Forward Looking Statements
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 "may," "will," "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 are intended to identify
forward-looking statements. Such statements reflect the current view of the
Company with respect to future events and we caution you that these statements
are not guarantees of future performance or events and are subject to risks,
assumptions, and other factors. 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.
The key factors that are not within the Company's control and that may have a
direct bearing on operating results include, but are not limited to,
managements' ability to raise capital in the future, the retention of key
employees and changes in the regulation of our industry, as well as the risk
factors identified in the Company's filings.
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 unaudited condensed consolidated 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
unaudited condensed consolidated 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.
For purposes of this Quarterly Report, "Tel-Instrument," "we," "our," "us," or
similar references refers to Tel-Instrument Electronics, Inc, unless the context
requires otherwise.
Overview
The Company reported net sales of $2,328,254 and $6,594,768 for the three and
nine months ended December 31, 2022. This compared to net sales of $3,171,532
and $10,914,787 for the same three and nine-month period in the prior fiscal
year. The sharp decline in sales for the first nine months of the current fiscal
year was primarily caused by supply chain procurement issues and unanticipated
delays in securing certain high dollar contracts. Long supplier lead times for
certain high demand chips have been unprecedented, preventing the timely
production of finished units being shipped to customers. The supply chain
situation is gradually improving, and TIC has received sufficient parts to
increase production operations during the fourth quarter of the current fiscal
year.
The gradual improvement in parts receipts resulted in a net loss from operations
of $66,025 for the third quarter. The net loss from operations for the first
nine months of the fiscal year was $845,294. Gross margin for the current
quarter was $893,707 (38.4%) which is approximately 6% lower than the three
months ended December 31, 2021 of $1,407,793 (44.4%). This is primarily
attributable to fixed production costs being spread over much lower volumes.
Net income was $392,627 and net loss was $317,610 for the three and nine months
ended December 31, 2022, respectively. The current quarter ended December 31,
2022 was positively impacted by $628,400 of Employee Retention Tax Credit
("ERC") filings.
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Overview (continued)
Backlog orders on December 31, 2022, were $5.6 million compared to $3.5 million
as of March 31, 2022. The increase was primarily due to the $2.9 million Navy
contract to upgrade the CRAFT test set. This work will be completed over the
next two years and should result in significant production revenues when the
development work is completed. The Critical Design Review ("CDR") for this
program is scheduled for April 2023 and will generate approximately $700K of NRE
("non-recurring engineering") billings.
The Company continues to pursue opportunities in the domestic and international
market for our Mode 5 test sets. The international market has been slow over the
last year due in part to the recent strength of the dollar. We are still
expecting a large follow-on order from the German government within the next six
months. We continue to receive orders from the U.S. Government and Lockheed
Martin for our AN/USM-708 and 719 ("CRAFT") Mode 5 test sets. TIC expects to
receive a $1.6 million order for the F-35 program in February 2023. Our
expectation is that orders and back-log will improve this fiscal year as the
SDR/OMNI test set enters the marketplace. We are also in negotiations with the
U.S. Army on a funded software upgrade to the TS-4530A product which should be
very profitable as the engineering work has already largely been completed.
TIC is also exploring new avenues to broaden its product portfolio including
designing a high frequency test set for the Lockheed Martin F-35 program. This
contract takes advantage of our expertise in RF technology. This is a completely
new market for TIC as it involves high frequency communication signals. This
contract includes non-recurring engineering funding and expected annual
production revenues in the $600,000 to $700,000 range. TIC has successfully
completed the engineering portion of the program and is waiting for a production
order. TIC will continue to explore funded engineering programs of this nature
as this is high margin business that helps diversify and expand our product
portfolio.
The main focus area for the Company is moving into the secure communications
testing. The key for long-term sustained growth will be to supplement our strong
position in military Mode 5 transponder testing with dominant product offerings
in the much larger commercial and military communications and navigation test
set market. TIC has spent several years and millions of dollars in developing
our ground-breaking SDR/OMNI product which is meant to address both the
commercial market for transponder and navigation test sets as well as competing
in the military secure comm test set market. The SDR/OMNI supports a wide
frequency range to accommodate new commercial and military waveforms in an
industry leading 4-pound package. This is approximately half the weight of
competitive test sets. It is also the only new multi-purpose test set which
meets the Class 1 military environmental specifications. It utilizes the latest
touch screen technology and has the capability to replace all TIC commercial
test sets and military flight-line test sets with one handheld product. TIC is
in the process of demonstrating this product to customers and finalizing product
verification. The Company has started initial production deliveries in December
2022 and has sold over $250,000 of SDR/OMNI test sets in January 2023. There are
several companies competing in this market space, but we believe that our
SDR/OMNI design will be extremely competitive, particularly for military
applications.
The Aeroflex litigation did not result in a favorable outcome for the Company,
despite our belief that we committed no wrongdoing. 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. The jury also ruled that Tel tortiously interfered with Aeroflex's
non-disclosure agreements with two former Aeroflex employees. The jury also
found that the former Aeroflex employees breached their non-disclosure
agreements with Aeroflex. The Court conducted further hearings on the Company's
post-trial motions which sought to reduce the damages award of $2.8 million, as
well as the punitive damages claim. The Court denied the Company's motions and
awarded Aeroflex an additional $2.1 million of punitive damages. The Company has
filed motions in January 2018 for the Court to reconsider the number of damages
on the grounds that they are duplicative and not legally supportable. The Court
heard these motions, and such motions were denied. The Company filed for an
appeal during 2019. The Company has posted a $2 million bond for the appeal.
This $2 million bond amount will remain in place during the appeal process. The
appeal process has effectively been in limbo for several years due to the Kansas
Supreme Court moving to remote work until October 14, 2022, when 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 has been set for hearing on March 30,
2023 in Topeka, Kansas. A decision on the case is expected approximately 90 days
after the conclusion of the arguments.
We believe we have strong appeal grounds, and the plan is to wait for the
eventual decision despite the negative impact of the interest accruals on our
financial results. The best case scenario is that the award is vacated while the
worst-case scenario would be a dismissal which would require TIC to pay the
judgement amount plus accrued interest. TIC's cash and borrowing position should
allow for the payment of the entire amount if necessary. This is based on
expected improved first quarter results and receipt of the Navy CDR NRE funding.
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Results of Operations
Sales
Net sales were $2,328,254 and $6,594,768 for the three and nine months ended
December 31, 2022, as compared to $3,171,532 and $10,914,787 for the same three
and nine month period in the prior fiscal year, respectively. The decrease in
sales of $843,278 (27%) and $4,320,019 (40%) respectively, was due primarily to
supply chain issues, where supplier lead times have increased from several
months to over six months in some cases. In particular, chip components have
been especially difficult to receive on a timely basis by our printed circuit
board ("PCB") vendors.
Gross Margin
Gross margin for the current quarter was $893,707 (38.4%) which is approximately
6% lower than the three months ended December 31, 2021 of $1,407,793 (44.4%).
This is primarily attributable to fixed production costs being spread over much
lower volumes plus higher parts component costs for hard to find obsolete parts.
TIC has increased its selling prices during January 2023 to offset these added
costs.
For the nine months ended December 31, 2022, total gross margin decreased to
$2,282,363 as compared to $5,090,446 for the nine months ended December 31,
2021.
Operating Expenses
Selling, general and administrative expenses increased $54,111 (10%) to $578,077
and decreased $61,597 (4%) to $1,613,021 for the three and nine months ended
December 31, 2022 respectively, as compared to $523,966 and $1,674,618,
respectively for the three and nine months ended December 31, 2021. The three
month increase of $54,111 is primarily a result of a $63,308 accrual for a
Homeland Security Investigations ("HIS") agency "Notice of Intent to Fine", as a
result of a Form I-9 audit that was initiated March 2018 and the final fine
amount settled during January 2023. The nine month decrease of $61,597 is a
result of net lower sales commissions, consultant fees, and profit sharing
accruals, partly offset by the resumption of travel and trade show
participation.
Aeroflex litigation costs were $10,860 for the three months ended December 31,
2022, as compared to $17,145 for the three months ended December 31, 2021.
Litigation costs decreased $9,443 to $12,102 for the nine months ended December
31, 2022, as compared to $21,545 for the nine months ended December 31, 2021.
This is a direct result of decreased activity related to the litigation (see
Notes 4 and 12 to the unaudited condensed consolidated financial statements)
during the comparative time frame . With respect to the Aeroflex litigation, the
Company has appealed the $4.9 million judgement and has set aside $2 million in
cash to support an appeal bond. The appeal submissions are now complete. We
continue to believe that the trial judge erred in his legal ruling on standing
and other issues during the trial and that we have strong grounds for the award
to be vacated or reduced. The Company has received an order that oral arguments
for the appeal will take place on March 30, 2023.
Engineering, research, and development expenses decreased $203,323 (35%) to
$370,795 and $448,011 or (23%) to $1,502,534 for the three and nine months ended
December 31, 2022 respectively, as compared to $574,118 and $1,950,545 for the
three and nine months ended December 31, 2021, respectively. Total engineering
expense decreased primarily as a result of the restart of the Lockheed Martin
MADL program and the Navy ECP Contract non-recurring engineering expenditures
("NRE") which reduced engineering costs in the current quarter by $160,184 and
$344,276 for the nine months ended December 31, 2022, with the balance of the
decrease a result of cost efficiencies.
(Loss) Income from Operations
As a result of the above, the Company recorded a loss from operations of $66,025
and $845,294 for the three and nine months ended December 31, 2022, as compared
to income from operations of $292,564 and $1,443,738 for the three and nine
months ended December 31, 2021.
Other Income (Expense), Net
For the three and nine months ended December 31, 2022, total other net income
was $563,048 and $443,235, this is primarily a result of $628,400 of Employee
Retention Tax Credits ("ERC") the Company was eligible for and has filed the
required amended tax returns. The credit refunds are anticipated to be released
by the Internal Revenue Service sometime between August - December 2023.
As compared to other net (expense) income of ($51,494) and $604,507 for the
three and nine months ended December 31, 2021, primarily the result of the
Second Draw PPP loan in the amount of $722,577 being fully forgiven on September
17, 2021 and on August 24, 2021, TIC, and the New Jersey Economic Development
Authority (NJEDA) signed a small business emergency assistance grant agreement
in the amount of $20,000.
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Income before Income Taxes
The Company recorded income before taxes of $497,023 and a net loss before taxes
of $402,059 for the three and nine months ended December 31, 2022, as compared
to income before taxes of $241,070 and $2,048,245 for the three and nine months
ended December 31, 2021.
Income Tax (Benefit) Expense
For the three months ended December 31, 2022, the Company recorded a year to
date adjusting income tax expense of $104,396. For the nine months ended
December 31, 2022 recorded a tax benefit of $84,449, and related increase in its
deferred tax asset, as a result of the Company's net loss, as compared to an
income tax expense of $46,448 and $278,446 for the three and nine months ended
December 31, 2021, respectively. The differences between income taxes, in the
prior year, expected at the U.S. federal statutory income tax rate of 21 percent
and the reported income tax expense are due to the recognition of non-taxable
PPP funds of $722,577 as other income during the three months ended September
30, 2021.
Net Income (Loss)
The Company recorded net income of $392,627 and a net loss of $317,610 for the
three and nine months ended December 31, 2022, as compared to net income of
$194,622 and $1,769,799 for the three and nine months ended December 31, 2021.
Liquidity and Capital Resources
At December 31, 2022, the Company had net working capital of
$3,142,693 including accrued legal damages related to the Aeroflex litigation of
$6,291,226, as compared to working capital of $3,671,667 at March 31, 2022. This
change is due primarily to the decline in sales revenue and profitability.
During the nine months ended December 31, 2022, the Company's cash balance
(including the $2 million in restricted cash for the appeal) decreased by
approximately $1.7 million to $5,303,597. The Company's principal sources, and
uses of funds were as follows:
Cash (used in) provided by operating activities. For the nine months ended
December 31, 2022, $1,571,007 in cash from operations was used, as compared to
the nine months ended December 31, 2021, the Company provided $2,048,312. This
decrease in cash provided for operations is mostly attributed to the net loss
for the nine months ended December 31, 2022, an increase in accounts receivable,
and an increase in inventories as we build stock for production. In addition to
buying additional inventory to address the supply chain interruptions, the
Company has purchased a significant amount of inventory for the SDR/OMNI
program. Additionally, the increase in other assets includes a receivable of
$628,400 for Employee Retention Tax Credits ("ERC") as result of amended 941
federal form filings.
Cash used in investing activities. For the nine months ended December 31, 2022,
the Company used $6,136 for purchases of equipment as compared to the nine
months ended December 31, 2021, the Company used $4,777.
Cash (used in) financing activities. For the nine months ended December 31,
2022, the Company used $80,000 in cash from financing activities as compared to
$240,000 for the nine months ended December 31, 2021. This decrease is due to
dividend payments of $80,000 per quarter not being made for quarter two and
three.
The Bank of America line of credit was renewed and will mature July 30, 2023. As
of December 31, 2022, the line of credit draw remained at zero.
On December 31, 2022, the Company had approximately $5.3 million of cash on hand
which included $2 million of restricted cash supporting the appeal bond.
As of December 31, 2022, the Company has recorded total damages of $6,291,226
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. The
Company has recorded accrued interest of $1,391,225 as of December 31, 2022.
The Company is very optimistic about the prospects of its appeal for a judgment
as a matter of law. The appeal is scheduled to be heard on March 30, 2023 and a
final decision is expected this summer. TIC's cash and borrowing position should
allow for the payment of the entire amount if necessary. This is based on
expected improved fourth quarter results and receipt of the $700K 0 Navy CDR NRE
funding.
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Moving forward, we believe that our expected cash flows from operations and
current cash balances, which amounted to approximately $5.3 million, including
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
unaudited condensed financial statements, including any payments for settlement
of the litigation.
Currently, the Company has no material future capital expenditure requirements.
These unaudited condensed consolidated financial statements should be read in
conjunction with the Company's Annual Report on For 10-K for the fiscal year
ended March 31, 2022, filed with the SEC on June 17, 2022 (the "Annual Report").
Off-Balance Sheet Arrangements
As of December 31, 2022, the Company had no off-balance sheet arrangements.
Critical Accounting Policies
Our critical accounting policies are described in Management's Discussion and
Analysis of Financial Condition and Results of Operations included in our Annual
Report. There have been no changes in our critical accounting policies. Our
significant accounting policies are described in our notes to the 2022
consolidated financial statements included in our Annual Report.
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