
Basic net loss per share computation:
|
||||||||
|
Net loss
|
$
|
(304,179
|
)
|
$
|
(1,643,682
|
)
|
||
|
Weighted-average common shares outstanding
|
3,189,123
|
2,776,643
|
||||||
|
Basic net loss per share
|
$
|
(0.10
|
)
|
$
|
(0.59
|
)
|
||
|
Diluted net loss per share computation:
|
||||||||
|
Net loss
|
$
|
(304,179
|
)
|
$
|
(1,643,682
|
)
|
||
|
Weighted-average common shares outstanding
|
3,189,123
|
2,776,643
|
||||||
|
Incremental shares attributable to the assumed exercise of outstanding stock options
|
-
|
-
|
||||||
|
Total adjusted weighted-average shares
|
3,189,123
|
2,776,643
|
||||||
|
Diluted net loss per share
|
$
|
(0.10
|
)
|
$
|
(0.59
|
)
|
||
TEL-INSTRUMENT ELECTRONICS CORP
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 6 – Long-Term Debt
In September 2010, the Company entered into an agreement with BCA Mezzanine Fund LLP (“BCA”) to loan the Company $2,500,000 in the form of a Promissory Note (the “Note”). The Note contains a number of affirmative and negative covenants which restrict our operations. For the quarter ended December 31, 2013, the Company was not in compliance with four covenants related to maintaining agreed upon financial ratios for fixed charges, leverage and debt service as well as a requirement for earnings before interest, taxes, depreciation and amortization (EBITDA). On February 13, 2014 the Company received a waiver from BCA on each of the above mentioned covenants. In consideration for this waiver for non-compliance of the financial covenants, the Company incurred an incremental fee of $10,000.
In consideration for the waiver for non-compliance of the financial covenants at September 30, 2013, on November 12, 2013, the Company incurred an incremental fee of $10,000.
In consideration for the waiver for non-compliance of the financial covenants at June 30, 2013, on August 12, 2013, BCA received warrants to purchase 20,000 shares of the Company’s common stock. The common stock underlying the warrants is exercisable at a price of $3.69 per share and the warrants expire on September 10, 2019. Determining the warrant value to be recorded requires us to develop estimates to be used in calculating the fair value of the warrant. The fair value of the warrant is calculated using the Black-Scholes valuation model. The value of the warrant will be recorded as a debt discount of $21,587, and will be amortized over the remaining life of the loan.
In consideration for the waiver for non-compliance of the financial covenants at March 31, 2013, on July 12, 2013, BCA received warrants to purchase 20,000 shares of the Company’s common stock. The common stock underlying the warrants is exercisable at a price of $3.33 per share and the warrants expire on September 10, 2019. Determining the warrant value to be recorded requires us to develop estimates to be used in calculating the fair value of the warrant. The fair value of the warrant is calculated using the Black-Scholes valuation model. The value of the warrant will be recorded as a debt discount of $19,523, and will be amortized over the remaining life of the loan.
On July 26, 2012, the Company entered into a securities purchase agreement (the “Purchase Agreement”) with a private investor (the “Private Investor”). Pursuant to the terms of the Purchase Agreement, the Company issued (i) a senior secured promissory note (the “2012 Note”) in favor of the Private Investor in the aggregate principal amount of $600,000, approximately $489,000 net of expenses, accruing interest at a rate of 14% per annum and (ii) a common stock purchase warrant to purchase 50,000 shares of the Company’s common stock, par value $0.10 per share. The 2012 Note, together with all unpaid interest and principal was due on March 31, 2013. The common stock underlying the warrant is exercisable at a price of $3.35 per share and the warrant expires on September 10, 2019. In conjunction with the Purchase Agreement the Company entered into an (i) Investor Rights Agreement, (ii) Securities Agreement, (iii) Intercreditor Agreement and (iv) Subordination Agreement. The Company reported the foregoing on its Current Report on Form 8-K filed with the SEC on August 3, 2012.
Effective May 31, 2013, the Private Investor converted the outstanding principal of $600,000, penalty of $25,000 and accrued interest for the month of May 2013 in the amount of $12,400 for a total of $637,400 into 200,000 shares of the Company’s common stock at a price of $3.187 per share. The fair value of these shares at the date of conversion was $3.32 per share. As such, the Company recorded a loss on the extinguishment of debt in the amount of $26,600 and this amount is included in the accompanying statement of operations for the nine months ended December 31, 2013. As further consideration to the Private Investor, the Company agreed that each time the Company issues any new shares of its common stock in the next two years (excluding the exercise of existing stock options and warrants currently outstanding), at a price lower than a purchase price of $3.187 per share, the Company will issue additional shares to the Private Investor, for no additional consideration, based on the differential between the $3.187 price and the price paid for the newly issued shares of common stock.
Note 7 – Note Payable – Related Party
In June 2013, a related party received a note payable from the Company in exchange for $100,000 which the Company used for working capital needs. On July 24, 2013, the related party converted its note payable in the amount of $100,000 into 31,348 shares of the Company’s common stock at a price of $3.19 per share. The price was approved by the board of directors (the “Board”) of the Company and was the same price as the 200,000 shares issued to the Private Investor upon the conversion of debt on May 31, 2013. The fair value of these shares at the date of conversion was $3.86 per share. As such, in July 2013, the Company recorded additional interest expense of $21,003.
TEL-INSTRUMENT ELECTRONICS CORP
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 8 – 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 table below presents information about reportable segments within the avionics business for the three and nine month periods ending December 31, 2013 and 2012:
|
Three Months Ended
December 31, 2013
|
Avionics
Government
|
Avionics
Commercial
|
Avionics
Total
|
Corporate
Items
|
Total
|
|||||||||||||||
|
Net sales
|
3,797,272
|
291,757
|
4,089,029
|
-
|
4,089,029
|
|||||||||||||||
|
Cost of Sales
|
2,415,427
|
277,915
|
2,693,342
|
-
|
2,693,342
|
|||||||||||||||
|
Gross Margin
|
1,381,845
|
13,842
|
1,395,687
|
-
|
1,395,687
|
|||||||||||||||
|
Engineering, research, and development
|
449,477
|
449,477
|
||||||||||||||||||
|
Selling, general and administrative
|
375,255
|
322,664
|
697,919
|
|||||||||||||||||
|
Amortization of debt discount
|
27,120
|
27,120
|
||||||||||||||||||
|
Amortization of deferred financing costs
|
27,826
|
27,826
|
||||||||||||||||||
|
Change in fair value of common stock warrants
|
229,726
|
229,726
|
||||||||||||||||||
|
Interest expense, net
|
50,700
|
50,700
|
||||||||||||||||||
|
Total expenses
|
824,732
|
658,036
|
1,482,768
|
|||||||||||||||||
|
Income (loss) before income taxes
|
570,955
|
(658,036)
|
(87,081
|
)
|
||||||||||||||||
|
Three Months Ended
December 31, 2012
|
Avionics
Government
|
Avionics
Commercial
|
Avionics
Total
|
Corporate
Items
|
Total
|
|||||||||||||||
|
Net sales
|
1,828,941
|
521,079
|
2,350,020
|
-
|
2,350,020
|
|||||||||||||||
|
Cost of Sales
|
1,480,584
|
416,068
|
1,896,652
|
-
|
1,896,652
|
|||||||||||||||
|
Gross Margin
|
348,357
|
105,011
|
453,368
|
-
|
453,368
|
|||||||||||||||
|
Engineering, research, and development
|
481,055
|
481,055
|
||||||||||||||||||
|
Selling, general, and administrative
|
264,627
|
322,519
|
587,146
|
|||||||||||||||||
|
Amortization of debt discount
|
37,948
|
37,948
|
||||||||||||||||||
|
Amortization of deferred financing costs
|
68,384
|
68,384
|
||||||||||||||||||
|
Financing costs
|
21,441
|
21,441
|
||||||||||||||||||
|
Change in fair value of common stock warrants
|
(19,710
|
)
|
(19,710
|
)
|
||||||||||||||||
|
Interest (income) expense, net
|
126,069
|
126,069
|
||||||||||||||||||
|
Total expenses
|
745,682
|
556,651
|
1,302,333
|
|||||||||||||||||
|
Loss before income taxes
|
(292,314
|
)
|
(556,651
|
)
|
(848,965
|
)
|
||||||||||||||
TEL-INSTRUMENT ELECTRONICS CORP
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 8 – Segment Information (continued)
|
Nine Months Ended
December 31 2013
|
Avionics
Government
|
Avionics
Commercial
|
Avionics
Total
|
Corporate
Items
|
Total
|
|||||||||||||||
|
Net sales
|
10,054,033
|
1,269,552
|
11,323,585
|
-
|
11,323,585
|
|||||||||||||||
|
Cost of Sales
|
6,497,178
|
968,813
|
7,465,991
|
-
|
7,465,991
|
|||||||||||||||
|
Gross Margin
|
3,556,855
|
300,739
|
3,857,594
|
-
|
3,857,594
|
|||||||||||||||
|
Engineering, research, and development
|
1,378,426
|
1,378,426
|
||||||||||||||||||
|
Selling, general and administrative
|
933,033
|
1,089,546
|
2,022,579
|
|||||||||||||||||
|
Amortization of debt discount
|
75,707
|
75,707
|
||||||||||||||||||
|
Amortization of deferred financing costs
|
81,986
|
81,986
|
||||||||||||||||||
|
Loss on extinguishment of debt
|
26,600
|
26,600
|
||||||||||||||||||
|
Change in fair value of common stock warrants
|
272,499
|
272,499
|
||||||||||||||||||
|
Interest expense, net
|
252,133
|
252,133
|
||||||||||||||||||
|
Total expenses
|
2,311,459
|
1,798,471
|
4,109,930
|
|||||||||||||||||
|
Income (loss) before income taxes
|
1,546,135
|
(1,798,471
|
)
|
(252,336
|
)
|
|||||||||||||||
|
Nine Months Ended
December 31, 2012
|
Avionics
Government
|
Avionics
Commercial
|
Avionics
Total
|
Corporate
Items
|
Total
|
|||||||||||||||
|
Net sales
|
4,226,451
|
1,695,807
|
5,922,258
|
-
|
5,922,258
|
|||||||||||||||
|
Cost of Sales
|
3,051,873
|
1,530,900
|
4,582,773
|
-
|
4,582,773
|
|||||||||||||||
|
Gross Margin
|
1,174,578
|
164,907
|
1,339,485
|
-
|
1,339,485
|
|||||||||||||||
|
Engineering, research, and development
|
1,608,459
|
-
|
1,608,459
|
|||||||||||||||||
|
Selling, general and administrative
|
891,764
|
1,035,616
|
1,927,380
|
|||||||||||||||||
|
Amortization of debt discount
|
82,349
|
82,349
|
||||||||||||||||||
|
Amortization of deferred financing costs
|
152,175
|
152,175
|
||||||||||||||||||
|
Financing costs
|
47,918
|
47,918
|
||||||||||||||||||
|
Change in fair value of common stock warrants
|
(268,767
|
)
|
(268,767
|
)
|
||||||||||||||||
|
Interest expense, net
|
349,556
|
349,556
|
||||||||||||||||||
|
Total expenses
|
2,500,223
|
1,398,847
|
3,899,070
|
|||||||||||||||||
|
Income (loss) before income taxes
|
(1,160,738
|
)
|
(1,398,847
|
)
|
(2,559,585
|
)
|
||||||||||||||
TEL-INSTRUMENT ELECTRONICS CORP
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 9 – Income Taxes
The Company adopted FASB ASC 740-10, Accounting for Uncertainty in Income Taxes, effective April 1, 2007 (“ASC 740-10”). 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 in the accompanying December 31, 2013 and March 31, 2013 condensed consolidated balance sheets. 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.
Note 10 – 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).
|
TEL-INSTRUMENT ELECTRONICS CORP
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 10 – Fair Value Measurements (continued)
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, 2013 and March 31, 2013. 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.
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, 2013
|
Level I
|
Level II
|
Level III
|
Total
|
||||||||||||
|
Total Assets
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
-
|
||||||||
|
Warrant liability
|
-
|
-
|
511,939
|
511,939
|
||||||||||||
|
Total Liabilities
|
$
|
-
|
$
|
-
|
$
|
511,939
|
$
|
511,939
|
||||||||
|
March 31, 2013
|
Level I
|
Level II
|
Level III
|
Total
|
||||||||||||
|
Total Assets
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
-
|
||||||||
|
Warrant liability
|
-
|
-
|
198,330
|
198,330
|
||||||||||||
|
Total Liabilities
|
$
|
-
|
$
|
-
|
$
|
198,330
|
$
|
198,330
|
||||||||
The Company adopted the guidance of ASC 815 “Derivative and Hedging”, which requires that we mark the value of our warrant liability (see Note 6) 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 fair value of the warrants is calculated using the Black-Scholes valuation model.
The following table provides a summary of the changes in fair value of our Level 3 financial liabilities from March 31, 2013 through December 31, 2013, 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 30, 2013:
|
Level 3 Reconciliation
|
Beginning 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
|
198,330
|
272,499
|
41,110
|
-
|
511,939
|
|||||||||||||||
|
Total Liabilities
|
$
|
198,330
|
$
|
272,499
|
$
|
41,110
|
$
|
-
|
$
|
511,939
|
||||||||||
TEL-INSTRUMENT ELECTRONICS CORP
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 10 – Fair Value Measurements (continued)
The common stock warrants were not issued with the intent of effectively hedging any future cash flow, fair value of any asset, liability or any net investment in a foreign corporation. The warrants do not qualify for hedge accounting, and, as such, all changes in the fair value of these warrants are recognized as other income/expense in the statement of operations until such time as the warrants are exercised or expire. Since these common stock warrants do not trade in an active securities market, the Company recognizes a warrant liability and estimates the fair value of these warrants using the Black-Scholes options model using the following assumptions:
Values at Inception
|
Date of
Warrant
|
Expiration
Date
|
Number of
Warrants
|
Exercise
Price
|
Fair Market Value
Per Share
|
Expected
Volatility
|
Remaining
Life in Years
|
Risk Free
Interest Rate
|
Warrant
Liability
|
||||||||||||||||||||||||||
|
09-10-2010
|
09-10-2019
|
136,920
|
$
|
6.70
|
$
|
6.70
|
28.51
|
%
|
9
|
2.81
|
%
|
$
|
267,848
|
|||||||||||||||||||||
|
09-10-2010
|
09-10-2015
|
10,416
|
$
|
6.70
|
$
|
6.70
|
28.51
|
%
|
5
|
1.59
|
%
|
$
|
13,808
|
|||||||||||||||||||||
|
07-26-2012
|
09-10-2019
|
50,000
|
$
|
3.35
|
$
|
3.90
|
42.04
|
%
|
7
|
0.94
|
%
|
$
|
66,193
|
|||||||||||||||||||||
|
07-26-2012
|
09-10-2019
|
20,000
|
$
|
3.35
|
$
|
3.90
|
42.04
|
%
|
7
|
0.94
|
%
|
$
|
26,477
|
|||||||||||||||||||||
|
11-20-2012
|
09-10-2019
|
20,000
|
$
|
3.56
|
$
|
3.50
|
42.45
|
%
|
6.83
|
1.09
|
%
|
$
|
21,441
|
|||||||||||||||||||||
|
02-14-2013
|
09-10-2019
|
20,000
|
$
|
3.58
|
$
|
3.80
|
41.25
|
%
|
6.58
|
1.43
|
%
|
$
|
23,714
|
|||||||||||||||||||||
|
07-12-2013
|
09-10-2019
|
20,000
|
$
|
3.33
|
$
|
3.32
|
40.26
|
%
|
6.17
|
2.00
|
%
|
$
|
19,523
|
|||||||||||||||||||||
|
08-12-2013
|
09-10-2019
|
20,000
|
$
|
3.69
|
$
|
3.69
|
40.20
|
%
|
6.08
|
2.01
|
%
|
$
|
21,587
|
|||||||||||||||||||||
Values at March 31, 2013
|
Date of
Warrant
|
Expiration
Date
|
Number of
Warrants
|
Exercise
Price
|
Fair Market Value
Per Share
|
Expected
Volatility
|
Remaining
Life in Years
|
Risk Free
Interest Rate
|
Warrant
Liability
|
||||||||||||||||||||||||||
|
09-10-2010
|
09-10-2019
|
136,920
|
$
|
6.70
|
$
|
3.50
|
41.45
|
%
|
6.45
|
1.24
|
%
|
$
|
81,080
|
|||||||||||||||||||||
|
09-10-2010
|
09-10-2015
|
10,416
|
$
|
6.70
|
$
|
3.50
|
41.45
|
%
|
2.45
|
0.25
|
%
|
$
|
1,870
|
|||||||||||||||||||||
|
07-26-2012
|
09-10-2019
|
50,000
|
$
|
3.35
|
$
|
3.50
|
41.45
|
%
|
6.33
|
1.24
|
%
|
$
|
53,269
|
|||||||||||||||||||||
|
07-26-2012
|
09-10-2019
|
20,000
|
$
|
3.35
|
$
|
3.50
|
41.45
|
%
|
6.33
|
1.24
|
%
|
$
|
21,307
|
|||||||||||||||||||||
|
11-20-2012
|
09-10-2019
|
20,000
|
$
|
3.56
|
$
|
3.50
|
41.45
|
%
|
6.50
|
1.24
|
%
|
$
|
20,664
|
|||||||||||||||||||||
|
02-14-2013
|
09-10-2019
|
20,000
|
$
|
3.67
|
$
|
3.50
|
41.45
|
%
|
6.45
|
1.24
|
%
|
$
|
20,140
|
|||||||||||||||||||||
Values at December 31, 2013
|
Date of
Warrant
|
Expiration
Date
|
Number of
Warrants
|
Exercise
Price
|
Fair Market Value
Per Share
|
Expected
Volatility
|
Remaining
Life in Years
|
Risk Free
Interest Rate
|
Warrant
Liability
|
||||||||||||||||||||||||||
|
09-10-2010
|
09-10-2019
|
136,920
|
$
|
6.70
|
$
|
5.55
|
40.73
|
%
|
5.70
|
1.75
|
%
|
$
|
183,711
|
|||||||||||||||||||||
|
09-10-2010
|
09-10-2015
|
10,416
|
$
|
6.70
|
$
|
5.55
|
40.73
|
%
|
1.70
|
0.38
|
%
|
$
|
5,809
|
|||||||||||||||||||||
|
07-26-2012
|
09-10-2019
|
50,000
|
$
|
3.35
|
$
|
5.55
|
40.73
|
%
|
5.70
|
1.75
|
%
|
$
|
109,407
|
|||||||||||||||||||||
|
07-26-2012
|
09-10-2019
|
20,000
|
$
|
3.35
|
$
|
5.55
|
40.73
|
%
|
5.70
|
1.75
|
%
|
$
|
43,762
|
|||||||||||||||||||||
|
11-20-2012
|
09-10-2019
|
20,000
|
$
|
3.56
|
$
|
5.55
|
40.73
|
%
|
5.70
|
1.75
|
%
|
$
|
42,321
|
|||||||||||||||||||||
|
02-14-2013
|
09-10-2019
|
20,000
|
$
|
3.67
|
$
|
5.55
|
40.73
|
%
|
5.70
|
1.75
|
%
|
$
|
41,592
|
|||||||||||||||||||||
|
07-1-2013
|
09-10-2019
|
20,000
|
$
|
3.33
|
$
|
5.55
|
40.73
|
%
|
5.70
|
1.75
|
%
|
$
|
43,876
|
|||||||||||||||||||||
|
08-12-2013
|
09-10-2019
|
20,000
|
$
|
3.69
|
$
|
5.55
|
40.73
|
%
|
5.70
|
1.75
|
%
|
$
|
41,461
|
|||||||||||||||||||||
The volatility calculation was based on the 48 months for the Company’s stock price prior to the measurement date, utilizing January 1, 2010 as the initial period, as the Company believes that this is the best indicator of future performance, and the source of the risk free interest rate is the US Treasury rate. The exercise price is per the agreement, the fair market value is the closing price of our stock on the date of measurement, and the expected life is based on management’s current estimate of when the warrants will be exercised. All inputs to the Black-Scholes options model are evaluated each reporting period.
TEL-INSTRUMENT ELECTRONICS CORP
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 11 – Reclassifications
Certain prior year and period amounts have been reclassified to conform to the current period presentation.
Note 12 – Litigation
On March 24, 2009, Aeroflex Wichita, Inc. (“Aeroflex”) filed a petition against the Company and two of its employees in the District Court, 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 (the “Award”), to develop new Mode-5 radar test sets and kits to upgrade the existing TS-4530 radar test sets to Mode 5. Aeroflex’s petition alleges that in connection with the Award, the Company and its named employees misappropriated Aeroflex’s trade secrets; tortiously interfered with its business relationship; conspired to harm Aeroflex and tortiously interfered with its contract and seeks injunctive relief and damages. 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 Award to the Company, 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 Aeroflex 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 on jurisdiction grounds the Aeroflex Action. Aeroflex appealed this decision. In May 2012, the Kansas Supreme Court reversed the decision and remanded the Aeroflex Action to the District Court for further proceedings. Discovery is still in the early stages and no firm trial date has been set. Tel is optimistic as to the outcome of this litigation. However, the outcome of any litigation is unpredictable and an adverse decision in this matter could have a material adverse effect on our financial condition, results of operations or liquidity.
Note 13 – New Accounting Pronouncements
For the nine months ended December 31, 2013, there have been no significant accounting pronouncements or changes in accounting pronouncements that have become effective that are expected to have a material impact on the Company’s financial position, operations or cash flows.
Note 14 – Subsequent Event
In January 2014, the Company negotiated a $2.14 million contract modification on the ITATS program. The ITATS product (“AN/ARM-206”) is a fully automated TACAN test set for use in U.S. Navy Intermediate Level repair locations. This contract modification entails the sale of certain Intellectual Property (“IP”) to the U.S. Navy plus the sale of ancillary test support equipment and a modest increase in the recurring price to reflect several product enhancements. A portion of the IP sale proceeds will go to the Company’s subcontractor on this program. This contract modification is expected to result in a pre-tax benefit of about $1.2 million over the next two fiscal quarters. The sale of the IP for the ITATS program should have no impact on sales of these units to the U.S. Navy or other customers. Management believes that the sale of the ITATS IP should improve the Company’s balance sheet and liquidity position and help facilitate the commencement of the ITATS full rate production this summer.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Forward Looking Statements
This quarterly report on Form 10-Q and other reports filed by the Company from time to time with the SEC contain or may contain forward-looking statements (collectively the “Filings”) and information that are based upon beliefs of, and information currently available to, the Company’s management as well as estimates and assumptions made by Company’s management. Readers are cautioned not to place undue reliance on these forward-looking statements, which are only predictions and speak only as of the date hereof. When used in the Filings, the words “anticipate”, “believe”, “estimate”, “expect”, “future”, “intend”, “plan”, or the negative of these terms and similar expressions as they relate to the Company or the Company’s management identify forward-looking statements. Such statements reflect the current view of the Company with respect to future events and are subject to risks, uncertainties, assumptions, and other factors, including the risks contained in the “Risk Factors” section of the Company’s Annual Report on Form 10-K for the year ended March 31, 2013, filed with the SEC on July 16, 2013, relating to the Company’s industry, the Company’s operations and results of operations, and any businesses that the Company may acquire. Should one or more of these risks or uncertainties materialize, or should the underlying assumptions prove incorrect, actual results may differ significantly from those anticipated, believed, estimated, expected, intended, or planned.
Although the Company believes that the expectations reflected in the forward-looking statements are reasonable, the Company cannot guarantee future results, levels of activity, performance, or achievements. Except as required by applicable law, including the securities laws of the United States, the Company does not intend to update any of the forward-looking statements to conform these statements to actual results.
Our financial statements are prepared in accordance with accounting principles generally accepted in the United States (“GAAP”). These accounting principles require us to make certain estimates, judgments and assumptions. We believe that the estimates, judgments and assumptions upon which we rely are reasonable based upon information available to us at the time that these estimates, judgments and assumptions are made. These estimates, judgments and assumptions can affect the reported amounts of assets and liabilities as of the date of the financial statements as well as the reported amounts of revenues and expenses during the periods presented. Our financial statements would be affected to the extent there are material differences between these estimates and actual results. In many cases, the accounting treatment of a particular transaction is specifically dictated by GAAP and does not require management’s judgment in its application. There are also areas in which management’s judgment in selecting any available alternative would not produce a materially different result. The following discussion should be read in conjunction with our financial statements and notes thereto appearing elsewhere in this report.
Overview
For the nine months ended December 31, 2013, the Company recorded operating income of $456,589 as compared to an operating loss of $2,196,354 for the nine months ended December 31, 2012. For the nine months ended December 31, 2013, the Company recorded a loss before taxes of $252,336 as compared to a loss before taxes of $2,559,585 for the nine months ended December 31, 2012. Excluding the non-cash loss on the change in the valuation of the common stock warrants, the Company has a profit before taxes of $20,163. The Company hopes to continue this positive trend. If the Company is unable to obtain a full rate production release on the TS-4530A program within a reasonable period of time, earnings growth could be delayed.
For the nine months ended December 31, 2013, sales increased $5,401,327 (91.2%) to $11,323,585 as compared to $5,922,258 for the nine months ended December 31, 2012. This increase is mostly attributed the shipment of units and kits for the TS-4530A program against a partial release from the U.S. Army, resumption of shipments on the CRAFT program as well as an increase in revenues for the Company’s legacy products. The Company had received $1.3 million in orders for its legacy products, of which a portion was shipped in the quarter ended December 31, 2013 with the balance to be shipped in the fourth quarter of the current fiscal year. The Company has received final AIMS certification for this TS-4530A, but a full production release on this contract will not be provided until the remaining logistics documentation items (e.g., technical manual) are approved by the U.S. Army. The Company has completed the major portion of the documentation and is working closely with the U.S. Army to secure a full production release as it has shipped most of the units and kits required under the initial production release. It is critical that the Company receives this production release to continue the growth and profitability it is starting to achieve. In the last few months the Company has received additional orders under this contract totaling approximately $4.1 million. The Company currently has $19.7 million of existing TS-4530A orders on this Indefinite-Delivery-Indefinite Quantity (“IDIQ”) contract program. The commencement of TS-4530A volume shipments will augment the Company’s liquidity position as the Company has a substantial amount of the material in house to commence production.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)
Overview (continued)
In October 2013, the Company received an additional contract for the CRAFT program with a maximum value of $9.5 million. The order is a not-to-exceed $9.5 million fixed-price, indefinite-delivery/indefinite-quantity (“IDIQ”) contract for the manufacture and delivery of communications/navigation radio frequency avionics flight line tester CRAFT AN/USM-708 and/or AN/USM-719. This contract is in support of the U.S. Navy, U.S. Marine Corps, U.S. Army and various Foreign Military Sales customers under the Foreign Military Sales program. This follow-on contract further strengthens our position in the industry as the predominant supplier of Mode 5 test equipment. The CRAFT unit has been well received by the end users and we look forward to working with the U.S. Navy on this program, and believe it will be the Mode 5 test set of choice for a number of years. The Company has received three delivery orders against this new contract for the additional test sets at a total value of $4.1 million. The Company currently has $11.2 million of existing orders on the CRAFT program and an option to purchase up to $5.4 million of additional units.
During the first nine months of fiscal year 2014, the Private Investor converted the outstanding principal of $600,000, penalty of $25,000 and accrued interest for the month of May 2013 in the amount of $12,400 for a total of $637,400 into 200,000 shares of the Company’s common stock at a price of $3.19 per share.
In June 2013 a related party received a note payable from the Company in exchange for $100,000, which the Company used for working capital needs. On July 24, 2013, the related party converted its note payable in the amount of $100,000 into 31,348 shares of the Company’s common stock at a price of $3.19 per share.
In consideration for the waiver for non-compliance of the financial covenants at March 31, 2013, on July 12, 2013, BCA received warrants to purchase 20,000 shares of the Company’s common stock. The common stock underlying the warrant is exercisable at a price of $3.33 per share and the warrants expire on September 10, 2019.
In consideration for the waiver for non-compliance of the financial covenants at June 30, 2013, on August 12, 2013, BCA received warrants to purchase 20,000 shares of the Company’s common stock. The common stock underlying the warrants is exercisable at a price of $3.69 per share and the warrants expire on September 10, 2019.
In consideration for the waiver for non-compliance of the financial covenants at September 30, 2013, on November 12, 2013, the Company incurred an incremental fee of $10,000.
As a result of the substantial operating losses incurred in the last year, the Company is not currently in compliance with the NYSE-MKT’s (the “Exchange”) continued listing standards. Based on the information provided by the Company on August 15, 2013, the Exchange has determined, based on the information provided and the improved first quarter results that the Company had made a reasonable demonstration of its ability to regain compliance by the end of the revised plan period which is now February 20, 2014. As such, the Company listing is being continued pursuant to an extension and will continue to be monitored against this plan.
The Company also received a letter from the staff of the Exchange that, based on the Company’s financial statements at March 31, 2013, the Company was no longer in compliance with the minimum stockholders’ equity requirement of $4.0 million, and had also reported net losses in three of its last four fiscal years, as set forth in Section 1003(a)(ii) of the NYSE MKT Company Guide. The Company was afforded the opportunity to submit a plan of compliance to the Exchange and based on information provided by the Company, the Exchange notified the Company that it accepted the Company’s plan of compliance and granted an extension until November 7, 2014.
The Company is optimistic that it will demonstrate sufficient progress to maintain our NYSE-MKT listing.
In June 2013, the Company received a performance-based payment from the government in the amount of $858,050, which was used to pay old outstanding accounts payable of a significant vendor. The Company made solid progress during the first nine months of the current fiscal year in working down outstanding payables to its vendors. Based on existing and expected production releases, the Company believes that it will have adequate liquidity, and backlog to fund operating plans for at least the next twelve months. Currently, the Company has no material future capital expenditure requirements.
If the Company is unable to obtain a full rate production release on the TS-4530A program within a reasonable period of time and/or our vendors or lenders begin to pursue legal action demanding payments, it would result in a material adverse effect on the Company’s operations and its ability to pay its obligations. As such, the Company may need to pursue additional sources of financing and/or additional progress payments. There can be no assurances that the Company can secure additional financing.
At December 31, 2013, the Company’s backlog was approximately $36.0 million as compared to approximately $36.9 million at December 31, 2012.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)
Results of Operations
Sales
For the three and nine months ended December 31, 2013, sales increased $1,739,039 (74.0%) and $5,401,327 (91.2%), respectively, to $4,089,059 and $11,323,585 for the three and nine months ended December 31, 2013 as compared to $2,350,020 and $5,922,258 for the three and nine months ended December 31, 2012.
Avionics government sales increased $1,968,331 (107.6%) and $5,827,582 (137.9%), respectively, to $3,797,272 and $10,054,033 for the three and nine months ended December 31, 2013 as compared to $1,828,941 and $4,226,451 for the three and nine months ended December 31, 2012. This increase is mostly attributed to the shipment of units and kits for the TS-4530A program against a partial release from the U.S. Army, resumption of shipments on the CRAFT program as well as an increase in revenues for the Company’s legacy products.
Commercial sales decreased $229,322 (44.0%) and $426,255 (25.1%), respectively, to $291,757 and $1,269,552 for the three and nine months ended December 31, 2013, as compared to $521,079 and $1,695,807 for the three and nine months ended December 31, 2012. The decrease in sales is primarily attributed to parts availability issues and lower sales from the overhaul and repairs business. The economic conditions in the commercial market remain depressed.
Gross Margin
Gross margin increased $942,319 (207.8%) and $2,518,109 (188.0%), respectively to $1,395,687 and $3,857,594 for the three and nine months ended December 31, 2013, as compared to $453,368 and $1,339,485 for the three and nine months ended December 31, 2012. Gross profit was favorably impacted by the increase in sales volume as a result of the increase in shipments of units and kits for the TS-4530A program against a partial release from the U.S. Army, resumption of shipments on the CRAFT program as well as an increase in revenues for the Company’s legacy products. The gross margin percentage for the three months ended December 31, 2013 was 34.1%, as compared to 19.3% for the three months ended December 31, 2012. The gross margin percentage for the nine months ended December 31, 2013 was 34.1%, as compared to 22.6%, for the nine months ended December 31, 2012.
Operating Expenses
Selling, general and administrative expenses increased $110,773 (18.9%) and $95,199, (4.9%), respectively, to $697,919 and $2,022,579 for the three and nine months ended December 31, 2013, as compared to $587,146 and $1,927,380 for the three and nine months ended December 31, 2012. For the three months ended December 31, 2013, the increase was primarily attributed to an increase in outside commission expenses associated with higher sales of the Company’s legacy products. For the nine months ended December 31, 2013, the increase was attributed to higher outside commission expenses, increased program management fees offset partially with lower personnel costs.
Engineering, research and development expenses decreased $31,578 (6.6%) and $230,033 (14.3%), respectively, to $449,477 and $1,378,426 for the three and nine months ended December 31, 2013 as compared to $481,055 and $1,608,459 for the three and nine months ended December 31, 2012, primarily as a result of a decrease in personnel costs as a result of the Company finalizing the engineering efforts on the CRAFT and TS-4530A programs.
Income (Loss) From Operations
As a result of the above, the Company recorded operating income of $248,291 and $456,589, respectively, for the three and nine months ended December 31, 2013, as compared to operating losses of $614,833 and $2,196,354, respectively, for the three and nine months ended December 31, 2012.
Other Income (Expense), Net
For the three months ended December 31, 2013, total other expense was $335,372 as compared to other expense of $234,132 for the three months ended December 31, 2012. This change is primarily due to the higher non-cash loss on the change in the valuation of common stock warrants as compared to the prior period last year offset partially by lower interest expense, amortization of debt discount and financing costs. For the three months ended December 31, 2013 the Company recorded a loss on the change in the valuation of common stock warrants in the amount of $229,726, primarily as a result of the higher stock price, as compared to a gain in the valuation of common stock warrants in the amount of $19,710 for the three months ended December 31, 2012, an unfavorable change of $249,436.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)
Results of Operations (continued)
Other Income (Expense), Net (continued)
For the nine months ended December 31, 2013, total other expense was $708,295 as compared to other expense of $363,231 for the nine months ended December 31, 2012. This change is primarily due to the higher non-cash loss on the change in the valuation of common stock warrants as compared to the prior period last year offset partially by lower interest expense, amortization of debt discount and financing costs. For the nine months ended December 31, 2013 the Company recorded a non-cash loss on the change in the valuation of common stock warrants in the amount of $272,499, primarily as a result of the higher stock price, as compared to a gain in the valuation of common stock warrants in the amount of $268,767 for the nine months ended December 31, 2012, an unfavorable change of $541,266.
Income (Loss) before Income Taxes
As a result of the above, the Company recorded a loss before income taxes of $87,081 for the three months ended December 31, 2013, as compared to a loss before taxes of $848,965 for the three months ended December 31, 2012. The Company also recorded a loss before income taxes of $252,336 for the nine months ended December 31, 2013, as compared to loss before income taxes of $2,559,585 for the nine months ended December 31, 2012. The Company would have recorded a profit before taxes of $142,645 for the three months ended December 31, 2013, excluding the non-cash loss on the change in the valuation of common stock warrants in the amount of $229,726, and a profit before taxes of $20,163 for the nine months ended December 31, 2013, excluding the non-cash loss on the change in the valuation of common stock warrants in the amount of $272,499.
Income Taxes
For the nine months ended December 31, 2013, the Company recorded a provision for income taxes in the amount of $51,843 as compared to an income tax benefit of $915,903 for the nine months ended December 31, 2012. These amounts represent the statutory federal and state tax rate on the Company’s income (loss) before taxes. For the nine months ended December 31, 2013, the Company recorded a provision for income taxes as the Company recorded a profit before taxes because the non-cash loss on the change in the valuation of common stock warrants is not deductible for tax purposes.
Net Income (Loss)
As a result of the above, the Company recorded a net loss of $145,933 for the three months ended December 31, 2013, as compared to a net loss of $545,177 for the three months ended December 31, 2012. The Company also recorded a net loss of $304,179 for the nine months ended December 31, 2013, as compared to a net loss of $1,643,682 for the nine months ended December 31, 2012.
Liquidity and Capital Resources
At December 31, 2013, the Company had net working capital of $1,821,929 as compared to $1,008,849 at March 31, 2013. This change is primarily the result of the conversion of short-term debt into equity and a reduction in accounts payable offset partially by a decline in inventories.
During the nine months ended December 31, 2013, the Company’s cash balance decreased by $93,950 to $216,347. The Company’s principal sources and uses of funds were as follows:
Cash provided by (used in) operating activities. For the nine months ended December 31, 2013, the Company provided $274,476 in cash for operations as compared to using $1,671,121 in cash for operations for the nine months ended December 31, 2012. This improvement is the result of the improvement in operating income, decrease in inventories and the increase in progress billings partially offset by the decrease in accounts payable and accounts receivable.
Cash used in investing activities. For the nine months ended December 31, 2013, the Company used $11,595 of its cash for investing activities, as compared to $60,816 for the nine months ended December 31, 2012 as result of lower purchases of equipment.
Cash (used in) provided by financing activities. For the nine months ended December 31, 2013, the Company used $356,831 in financing activities as compared to providing $1,417,536 for the nine months ended December 31, 2012. For the nine months ended December 31, 2012, the Company received net proceeds from the sale of common stock and proceeds from the issuance of long-term debt in the amount of $1,488,662 as compared to $100,000 for the nine months ended December 31, 2013. Additionally, the Company repaid debt and capital lease obligations of $470,201 for the nine months ended December 31, 2013 as compared to $175,556 for the nine months ended December 31, 2012.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)
Liquidity and Capital Resources (continued)
During the first nine months of the current fiscal year, the Private Investor converted the outstanding principal of $600,000, penalty of $25,000 and accrued interest for the month of May 2013 in the amount of $12,400 for a total of $637,400 into 200,000 shares of common stock at a price of $3.19 per share.
In June 2013, a related party received a note payable from the Company in exchange for $100,000, which the Company used for working capital needs. On July 24, 2013, the related party converted its note payable in the amount of $100,000 into 31,348 shares of the Company’s common stock at a price of $3.19 per share.
In consideration for the waiver for non-compliance of the financial covenants at March 31, 2013, on July 12, 2013, BCA received warrants to purchase 20,000 shares of the Company’s common stock. The common stock underlying the warrant is exercisable at a price of $3.33 per share and the warrants expire on September 10, 2019.
In consideration for the waiver for non-compliance of the financial covenants at June 30, 2013, on August 12, 2013, BCA received warrants to purchase 20,000 shares of the Company’s common stock. The common stock underlying the warrants is exercisable at a price of $3.69 per share and the warrants expire on September 10, 2019.
In consideration for the waiver for non-compliance of the financial covenants at September 30, 2013, on November 12, 2013, the Company incurred an incremental fee of $10,000.
As a result of the substantial operating losses incurred in the last year, the Company is not currently in compliance with the Exchange’s continued listing standards. Based on the information provided by the Company on August 15, 2013, the Exchange has determined, based on the information provided and the improved first quarter results that the Company had made a reasonable demonstration of its ability to regain compliance by the end of the revised plan period which is now February 20, 2014. As such, the Company listing is being continued pursuant to an extension and will continue to be monitored against this plan.
The Company also received a letter from the staff of the Exchange that, based on the Company’s financial statements at March 31, 2013, the Company was no longer in compliance with the minimum stockholders’ equity requirement of $4.0 million, and had also reported net losses in three of its last four fiscal years, as set forth in Section 1003(a)(ii) of the NYSE MKT Company Guide. The Company was afforded the opportunity to submit a plan of compliance to the Exchange and based on information provided by the Company, the Exchange notified the Company that it accepted the Company’s plan of compliance and granted an extension until November 7, 2014.
The Company is optimistic that it will demonstrate sufficient progress to maintain our NYSE-MKT listing.
In June 2013, the Company received a performance-based payment from the government in the amount of $858,050, which was used to pay old outstanding accounts payable of a significant vendor. The Company made solid progress during the first nine months of the current fiscal year in working down outstanding payables to its vendors.
Based on existing and expected production releases, the Company believes that it will have adequate liquidity, and backlog to fund operating plans for at least the next twelve months. Currently, the Company has no material future capital expenditure requirements.
If the Company is unable to obtain a full rate production release on the TS-4530A program within a reasonable period of time and/or our vendors or lenders begin to pursue legal action demanding payments, it would result in a material adverse effect on the Company’s operations and its ability to pay its obligations. As such, the Company may need to pursue additional sources of financing and/or additional progress payments. There can be no assurances that the Company can secure additional financing.
There was no significant impact on the Company’s operations as a result of inflation for the nine months ended December 31, 2013. These financial statements should be read in conjunction with the Company’s Annual Report on Form 10-K for the fiscal year ended March 31, 2013, filed with the SEC on July 16, 2013.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)
Off-Balance Sheet Arrangements
As of December 31, 2013, the Company had no off-balance sheet arrangements.
Critical Accounting Policies
Our critical accounting policies are described in Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the year ended March 31, 2013, as filed with the SEC on July 16, 2013. There have been no changes in our critical accounting policies. Our significant accounting policies are described in our notes to the 2013 consolidated financial statements included in our Annual Report on Form 10-K for the year ended March 31, 2013, as filed with the SEC on July 16, 2013.
Item 3. Quantitative and Qualitative Disclosures about Market Risk.
We do not hold any derivative instruments and do not engage in any hedging activities.
Item 4. Controls and Procedures.
(a) Evaluation of Disclosure Controls and Procedures
The Company, including its principal executive officer and principal financial officer, conducted an evaluation of the effectiveness of the design and operation of its disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”) as of the end of the period covered by this report (the “Evaluation Date”). Based upon the evaluation, our principal executive officer and principal financial officer concluded as of the Evaluation Date that our disclosure controls and procedures were effective. Disclosure controls are controls and procedures designed to reasonably ensure that information required to be disclosed in our reports filed under the Exchange Act, such as this report, is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls include controls and procedures designed to reasonably ensure that such information is accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate to allow timely decisions regarding required disclosure.
Changes in Internal Control over Financial Reporting
The Company, including its principal executive officer and principal accounting officer, reviewed the Company’s internal control over financial reporting, pursuant to Rule 13(a)-15(e) under the Exchange Act and concluded that there was no change in the Company’s internal control over financial reporting during the Company’s most recently completed fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
PART II – OTHER INFORMATION
Item 1. Legal Proceedings.
On March 24, 2009, Aeroflex Wichita, Inc. (“Aeroflex”) filed a petition against the Company and two of its employees in the District Court, 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 (the “Award”), to develop new Mode 5 radar test sets and kits to upgrade the existing TS-4530 radar test sets to Mode 5. Aeroflex’s petition alleges that in connection with the Award, the Company and its named employees misappropriated Aeroflex’s trade secrets; tortiously interfered with its business relationship; conspired to harm Aeroflex and tortiously interfered with its contract and seeks injunctive relief and damages. 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 Award to the Company, 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 Aeroflex 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 on jurisdiction grounds the Aeroflex Action. Aeroflex appealed this decision. In May 2012, the Kansas Supreme Court reversed the decision and remanded the Aeroflex Action to the District Court for further proceedings. The case is in discovery. Aeroflex has not yet identified to the court's satisfaction the trade secrets that Aeroflex alleges to have been misappropriated. Because of the pending discovery disputes, discovery is still in the early stages and no firm trial date has been set. Tel is optimistic as to the outcome of this litigation. However, the outcome of any litigation is unpredictable and an adverse decision in this matter could have a material adverse effect on our financial condition, results of operations or liquidity.
Other than described above, we are currently not involved in any litigation that we believe could have a material adverse effect on our financial condition or results of operations. There is no action, suit, proceeding, inquiry or investigation before or by any court, public board, government agency, self-regulatory organization or body pending or, to the knowledge of the executive officers of our company or any of our subsidiaries, threatened against or affecting our company, our Common Stock, any of our subsidiaries or of our companies or our subsidiaries’ officers or directors in their capacities as such, in which an adverse decision could have a material adverse effect.
Item 1A. Risk Factors.
We believe there are no changes that constitute material changes from the risk factors previously disclosed in the Company’s Annual Report on Form 10-K for the fiscal year ended March 31, 2013, filed with the SEC on July 16, 2013.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
There were no unregistered sales of the Company’s equity securities during the quarter ended December 31, 2013, other than those previously reported in a Current Report on Form 8-K.
Item 3. Defaults Upon Senior Securities.
There has been no default in the payment of principal, interest, sinking or purchase fund installment, or any other material default, with respect to any indebtedness of the Company.
Item 4. Mine Safety Disclosures.
Not applicable.
Item 5. Other Information.
There is no other information required to be disclosed under this item which was not previously disclosed.
Item 6. Exhibits.
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Exhibit No.
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Description
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31.1
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31.2
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32.1
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32.2
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101.INS
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XBRL Instance Document*
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101.SCH
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Taxonomy Extension Schema Document*
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101.CAL
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Taxonomy Extension Calculation Linkbase Document*
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101.DEF
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Taxonomy Extension Definition Linkbase Document*
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101.LAB
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Taxonomy Extension Label Linkbase Document*
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101.PRE
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Taxonomy Extension Presentation Linkbase Document*
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* Filed herewith
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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TEL-INSTRUMENT ELECTRONICS CORP.
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Date: February 14, 2014
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By:
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/s/ Jeffrey C. O’Hara
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Name: Jeffrey C. O’Hara
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Title: Chief Executive Officer
Principal Executive Officer
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Date: February 14, 2014
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By:
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/s/ Joseph P. Macaluso
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Name: Joseph P. Macaluso
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Title: Principal Financial Officer
Principal Accounting Officer
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