Notes To Consolidated Financial Statements
1. Business, Organization, and Liquidity
Business and Organization
Tel-Instrument Electronics Corp. (“Tel,” “TIC,” or the “Company”) has been in business since 1947. The Company is a leading designer and manufacturer of avionics test and measurement instruments for the global, commercial air transport, general aviation, and government/military defense markets. Tel provides instruments to test, measure, calibrate, and repair a wide range of airborne navigation and communication equipment. The Company sells its equipment in both domestic and international markets. Tel continues to develop new products in anticipation of customers’ needs and to maintain its strong market position. Its development of multi-function testers has made it easier for customers to perform ramp tests with less operator training, fewer test sets, and lower product support costs. The Company has become a major manufacturer and supplier of Identification Friend or Foe (“IFF”) flight line test equipment over the last two decades.
Liquidity and PPP Loans
On March 31, 2023, the Company had positive working capital of $3,058,638, as compared to working capital of $3,671,667 on March 31, 2022. This included $5.9 million of cash including the $2 million supersedes appeal bond. The Company also has borrowed the full capacity of $690,000 under the Company’s line of credit agreement. As discussed in Note 20 of the consolidated financial statements, the Company has recorded total damages of $6,360,698, including accrued interest, as a result of the jury verdict associated with the Aeroflex litigation as well as the Court’s decision on punitive damages.
There was a $6.5 million sales order backlog on March 31, 2023.
Bank of America renewed our line of credit with a maturity date of July 30, 2023. As of March 31, 2023, the line of credit was fully drawn upon for $690,000.
The Employee Retention Credit (ERC) is a refundable tax credit for businesses that continued to pay employees while shut down due to the COVID-19 pandemic or had significant declines in gross receipts from March 13, 2020 to December 31, 2021. Eligible employers can claim the ERC on an original or adjusted employment tax return for a period within those dates. The Company filed adjusted employment tax returns for quarters one and two of calendar year 2021, with a refund of $628,401 that was received June 1, 2023.
Moving forward, we believe that our expected cash flows from operations and current cash balances, which amounted to approximately $5.9 million, including the approximately $2 million in restricted cash will be sufficient to operate in the normal course of business for next 12 months from the issuance date of these consolidated financial statements, including any payments for settlement of the litigation.
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 during the year ended March 31, 2023.
Impact of the COVID-19 Coronavirus
In December 2019, a novel strain of coronavirus, which causes the disease known as COVID-19, was reported to have surfaced in Wuhan, China. Since then, COVID-19 coronavirus has spread globally. In March 2020, the World Health Organization declared the COVID-19 outbreak a pandemic and the U.S. government imposed travel restrictions on travel between the United States, Europe, and certain other countries. The impact of this pandemic has been, and will likely continue to be, extensive in many aspects of society, which has resulted, and will likely continue to result, in significant disruptions to the global economy as well as businesses and capital markets around the world.
In response to public health directives and orders and to help minimize the risk of the virus to employees, the Company has taken precautionary measures, including implementing work-from-home policies for certain employees. The impact of the virus, including work-from-home policies, may negatively impact productivity, disrupt the Company's business, and delay certain projects, the magnitude of which will depend, in part, on the length and severity of the restrictions and other limitations on the Company's ability to conduct its business in the ordinary course. Other impacts to the Company's business may include temporary closures of its suppliers and disruptions or restrictions on its employees' ability to travel. Any prolonged material disruption to the Company's employees or suppliers could adversely impact the Company's financial condition and results of operations, including its ability to obtain financing.
TEL-INSTRUMENT ELECTRONICS CORP.
Notes To Consolidated Financial Statements
1. Business, Organization, and Liquidity (continued)
Impact of the COVID-19 Coronavirus (continued)
On September 9, 2021, President Biden announced Executive Order 14042 (“Executive Order”) and related initiatives designed to lead the country out of the COVID-19 pandemic. The Executive Order includes policies that will require employees of contractors that do business with the federal government to be vaccinated. On September 24, 2021, The Safer Federal Workforce Task Force released COVID-19 vaccine guidance for Federal contractors and subcontractors. According to this guidance, covered employees must be fully vaccinated by December 8, 2021, or at the latest, by the first day of performance on a covered contract, absent the need for a disability or religious accommodation. In addition, covered contractors must follow the CDC’s mask and physical distance requirements for covered contractor employees and visitors. The Executive Order and the guidance apply to any prime contractor or subcontractor that is a party to a “contract or contract-like instrument” that includes a clause incorporating the requirements of the Executive Order. The new clause was applied on October 15, 2021, to only new federal contracts, solicitations, contract extensions and renewals.
On December 7, 2021, the federal court in Georgia issued a preliminary injunction temporarily halting the enforcement of EO 14042 (Ensuring Adequate COVID Safety Protocols for Federal Contractors) for all covered contracts nation-wide. New guidance from OMB also followed suit giving federal agencies input on how to go about non-enforcement provisions until legal challenges have been resolved. The updated guidance will remain applicable despite any change to new or existing court decisions. The new guidance does not impact the Safer Federal Workforce Taskforce Guidance.
2. Summary of Significant Accounting Policies
Principles of Consolidation:
The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States and include the Company and its wholly owned subsidiary. All significant inter-company accounts and transactions have been eliminated.
Leases:
The Company accounts for leases under Financial Accounting Standards Board (“FASB”) Topic 842, Accounting for Leases (“ASC 842). Under its core principle, a lessee recognizes a right-of-use (“ROU”) asset and a related lease liability on the balance sheet for most leases. The most significant change is on the balance sheet for lessees. For the income statement, the pattern of expense recognition depends on a lease’s classification but is generally consistent with current U.S. GAAP (ASC 840, Leases, or “ASC 840”).
The Company determines if a contractual arrangement is a lease at inception. Operating leases are included in operating lease right-of-use (“ROU”) assets, current operating lease liabilities, and noncurrent operating lease liabilities on the Company’s consolidated balance sheet. The Company evaluates and classifies leases as operating or finance leases for financial reporting purposes. The classification evaluation begins at the commencement date and the lease term used in the evaluation includes the non-cancellable period for which the Company has the right to use the underlying asset, together with renewal option periods when the exercise of the renewal option is reasonably certain and failure to exercise such option which result in an economic penalty. The Company’s real estate lease is classified as an operating lease. ROU assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent the Company’s obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at the commencement date of the lease based on the present value of lease payments over the lease term. The lease payments included in the present value are fixed lease payments. As most of the Company’s leases do not provide an implicit rate, the Company estimates its collateralized incremental borrowing rate, based on information available at the commencement date, in determining the present value of lease payments. The Company applies the portfolio approach in applying discount rates to its classes of leases. The operating lease ROU assets include any payments made before the commencement date. Lease expense for lease payments is recognized on a straight-line basis over the lease term. The Company does not currently have subleases. The Company does not currently have residual value guarantees or restrictive covenants in its leases.
TEL-INSTRUMENT ELECTRONICS CORP.
Notes To Consolidated Financial Statements
2. Summary of Significant Accounting Policies (continued)
Revenue Recognition:
Under Financial Accounting Standards Board (“FASB”) Topic 606, Revenue from Contacts with Customers (“ASC 606”), the Company recognizes revenue when the customer obtains control of promised goods or services, in an amount that reflects the consideration which is expected to be received in exchange for those goods or services. The Company recognizes revenue following the five-step model prescribed under ASC 606: (i) identify contract(s) with a customer; (ii) identify the performance obligation(s) in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligation(s) in the contract; and (v) recognize revenue when (or as) the Company satisfies a performance obligation. The Company only applies the five-step model to contracts when it is probable that the entity will collect the consideration it is entitled to in exchange for the goods and services it transfers to the customer. At contract inception, once the contract is determined to be within the scope of ASC 606, the Company assesses the goods or services promised within each contract and determines those that are performance obligations and assesses whether each promised good or service is distinct. The Company then recognizes as revenue the amount of the transaction price that is allocated to the respective performance obligation when (or as) the performance obligation is satisfied.
The Company accounts for revenue recognition in accordance with ASC 606.The core principle of Topic 606 is to recognize revenues when promised goods or services are transferred to customers in an amount that reflects the consideration that is expected to be received for those goods or services. The ASC 606 defines a five-step process to achieve the core principle and, in doing so, it is possible more judgement and estimates may be required within the revenue recognition process than are currently in use.
The Company generates revenue from designing, manufacturing, and selling avionic tests and measurement solutions for the global commercial air transport, general aviation, and government/military aerospace and defense markets. The Company also offers calibration and repair services for a wide range of airborne navigation and communication equipment.
Nature of goods and services
The following is a description of the products and services from which the Company generates revenue, as well as the nature, timing of satisfaction of performance obligations, and significant payment terms for each.
Test Units/Sets
The Company develops, and manufactures unit sets to test navigation and communication equipment, such as ramp testers and bench testers for radios installed in aircraft. The Company recognizes revenue when the customer obtains control of the Company’s product based on the contractual shipping terms of the contract, usually at time of shipment. Revenue on products is presented gross because the Company is primarily responsible for fulfilling the promise to provide the product, is responsible to ensure that the product is produced in accordance with the related supply agreement and bears the risk of loss while the inventory is in-transit. Revenue is measured as the amount of consideration the Company expects to receive in exchange for transferring products to the customer. If the contract contains a single performance obligation, the entire transaction price is allocated to the single performance obligation. Contracts that contain multiple performance obligations require an allocation of the transaction price based on the estimated relative standalone selling prices of the promised products or services underlying each performance obligation. The Company determines stand-alone selling prices based on the price at which the performance obligation is sold separately. If the stand-alone selling price is not observable through past transactions, the Company estimates the standalone selling price considering available information such as market conditions and internally approved pricing guidelines related to the performance obligations.
When determining the transaction price of a contract, an adjustment is made if payment from the customer occurs either significantly before or significantly after performance, resulting in a significant financing component. Applying the practical expedient in paragraph 606-10-32-18, the Company does not assess whether a significant financing component exists if the period between when the Company performs its obligations under the contract and when the customer pays is one year or less. None of the Company’s contracts contained a significant financing component as of March 31, 2023.
TEL-INSTRUMENT ELECTRONICS CORP.
Notes To Consolidated Financial Statements
2. Summary of Significant Accounting Policies (continued)
Revenue Recognition (continued):
Replacement Parts
The Company offers replacement parts for test equipment, ramp testers, and bench testers. Similar to the sale of test units, the control of the product transfers at a point of time and therefore, revenue is recognized at the point in time when the obligation to the customer has been fulfilled.
Extended Warranties
The extended warranties sold by the Company provide a level of assurance beyond the coverage for defects that existed at the time of a sale or against certain types of covered damage with coverage terms generally ranging from 5 to 7 years. Amounts received for warranties are recorded as deferred revenue and recognized as revenue ratably over the respective term of the agreements.
As of March 31, 2023, approximately $296,400 is expected to be recognized from remaining performance obligations for extended warranties as compared to $386,907 on March 31, 2022. For the year ended March 31, 2023, the Company recognized revenue of $98,908 from amounts that were included in Deferred Revenue as compared to $75,791 for the year ended March 31, 2022.
The following table provides a summary of the changes in deferred revenues related to extended warranties for the year ended March 31, 2023:
Deferred revenues related to extended warranties on April 1, 2022
|
|
$ |
386,907 |
|
Additional extended warranties
|
|
|
8,401 |
|
Revenue recognized for the year ended March 31, 2023
|
|
|
(98,908 |
)
|
Deferred revenues related to extended warranties on March 31, 2023
|
|
$ |
296,400 |
|
Other Deferred Revenues
The Company sometimes receives payments in advance of shipment. These amounts are classified as other deferred revenues. For the period ended March 31, 2023, the Company has other deferred revenues of $600 and $21,999 for the prior year ended March 31, 2022.
Repair and Calibration Services
The Company offers repair and calibration services for units that are returned for annual calibrations and/or for repairs after the warranty period has expired. The Company repairs and calibrates a wide range of airborne navigation and communication equipment. Revenue is recognized at the time the repaired or calibrated unit is shipped back to the customer, as it is at this time that the work is completed.
Other
The majority of the Company’s revenues are from contracts with the U.S. government, airlines, aircraft manufacturers, such as Boeing and Lockheed Martin, domestic distributors, international distributors for sales to military and commercial customers, and other commercial customers. The contracts with the U.S. government typically are subject to the Federal Acquisition Regulation (“FAR”) which provides guidance on the types of costs that are allowable in establishing prices for goods and services provided under U.S. government contracts. Payment terms and conditions vary by contract, although terms generally include a requirement of payment within a range from 30 to 60 days, or in certain cases, up-front deposits. In circumstances where the timing of revenue recognition differs from the timing of invoicing, the Company has determined that the Company's contracts generally do not include a significant financing component. Payments received prior to the delivery of units or services performed are recorded as deferred revenues. Taxes collected from customers, which are subsequently remitted to governmental authorities, are excluded from sales. The Company applied the practical expedient to account for shipping and handling activities as fulfillment cost rather than as a separate performance obligation. Shipping and handling costs charged to customers are classified as sales, and the shipping and handling costs incurred are included in cost of sales. All sales are denominated in U.S. dollars. The Company excludes from revenues all taxes assessed by a governmental authority that are imposed on the sale of its products and collected from customers. The Company chose to apply the available practical expedient as commission eligible sales orders are fulfilled within less than one year and commissions are generally paid by the Company within 30 days of the related sales order fulfillment. Accordingly, management has determined that no change in accounting for costs to obtain a contract will be required for the Company to conform to ASC 606.
TEL-INSTRUMENT ELECTRONICS CORP.
Notes To Consolidated Financial Statements
2. Summary of Significant Accounting Policies (continued)
Revenue Recognition (continued):
Disaggregation of revenue
In the following tables, revenue is disaggregated by revenue category.
|
|
For the Year Ended
March 31, 2023
|
|
|
|
Commercial
|
|
|
Government
|
|
Sales Distribution
|
|
|
|
|
|
|
|
|
Test Units
|
|
$ |
490,485 |
|
|
$ |
6,369,374 |
|
|
|
$ |
490,485 |
|
|
$ |
6,369,374 |
|
The remainder of our revenues for the year ended March 31, 2023, are derived from repairs and calibration of $1,462,048 replacement parts of $176,861, extended warranties of $98,908 and other miscellaneous income of $33,481.
|
|
For the Year Ended
March 31, 2022
|
|
|
|
Commercial
|
|
|
Government
|
|
Sales Distribution
|
|
|
|
|
|
|
|
|
Test Units
|
|
$ |
409,594 |
|
|
$ |
10,307,842 |
|
|
|
$ |
409,594 |
|
|
$ |
10,307,842 |
|
The remainder of our revenues for the year ended March 31, 2022, are derived from repairs and calibration of $1,853,665, replacement parts of $229,058, extended warranties of $75,791 and other miscellaneous income of $56,840.
In the following table, revenue is disaggregated by geography.
|
|
For the Year
Ended
March 31, 2023
|
|
|
For the Year
Ended
March 31, 2022
|
|
Geography
|
|
|
|
|
|
|
|
|
United States
|
|
$ |
6,690,067 |
|
|
$ |
8,175,301 |
|
International
|
|
|
1,941,090 |
|
|
|
4,757,489 |
|
Total
|
|
$ |
8,631,157 |
|
|
$ |
12,932,790 |
|
Fair Value of Financial Instruments:
Accounting Standards Codification subtopic 825-10, Financial Instruments ("ASC 825-10") requires disclosure of the fair value of certain financial instruments. The carrying value of cash, accounts payable and accrued liabilities as reflected in the balance sheets, approximate fair value because of the short-term maturity of these instruments. All other significant financial assets, financial liabilities and equity instruments of the Company are either recognized or disclosed in the financial statements together with other information relevant for making a reasonable assessment of future cash flows, interest rate risk and credit risk. Where practicable the fair values of financial assets and financial liabilities have been determined and disclosed; otherwise only available information pertinent to fair value has been disclosed. The Company follows Accounting Standards Codification subtopic 820-10, Fair Value Measurements and Disclosures ("ASC 820-10") and ASC 825-10, which permits entities to choose to measure many financial instruments and certain other items at fair value.
Cash: Cash primarily consists of deposits held at major banks.
TEL-INSTRUMENT ELECTRONICS CORP.
Notes To Consolidated Financial Statements
2. Summary of Significant Accounting Policies (continued)
Concentrations of Credit Risk:
Cash held in banks: The Company maintains cash balances at a financial institution that is insured by the Federal Deposit Insurance Corporation (“FDIC”) up to federally insured limits. At times balances may exceed FDIC insured limits. The Company has not experienced any losses in such accounts.
Accounts Receivable: The Company’s avionics customer base is primarily comprised of airlines, distributors, and the U.S. Government. As of March 31, 2023, the Company believes it has no significant credit risk related to its concentration within its accounts receivable.
Inventories:
Inventories are stated at the lower of cost or net realizable value. Cost is determined on a first-in, first-out basis. Inventories are written down if the estimated net realizable value is less than the recorded value. The Company reviews the carrying cost of inventories by product to determine the adequacy of reserves for obsolescence. In accounting for inventories, the Company must make estimates regarding the estimated realizable value of inventory. The estimate is based, in part, on the Company’s forecasts of future sales and age of inventory. If actual conditions are less favorable than those we have projected, we may need to increase our reserves for excess and obsolete inventories. Any increases in our reserves will adversely impact our results of operations. The establishment of a reserve for excess and obsolete inventory establishes a new cost basis in the inventory. Such reserves are not reduced until the product is sold. If we are able to sell such inventory any related reserves would be reversed in the period of sale. In accordance with industry practice, service parts inventory is included in current assets, although service parts are carried for established requirements during the serviceable lives of the products and, therefore, not all parts are expected to be sold within one year.
Equipment and Leasehold Improvements:
Office and manufacturing equipment are stated at cost, net of accumulated depreciation. Depreciation and amortization are provided on a straight-line basis over periods ranging from 3 to 5 years. Leasehold improvements are amortized over the term of the lease or the useful life of the asset, whichever is shorter.
Maintenance, repairs, and renewals that do not materially add to the value of the equipment nor appreciably prolong its life are charged to expense as incurred. When assets are retired or otherwise disposed of, the cost and related accumulated depreciation are removed from the accounts and the resulting gain or loss is included in the Statement of Operations.
Engineering, Research and Development Costs:
Engineering, research, and development costs are expensed as incurred.
Deferred Revenues:
Amounts billed in advance of the period in which the service is rendered, or product delivered are recorded as deferred revenue. On March 31, 2023, and 2022, deferred revenues totaled $297,000 and $408,906, respectively. See above for additional information regarding our revenue recognition policies.
Net Income (Loss) per Common Share Attributable to Common Shareholders:
Net income (loss) per share attributable to common stockholders has been computed according to Accounting Standards Codification (“ASC 260”), Earnings per Share, which requires a dual presentation of basic and diluted income (loss) per share (“EPS”). Basic EPS attributable to common stockholders represents net income (loss) less preferred dividends divided by the weighted average number of common shares outstanding during a reporting period. Diluted EPS attributable to common stockholders reflects the potential dilution that could occur if securities, including preferred stock, warrants and options, were converted into common stock. The dilutive effect of outstanding warrants and options is reflected in earnings per share by use of the treasury stock method. The dilutive effect of preferred stock is reflected in earnings per share by use of the if-converted method. In applying the treasury stock method for stock-based compensation arrangements, the assumed proceeds are computed as the sum of the amount the employee must pay upon exercise and the amounts of average unrecognized compensation.
TEL-INSTRUMENT ELECTRONICS CORP.
Notes To Consolidated Financial Statements
2. Summary of Significant Accounting Policies (continued)
Income Taxes
The Company accounts for income taxes using the asset and liability method described in FASB ASC 740, Income Taxes. Deferred tax assets arise from a variety of sources, the most significant being a) tax losses that can be carried forward to be utilized against profits in future years; b) expenses recognized for financial reporting purposes but disallowed in the tax return until the associated cash flow occurs; and c) valuation changes of assets which need to be tax effected for book purposes but are deductible only when the valuation change is realized.
Deferred tax assets and liabilities are determined based on differences between financial reporting and tax bases of assets and liabilities and are measured using enacted tax rates and laws that are expected to be in effect when such differences are expected to reverse. The measurement of deferred tax assets is reduced, if necessary, by a valuation allowance for any tax benefit which is not more likely than not to be realized. In assessing the need for a valuation allowance, future taxable income is estimated, considering the realization of tax loss carryforwards. Valuation allowances related to deferred tax assets can also be affected by changes to tax laws, changes to statutory tax rates and future taxable income levels. In the event it was determined that the Company would not be able to realize all or a portion of our deferred tax assets in the future, we would reduce such amounts through a charge to income in the period in which that determination is made. Conversely, if we were to determine that we would be able to realize our deferred tax assets in the future in excess of the net carrying amounts, we would decrease the recorded valuation allowance through an increase to income in the period in which that determination is made. In its evaluation of a valuation allowance the Company considers existing contracts and backlog, and the probability that options under these contract awards will be exercised as well as sales of existing products. The Company prepares profit projections based on the revenue and expenses forecast to determine that such revenues will produce sufficient taxable income to realize the deferred tax assets.
In December 2019, the FASB issued ASU No. 2019-12, Income Taxes - simplifying the accounting for income taxes (Topic 740), which is meant to simplify the accounting for income taxes by removing certain exceptions to the general principles in Topic 740, Income Taxes. The amendment also improves consistent application and simplify GAAP for other areas of Topic 740 by clarifying and amending existing guidance. This ASU was effective April 1, 2021, and adoption of this standard had no significant impact on our financial position and results of operations.
The Company accounts for uncertainties in income taxes under ASC 740-10-50 which prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. ASC 740-10 requires that the Company determine whether the benefits of its tax positions are more-likely-than-not of being sustained upon audit based on the technical merits of the tax position. The Company recognizes the impact of an uncertain income tax position taken on its income tax return at the largest amount that is more-likely-than-not to be sustained upon audit by the relevant taxing authority. The implementation of ASC 740-10 had no impact on the Company’s results of operations or financial position.
Despite the Company’s belief that its tax return positions are consistent with applicable tax laws, one or more positions may be challenged by taxing authorities. Settlement of any challenge can result in no change, a complete disallowance, or some partial adjustment reached through negotiations or litigation. Interest and penalties related to income tax matters, if applicable, will be recognized as income tax expense. There are no uncertain tax positions that management is aware of as of March 31, 2023 and 2022.
During the years ended March 31, 2023 and 2022 the Company did not incur any expense related to interest or penalties for income tax matters, and no such amounts were accrued as of March 31, 2023 and 2022. The Company’s tax years remain open for examination by the tax authorities primarily beginning 2020 through present.
Stock-based Compensation:
The Company accounts for stock-based compensation in accordance with FASB ASC 718 which requires the measurement of stock-based compensation based on the fair value of the award on the date of grant. The Company recognizes compensation cost on awards on a straight-line basis over the vesting period, typically four years. The Company estimates the fair value of each option granted using the Black-Scholes option-pricing model. Additional information and disclosure are provided in Note 13 below.
TEL-INSTRUMENT ELECTRONICS CORP.
Notes To Consolidated Financial Statements
2. Summary of Significant Accounting Policies (continued)
Long-Lived Assets:
The Company assesses the recoverability of the carrying value of its long-lived assets whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future, undiscounted cash flows expected to be generated by an asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell. No impairment losses have been recognized for the years ended March 31, 2023, and 2022, respectively.
Use of Estimates:
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires that management make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The most significant estimates include income taxes, warranty claims, inventory, and accounts receivable valuations.
Accounts Receivable:
The Company performs ongoing credit evaluations of its customers and adjusts credit limits based on customer payment and current credit worthiness, as determined by review of their current credit information. The Company continuously monitors credit limits for and payments from its customers and maintains provision for estimated credit losses based on its historical experience and any specific customer issues that have been identified. While such credit losses have historically been within the Company’s expectation and the provision established, the Company cannot guarantee that this will continue.
Warranty Expenses:
Warranty reserves are based upon historical rates and specific items that are identifiable and can be estimated at time of sale. While warranty costs have historically been within the Company’s expectations and the provisions established, future warranty costs could be in excess of the Company’s warranty reserves. A significant increase in these costs could adversely affect the Company’s operating results for the period and the periods these additional costs materialize. Warranty reserves are adjusted from time to time when actual warranty claim experience differs from estimates. For the year ended March 31, 2023, warranty reserve costs were $17,479 as compared to $38,236 for the year ended March 31, 2022, and are included in Cost of Sales in the accompanying consolidated statement of operations. See Note 10 for warranty reserves.
Risks and Uncertainties:
The Company’s operations are subject to a number of risks, including but not limited to changes in the general economy, demand for the Company’s products, the success of its customers, research and development results, reliance on the government and commercial markets, litigation, and the renewal of its line of credit. The Company has major contracts with the U.S. Government, which like all government contracts are subject to termination.
The ongoing COVID-19 pandemic has resulted and continues to result in significant financial market volatility and uncertainty in recent months. In addition, U.S. and global markets are experiencing volatility and disruption following the escalation of geopolitical tensions and the start of the military conflict between Russia and Ukraine. A continuation or worsening of the levels of market disruption and volatility seen in the recent past could have an adverse effect on our ability to access capital and on the market price of our common stock, and we may not be able to successfully raise capital through the sale of our securities.
TEL-INSTRUMENT ELECTRONICS CORP.
Notes To Consolidated Financial Statements
2. Summary of Significant Accounting Policies (continued)
New Accounting Pronouncements
In June 2016, the FASB issued ASU No. 2016-13 Financial Instruments - Credit Losses (Topic 326), Measurement of Credit Losses on Financial Statements. The amendment in this update replaces the incurred loss impairment methodology in current GAAP with a methodology that reflects expected credit losses on instruments within its scope, including trade receivables. This update is intended to provide financial statement users with more decision-useful information about the expected credit losses. The effective date of the new standard is for fiscal years beginning after December15, 2022 and will be adopted by the Company on April 1, 2023. We do not expect the adoption of this standard to have a significant impact on our financial position and results of operations.
No other recently issued accounting pronouncements had or are expected to have a material impact on the Company’s consolidated financial statements.
3. Accounts Receivable
The following table sets forth the components of accounts receivable:
|
|
March 31,
|
|
|
|
2023
|
|
|
2022
|
|
Government
|
|
$ |
651,370 |
|
|
$ |
697,731 |
|
Commercial
|
|
|
255,912 |
|
|
|
358,734 |
|
Less: Allowance for doubtful accounts
|
|
|
(6,401 |
)
|
|
|
(7,425 |
)
|
|
|
$ |
900,881 |
|
|
$ |
1,049,040 |
|
4. Inventories
Inventories consist of:
|
|
March 31,
|
|
|
|
2023
|
|
|
2022
|
|
Purchased parts
|
|
$ |
2,602,447 |
|
|
$ |
2,371,105 |
|
Work-in-process
|
|
|
1,388,679 |
|
|
|
962,460 |
|
Finished goods
|
|
|
55,052 |
|
|
|
- |
|
Less: Allowance for obsolete inventory
|
|
|
(460,113 |
)
|
|
|
(513,068 |
)
|
|
|
$ |
3,586,065 |
|
|
$ |
2,820,497 |
|
Work-in-process inventory includes $973,216 and $838,490 for government contracts on March 31, 2023 and 2022, respectively.
5. Restricted Cash to Support Appeal Bond
In January 2018, the Company transferred $2,000,000 to a restricted cash account to secure a letter of credit which was used for collateral for the appeal bond (See Note 20).
TEL-INSTRUMENT ELECTRONICS CORP.
Notes To Consolidated Financial Statements (Continued)
6. Prepaids and Other Assets
Prepaid expenses and other current assets consist of:
|
|
March 31,
2023
|
|
|
March 31,
2022
|
|
|
|
|
|
|
|
|
|
|
Prepaid expenses
|
|
$ |
148,929 |
|
|
$ |
181,056 |
|
Deferred charges
|
|
|
24,720 |
|
|
|
24,204 |
|
Other receivables
|
|
|
643,976 |
|
|
|
38,780 |
|
|
|
$ |
817,625 |
|
|
$ |
244,040 |
|
In March 2020, the Coronavirus Aid, Relief, and Economic Security Act was signed into law, providing numerous tax provisions and other stimulus measures, including the Employee Retention Tax Credit (“ERTC”): a refundable tax credit against certain employment taxes. The Taxpayer Certainty and Disaster Tax Relief Act of 2020 and the American Rescue Plan Act of 2021 extended and expanded the availability of the ERTC. We qualified for the ERTC in the first two quarters of 2021. During year ended March 31, 2023, we recorded an aggregate benefit of $628,401 in our consolidated financial statements and the receivable for the ERTC benefit as of March 31, 2023 is in other current assets, which was received June 1, 2023.
7. Equipment and Leasehold Improvements
Equipment and leasehold improvements consist of the following:
|
|
March 31,
|
|
|
|
2023
|
|
|
2022
|
|
Leasehold improvements
|
|
$ |
127,655 |
|
|
$ |
127,655 |
|
Machinery and equipment
|
|
|
1,918,717 |
|
|
|
1,906,983 |
|
Automobiles
|
|
|
23,712 |
|
|
|
23,712 |
|
Sales equipment
|
|
|
609,875 |
|
|
|
595,475 |
|
Assets under finance leases
|
|
|
637,189 |
|
|
|
637,189 |
|
Less: Accumulated depreciation & amortization
|
|
|
(3,231,981 |
)
|
|
|
(3,175,676 |
)
|
|
|
$ |
85,167 |
|
|
$ |
115,338 |
|
Depreciation and amortization expense related to the assets above for the years ended March 31, 2023, and 2022 was $56,304 and $95,904, respectively.
8. Line of Credit
The Company has a line of credit with Bank of America with open availability up to $690,000, with monthly payments of interest only. The borrowing base calculation is tied to accounts receivable and is collateralized by substantially all of the assets of the Company. Interest on any outstanding balance is payable monthly at an annual interest rate equal to the sum of the greater of the BSBY (Bloomberg Short-Term Bank Yield Index rate) daily float plus 3.75 percentage points.
As of March 31, 2023, and March 31, 2022, the outstanding balances were $690,000 and $0, respectively. The interest rate on March 31, 2023, was 8.64%.
Bank of America renewed the Company line of credit with a maturity date of July 30, 2023.
TEL-INSTRUMENT ELECTRONICS CORP.
Notes To Consolidated Financial Statements (Continued)
9. Right of Use Assets and Operating Lease Liability
The Company leases its general office and manufacturing facility in East Rutherford, NJ with monthly payments of $18,467 under an operating lease agreement which expired July 31, 2016. The lease is for a five year period, beginning August 1, 2011, with a five year option in a one-story facility. In June 2016, the Company extended the lease term for another five years until August 2021. Under terms of the lease, the Company is also responsible for its proportionate share of the additional rent to include all real estate taxes, insurance, snow removal, landscaping, and other building charges. The Company is also responsible for the utility costs for the premises. During April 2021, the Company extended the lease term for another eight years until August 31, 2029. Under the extended lease all terms remain the same, with the exception of the monthly payment of $18,467 escalating to $23,083 commencing September 1, 2021. As a result, the Company recorded $1,830,857 of right-of-use assets and related operating leases liabilities during the year ended March 31, 2021.
The Company leases a small office in Lawrence, Kansas under an operating lease agreement which expired March 30, 2023, and was renewed for an additional 12 months, expiring on March 31, 2024.
The Company's leases generally do not provide an implicit rate, and therefore the Company uses its incremental borrowing rate as the discount rate when measuring operating lease liabilities. The incremental borrowing rate represents an estimate of the interest rate the Company would incur at lease commencement to borrow an amount equal to the lease payments on a collateralized basis over the term of a lease. The Company estimated its incremental borrowing rate based on its credit quality, line of credit agreement and by comparing interest rates available in the market for similar borrowings. The Company used a discount rate of 3.9% for both March 31, 2023, and 2022, respectively. The weighted average remaining lease term is 6.42 years.
Right to use assets is summarized below:
|
|
March 31,
|
|
|
|
2023
|
|
|
2022
|
|
Right to use asset
|
|
$ |
1,830,857 |
|
|
$ |
1,830,857 |
|
Less: Accumulated amortization
|
|
|
(304,306 |
)
|
|
|
(109,936 |
)
|
Right to use assets, net
|
|
$ |
1,526,551 |
|
|
$ |
1,720,921 |
|
The following table reconciles the undiscounted future minimum lease payments (displayed by year and in the aggregate) under non-cancelable operating leases with terms of more than one year to the total lease liabilities recognized on the consolidated balance sheet as of March 31, 2023:
2024
|
|
$ |
254,840 |
|
2025
|
|
|
254,840 |
|
2026
|
|
|
267,767 |
|
2027
|
|
|
277,000 |
|
2028
|
|
|
277,000 |
|
Thereafter
|
|
|
392,416 |
|
Total undiscounted future minimum lease payments
|
|
|
1,723,863 |
|
Less: Difference between undiscounted lease payments and discounted lease liabilities
|
|
|
(197,312 |
)
|
Present value of net minimum lease payments
|
|
|
1,526,551 |
|
Less current portion
|
|
|
(202,087 |
)
|
Operating lease liabilities – long-term
|
|
$ |
1,324,464 |
|
During the year ended March 31, 2023 and 2022, the Company recorded $408,588 and $395,558, as lease expense to current period operations, respectively.
TEL-INSTRUMENT ELECTRONICS CORP.
Notes To Consolidated Financial Statements (Continued)
10. Accrued Expenses
Accrued vacation pay, payroll and payroll withholdings consist of the following:
|
|
March 31,
|
|
|
|
2023
|
|
|
2022
|
|
|
|
|
|
|
|
|
|
|
Accrued vacation pay
|
|
$ |
163,430 |
|
|
$ |
185,735 |
|
Accrued profit sharing
|
|
|
- |
|
|
|
163,132 |
|
Accrued compensation and payroll withholdings
|
|
|
76,604 |
|
|
|
61,671 |
|
|
|
$ |
240,034 |
|
|
$ |
410,538 |
|
Accrued vacation pay, payroll and payroll withholdings include $26,535 and $23,262 on March 31, 2023, and 2022, respectively, which is due to officers.
Accrued expenses - other consist of the following:
|
|
March 31,
|
|
|
|
2023
|
|
|
2022
|
|
|
|
|
|
|
|
|
|
|
Accrued commissions
|
|
$ |
19,049 |
|
|
$ |
11,706 |
|
Accrued legal costs
|
|
|
- |
|
|
|
6,061 |
|
Warranty reserve
|
|
|
87,407 |
|
|
|
87,407 |
|
Accrued purchase
|
|
|
40,707 |
|
|
|
39,021 |
|
Other
|
|
|
10,733 |
|
|
|
29,950 |
|
|
|
|
|
|
|
|
|
|
|
|
$ |
157,896 |
|
|
$ |
174,145 |
|
The following table provides a summary of the changes in warranty reserves for the years ended March 31, 2023, and 2022:
|
|
March 31,
|
|
|
|
2023
|
|
|
2022
|
|
Warranty reserve, at beginning of period
|
|
$ |
87,407 |
|
|
$ |
90,752 |
|
Warranty expense
|
|
|
17,479 |
|
|
|
38,236 |
|
Warranty deductions
|
|
|
(17,479 |
)
|
|
|
(41,581 |
)
|
Warranty reserve, at end of period
|
|
$ |
87,407 |
|
|
$ |
87,407 |
|
11. Series A 8% Convertible Preferred Stock
On November 14, 2017, the Company entered into definitive subscription agreements with an accredited investor, pursuant to which the investor purchased an aggregate of 500,000 shares of the Company’s Series A Preferred Stock (the “Series A Preferred”) for an aggregate of $3 million. The Company used such proceeds for the payment of any Court judgment and/or settlement related to the Aeroflex Wichita, Inc. litigation, working capital purposes, and for payment of fees and expenses associated with this transaction. The Closing occurred following the satisfaction of customary closing conditions. The securities issued pursuant to the Subscription Agreements were not registered under the Securities Act of 1933, as amended (the “Securities Act”), but qualified for exemption under Section 4(a)(2) of the Securities Act. The securities were exempt from registration under Section 4(a)(2) of the Securities Act because the issuance of such securities by the Company did not involve a “public offering,” as defined in Section 4(a)(2) of the Securities Act, due to the insubstantial number of persons involved in the transaction, size of the offering, manner of the offering and number of securities offered. The Company did not undertake an offering in which it sold a high number of securities to a high number of investors. In addition, these shareholders had the necessary investment intent as required by Section 4(a)(2) of the Securities Act since they agreed to, and received, share certificates bearing a legend stating that such securities are restricted pursuant to Rule 144 of the Securities Act. This restriction ensures that these securities would not be immediately redistributed into the market and therefore not be part of a “public offering.” Based on an analysis of the above factors, the Company has met the requirements to qualify for exemption under Section 4(a)(2) of the Securities Act. The shares of Series A Preferred have a stated value of $6.00 per share (the “Series A Stated Value”) and are convertible into Common Stock at a price of $3.00 per share. The holders of shares of the Series A Preferred shall be entitled to
TEL-INSTRUMENT ELECTRONICS CORP.
Notes To Consolidated Financial Statements (Continued)
11. Series A 8% Convertible Preferred Stock (continued):
receive dividends out of any assets legally available, to the extent permitted by New Jersey law, at an annual rate equal to 8% of the Series A Stated Value of such shares of Series A Preferred, calculated on the basis of a 360 day year, consisting of twelve 30-day months, and shall accrue from the date of issuance of such shares of Series A Preferred, payable quarterly in cash. Any unpaid dividends shall accrue at the same rate. To the extent not paid on the last day of March, June, September and December of each calendar year, all dividends on any share of Series A.
Preferred shall accumulate whether or not declared by the Board and shall remain accumulated dividends until paid. As of March 31, 2023, the Company recognized $930,667 as deemed dividends and are included in the carrying value of the Series A Convertible Preferred Stock. The Holders will vote together with the holders of the Company’s Common Stock on an as-converted basis on each matter submitted to a vote of holders of Common Stock (whether at a meeting of shareholders or by written consent). Effective beginning on the third anniversary of the Original Issue Date, and upon 30 days’ written notice to the Holders of Series A Preferred, the Company may, in its sole discretion, redeem the Series A Preferred at the aggregate Series A Stated Value plus any accrued and accumulated but unpaid dividends. During the years ended March 31, 2023 and 2022, the Company paid dividends of $60,000 and $240,000, respectively.
12. Series B 8% Convertible Preferred Stock
On October 5, 2018, the Company entered into definitive subscription agreement with an accredited investor, pursuant to which the investor purchased an aggregate of 166,667 shares of the Company’s Series B Preferred Stock (the “Series B Preferred”) for an aggregate of $1 million. The Company used such proceeds for working capital to finance its operations based on the current and expected increase in business, and for payment of fees and expenses associated with this transaction. The Closing occurred following the satisfaction of customary closing conditions. The securities issued pursuant to this subscription agreement were not registered under the Securities Act of 1933, as amended (the “Securities Act”), but qualified for exemption under Section 4(a)(2) of the Securities Act. The securities were exempt from registration under Section 4(a)(2) of the Securities Act because the issuance of such securities by the Company did not involve a “public offering,” as defined in Section 4(a)(2) of the Securities Act, due to the insubstantial number of persons involved in the transaction, size of the offering, manner of the offering and number of securities offered. The Company did not undertake an offering in which it sold a high number of securities to a high number of investors. In addition, this individual had the necessary investment intent as required by Section 4(a)(2) of the Securities Act since he agreed to receive share certificates bearing a legend stating that such securities are restricted pursuant to Rule 144 of the Securities Act. This restriction ensures that these securities would not be immediately redistributed into the market and therefore not be part of a “public offering.” Based on an analysis of the above factors, the Company has met the requirements to qualify for exemption under Section 4(a)(2) of the Securities Act.
The shares of Series B Preferred to have a stated value of $6.00 per share (the “Series B Stated Value”) and are convertible into Common Stock at a price of $2.00 per share. The holder of shares of the Series B Preferred shall be entitled to receive dividends out of any assets legally available, to the extent permitted by New Jersey law, at an annual rate equal to 8% of the Series B Stated Value of such shares of Series B Preferred, calculated on the basis of a 360 day year, consisting of twelve 30-day months, and shall accrue from the date of issuance of such shares of Series B Preferred, payable quarterly in cash. Any unpaid dividends shall accrue at the same rate. To the extent not paid on the last day of March, June, September and December of each calendar year, all dividends on any share of Series B Preferred shall accumulate whether or not declared by the Board and shall remain accumulated dividends until paid. As of March 31, 2023, the Company recognized $239,111 as deemed dividends and are included in the carrying value of the Series B Convertible Preferred Stock. The Holders will vote together with the holders of the Company’s Common Stock on an as-converted basis on each matter submitted to a vote of holders of Common Stock (whether at a meeting of shareholders or by written consent). Effective beginning on the third anniversary of the Original Issue Date, and upon 30 days’ written notice to the Holders of Series B Preferred, the Company may, in its sole discretion, redeem the Series B Preferred at the aggregate Series B Stated Value plus any accrued and accumulated but unpaid dividends. During the years ended March 31, 2023 and 2022, the Company paid dividends of $20,000 and $80,000, respectively.
TEL-INSTRUMENT ELECTRONICS CORP.
Notes To Consolidated Financial Statements (Continued)
13. Stock Option Plans
The Board of Directors (the “Board”) adopted on January 18, 2017, and ratified by the shareholders at the Annual Meeting on January 18, 2017, the Company’s 2016 Stock Option Plan (the “Plan”). The Plan provides for the granting of incentive stock options, by a committee to be appointed by the Board (both the Board and the Committee are referred to herein as the “Committee”) to directors, officers, and employees (excluding directors and officers who are not employees) to purchase shares of the Common Stock of the Company, par value $0.10 per share (the “Stock”), in accordance with the terms and provisions. The 2016 Plan reserves for issuance, options to purchase up to 250,000 shares of its common stock. Options granted under the plan are exercisable up to a period of five years from the date of grant at an exercise price which is not less than the fair market value of the common stock at the date of grant, except to a shareholder owning 10% or more of the outstanding common stock of the Company, as to which the exercise price must be not less than 110% of the fair market value of the common stock at the date of grant. Options are exercisable on a cumulative basis, 20% at or after each of the first, second, and third anniversary of the grant and 40% after the fourth year anniversary. During fiscal year 2023, the Company did not grant any stock options.
The fair value of each option awarded is estimated on the date of grant using the Black-Scholes option valuation model that uses the assumptions noted in the following table. Expected volatilities are based on historical volatility of Common Stock. The expected life of the options granted represents the period of time from date of grant to expiration (5 years). The risk-free interest rate is based on the U.S. Treasury yield in effect at the time of grant. The per share weighted-average fair value of stock options granted for the years ended March 31, 2022 were $1.02, on the date of grant using the Black Scholes option-pricing model with the following assumptions:
|
|
Dividend
|
|
|
Risk-free
|
|
|
|
|
|
|
|
|
|
Yield
|
|
|
Interest rate
|
|
|
Volatility
|
|
|
Life
|
2022
|
|
|
0.0 |
%
|
|
|
0.78 |
%
|
|
|
82.69 |
%
|
|
5 years |
A summary of the status of the Company’s stock option plans for the fiscal years ended March 31, 2023, and 2022 and changes during the years are presented below (in number of options):
|
|
Number of
Options
|
|
|
Average
Exercise Price
|
|
Average Remaining
Contractual Term
|
|
Aggregate
Intrinsic Value
|
|
Outstanding options on April 1, 2021
|
|
|
98,500 |
|
|
$ |
3.19 |
|
3.3 years |
|
$ |
30,835 |
|
Options granted
|
|
|
23,000 |
|
|
$ |
2.94 |
|
|
|
|
|
|
Options exercised
|
|
|
- |
|
|
$ |
- |
|
|
|
|
|
|
Options canceled/forfeited
|
|
|
(10,000 |
)
|
|
$ |
3.19 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding options on March 31, 2022
|
|
|
111,500 |
|
|
$ |
3.14 |
|
2.72 years |
|
$ |
3,680 |
|
Options granted
|
|
|
- |
|
|
$ |
- |
|
|
|
|
|
|
Options exercised
|
|
|
- |
|
|
$ |
- |
|
|
|
|
|
|
Options canceled/forfeited
|
|
|
(12,500 |
)
|
|
$ |
3.16 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding options on March 31, 2023
|
|
|
99,000 |
|
|
$ |
3.13 |
|
1.78 years |
|
$ |
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested Options:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2023:
|
|
|
49,200 |
|
|
$ |
3.16 |
|
1.5 years |
|
$ |
- |
|
March 31, 2022:
|
|
|
36,900 |
|
|
$ |
3.21 |
|
2.0 years |
|
$ |
- |
|
Remaining options available for grant were 151,000 and 138,500 as of March 31, 2023, and 2022, respectively.
For the years ended March 31, 2023, and 2022, the unamortized compensation expense for stock options was $17,663 and $45,924, respectively. Unamortized compensation expense is expected to be recognized over a weighted-average period of approximately 3.7 years.
The compensation cost that has been charged was $23,182 and $19,733 for the fiscal years ended March 31, 2023, and 2022, respectively.
TEL-INSTRUMENT ELECTRONICS CORP.
Notes To Consolidated Financial Statements (Continued)
14. Income Taxes
Income tax provision (benefit):
|
|
Fiscal Year Ended
|
|
|
|
March 31,
|
|
|
March 31,
|
|
|
|
2023
|
|
|
2022
|
|
Current:
|
|
|
|
|
|
|
|
|
Federal
|
|
$ |
- |
|
|
$ |
- |
|
State and local
|
|
|
211 |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
Total current tax provision
|
|
|
211 |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
Deferred:
|
|
|
|
|
|
|
|
|
Federal
|
|
|
(120,422 |
)
|
|
|
178,780 |
|
State and local
|
|
|
(7,926 |
)
|
|
|
(3,327 |
)
|
Release of valuation allowance
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
Total deferred tax provision (benefit)
|
|
|
(128,348 |
)
|
|
|
175,453 |
|
|
|
|
|
|
|
|
|
|
Total provision (benefit)
|
|
$ |
(128,137 |
)
|
|
$ |
175,453 |
|
The approximate values of the components of the Company’s deferred taxes on March 31, 2023, and 2022 are as follows:
|
|
March 31,
|
|
|
March 31,
|
|
|
|
2023
|
|
|
2022
|
|
Deferred tax assets (liabilities):
|
|
|
|
|
|
|
|
|
Net operating loss carryforwards
|
|
$ |
566,694 |
|
|
$ |
706,643 |
|
Tax credits
|
|
|
329,032 |
|
|
|
329,032 |
|
Charitable contributions
|
|
|
54 |
|
|
|
52 |
|
Legal damages
|
|
|
1,363,176 |
|
|
|
1,291,734 |
|
Allowance for doubtful accounts
|
|
|
1,372 |
|
|
|
1,572 |
|
Reserve for inventory obsolescence
|
|
|
98,608 |
|
|
|
108,696 |
|
Vacation accrual
|
|
|
35,025 |
|
|
|
39,349 |
|
Warranty reserve
|
|
|
18,732 |
|
|
|
18,518 |
|
Deferred revenues
|
|
|
63,651 |
|
|
|
86,629 |
|
Stock options
|
|
|
16,001 |
|
|
|
15,819 |
|
Gain on Sale of Asset
|
|
|
354 |
|
|
|
350 |
|
Depreciation
|
|
|
5,986 |
|
|
|
1,193 |
|
174 Capitalization
|
|
|
229,250 |
|
|
|
- |
|
Deferred tax asset
|
|
|
2,727,935 |
|
|
|
2,599,587 |
|
Less valuation allowance
|
|
|
(100,000 |
)
|
|
|
(100,000 |
)
|
|
|
|
|
|
|
|
|
|
Deferred tax asset, net
|
|
$ |
2,627,935 |
|
|
$ |
2,499,587 |
|
The recognized deferred tax asset is based upon the expected utilization of its benefit from future taxable income. The Company has federal net operating loss (“NOL”) carryforwards of $2,667,834 as of March 31, 2023 and $3,346,299 as of March 31, 2022. These carryforward losses are available to offset future taxable income and begin to expire in the year 2028. New Jersey State NOL carryforwards were $1,495,328 as of March 31, 2023. New Jersey State NOL carryforwards expire in 20 years, and certain of these amounts begin to expire in 2030.
TEL-INSTRUMENT ELECTRONICS CORP.
Notes To Consolidated Financial Statements (Continued)
14. Income Taxes (continued)
The foregoing amounts are management’s estimates, and the actual results could differ from those estimates. Future profitability in this competitive industry depends on continually obtaining and fulfilling new profitable sales agreements and modifying products. The inability to obtain new profitable contracts or the failure of the Company’s engineering development efforts could reduce estimates of future profitability, which could affect the Company’s ability to realize the deferred tax assets.
A reconciliation of the income tax expense (benefit) provision at the statutory Federal tax rate of 21% for the years ended March 31, 2023, and 2022, respectively, to the income tax benefit provision recognized in the financial statements is as follows:
|
|
March 31,
|
|
|
March 31,
|
|
|
|
2023
|
|
|
2022
|
|
|
|
|
|
|
|
|
|
|
Income tax provision – statutory rate
|
|
$ |
(108,503 |
)
|
|
$ |
311,492 |
|
Income tax expenses – state and local, net of federal benefit
|
|
|
(3,966 |
)
|
|
|
2,949 |
|
Permanent items
|
|
|
(126,355 |
)
|
|
|
(147,597 |
)
|
True ups
|
|
|
110,687 |
|
|
|
8,609 |
|
Income tax provision (benefit)
|
|
$ |
(128,137 |
)
|
|
$ |
175,453 |
|
15. Net Income (Loss) per Share
Net income (loss) per share attributable to common stockholders has been computed according to Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC 260”), “Earnings per Share,” which requires a dual presentation of basic and diluted income (loss) per share (“EPS”). Basic EPS attributable to common stockholders represents net income (loss) less preferred dividends divided by the weighted average number of common shares outstanding during a reporting period. Diluted EPS attributable to common stockholders reflects the potential dilution that could occur if securities, including preferred stock, warrants and options, were converted into common stock. The dilutive effect of outstanding warrants and options is reflected in earnings per share by use of the treasury stock method. The dilutive effect of preferred stock is reflected in earnings per share by use of the if-converted method. In applying the treasury stock method for stock-based compensation arrangements, the assumed proceeds are computed as the sum of the amount the employee must pay upon exercise and the amounts of average unrecognized compensation.
|
|
March 31, 2023
|
|
|
March 31, 2022
|
|
Basic net (loss) income per share computation:
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
$ |
(388,545 |
)
|
|
$ |
1,309,738 |
|
Less: Preferred dividends
|
|
|
(320,000 |
)
|
|
|
(320,000 |
)
|
|
|
|
|
|
|
|
|
|
Net (loss) income attributable to common shareholders
|
|
|
(708,545 |
)
|
|
|
989,738 |
|
Weighted-average common shares outstanding
|
|
|
3,255,887 |
|
|
|
3,255,887 |
|
Basic net (loss) income per share
|
|
$ |
(0.22 |
)
|
|
$ |
0.30 |
|
Diluted net (loss) income per share computation
|
|
|
|
|
|
|
|
|
Net (loss) income attributable to common shareholders
|
|
$ |
(708,545 |
)
|
|
$ |
989,738 |
|
Add: Preferred dividends
|
|
|
- |
|
|
|
320,000 |
|
Diluted (loss) income attributable to common shareholders
|
|
$ |
(708,545 |
)
|
|
$ |
1,309,738 |
|
Weighted-average common shares outstanding
|
|
|
3,255,887 |
|
|
|
3,255,887 |
|
Incremental shares attributable to the assumed conversion of preferred stock
|
|
|
- |
|
|
|
1,839,778 |
|
Total adjusted weighted-average shares
|
|
|
3,255,887 |
|
|
|
5,095,665 |
|
Diluted net (loss) income per share
|
|
$ |
(0.22 |
)
|
|
$ |
0.26 |
|
TEL-INSTRUMENT ELECTRONICS CORP.
Notes To Consolidated Financial Statements (Continued)
15. Net Income (Loss) per Share (continued)
The following table summarizes securities that, if exercised, would have an anti-dilutive effect on earnings per share:
|
|
March 31, 2023
|
|
|
March 31, 2022
|
|
Convertible preferred stock
|
|
|
1,862,278 |
|
|
|
1,839,778 |
|
Stock options
|
|
|
99,000 |
|
|
|
111,500 |
|
|
|
|
1,961,278 |
|
|
|
111,500 |
|
16. Related Parties
The Company has obtained marketing and sales services from a brother-in-law of the Company’s CEO with the related fees and commissions amounting to $145,446 and $145,898 for the years ended March 31, 2023, and 2022, respectively. On March 31, 2023, $3,390 was due this individual, which is included in accounts payable in the accompanying consolidated balance sheet.
17. Employee Benefit Plan
The Company sponsors a 401k Plan in which employee contributions on a pre-tax basis are supplemented by matching contributions by the Company. The Company charged to operations $58,090 and $70,711 as its matching contribution to the Company’s 401k Plan for the years ended March 31, 2023 and 2022, respectively.
18. Significant Customer Concentrations
Domestic commercial sales are made throughout the U.S. to commercial airlines and general aviation businesses directly or through distributors. There were $2,165,485 in domestic commercial sales in fiscal year 2023 and there was two (2) direct commercial customer who accounted for 22% and 19% of domestic commercial sales, respectively. The Company has one domestic distributor which receives discounts ranging between 16%-20% discount for stocking, selling, and, in some cases, providing product calibration and repairs. The loss of this distributor would not have a material adverse effect on the Company or its operations.
Our commercial distributor represented approximately 19 % and 14%, respectively, of commercial sales during fiscal years 2023 and 2022.
Marketing to the U.S. Government is made directly by employees of the Company or through independent sales representatives, who receive similar commissions to the commercial distributors. For the years ended March 31, 2023, and 2022, sales to the U.S. Government, including shipments through the government’s logistics centers, represented approximately 18% and 26%, respectively, of total sales. For the year ended March 31, 2023, two (2) direct customers represented 17% and 11% of total sales and 16%, 13% and 11% of government sales, respectively. No international distributors represented 10% or more of total sales or of total government sales for the year ended March 31, 2023. For the year ended March 31, 2022, two (2) direct customers represented 20% and 12% of total sales and 25% and 10% of government sales, respectively. Two (2) international distributors represented 13% and 12% of total sales and two (2) represented 16% and 15% of government sales for the year ended March 31, 2022.
Net sales to foreign customers, which, for the most part, are international distributors were $1,941,090 and $4,757,489 for the years ended March 31, 2023, and 2022, respectively. All other sales were to customers located in the U.S. The following table presents net sales by U.S. and foreign countries:
|
|
2023
|
|
|
2022
|
|
United States
|
|
$ |
6,690,067 |
|
|
$ |
8,175,301 |
|
Foreign countries
|
|
|
1,941,090 |
|
|
|
4,757,489 |
|
Total Avionics Sales
|
|
$ |
8,631,157 |
|
|
$ |
12,932,790 |
|
TEL-INSTRUMENT ELECTRONICS CORP.
Notes To Consolidated Financial Statements (Continued)
18. Significant Customer Concentrations (continued)
There were no net sales related to any single foreign country more than 10% of consolidated net sales for fiscal year ended March 31, 2023. Net sales related to any single foreign country more than 10% of consolidated net sales included two (2) foreign countries for fiscal year ended March 31, 2022. They were United Kingdom (13%) and Korea (13%). The Company had no assets outside the United States. Receivables from the U.S. Government represented approximately 11% and 11%, respectively, of total receivables on March 31, 2023, and 2022, respectively. As of March 31, 2023, there was one individual customer that represented 25% of the Company’s total outstanding accounts receivable. As of March 31, 2022, one individual customer represented 11% of the Company’s outstanding accounts receivable.
Total sales by test set product that were more than 10% of consolidated net sales were the T-47/M5 dual (17%) and AN/USM-708 (25%) for the year ended March 31, 2023. Total sales by test set product that were more than 10% of consolidated net sales were the T-47/M5 dual (28%), AN/USM-708 (18%) and the T-47/NH (14%) for the year ended March 31, 2022.
19. Segment Information
In accordance with FASB ASC 280, “Disclosures about Segments of an Enterprise and related information”, the Company determined it has two reportable segments - avionics government and avionics commercial. There are no inter-segment revenues.
The Company is organized primarily on the basis of its avionics products. The avionics government segment consists primarily of the design, manufacture, and sale of test equipment to the U.S. and foreign governments and militaries either directly or through distributors. The avionics commercial segment consists of design, manufacture, and sale of test equipment to domestic and foreign airlines, directly or through commercial distributors, and to general aviation repair and maintenance shops. The Company develops and designs test equipment for the avionics industry and as such, the Company’s products and designs cross segments.
Management evaluates the performance of its segments and allocates resources to them based on gross margin. The Company’s general and administrative costs and sales and marketing expenses, and engineering costs are not segment specific. As a result, all operating expenses are not managed on a segment basis. Net interest includes expenses on debt and income earned on cash balances, both maintained at the corporate level. Segment assets include accounts receivable and work-in-process inventory. Asset information, other than accounts receivable and work-in-process inventory, is not reported since the Company does not produce such information internally. All long-lived assets are located in the U.S.
The tables below present information about reportable segments for the years ended March 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate/
|
|
|
|
|
|
|
|
Avionics
|
|
|
Avionics
|
|
|
Avionics
|
|
|
Reconciling
|
|
|
|
|
|
2023
|
|
Government
|
|
|
Commercial
|
|
|
Total
|
|
|
Items
|
|
|
Total
|
|
Net sales
|
|
$ |
6,369,374 |
|
|
$ |
2,261,783 |
|
|
$ |
8,631,157 |
|
|
$ |
- |
|
|
$ |
8,631,157 |
|
Cost of sales
|
|
|
3,841,293 |
|
|
|
1,741,114 |
|
|
|
5,582,407 |
|
|
|
- |
|
|
|
5,582,407 |
|
Gross margin
|
|
|
2,528,081 |
|
|
|
520,669 |
|
|
|
3,048,750 |
|
|
|
- |
|
|
|
3,048,750 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses (income)
|
|
|
|
|
|
|
|
|
|
$ |
2,492,112 |
|
|
$ |
1,073,320 |
|
|
|
3,565,432 |
|
Income (loss) before income taxes
|
|
|
|
|
|
|
|
|
|
$ |
556,638 |
|
|
$ |
(1,073,320 |
) |
|
$ |
(516,682 |
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment Assets
|
|
|
|
|
|
|
|
|
|
$ |
4,486,946 |
|
|
$ |
10,942,868 |
|
|
$ |
15,429,814 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate/
|
|
|
|
|
|
|
|
Avionics
|
|
|
Avionics
|
|
|
Avionics
|
|
|
Reconciling
|
|
|
|
|
|
2022
|
|
Government
|
|
|
Commercial
|
|
|
Total
|
|
|
Items
|
|
|
Total
|
|
Net sales
|
|
$ |
10,363,831 |
|
|
$ |
2,568,959 |
|
|
$ |
12,932,790 |
|
|
$ |
- |
|
|
$ |
12,932,790 |
|
Cost of sales
|
|
|
5,447,287 |
|
|
|
1,720,163 |
|
|
|
7,167,450 |
|
|
|
- |
|
|
|
7,167,450 |
|
Gross margin
|
|
|
4,916,544 |
|
|
|
848,796 |
|
|
|
5,765,340 |
|
|
|
- |
|
|
|
5,765,340 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses (income)
|
|
|
|
|
|
|
|
|
|
$ |
3,318,804 |
|
|
$ |
961,345 |
|
|
|
4,280,149 |
|
Income before income taxes
|
|
|
|
|
|
|
|
|
|
$ |
2,446,536 |
|
|
$ |
(961,345 |
) |
|
$ |
1,485,191 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment Assets
|
|
|
|
|
|
|
|
|
|
$ |
3,869,537 |
|
|
$ |
11,575,735 |
|
|
$ |
15,445,272 |
|
TEL-INSTRUMENT ELECTRONICS CORP.
Notes To Consolidated Financial Statements (Continued)
20. Litigation
Contingencies are recorded in the consolidated financial statements when it is probable that a liability will be incurred and the amount of the loss is reasonably estimable, or otherwise disclosed, in accordance with Accounting Standards Codification 450, Contingencies (ASC 450). Significant judgment is required in both the determination of probability and the determination as to whether a loss is reasonably estimable. In the event the Company determines that a loss is not probable, but is reasonably possible, and it becomes possible to develop what the Company believes to be a reasonable range of possible loss, then the Company will include disclosures related to such matter as appropriate and in compliance with ASC 450. To the extent there is a reasonable possibility that the losses could exceed the amounts already accrued, the Company will, when applicable, adjust the accrual in the period the determination is made, disclose an estimate of the additional loss or range of loss or if the amount of such adjustment cannot be reasonably estimated, disclose that an estimate cannot be made. On March 24, 2009, Aeroflex Wichita, Inc. (“Aeroflex”) filed a petition against the Company and two of its employees in the District Court located in Sedgwick County, Kansas, Case No. 09 CV 1141 (the “Aeroflex Action”), alleging that the Company and its two employees misappropriated Aeroflex’s proprietary technology in connection with the Company winning a substantial contract from the U.S. Army, to develop new Mode-5 radar test sets and kits to upgrade the existing TS-4530 radar test sets to Mode 5 (the “Award”). Aeroflex’s petition, seeking injunctive relief and damages, alleges that in connection with the Award, the Company and its named employees misappropriated Aeroflex’s trade secrets; tortiously interfered with Aeroflex’s business relationship; conspired to harm Aeroflex and tortiously interfered with Aeroflex’s contract. The central basis of all the claims in the Aeroflex Action is that the Company misappropriated and used Aeroflex proprietary technology and confidential information in winning the Award. In February 2009, subsequent to the Company winning the Award, Aeroflex filed a protest of the Award with the Government Accounting Office (“GAO”). In its protest, Aeroflex alleged, inter alia, that the Company used Aeroflex’s proprietary technology in order to win the Award, the same material allegations as were later alleged in the Aeroflex Action. On or about March 17, 2009, the U.S. Army Contracts Attorney, and the U.S. Army Contracting Officer each filed a statement with the GAO, expressly rejecting Aeroflex’s allegations that the Company used or infringed on Aeroflex’s proprietary technology in winning the Award and concluding that the Company had used only its own proprietary technology. On April 6, 2009, Aeroflex withdrew its protest.
In December 2009, the Kansas District Court dismissed the Aeroflex Action on jurisdiction grounds. Aeroflex appealed this decision. In May 2012, the Kansas Supreme Court reversed the decision and remanded the Aeroflex Action to the Kansas District Court for further proceedings. The case then entered an extended discovery period in the District Court.
On May 23, 2016, the Company filed a motion for summary judgment based on Aeroflex’s lack of jurisdictional standing to bring the case. The motion asserts that Aeroflex does not own the intellectual property at issue since it is a bare licensee of Northrop Grumman. Northrop Grumman has declined to join this suit as plaintiff. The motion asserted Aeroflex lacks standing to sue alone. Also, the motion raises the fact that Aeroflex allowed the license to expire, Aeroflex’s claims are either moot or Aeroflex lacks standing to sue for damages alleged to have accrued after the license ended in 2011. The motion for summary judgment was denied.
The Aeroflex trial on remand in the Kansas District Court began in March 2017. After a nine-week trial, the jury rendered its verdict. The jury found no misappropriation of Aeroflex trade secrets, but it did rule that the Company tortiously interfered with a prospective business opportunity and awarded damages of $1.3 million for lost profits. The jury also ruled that Tel tortiously interfered with Aeroflex’s non-disclosure agreements with two former Aeroflex employees and awarded damages of $1.5 million for lost profits, resulting in total damages against the Company of $2.8 million. The jury also found that the former Aeroflex employees breached their non-disclosure agreements with Aeroflex and awarded damages against these two individuals totaling $525,000. The jury also decided that punitive damages should be allowed against the Company.
Following the verdict, the Company filed a motion for judgment as a matter of law. In the motion, the Company renewed its motion for judgment on Aeroflex’s tortious interference with prospective business opportunity claim arguing that such claim is barred by the statute of limitations. Alternatively, the motion asserts there is insufficient evidence supporting the lost profit award on that claim. Additionally, the motion for judgment addresses inconsistency between the awards against the former Aeroflex employees for breach of the non-disclosure agreements and the award against the Company for interfering with those agreements. Alternatively, the motion asserts there is insufficient evidence supporting the lost profit award on that claim.
During July 2017, the Court heard the Company’s motion for judgment as well as conducting a hearing as to the amount of a punitive damages award. Kansas statutes limit punitive damages to a maximum of $5 million.
TEL-INSTRUMENT ELECTRONICS CORP.
Notes To Consolidated Financial Statements (Continued)
20. Litigation (continued)
Aeroflex submitted a motion to the Court requesting that the judge award punitive damages at the maximum $5 million amount. In October 2017, the Court denied the Company’s motions and awarded Aeroflex an additional $2.1 million of punitive damages, which brings the total Tel damages awarded in this case to approximately $4.9 million.
The Journal Entry of Judgment including judgment against the Company in the amount of $1.3 million for tortious interference with prospective business advantage, of $1.5 million for tortious interference with existing contracts, and $2.1 million in punitive damages was entered on November 22, 2017. Pursuant to K.S.A. 16-204(d) “any judgment rendered by a court of this state on or after July 1, 1986, shall bear interest on and after the day on which judgment is rendered at the rate provided by subsection (e). The Kansas Secretary of State publishes the rate amount. The amount published for July 1, 2017, through June 30, 2018, was 5.75%, 6.5% July 1, 2018, through June 30, 2019, 7.0% July 1, 2019, through June 30, 2020, and 4.25% July 1, 2020, through June 30, 2022. The interest rate through March 31, 2023 was 5.75%. Interest on the $4,900,000 judgment started to accrue on November 22, 2017, the date the judgment was entered. As of March 31, 2023, the outstanding amount of the judgement and accrued interest is $6,360,698.
The Company filed post-trial motions to avoid damage duplication and inconsistency, and to secure judgment as a matter of law or a new trial. The trial court denied those motions. The Company appealed the verdict and the post-trial rulings to the Court of Appeals of the State of Kansas, Case No. 18-119,563. The Company posted a $2 million supersedeas bond. The Plaintiff filed a cross-appeal. The appeal and cross-appeal are fully briefed.
On January 28, 2022, Aeroflex filed a Motion to Require Supplemental Appeal Bond with the Court of Appeals of the State of Kansas, seeking a bond from the Company in the amount of $6 million to supplement the existing bond of $2 million. The Company has filed a response and we are confident that this motion will be denied.
On October 14, 2022, the Company received an order from the Kansas appellate court of appeals lifting the briefing stay that was entered on March 19, 2020. The Kansas appellate court has notified the Company that the argument was set for hearing on March 30, 2023 in Topeka, Kansas which in fact took place. A decision on the case is expected approximately 90 days after the conclusion of the arguments that were heard on March 30, 2023. This is based on expected improved upcoming first quarter results and receipt of the Navy CDR NRE funding.
The Company is very optimistic about the prospects of its appeal for a judgment as a matter of law.
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.