TEL INSTRUMENT ELECTRONICS CORP - Quarter Report: 2017 September (Form 10-Q)

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549 

 

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FORM 10-Q 

 

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

For the quarterly period ended: September 30, 2017

Commission File Number: 001-31990

(Exact name of registrant as specified in its charter)

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

 

 

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

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

As of November 13, 2017, there were 3,255,887 shares outstanding of the registrant’s common stock.

TEL-INSTRUMENT ELECTRONICS CORP.

TABLE OF CONTENTS

 

PART I – FINANCIAL INFORMATION

Item 1.  Financial Statements.

 

		September 30, 2017				March 31, 2017
		(unaudited)
ASSETS
Current assets:
Cash and cash equivalents		$	130,235			$	287,873
Accounts receivable, net			1,067,277				1,556,382
Inventories, net			4,456,377				4,208,179
Prepaid expenses and other current assets			77,282				188,578
Total current assets			5,731,171				6,241,012
Equipment and leasehold improvements, net			176,717				161,427
Other long-term assets			33,509				33,509
Total assets			5,941,397				6,435,948
LIABILITIES & STOCKHOLDERS’ (DEFICIT) EQUITY
Current liabilities:
Current portion of long-term debt			77,802				291,991
Line of credit			1,000,000				200,000
Capital lease obligations – current portion			6,564				6,268
Accounts payable and accrued liabilities			2,357,566				2,072,955
Federal and state taxes payable			-				4,105
Deferred revenues – current portion			45,358				123,720
Accrued legal damages			4,900,000				2,800,000
Accrued payroll, vacation pay and payroll taxes			417,016				527,413
Total current liabilities			8,804,306				6,026,452
Capital lease obligations – long-term			10,402				13,760
Long-term debt			-				2,124
Deferred revenues – long-term			366,915				352,973
Warrant liability			5,000				95,000
Total liabilities			9,186,623				6,490,309
Commitments
Stockholders’ (deficit) equity:
Common stock, 4,000,000 shares authorized, par value $0.10 per share, 3,255,887 shares issued and outstanding, respectively			325,586				325,586
Additional paid-in capital			8,123,184				8,107,369
Accumulated deficit			(11,693,996	)			(8,487,316	)
Total stockholders’ (deficit) equity			(3,245,226	)			(54,361	)
Total liabilities and stockholders’ (deficit) equity		$	5,941,397			$	6,435,948

 

See accompanying notes to condensed consolidated financial statements.

(Unaudited)

 

		Three Months Ended								Six Months Ended
		September 30, 2017				September 30, 2016				September 30, 2017				September 30, 2016
Net sales		$	1,787,165			$	5,076,029			$	5,329,242			$	10,418,398
Cost of sales			1,387,295				3,250,441				3,688,082				6,716,157
Gross margin			399,870				1,825,588				1,641,160				3,702,241
Operating expenses:
Selling, general and administrative			626,395				687,013				1,332,681				1,460,042
Litigation expenses			43,333				188,125				425,845				326,840
Legal damages			2,100,000				-				2,100,000				-
Engineering, research and development			529,667				583,771				1,144,940				1,168,648
Total operating expenses			3,299,395				1,458,909				5,003,466				2,955,530
(Loss) income from operations			(2,899,525	)			366,679				(3,362,306	)			746,711
Other income (expense):
Proceeds from life insurance			-				-				92,678				-
Amortization of deferred financing costs			(1,357	)			(1,357	)			(2,714	)			(2,713	)
Change in fair value of common stock warrants			(5,000	)			34,000				90,000				251,203
Interest expense			(14,707	)			(17,507	)			(24,338	)			(35,333	)
Total other (expense) income			(21,064	)			15,136				155,626				213,157
(Loss) income before income taxes			(2,920,589	)			381,815				(3,206,680	)			959,868
Income tax expense			-				109,760				-				277,504
Net (loss) income		$	(2,920,589	)		$	272,055			$	(3,206,680	)		$	682,364
Basic (loss) income per common share		$	(0.90	)		$	0.08			$	(0.98	)		$	0.21
Diluted (loss) income per common share		$	(0.90	)		$	0.07			$	(0.98	)		$	0.20
Weighted average shares outstanding:
Basic			3,255,887				3,255,887				3,255,887				3,255,887
Diluted			3,255,887				3,266,133				3,255,887				3,267,192

See accompanying notes to condensed consolidated financial statements.

(Unaudited)

 

See accompanying notes to condensed consolidated financial statements.

(Unaudited)

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 September 30, 2017, the results of operations for the three and six months ended September 30, 2017 and September 30, 2016, and statements of cash flows for the three and six months ended September 30, 2017 and September 30, 2016.  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, 2017 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, 2017, as filed with the United States Securities and Exchange Commission (the “SEC”) on July 14, 2017 (the “Annual Report).

The financial statements have been prepared on a going concern basis, which contemplates the realization of assets and satisfaction of liabilities and commitments in the normal course of business. The ability of the Company to continue as a going concern is dependent upon its ability to raise additional capital to support the appeal process or pay any final damages amount and achieve profitable operations. In November 2017, the Company signed a subscription agreement in which the Company received $3 million for Series A Convertible Preferred Stock (See Note 16 to the Notes to the Condensed Financial Statements). These funds will be used to finance an appeal and provide funds for operations. The accompanying financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.

 

During the six months ended September 30, 2017, there have been no material changes in the Company’s significant accounting policies to those previously disclosed in the Annual Report.

 

The following table sets forth the components of accounts receivable:

(Unaudited)

 

Inventories consist of:

 

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

 

(Unaudited)

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

 

 

Term Loans with Bank of America

In November 2014, the Company entered into a term loan in the amount of $1,200,000 with Bank of America. The term loan is for three years, and matures in November 2017. Monthly payments are at $36,551 including interest at 6%. The term loan is collateralized by substantially all of the assets of the Company. At September 30, 2017 and March 31, 2017, the outstanding balances were $72,552 and $285,810, respectively. At September 30, 2017, $72,552 was classified as current. This term loan is scheduled to be fully paid in November 2017.

In July 2015, the Company entered into a term loan in the amount of $18,000 with Bank of America. The term loan is for three years, and matures in July 2018. Monthly payments are at $536 including interest at 4.5%. The term loan is collateralized by substantially all of the assets of the Company. At September 30, 2017 and March 31, 2017, the outstanding balances were $5,250 and $8,305, respectively. At September 30, 2017, $5,250 was classified as current.

 

On March 21, 2016, the Company entered into a line of credit agreement with Bank of America, which expired March 31, 2017. In March 2017, the line of credit was renewed and the expiration date extended until March 31, 2018.  The new line provides a revolving credit facility with borrowing capacity of up to $1,000,000. There are no covenants or borrowing base calculations associated with this line of credit. Interest on any outstanding balances is payable monthly at an annual interest rate equal to the LIBOR (London Interbank Offered Rates) Daily Floating plus 3.75 percentage points. The Company’s interest rate was 4.985% at September 30, 2017.   The line is collateralized by substantially all of the assets of the Company.  During the six months ended September 30, 2017, the Company borrowed $800,000 from this line of credit. As of September 30, 2017 and March 31, 2017, the outstanding balances were $1,000,000 and $200,000, respectively.  As of September 30, 2017 the remaining availability under this line is $-0-.

(Unaudited)

 

In June 2016, the Company negotiated a settlement with a customer in the amount of $679,935 for price increases due to delays on a production release. Deferred revenues are recognized based upon the shipment of units under this contract. During the six months ended September 30, 2017, the Company recognized the remaining balance of $73,302 as compared to $342,836 for the six months ended September 30, 2016. As of September 30, 2017, the remaining deferred revenues related to the above-mentioned settlement was $-0- as compared to $73,302 at March 31, 2017. 

 

During the quarter ended September 30, 2017, the Company recognized revenues in the amount of $70,000 that pertained to fiscal year 2017 shipments and was not recorded in fiscal year 2017.

 

 

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

 

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

 

Management evaluates the performance of its segments and allocates resources to them based on gross margin. The Company’s general and administrative costs and sales and marketing expenses, and engineering costs are not segment specific. As a result, all operating expenses are not managed on a segment basis.  Net interest includes expenses on debt and income earned on cash balances, both maintained at the corporate level. Segment assets include accounts receivable and work-in-process inventory. Asset information, other than accounts receivable and work-in-process inventory, is not reported, since the Company does not produce such information internally.  All long-lived assets are located in the U.S.

The table below presents information about reportable segments within the avionics business for the three month periods ending September 30, 2017 and 2016:

 

(Unaudited)

 

(Unaudited)

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 has provided a 100% valuation allowance against its deferred tax asset at September 30, 2017 and March 31, 2017.

 

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).

(Unaudited)

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 September 30, 2017 and March 31, 2017.  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.

 

 

The Company adopted the guidance of ASC 815 “Derivative and Hedging”, which requires that we mark the value of our warrant liability to market and recognize the change in valuation in our statement of operations each reporting period. Determining the warrant liability to be recorded requires us to develop estimates to be used in calculating the fair value of the warrant.  

 

The following table provides a summary of the changes in fair value of our Level 3 financial liabilities from March 31, 2017 through September 30, 2017, as well as the portion of gains or losses included in income attributable to unrealized gains or losses related to the liability held at September 30, 2017:

 

 

The Company has remaining warrants with an outside investor to purchase 50,000 shares of the Company’s common stock at an exercise price of $3.35 per share or exercising the “put option” to the Company.  The warrant liability of the 50,000 warrants was $5,000 at September 30, 2017 as compared to $95,000 at March 31, 2017.

Certain prior year and period amounts have been reclassified to conform to the current period presentation.

(Unaudited)

Contingencies are recorded in the consolidated financial statements when it is probable that a liability will be incurred and the amount of the loss is reasonably estimable, or otherwise disclosed, in accordance with Accounting Standards Codification 450, Contingencies (“ASC 450”). Significant judgment is required in both the determination of probability and the determination as to whether a loss is reasonably estimable. In the event the Company determines that a loss is not probable, but is reasonably possible, and it becomes possible to develop what the Company believes to be a reasonable range of possible loss, then the Company will include disclosures related to such matter as appropriate and in compliance with ASC 450. To the extent there is a reasonable possibility that the losses could exceed the amounts already accrued, the Company will, when applicable, adjust the accrual in the period the determination is made, disclose an estimate of the additional loss or range of loss or if the amount of such adjustment cannot be reasonably estimated, disclose that an estimate cannot be made.

On March 24, 2009, Aeroflex Wichita, Inc. (“Aeroflex”) filed a petition against the Company and two of its employees in the District Court located in Sedgwick County, Kansas, Case No. 09 CV 1141 (the “Aeroflex Action”), alleging that the Company and its two employees misappropriated Aeroflex’s proprietary technology in connection with the Company winning a substantial contract from the U.S. Army, to develop new Mode-5 radar test sets and kits to upgrade the existing TS-4530 radar test sets to Mode 5 (the “Award”). Aeroflex’s petition, seeking injunctive relief and damages, alleges that in connection with the Award, the Company and its named employees misappropriated Aeroflex’s trade secrets; tortiously interfered with Aeroflex’s business relationship; conspired to harm Aeroflex and tortiously interfered with Aeroflex’s contract. The central basis of all the claims in the Aeroflex Action is that the Company misappropriated and used Aeroflex proprietary technology and confidential information in winning the Award.  In February 2009, subsequent to the Company winning the Award, Aeroflex filed a protest of the Award with the Government Accounting Office (“GAO”). In its protest, Aeroflex alleged, inter alia, that the Company used Aeroflex’s proprietary technology in order to win the Award, the same material allegations as were later alleged in the Aeroflex Action. On or about March 17, 2009, the U.S. Army Contracts Attorney and the U.S. Army Contracting Officer each filed a statement with the GAO, expressly rejecting Aeroflex’s allegations that the Company used or infringed on Aeroflex’s proprietary technology in winning the Award, and concluding that the Company had used only its own proprietary technology. On April 6, 2009, Aeroflex withdrew its protest.

In December 2009, the Kansas District Court dismissed the Aeroflex Action on jurisdiction grounds. Aeroflex appealed this decision. In May 2012, the Kansas Supreme Court reversed the decision and remanded the Aeroflex Action to the Kansas District Court for further proceedings.

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. 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 2015 2011. The motion for summary judgment was denied.

The Aeroflex trial on remand in the Kansas District Court began in March 2017. After a six-week trial, the jury rendered its verdict. The jury found no misappropriation of Aeroflex trade secrets but it did rule that the Company tortiously interfered with a prospective business opportunity and awarded damages of $1.3 million for lost profits. The jury also ruled that Tel tortiously interfered with Aeroflex’s non-disclosure agreements with two former Aeroflex employees and awarded damages of $1.5 million for lost profits, resulting in total damages against the Company of $2.8 million. The jury also found that the former Aeroflex employees breached their non-disclosure agreements with Aeroflex and awarded damages against these two individuals totaling $525,000. The jury also decided that punitive damages should be allowed against the Company.

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

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

(Unaudited)

Aeroflex submitted a motion to the Court requesting that the judge award punitive damages at the maximum $5 million amount. In Kansas, punitive damages are awarded to “punish the wrongdoer for his malicious, vindictive or willful and wanton invasion of another’s rights, with the ultimate purpose being to restrain and deter others from the commission of similar wrongdoings.” Importantly, Kansas courts have ruled that the purpose of punitive damages “is to sting, not to kill”. The Court will also take into consideration the Company’s financial condition in setting the amount of punitive damages.

Once the court has entered judgment, the Company has approximately 30 days to file an appeal or request a new trial. If the Company files the appeal on its own, it will be required to post a bond equal to the lesser of: (1) the final damages award; or (2) $1 million plus 25% of the amount of the verdict in excess of $1 million, which would currently total $1.975 million.

 

The Company believes it has excellent grounds to appeal this verdict. The appeal process would be expected to take several years to complete.

In November 2017, the Company signed a subscription agreement in which the Company received $3 million for Series A Convertible Preferred Stock (See Note 16 to the Notes to the Condensed Financial Statements). These funds will be used to finance an appeal and provide funds for operations.

Other than the matters outlined above, we are currently not involved in any litigation that we believe could have a material adverse effect on our financial condition or results of operations. There is no action, suit, proceeding, inquiry or investigation before any court, public board, government agency, self-regulatory organization or body pending or, to the knowledge of executive officers of our Company, threatened against or affecting our Company, or our common stock in which an adverse decision could have a material effect.

 

In March 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-09 (“Improvements to Employee Share-Based Payment Accounting”) which simplifies several aspects of accounting for share-based payment transactions including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. The new standard is effective for fiscal years beginning after December 15, 2016 and interim periods within those fiscal years with early adoption permitted. The Company does not believe that the adoption of this standard will have a material impact on the Company’s consolidated financial statements.

In February 2016, the FASB issued ASU 2016-02 (“Leases”), which introduces the recognition of lease assets and lease liabilities by lessees for those leases classified as operating leases under previous guidance. The new standard establishes a right-of-use (“ROU”) model that requires a lessee to record an ROU asset and a lease liability on the balance sheet for all leases with terms longer than 12 months. The new standard is effective for fiscal years beginning after December 15, 2018 and interim periods within those fiscal years with early adoption permitted. The adoption of this ASU will increase assets and liabilities for operating leases. The Company is evaluating the impact that the adoption of this standard will have on the Company’s consolidated financial statements.

In November 2015, the FASB issued ASU 2015-17, which is an update to Topic 740, “Income Taxes”. This update requires that all deferred tax assets and liabilities be classified as non-current. The Company adopted this update in the current year, which is reflected in the accompanying balance sheets. The deferred tax recorded as a current asset for the year ended March 31, 2016 was reclassified as Deferred Tax – Non-Current. The adoption of this update did not have any impact on the Company’s results of operations.

(Unaudited)

In August 2014, the FASB issued Accounting Standards Update (“ASU”) No. 2014-15, Presentation of Financial Statements - Going Concern to provide guidance about management’s responsibility to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern. The guidance requires management to assess whether there are conditions or events, considered in the aggregate, that raise substantial doubt about an entity’s ability to continue as a going concern within one year after the date that the financial statements are issued. When management identifies such conditions or events, a footnote disclosure is required to disclose their nature, as well as management’s plans to alleviate the substantial doubt to continue as a going concern. The standard became effective for our fiscal year end 2017 and did not have an impact on the consolidated financial statements.

In May 2014, the FASB issued ASU 2014-09 that introduces a new five-step revenue recognition model in which an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. This ASU also requires disclosures sufficient to enable users to understand the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers, including qualitative and quantitative disclosures about contracts with customers, significant judgments and changes in judgments, and assets recognized from the costs to obtain or fulfill a contract. In March 2016, the FASB issued ASU 2016-08 which further clarifies the guidance on the principal versus agent considerations within ASU 2014-09. In April 2016, the FASB issued ASU 2016-10 to expand the guidance on identifying performance obligations and licensing within ASU 2014-09. In May 2016, the FASB issued ASU 2016-12 to improve revenue recognition in the areas of collectability, presentation of sales tax and other similar taxes collected from customers, noncash consideration, contract modifications and completed contracts at transition. This update also amends the disclosure requirements within ASU 2014-09 for entities that retrospectively apply the guidance. The latest amendments are intended to address implementation issues that were raised by stakeholders and discussed by the Revenue Recognition Transition Resource Group, and provide additional practical expedients. These standards are effective for fiscal years beginning after December 15, 2017, including interim periods within that reporting period. The Company is currently evaluating the new guidance to determine the impact, if any, it will have on its consolidated financial statements.

 

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

In November 2017, the Company entered into a subscription agreement with an existing stockholder to provide $3 million in exchange for Series A Convertible Preferred Stock. The Series A Preferred Stock has the rights, privileges, preferences and restrictions set for in the Certificate of Amendment to Certificate of Incorporation (the “Designations”) filed by the Company with the Secretary of State of the State of New Jersey on November 8, 2017.  The Designations provide for an 8% dividend rate and Series A Preferred Stock is convertible into shares of common stock at a price of $3.00 per share.

Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations.

This Quarterly Report on Form 10-Q and other reports filed by the Company from time to time with the SEC (collectively the “Filings”) contain or may contain forward-looking statements and information that are based upon beliefs of, and information currently available to, the Company’s management as well as estimates and assumptions made by Company’s management.  Readers are cautioned not to place undue reliance on these forward-looking statements, which are only predictions and speak only as of the date hereof.  When used in the Filings, the words “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, 2017, filed with the SEC on July 14, 2017, 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.

 

The Company continues to pursue international opportunities with its "Drive to Mode 5" marketing campaign.  All allied countries have a drop dead date of January 1, 2020 for implementing Mode 5 capability; as a result, we believe that this international Mode 5 business will remain strong for at least the next three years. The Company believes it has built a solid position in the Mode 5 IFF and TACAN test set market, and these products should be very competitive in both the domestic and overseas markets, and we have already delivered Mode 5 test sets into 18 international markets.

We believe the real long-term growth potential for the Company is in our new line of modular hand-held test sets. This provides us with the opportunity to expand out of our relatively narrow avionics test market niche and enter the much larger secure communications radio test market. We are actively working to line up partners to enter this growth market and we believe that our new hardware platform provides unmatched capabilities in a market leading form factor. The Company is also evaluating upcoming U.S. Navy requirements, and expects at least one large competitive solicitation will be issued in the next 12 months for a product in our technical area of expertise. We are also working closely with our other military customers on new potential market opportunities that will be needed to maintain our sales and profitability growth.

The commercial avionics industry is undergoing a great deal of regulatory change including the requirement that all aircraft be equipped with ADS-B transponders as well as the introduction of new UAT navigation for the general aviation market. We believe that our new hand-held products, that we are planning to introduce in the near term, will generate increased market share at attractive gross margin levels. The Company is also targeting the extremely large commercial and military radio test set market which is many times the size of our traditional avionics test market. We are also working closely with our military customers on new potential market opportunities that will be needed to maintain our sales and profitability growth.

We continue to evaluate other attractive potential market opportunities.

Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations.

The expectation is that we will significantly improve our gross margins beginning next fiscal year with a goal of returning to our traditional 50% gross margin levels. As such, we believe the key will be to secure sufficient high margin business with our existing and new products to maintain a reasonable backlog. The timing of these new orders is largely out of our hands so we expect to see increased volatility in our quarterly revenues during fiscal year 2018. At September 30, 2017, the Company’s backlog of orders was approximately $1.6 million as compared to $3.2 million at March 31, 2017.

 

On March 21, 2016, the Company entered into a line of credit agreement with Bank of America, which expired March 31, 2017. In March 2017, the line of credit was renewed and the expiration date extended until March 31, 2018.  The new line provides a revolving credit facility with borrowing capacity of up to $1,000,000. There are no covenants or borrowing base calculations associated with this line of credit. Interest on any outstanding balances is payable monthly at an annual interest rate equal to the LIBOR (London Interbank Offered Rates) Daily Floating plus 3.75 percentage points. The Company’s interest rate was 4.985% at September 30, 2017.   The line is collateralized by substantially all of the assets of the Company.  During the six months ended September 30, 2017, the Company borrowed $800,000 from this line of credit. As of September 30, 2017 and March 31, 2017, the outstanding balances were $1,000,000 and $200,000, respectively.  As of September 30, 2017 the remaining availability under this line was $-0-.

 

On July 27, 2017, the Company received a letter from the staff of the NYSE American (the “Exchange”) stating that, based on Tel’s financial statements at March 31, 2017, Tel is not in compliance with  Section 1003(a)(i) of the NYSE American Company Guide, which requires that a company’s stockholders’ equity be $2.0 million or more if it has reported net losses in two of its last three fiscal years (the “Stockholders’ Equity Requirement”). As of March 31, 2017, the Company had a stockholders’ deficit of $54,361, which resulted from litigation costs, the accrual of $2.8 million in damages, as well as the recording of a valuation allowance against the Company’s deferred tax asset of $3.5 million, which resulted in the Company recording a net loss of $4.8 million for the fiscal year ended March 31, 2017, thus bringing the Company below the Stockholders’ Equity Requirement.

 

The Company submitted is plan to the Exchange, a plan advising of the actions the Company has taken or will take to regain compliance with the Stockholders’ Equity Requirement by January 29, 2019. In October 2017, the Exchange accepted the Company’s plan.

 

Tel’s stock will continue to be listed on the NYSE American while Tel works to regain compliance with the Stockholders’ Equity Requirement. The Company’s common stock will continue to trade under the symbol “TIK”. The Company’s receipt of such notification from the Exchange does not affect the Company’s business, operations or reporting requirements with the U.S. Securities and Exchange Commission.

 

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.

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. 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.

Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations.

The Aeroflex trial on remand in the Kansas District Court began in March 2017. After a six-week trial, the jury rendered its verdict. The jury found no misappropriation of Aeroflex trade secrets but it did rule that the Company tortiously interfered with a prospective business opportunity and awarded damages of $1.3 million for lost profits. The jury also ruled that Tel tortiously interfered with Aeroflex’s non-disclosure agreements with two former Aeroflex employees and awarded damages of $1.5 million for lost profits, resulting in total damages against the Company of $2.8 million. The jury also found that the former Aeroflex employees breached their non-disclosure agreements with Aeroflex and awarded damages against these two individuals totaling $525,000. The jury also decided that punitive damages should be allowed against the Company.

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

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

Aeroflex submitted a motion to the Court requesting that the judge award punitive damages at the maximum $5 million amount. In Kansas, punitive damages are awarded to “punish the wrongdoer for his malicious, vindictive or willful and wanton invasion of another’s rights, with the ultimate purpose being to restrain and deter others from the commission of similar wrongdoings.” Importantly, Kansas courts have ruled that the purpose of punitive damages “is to sting, not to kill”. The Court will also take into consideration the Company’s financial condition in setting the amount of punitive damages.

Once the court has entered judgment, the Company has approximately 30 days to file an appeal or request a new trial. If the Company files the appeal on its own, it will be required to post a bond equal to the lesser of: (1) the final damages award; or (2) $1 million plus 25% of the amount of the verdict in excess of $1 million, which would currently total $1.975 million. The Company believes it has excellent grounds to appeal this verdict. The appeal process would be expected to take several years to complete.

 

For the three months ended September 30, 2017, total net sales decreased $3,288,864 (64.8%) to $1,787,165, as compared to $5,076,029 for the three months ended September 30, 2016. Avionics government sales decreased $3,310,071 (76.3%) to $1,028,693 for the three months ended September 30, 2017, as compared to $4,338,764 for the three months ended September 30, 2016. The decrease in sales is mostly attributed to the decrease in shipment of the U.S. Army TS-4530A Kits and Sets, and the CRAFT and ITATS units associated with the U.S. Navy programs, which contracts have now been completed. Commercial sales increased $21,207 (2.9%) to $758,472 for the three months ended September 30, 2017 as compared to $737,265 for the three months ended September 30, 2016. This increase is attributed to the increased sales of the TR-220 partially offset by a decrease in sales of the T-30D and lower part sales.

For the six months ended September 30, 2017, total net sales decreased $5,089,156 (48.8%) to $5,329,242, as compared to $10,418,398 for the six months ended September 30, 2016. Avionics government sales decreased $5,209,365 (56.6%) to $4,001,019 for the six months ended September 30, 2017, as compared to $9,210,384 for the six months ended September 30, 2016. The decrease in sales is mostly attributed to the decrease in shipment of the U.S. Army TS-4530A Kits and Sets, and the CRAFT and ITATS units associated with the U.S. Navy programs, which contracts have now been completed. Commercial sales increased $120,209 (10.0%) to $1,328,223 for the six months ended September 30, 2017 as compared to $1,208,014 for the six months ended September 30, 2016. This increase is attributed to the increased sales of the TR-220 partially offset by a decrease in sales of the T-30D and lower part sales.

Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations.

For the three and six months ended September 30, 2017, total gross margin decreased $1,425,718 (78.1%) and $2,061,081 (55.7%) to $399,870 and $1,641,160, respectively, as compared to $1,825,588 and $3,702,241 for the three and six months ended September 30, 2016, respectively, primarily as a result of the lower volume as well as labor and overhead variances as a result of the lower volume. The gross margin percentage for the three months ended September 30, 2017 was 22.4%, as compared to 36.0% for the three months ended September 30, 2016. The gross margin percentage for the six months ended September 30, 2017 was 30.8%, as compared to 35.5% for the six months ended September 30, 2016.

Selling, general and administrative expenses decreased $60,618 (8.9%) to $626,395 for the three months ended September 30, 2017, as compared to $687,013 for the three months ended September 30, 2016. This decrease was primarily attributed to lower salaries and related expenses, lower accrued profit sharing and commission expenses offset partially by higher professional fees.

Selling, general and administrative expenses decreased $127,361 (8.7%) to $1,332,681 for the six months ended September 30, 2017, as compared to $1,460,042 for the six months ended September 30, 2016. This decrease was primarily attributed to lower salaries and related expenses and lower accrued profit sharing expense offset partially by higher outside commission expenses and professional fees.

Litigation expenses for the three months ended September 30, 2017 decreased to $43,333 as compared to $188,125 for the three months ended September 30, 2016 as a result of less activity as the Company was awaiting the decision by the court.

Litigation expenses increased to $425,845 for the six months ended September 30, 2017 as compared to $326,840 for the six months ended September 30, 2016 as a result of the trial expenses associated with the Aeroflex Wichita, Inc. (“Aeroflex”) litigation during the first quarter of this fiscal year partially offset by the limit activity in the current quarter.

The Company recorded $2.1 million in additional legal damages for the three months ended September 30, 2017 as a result of the court’s decision regarding punitive damages.

Engineering, research and development expenses decreased $54,104 (9.3%) and $23,708 (2.0%) to $529,667 and $1,144,940, respectively, for the three and six months ended September 30, 2017 as compared to $583,771 and $1,168,940 for the three and six months ended September 30, 2016. The Company continues to invest in new products by taking advantage of our CRAFT and TS-4530A technology to develop smaller hand-held products, which will broaden our product line for both commercial and military applications. The Company is also developing its T-47M5 Mode 5 test set, which we believe will compete effectively in the international market.

As a result of the above, the Company recorded losses from operations of $2,899,525 and $3,362,306 for the three and six months ended September 30, 2017, as compared to income from operations of $366,679 and $746,711 for the three and six months ended September 30, 2016.  

For the three months ended September 30, 2017, total other expense was $21,064, as compared to other income of $15,136 for the three months September 30, 2016. This decrease in other income is primarily due to the loss on the change in the valuation of common stock warrants as compared to a gain in the same period last year.

For the six months ended September 30, 2017, total other income was $155,626, as compared to other income of $213,157 for the six months September 30, 2016. This decrease in other income is primarily due to the lower gain on the change in the valuation of common stock warrants as compared to a gain in the same period last year offset partially by proceeds from a life insurance policy.

As a result of the above, the Company recorded a loss before taxes of $2,920,589 and $3,206,680 for the three and six months ended September 30, 2016, as compared to income before taxes of $381,815 and $959,868 for the three and six months ended September 30, 2016.  

Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations.

For the three and six months ended September 30, 2017, the Company recorded no income tax benefit as such amount was offset by a valuation allowance. For the three and six months ended September 30, 2016, the Company reported provisions for income tax in the amounts of $109,760 and $277,504, respectively.

As a result of the above, the Company recorded net losses of $2,920,589 and $3,206,680 for the three and six months ended September 30, 2017, as compared to net income of $272,055 and $682,364 for the three and six months ended September 30, 2016.  

At September 30, 2017, the Company had net negative working capital of $3,073,135 as compared to positive working capital of $214,560 at March 31, 2017. This change is primarily the result of the additional legal damages and additional amounts drawn from the line of credit.

During the six months ended September 30, 2017, the Company’s cash balance decreased by $157,638 to $130,235.  The Company’s principal sources and uses of funds were as follows:

Cash used in operating activities. For the six months ended September 30, 2017, the Company used $684,861 in cash for operations as compared to providing $846,851 in cash from operations for the six months ended September 30, 2016.  This increase in cash used for operations is the result of the lower operating income, increase in inventories offset partially by the decrease in accounts receivable, increase in accounts payable and accrued expenses and the changes in deferred revenues.

Cash used in investing activities.  For the six months ended September 30, 2017, the Company used $53,402 of its cash for investment activities, as compared to $30,303 for the six months ended September 30, 2016 as a result of a decrease in the purchase of capital equipment.

 

Cash provided by (used in) financing activities. For the six months ended September 30, 2017, the Company provided $580,625 in cash from financing activities as compared to using $958,647 for the six months ended September 30, 2016 primarily as a result of the proceeds from the line of credit. The six months ended September 30, 2016 included a $720,000 payment of a warrant liability that did not occur this year.

In November 2014, the Company entered into a term loan in the amount of $1,200,000 with Bank of America. The term loan is for three years, and matures in November 2017. Monthly payments are at $36,551 including interest at 6%. The term loan is collateralized by substantially all of the assets of the Company. At September 30, 2017 and March 31, 2017, the outstanding balances were $72,552 and $285,810, respectively. At September 30, 2017, $179,999 was classified as current.

In July 2015, the Company entered into a term loan in the amount of $18,000 with Bank of America. The term loan is for three years and matures in July 2018. Monthly payments are at $536 including interest at 4.5%. The term loan is collateralized by substantially all of the assets of the Company. At September 30, 2017 and March 31, 2017, the outstanding balances were $5,250 and $8,305, respectively. At September 30, 2017, $5,250 was classified as current.

 

On March 21, 2016, the Company entered into a line of credit agreement with Bank of America, which expired March 31, 2017. In March 2017, the line of credit was renewed and the expiration date extended until March 31, 2018.  The new line provides a revolving credit facility with borrowing capacity of up to $1,000,000. There are no covenants or borrowing base calculations associated with this line of credit. Interest on any outstanding balances is payable monthly at an annual interest rate equal to the LIBOR (London Interbank Offered Rates) Daily Floating plus 3.75 percentage points. The Company’s interest rate was 4.985% at September 30, 2017.   The line is collateralized by substantially all of the assets of the Company.  During the six months ended September 30, 2017, the Company borrowed $800,000 from this line of credit. As of September 30, 2017 and March 31, 2017, the outstanding balances were $1,000,000 and $200,000, respectively.  As of September 30, 2017 the remaining availability under this line is $-0-.

Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations.

The Company has approximately 30 days to file an appeal or request a new trial. If the Company files the appeal on its own, it will be required to post a bond in the equal to the lesser of: (1) the final damages award; or (2) $1 million plus 25% of the amount of the verdict in excess of $1 million, which would currently total $1.975 million.

The Company believes it has excellent grounds to appeal this verdict. The appeal process would be expected to take several years to complete.

Currently, the Company has no material future capital expenditure requirements.

There was no significant impact on the Company’s operations as a result of inflation for the six months ended September 30, 2017.

 

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, 2017, filed with the SEC on July 14, 2017 (the “Annual Report”).

As of September 30, 2017, the Company had no material off-balance sheet arrangements.

Our critical accounting policies are described in Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report. There have been no changes in our critical accounting policies. Our significant accounting policies are described in our notes to the 2017 consolidated financial statements included in our Annual Report.

Item 3.  Quantitative and Qualitative Disclosures about Market Risk.

 

We do not hold any derivative instruments and do not engage in any hedging activities.

 

Item 4.  Controls and Procedures.

 

(a)	Evaluation of Disclosure Controls and Procedures

The Company, including its principal executive officer and principal financial officer, conducted an evaluation of the effectiveness of the design and operation of its disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”) as of the end of the period covered by this report (the “Evaluation Date”). Based upon the evaluation, our principal executive officer and principal financial officer concluded as of the Evaluation Date that our disclosure controls and procedures were effective. Disclosure controls are controls and procedures designed to reasonably ensure that information required to be disclosed in our reports filed under the Exchange Act, such as this report, is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls include controls and procedures designed to reasonably ensure that such information is accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate to allow timely decisions regarding required disclosure.

 

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 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.

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. 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 six-week trial, the jury rendered its verdict. The jury found no misappropriation of Aeroflex trade secrets but it did rule that the Company tortiously interfered with a prospective business opportunity and awarded damages of $1.3 million for lost profits. The jury also ruled that Tel tortiously interfered with Aeroflex’s non-disclosure agreements with two former Aeroflex employees and awarded damages of $1.5 million for lost profits, resulting in total damages against the Company of $2.8 million. The jury also found that the former Aeroflex employees breached their non-disclosure agreements with Aeroflex and awarded damages against these two individuals totaling $525,000. The jury also decided that punitive damages should be allowed against the Company.

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

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

Aeroflex submitted a motion to the Court requesting that the judge award punitive damages at the maximum $5 million amount. In Kansas, punitive damages are awarded to “punish the wrongdoer for his malicious, vindictive or willful and wanton invasion of another’s rights, with the ultimate purpose being to restrain and deter others from the commission of similar wrongdoings.” Importantly, Kansas courts have ruled that the purpose of punitive damages “is to sting, not to kill”. The Court will also take into consideration the Company’s financial condition in setting the amount of punitive damages

PART II – OTHER INFORMATION

 

Item 1.  Legal Proceedings (continued)

Once the court has entered judgment, the Company has approximately 30 days to file an appeal or request a new trial. If the Company files the appeal on its own, it will be required to post a bond equal to the lesser of: (1) the final damages award; or (2) $1 million plus 25% of the amount of the verdict in excess of $1 million, which would currently total $1.975 million. The Company believes it has excellent grounds to appeal this verdict. The appeal process would be expected to take several years to complete.

Other than the matters outlined above, we are currently not involved in any litigation that we believe could have a material adverse effect on our financial condition or results of operations. There is no action, suit, proceeding, inquiry or investigation before any court, public board, government agency, self-regulatory organization or body pending or, to the knowledge of executive officers of our Company, threatened against or affecting our Company, or our common stock in which an adverse decision could have a material effect.

Item 1A.  Risk Factors.

We believe there are no changes that constitute material changes from the risk factors previously disclosed in the Company’s Annual Report on Form 10-K for the fiscal year ended March 31, 2017, filed with the SEC on July 14, 2017.

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 September 30, 2017 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.

 

* Filed herewith

SIGNATURES

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